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GAMCO INVESTORS, INC. ET AL - Quarter Report: 2012 June (Form 10-Q)

form10q063012.htm


SECURITIES & EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q

(Mark One)

[X]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2012
or

[ ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ___ to ___

Commission File No. 001-14761

GAMCO INVESTORS, INC.
(Exact name of Registrant as specified in its charter)
       
New York
   
13-4007862
(State of other jurisdiction of incorporation or organization)
   
(I.R.S. Employer Identification No.)
   
     
One Corporate Center, Rye, NY
   
10580-1422
(Address of principle executive offices)
   
(Zip Code)
       
(914) 921-3700
Registrant’s telephone number, including area code
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes
x
No
o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yesx    Noo
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer", "accelerated filer", and "smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer ¨
 
Accelerated filer x
 
       
Non-accelerated filer o
 
Smaller reporting company o
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes
o
No
x
 
Indicate the number of shares outstanding of each of the Registrant’s classes of Common Stock, as of the latest practical date.
Class
 
Outstanding at July 31, 2012
 
Class A Common Stock, .001 par value
 
6,609,863
 
Class B Common Stock, .001 par value
 
20,020,730
 
 
 
 

 
 
INDEX
 
GAMCO INVESTORS, INC. AND SUBSIDIARIES
   
   
PART I.
FINANCIAL INFORMATION
 
   
   
Item 1.
Unaudited Condensed Consolidated Financial Statements
   
 
Condensed Consolidated Statements of Income:
 
-    Three months ended June 30, 2012 and 2011
 
-    Six months ended June 30, 2012 and 2011
   
 
Condensed Consolidated Statements of Comprehensive Income:
 
-    Three months ended June 30, 2012 and 2011
 
-    Six months ended June 30, 2012 and 2011
   
   
 
Condensed Consolidated Statements of Financial Condition:
 
-    June 30, 2012
 
-    December 31, 2011
 
-    June 30, 2011
   
 
Condensed Consolidated Statements of Equity:
 
-    Six months ended June 30, 2012 and 2011
   
 
Condensed Consolidated Statements of Cash Flows:
 
-    Six months ended June 30, 2012 and 2011
   
 
Notes to Unaudited Condensed Consolidated Financial Statements
   
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
   
Item 3.
Quantitative and Qualitative Disclosures About Market Risk (Included in Item 2)
   
Item 4.
Controls and Procedures
   
PART II.
OTHER INFORMATION
 
   
Item 1.
Legal Proceedings
   
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
   
Item 6.
Exhibits
   
SIGNATURES
 
   
 
 
2

 
 
GAMCO INVESTORS, INC. AND SUBSIDIARIES
   
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
   
UNAUDITED
   
(Dollars in thousands, except per share data)
   
                           
                           
   
Three Months Ended
   
Six Months Ended
   
   
June 30,
   
June 30,
   
   
2012
   
2011
   
2012
   
2011
   
Revenues
                         
  Investment advisory and incentive fees
  $ 67,210     $ 69,252     $ 134,993     $ 132,163    
  Distribution fees and other income
    11,006       11,588       22,629       21,933    
  Institutional research services
    2,808       4,241       5,151       7,890    
Total revenues
    81,024       85,081       162,773       161,986    
Expenses
                                 
  Compensation
    32,921       34,365       67,475       67,782    
  Management fee
    2,615       3,626       6,799       6,739    
  Distribution costs
    10,012       9,588       20,189       23,017    
  Other operating expenses
    5,109       7,005       10,931       13,191    
Total expenses
    50,657       54,584       105,394       110,729  
(a)
                                   
Operating income
    30,367       30,497       57,379       51,257    
Other income (expense)
                                 
  Net gain/(loss) from investments
    (4,171 )     3,669       9,707       12,409    
  Interest and dividend income
    1,782       1,861       3,018       3,797    
  Interest expense
    (4,429 )     (3,403 )     (8,833 )     (6,270 )  
Total other income (expense), net
    (6,818 )     2,127       3,892       9,936    
Income before income taxes
    23,549       32,624       61,271       61,193    
Income tax provision
    8,686       11,945       22,442       22,233    
Net income
    14,863       20,679       38,829       38,960    
Net income/(loss) attributable to noncontrolling interests
    (242 )     32       (112 )     670    
Net income attributable to GAMCO Investors, Inc.'s shareholders
  $ 15,105     $ 20,647     $ 38,941     $ 38,290    
                                   
Net income attributable to GAMCO Investors, Inc.'s shareholders
                                 
  per share:
                                 
Basic
  $ 0.58     $ 0.77     $ 1.48     $ 1.43    
                                   
Diluted
  $ 0.57     $ 0.77     $ 1.47     $ 1.42    
                                   
Weighted average shares outstanding:
                                 
Basic
    26,258       26,665       26,338       26,783    
                                   
Diluted
    26,426       26,733       26,501       26,872    
                                   
Dividends declared:
  $ 0.29     $ 0.04     $ 0.33     $ 0.07    
                                   
(a) Includes $5.6 million in costs directly related to the launch of a new closed-end fund.
                   
                                   
See accompanying notes.
                                 

 
3

 

GAMCO INVESTORS, INC. AND SUBSIDIARIES
 
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 
UNAUDITED
 
(Dollars in thousands, except per share data)
 
                         
                         
   
Three Months Ended
   
Six Months Ended
 
   
June 30,
   
June 30,
 
   
2012
   
2011
   
2012
   
2011
 
                         
Net income
  $ 14,863     $ 20,679     $ 38,829     $ 38,960  
Other comprehensive income/(loss), net of tax:
                               
  Foreign currency translation
    22       (1 )     5       23  
  Net unrealized gains/(losses) on securities available for sale
    (2,579 )     (1,550 )     878       937  
Other comprehensive income/(loss)
    (2,557 )     (1,551 )     883       960  
                                 
Comprehensive income
    12,306       19,128       39,712       39,920  
Less: Comprehensive income/(loss) attributable to noncontrolling interests
    242       (32 )     112       (670 )
                                 
Comprehensive income attributable to GAMCO Investors, Inc.
  $ 12,548     $ 19,096     $ 39,824     $ 39,250  
                                 
See accompanying notes.
                               
 
 
4

 
 
GAMCO INVESTORS, INC. AND SUBSIDIARIES
 
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
 
UNAUDITED
 
(Dollars in thousands, except per share data)
 
                   
   
June 30,
   
December 31,
   
June 30,
 
   
2012
   
2011
   
2011
 
ASSETS
                 
Cash and cash equivalents
  $ 324,440     $ 276,340     $ 260,839  
Investments in securities
    249,630       238,333       298,425  
Investments in sponsored registered investment companies
    59,561       59,214       64,880  
Investments in partnerships
    102,119       100,893       98,598  
Receivable from brokers
    41,513       20,913       35,968  
Investment advisory fees receivable
    26,026       32,156       25,746  
Income tax receivable
    402       39       238  
Other assets
    23,039       28,861       25,964  
  Total assets
  $ 826,730     $ 756,749     $ 810,658  
                         
LIABILITIES AND EQUITY
                       
Payable to brokers
  $ 20,113     $ 10,770     $ 2,950  
Income taxes payable and deferred tax liabilities
    12,846       15,296       21,622  
Capital lease obligation
    5,013       5,072       5,126  
Compensation payable
    28,985       17,695       29,484  
Securities sold, not yet purchased
    7,010       5,488       10,244  
Mandatorily redeemable noncontrolling interests
    1,352       1,386       1,478  
Accrued expenses and other liabilities
    29,641       24,441       34,620  
  Sub-total
    104,960       80,148       105,524  
                         
5.5% Senior notes (due May 15, 2013)
    99,000       99,000       99,000  
5.875% Senior notes (due June 1, 2021)
    100,000       100,000       100,000  
 Zero coupon subordinated debentures, Face value: $86.3 million at June 30, 2012 and                        
  December 31, 2011 and $86.4 million at June 30, 2011 (due December 31, 2015)
    66,598       64,119       61,814  
  Total liabilities
    370,558       343,267       366,338  
                         
Redeemable noncontrolling interests
    26,162       6,071       35,519  
Commitments and contingencies (Note J)
                       
Equity
                       
  GAMCO Investors, Inc. stockholders' equity
                       
    Preferred stock, $.001 par value; 10,000,000 shares authorized;
                       
      none issued and outstanding
                       
    Class A Common Stock, $0.001 par value; 100,000,000 shares authorized;
                       
      13,781,213, 13,627,397 and 13,569,703 issued, respectively; 6,609,863,
                       
      6,684,149 and 6,647,212 outstanding, respectively
    13       13       13  
    Class B Common Stock, $0.001 par value; 100,000,000 shares authorized;
                       
      24,000,000 shares issued; 20,020,730, 20,070,746 and 20,142,640 shares
                       
      outstanding, respectively
    20       20       20  
    Additional paid-in capital
    266,231       264,409       263,371  
    Retained earnings
    439,292       409,191       406,666  
    Accumulated other comprehensive income
    23,403       22,520       26,349  
    Treasury stock, at cost (7,171,350, 6,943,248 and 6,922,491 shares, respectively)
    (302,300     (292,181     (291,287 )
  Total GAMCO Investors, Inc. stockholders' equity
    426,659       403,972       405,132  
Noncontrolling interests
    3,351       3,439       3,669  
Total equity
    430,010       407,411       408,801  
                         
Total liabilities and equity
  $ 826,730     $ 756,749     $ 810,658  
                         
See accompanying notes.
                       
 
 
5

 
 
GAMCO INVESTORS, INC. AND SUBSIDIARIES
 
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
 
UNAUDITED
 
(In thousands)
 
                                                 
For the six months ended June 30, 2012
 
         
GAMCO Investors, Inc. stockholders
       
                           
Accumulated
                   
               
Additional
         
Other
               
Redeemable
 
   
Noncontrolling
   
Common
   
Paid-in
   
Retained
   
Comprehensive
   
Treasury
         
Noncontrolling
 
   
Interests
   
Stock
   
Capital
   
Earnings
   
Income
   
Stock
   
Total
   
Interests
 
Balance at December 31, 2011
  $ 3,439     $ 33     $ 264,409     $ 409,191     $ 22,520     $ (292,181 )   $ 407,411     $ 6,071  
Redemptions of redeemable
                                                               
 noncontrolling interests
    -       -       -       -       -       -       -       (393 )
Contributions from redeemable
                                                               
 noncontrolling interests
    -       -       -       -       -       -       -       20,508  
Net income (loss)
    (88 )     -       -       38,941       -       -       38,853       (24 )
Net unrealized gains on
                                                               
 securities available for sale,
                                                               
 net of income tax ($515)
    -       -       -       -       878       -       878       -  
Foreign currency translation
    -       -       -       -       5       -       5       -  
Dividends declared ($0.33 per
                                                               
 share)
    -       -       -       (8,840 )     -       -       (8,840 )     -  
Stock based compensation
                                                               
 expense
    -       -       1,740       -       -       -       1,740       -  
Exercise of stock options
                                                               
 including tax benefit
    -       -       82       -       -       -       82       -  
Purchase of treasury stock
    -       -       -       -       -       (10,119 )     (10,119 )     -  
Balance at June 30, 2012
  $ 3,351     $ 33     $ 266,231     $ 439,292     $ 23,403     $ (302,300 )   $ 430,010     $ 26,162  
                                                                 
See accompanying notes.
                                                               
 
 
6

 
 
GAMCO INVESTORS, INC. AND SUBSIDIARIES
 
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
 
UNAUDITED
 
(In thousands)
 
                                                 
For the six months ended June 30, 2011
 
         
GAMCO Investors, Inc. stockholders
       
                           
Accumulated
                   
               
Additional
         
Other
               
Redeemable
 
   
Noncontrolling
   
Common
   
Paid-in
   
Retained
   
Comprehensive
   
Treasury
         
Noncontrolling
 
   
Interests
   
Stock
   
Capital
   
Earnings
   
Income
   
Stock
   
Total
   
Interests
 
Balance at December 31, 2010
  $ 3,579     $ 33     $ 262,108     $ 370,272     $ 25,389     $ (271,773 )   $ 389,608     $ 26,984  
Redemptions of redeemable
                                                               
 noncontrolling interests
    -       -       -       -       -       -       -       (839 )
Contributions from redeemable
                                                               
 noncontrolling interests
    -       -       -       -       -       -       -       12,897  
Deconsolidation of
                                                               
  Partnership
    -       -       -       -       -       -       -       (4,103 )
Net income
    90       -       -       38,290       -       -       38,380       580  
Net unrealized gains on
                                                               
 securities available for sale,
                                                               
 net of income tax ($550)
    -       -       -       -       937       -       937       -  
Foreign currency translation
    -       -       -       -       23       -       23       -  
Dividends declared
                                                               
 ($0.07 per share)
    -       -       -       (1,896 )     -       -       (1,896 )     -  
Stock based compensation
                                                               
 expense
    -       -       1,263       -       -       -       1,263       -  
Purchase of treasury stock
    -       -       -       -       -       (19,514 )     (19,514 )     -  
Balance at June 30, 2011
  $ 3,669     $ 33     $ 263,371     $ 406,666     $ 26,349     $ (291,287 )   $ 408,801     $ 35,519  
                                                                 
See accompanying notes.
                                                               
 
 
7

 
 
GAMCO INVESTORS, INC. AND SUBSIDIARIES
 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
UNAUDITED
 
(In thousands)
 
             
   
Six Months Ended
 
   
June 30,
 
   
2012
   
2011
 
Operating activities
           
Net income
  $ 38,829     $ 38,960  
 Adjustments to reconcile net income to net cash provided by operating activities:
               
  Equity in net gains from partnerships
    (2,651 )     (3,094 )
  Depreciation and amortization
    359       456  
  Stock based compensation expense
    1,740       1,263  
  Deferred income taxes
    1,434       1,220  
  Tax benefit from exercise of stock options
    24       -  
  Foreign currency translation
    5       23  
  Other-than-temporary loss on available for sale securities
    20       -  
  Fair value of donated securities
    181       56  
  Gains on sales of available for sale securities
    (408 )     (584 )
  Accretion of zero coupon debentures
    2,497       2,234  
  Loss on extinguishment of debt
    1       -  
(Increase) decrease in assets:
               
  Investments in trading securities
    (10,137 )     (70,979 )
  Investments in partnerships:
               
    Contributions to partnerships
    (25,743 )     (10,683 )
    Distributions from partnerships
    27,168       3,226  
  Receivable from brokers
    (20,601 )     4,966  
  Investment advisory fees receivable
    6,131       19,044  
  Income tax receivable and deferred tax assets
    (362 )     87  
  Other assets
    5,466       (2,312 )
Increase (decrease) in liabilities:
               
  Payable to brokers
    9,343       1,396  
  Income taxes payable and deferred tax liabilities
    (4,401 )     (3,108 )
  Compensation payable
    11,289       5,710  
  Mandatorily redeemable noncontrolling interests
    (34 )     35  
  Accrued expenses and other liabilities
    4,988       12,776  
Total adjustments
    6,309       (38,268 )
Net cash provided by operating activities
  $ 45,138     $ 692  
                 
 
 
8

 
 
GAMCO INVESTORS, INC. AND SUBSIDIARIES
 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
UNAUDITED (continued)
 
(In thousands)
 
             
   
Six Months Ended
 
   
June 30,
 
   
2012
   
2011
 
Investing activities
           
Purchases of available for sale securities
  $ (8 )   $ (4,370 )
Proceeds from sales of available for sale securities
    780       5,685  
Return of capital on available for sale securities
    842       777  
Net cash provided by investing activities
    1,614       2,092  
                 
Financing activities
               
Contributions from redeemable noncontrolling interests
    20,508       12,897  
Redemptions of redeemable noncontrolling interests
    (393 )     (839 )
Issuance of 5.875% Senior notes due June 1, 2021
    -       100,000  
Issuance costs on the 5.875% Senior notes due June 1, 2021
    -       (934 )
Proceeds from exercise of stock options
    58       -  
Repurchase of zero coupon subordinated debentures
    (18 )     -  
Dividends paid
    (8,685 )     (1,896 )
Purchase of treasury stock
    (10,119 )     (19,514 )
Net cash provided by financing activities
    1,351       89,714  
Effect of exchange rates on cash and cash equivalents
    (3 )     (9 )
Net increase in cash and cash equivalents
    48,100       92,489  
Cash and cash equivalents at beginning of period
    276,340       169,601  
Decrease in cash from deconsolidation of partnership
    -       (1,251 )
Cash and cash equivalents at end of period
  $ 324,440     $ 260,839  
Supplemental disclosures of cash flow information:
               
Cash paid for interest
  $ 4,979     $ 3,267  
Cash paid for taxes
  $ 25,479     $ 23,433  
                 
Non-cash activity:
               
- On January 1, 2011, GAMCO Investors, Inc. was no longer deemed to have control over a certain partnership which resulted in the deconsolidation
 
 of that partnership and decreases of approximately $1,251 of cash and cash equivalents, $2,852 of net assets and $4,103 of noncontrolling interests.
 
- For the six months ended June 30, 2012 and June 30, 2011, the Company accrued restricted stock  award dividends of $106 and $17, respectively.
 
                 
See accompanying notes.
               
 
 
9

 
 
GAMCO INVESTORS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2012
(Unaudited)
A.  Significant Accounting Policies

Basis of Presentation
 
Unless we have indicated otherwise, or the context otherwise requires, references in this report to “GAMCO Investors, Inc.,” “GAMCO,” “the Company,” “GBL,” “we,” “us” and “our” or similar terms are to GAMCO Investors, Inc., its predecessors and its subsidiaries.
 
The unaudited interim condensed consolidated financial statements of GAMCO included herein have been prepared in conformity with generally accepted accounting principles (“GAAP”) in the United States for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by GAAP in the United States for complete financial statements.  In the opinion of management, the unaudited interim condensed consolidated financial statements reflect all adjustments, which are of a normal recurring nature, necessary for a fair presentation of financial position, results of operations and cash flows of GAMCO for the interim periods presented and are not necessarily indicative of a full year’s results.
 
The condensed consolidated financial statements include the accounts of GAMCO and its subsidiaries, including our new broker-dealer, G.distributors, LLC, a wholly-owned subsidiary of GAMCO, which became the distributor for the Gabelli/GAMCO family of funds on August 1, 2011.  Intercompany accounts and transactions are eliminated.
 
These condensed consolidated financial statements should be read in conjunction with our audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2011 from which the accompanying condensed consolidated financial statements were derived.

Beginning with the period ended March 31, 2012 the Company has now separately disclosed the amount of investments in sponsored registered investment companies as a new line item in the condensed consolidated statements of financial condition.  These amounts were previously included within investments in securities in the condensed consolidated statements of financial condition.

Use of Estimates
 
The preparation of the condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported on the condensed consolidated financial statements and accompanying notes.  Actual results could differ from those estimates.

Recent Accounting Developments

In May 2011, the Financial Accounting Standards Board (“FASB”) issued guidance on fair value measurement which expands existing disclosure requirements for fair value measurements and makes other amendments.  The guidance requires, for level 3 fair value measurements, (1) a quantitative disclosure of the unobservable inputs and assumptions used in the measurement, (2) a description of the valuation processes in place, and (3) a narrative description of the sensitivity of the fair value to changes in unobservable inputs and interrelationships between those inputs.  Additionally, the guidance requires disclosure of the level in the fair value hierarchy of items that are not measured at fair value in the statement of financial condition but whose fair value must be disclosed and clarifies that the valuation premise and highest and best use concepts are not relevant to financial assets or liabilities.  The guidance is effective for interim and annual periods beginning after December 15, 2011.  The Company adopted this guidance on January 1, 2012 and has reflected the new disclosures in the condensed consolidated financial statements.

In June 2011, the FASB issued guidance which revises the manner in which entities present comprehensive income in their financial statements.  The new guidance requires entities to report comprehensive income in either (1) a continuous statement of comprehensive income or (2) two separate but consecutive statements.  Under the two-statement approach, the first statement would include components of net income, which is consistent with the income statement format used currently, and the second statement would include components of other comprehensive income (“OCI”).  The guidance does not change the items that must be reported in OCI.  In December 2011, the FASB indefinitely deferred a portion of the guidance that would have required entities to present reclassification adjustments out of accumulated other comprehensive income by component in both the statement in which the net income is presented and the statement in which other comprehensive income is presented.  The guidance is effective for fiscal years beginning after December 15, 2011, and for interim periods within those fiscal years.  The Company adopted the guidance on January 1, 2012 and opted for the two separate but consecutive statements approach.  Accordingly, the Company now presents the condensed consolidated statements of comprehensive income immediately following the condensed consolidated statements of income.
 
 
10

 
 
In December 2011, the FASB issued guidance which creates new disclosure requirements about the nature of an entity’s right of offset and related arrangements associated with its financial instruments and derivative instruments.  The disclosure requirements are effective for annual reporting periods beginning on or after January 1, 2013, and interim periods therein, with retrospective application required.  The new disclosures are designed to make financial statements that are prepared under U.S. GAAP more comparable to those prepared under International Financial Reporting Standards.  The Company is currently evaluating the impact that the application of this guidance will have on its disclosures.

In July 2012, the FASB issued guidance allowing companies to first perform a qualitative assessment to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired.  If a company determines, on the basis of qualitative factors, that the fair value of such asset is not more likely than not impaired, it would not need to calculate the fair value of such asset.  However, if a company concludes otherwise, it must calculate the fair value of the asset, compare the value with its carrying amount and record an impairment charge, if any.  To perform the qualitative assessment, a company must identify and evaluate events and circumstances that could affect the significant inputs used to determine the fair value of an indefinite-lived intangible asset.  This guidance is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012, with early adoption permitted.  The application of this guidance is not expected to be material to the condensed consolidated financial statements.

B.  Investment in Securities

Investments in securities at June 30, 2012, December 31, 2011 and June 30, 2011 consisted of the following:
 
   
June 30, 2012
   
December 31, 2011
   
June 30, 2011
 
   
Cost
   
Fair Value
   
Cost
   
Fair Value
   
Cost
   
Fair Value
 
   
(In thousands)
 
Trading securities:
                                   
  Government obligations
  $ 50,119     $ 50,139     $ 42,124     $ 42,126     $ 7,924     $ 7,925  
  Common stocks
    154,470       162,883       153,294       159,314       238,689       251,118  
  Mutual funds
    1,086       1,406       1,084       1,307       1,081       1,501  
  Other investments
    323       374       466       399       459       487  
Total trading securities
    205,998       214,802       196,968       203,146       248,153       261,031  
                                                 
Available for sale securities:
                                               
  Common stocks
    15,934       32,815       16,487       33,282       16,780       35,296  
  Mutual funds
    1,361       2,013       1,362       1,905       1,362       2,098  
Total available for sale securities
    17,295       34,828       17,849       35,187       18,142       37,394  
                                                 
Total investments in securities
  $ 223,293     $ 249,630     $ 214,817     $ 238,333     $ 266,295     $ 298,425  
                                                 
 
Securities sold, not yet purchased at June 30, 2012, December 31, 2011 and June 30, 2011 consisted of the following:
 
   
June 30, 2012
   
December 31, 2011
   
June 30, 2011
 
   
Proceeds
   
Fair Value
   
Proceeds
   
Fair Value
   
Proceeds
   
Fair Value
 
Trading securities:
 
(In thousands)
 
  Common stocks
  $ 6,194     $ 6,687     $ 5,271     $ 5,415     $ 9,416     $ 10,238  
  Other
    12       323       49       73       1       6  
Total securities sold, not yet purchased
  $ 6,206     $ 7,010     $ 5,320     $ 5,488     $ 9,417     $ 10,244  
                                                 
 
 
11

 

Investments in sponsored registered investment companies at June 30, 2012, December 31, 2011 and June 30, 2011 consisted of the following:
 
   
June 30, 2012
   
December 31, 2011
   
June 30, 2011
 
   
Cost
   
Fair Value
   
Cost
   
Fair Value
   
Cost
   
Fair Value
 
   
(In thousands)
 
Trading securities:
                                   
  Mutual funds
  $ 19     $ 19     $ 15     $ 18     $ 15     $ 24  
Total trading securities
    19       19       15       18       15       24  
                                                 
Available for sale securities:
                                               
  Closed-end funds
    36,266       56,171       37,104       55,855       38,588       60,900  
  Mutual funds
    2,198       3,371       2,213       3,341       2,249       3,956  
Total available for sale securities
    38,464       59,542       39,317       59,196       40,837       64,856  
                                                 
Total investments in sponsored
                                               
  registered investment companies
  $ 38,483     $ 59,561     $ 39,332     $ 59,214     $ 40,852     $ 64,880  
                                                 
 
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 United States Treasury Bills and Notes with maturities of greater than three months at the time of purchase are classified as investments in securities, and those with maturities of three months or less at the time of purchase are classified as cash equivalents.  A substantial portion of investments in securities is held for resale in anticipation of short-term market movements and therefore is classified as trading securities.  Trading securities are stated at fair value, with any unrealized gains or losses reported in current period earnings.  Available for sale (“AFS”) investments are stated at fair value, with any unrealized gains or losses, net of taxes, reported as a component of equity except for losses deemed to be other than temporary which are recorded as unrealized losses in the condensed consolidated statements of income.

The Company recognizes all derivatives as either assets or liabilities measured at fair value and includes them in either investments in securities or securities sold, not yet purchased on the condensed consolidated statements of financial condition.  From time to time, the Company and/or the partnerships and offshore funds that the Company consolidates will enter into hedging transactions to manage their exposure to foreign currencies and equity prices related to their proprietary investments.  For the three and six months ended June 30, 2012, the Company had derivative transactions in equity derivatives which resulted in net gains of $15,000 and net losses of $14,000, respectively.  For the three and six months ended June 30, 2011, the Company had no derivative transactions.  At June 30, 2011, the Company did not hold any derivatives.  At June 30, 2012 and December 31, 2011, we held derivative contracts on 4.7 million equity shares and 142,000 equity shares, respectively, and the fair value was ($72,000) and $24,000, respectively; these are included in investments in securities in the condensed consolidated statements of financial condition.  These transactions are not designated as hedges for accounting purposes, and therefore changes in fair values of these derivatives are included in net gain/(loss) from investments in the condensed consolidated statements of income. 
 
 
12

 

The following is a summary of the cost, gross unrealized gains, gross unrealized losses and fair value of available for sale investments as of June 30, 2012, December 31, 2011 and June 30, 2011:
 
   
June 30, 2012
 
         
Gross
   
Gross
       
         
Unrealized
   
Unrealized
   
Fair
 
   
Cost
   
Gains
   
Losses
   
Value
 
   
(In thousands)
 
Common stocks
  $ 15,934     $ 16,881     $ -     $ 32,815  
Closed-end Funds
    36,266       19,905       -       56,171  
Mutual funds
    3,559       1,825       -       5,384  
Total available for sale securities
  $ 55,759     $ 38,611     $ -     $ 94,370  
                                 
   
December 31, 2011
 
           
Gross
   
Gross
         
           
Unrealized
   
Unrealized
   
Fair
 
   
Cost
   
Gains
   
Losses
   
Value
 
   
(In thousands)
 
Common stocks
  $ 16,487     $ 16,795     $ -     $ 33,282  
Closed-end Funds
    37,104       18,779       (28 )     55,855  
Mutual funds
    3,575       1,671       -       5,246  
Total available for sale securities
  $ 57,166     $ 37,245     $ (28 )   $ 94,383  
                                 
   
June 30, 2011
 
           
Gross
   
Gross
         
           
Unrealized
   
Unrealized
   
Fair
 
   
Cost
   
Gains
   
Losses
   
Value
 
   
(In thousands)
 
Common stocks
  $ 16,780     $ 18,516     $ -     $ 35,296  
Closed-end Funds
    38,588       22,312       -       60,900  
Mutual funds
    3,611       2,443       -       6,054  
Total available for sale securities
  $ 58,979     $ 43,271     $ -     $ 102,250  
                                 
 
Unrealized changes to fair value, net of taxes, for the three months ended June 30, 2012 and June 30, 2011 of $2.6 million and $1.6 million in losses, respectively, have been included in other comprehensive income, a component of equity, at June 30, 2012 and June 30, 2011.  Return of capital on available for sale securities was $0.3 million and $0.2 million for the three months ended June 30, 2012 and June 30, 2011, respectively.  Proceeds from sales of investments available for sale were approximately $0.3 million and $5.6 million for the three month periods ended June 30, 2012 and June 30, 2011, respectively.  For the three months ended June 30, 2012 and June 30, 2011, gross gains on the sale of investments available for sale amounted to $0.1 million and $0.5 million, respectively, and were reclassed from other comprehensive income into the condensed consolidated statements of income.  There were no losses on the sale of investments available for sale for the three months ended June 30, 2012 or June 30, 2011.  Unrealized changes to fair value, net of taxes, for the six months ended June 30, 2012 and June 30, 2011 of $0.9 million and $0.9 million in gains, respectively, have been included in other comprehensive income, a component of equity, at June 30, 2012 and June 30, 2011. Return of capital on available for sale securities was $0.8 million and $0.8 million for the six months ended June 30, 2012 and June 30, 2011, respectively.  Proceeds from sales of investments available for sale were approximately $0.8 million and $5.7 million for the six month periods ended June 30, 2012 and June 30, 2011, respectively.  For the six months ended June 30, 2012 and June 30, 2011, gross gains on the sale of investments available for sale amounted to $0.4 million and $0.6 million, respectively, and were reclassed from other comprehensive income into the condensed consolidated statements of income.  There were no losses on the sale of investments available for sale for the six months ended June 30, 2012 or June 30, 2011.  The basis on which the cost of a security sold is determined is specific identification.
 
 
13

 

Investments classified as available for sale that are in an unrealized loss position for which other-than-temporary impairment has not been recognized consisted of the following:
 
   
June 30, 2012
   
December 31, 2011
   
June 30, 2011
 
         
Unrealized
               
Unrealized
               
Unrealized
       
   
Cost
   
Losses
   
Fair Value
 
Cost
   
Losses
   
Fair Value
 
Cost
   
Losses
   
Fair Value
 
(in thousands)
                                                     
Mutual Funds
  $ -     $ -     $ -     $ 101     $ (28 )   $ 73     $ -     $ -     $ -  
                                                                         
 
At December 31, 2011, there was one holding in a loss position which was not deemed to be other-than-temporarily impaired due to the length of time that it had been in a loss position and because it passed scrutiny in our evaluation of issuer-specific and industry-specific considerations.  In this specific instance, the investment at December 31, 2011 was a closed-end fund with diversified holdings across multiple companies and across multiple industries.  The one holding was impaired for seven consecutive months.  The value of this holding at December 31, 2011 was $0.1 million.

At June 30, 2012 and June 30, 2011, there were no available for sale holdings in loss positions.

For the three and six months ended June 30, 2012, there was $20,000 of losses on available for sale securities deemed to be other than temporary.

C. Investments in Partnerships, Offshore Funds and Variable Interest Entities
 
The Company is general partner or co-general partner of various sponsored limited partnerships and the investment manager of various sponsored offshore funds, and has investments in these totaling $88.0 million, $86.9 million and $78.3 million at June 30, 2012, December 31, 2011 and June 30, 2011, respectively, whose underlying assets consist primarily of marketable securities (the “affiliated entities”).  We also have investments in unaffiliated partnerships, offshore funds and other entities of $14.1 million, $14.0 million and $20.3 million at June 30, 2012, December 31, 2011 and June 30, 2011, respectively (the “unaffiliated entities”).  We evaluate each entity for the appropriate accounting treatment and disclosure.  Certain of the affiliated entities are consolidated.  In addition, our statement of financial condition caption “Investments in partnerships” includes those investments, in both affiliated and unaffiliated entities, which the Company accounts for under the equity method of accounting, as well as certain investments that the feeder funds hold that are carried at fair value, as described in Note D.  The Company reflects the equity in earnings of these equity method investees and the change in fair value of the consolidated feeder funds under the caption “Net gain/(loss) from investments” on the condensed consolidated statements of income.

The following table highlights the number of entities that we consolidate as well as under which accounting guidance they are consolidated, including consolidated feeder funds (“CFFs”), which retain their specialized investment company accounting, partnerships and offshore funds.
 
Entities consolidated
                                               
   
CFFs
   
Partnerships
   
Offshore Funds
   
Total
 
   
VIEs
   
VOEs
   
VIEs
   
VOEs
   
VIEs
   
VOEs
   
VIEs
   
VOEs
 
Entities consolidated at December 31, 2010
    1       2       -       2       1       -       2       4  
Additional consolidated entities
    -       -       -       -       -       1       -       1  
Deconsolidated entities
    -       -       -       (1 )     -       -       -       (1 )
Entities consolidated at June 30, 2011
    1       2       -       1       1       1       2       4  
Additional consolidated entities
    -       -       -       -       -       -       -       -  
Deconsolidated entities
    -       -       -       -       (1 )     -       (1 )     -  
Entities consolidated at December 31, 2011
    1       2       -       1       -       1       1       4  
Additional consolidated entities
    -       -       -       -       -       -       -       -  
Deconsolidated entities
    -       -       -       -       -       -       -       -  
Entities consolidated at June 30, 2012
    1       2       -       1       -       1       1       4  
                                                                 
 
 
14

 

On January 1, 2011, upon analysis of several factors, including the additional contribution of capital from unrelated third parties into a partnership that we consolidated for the year ended and as of December 31, 2010, we determined that the Company was no longer deemed to control one particular partnership, resulting in the deconsolidation of this partnership, effective January 1, 2011.  The deconsolidation did not result in the recognition of any gain or loss.  The Company continues to serve as the general partner and earn fees for this role, and it also maintains an investment in the deconsolidated partnership which is included in investments in partnerships on the condensed consolidated statements of financial condition and is accounted for under the equity method (which approximates fair value).

The following table includes the net impact by line item on the condensed consolidated statements of financial condition for each category of entity consolidated (in thousands):
 
   
June 30, 2012
 
   
Prior to
                 
   
Consolidation
 
CFFs
 
Partnerships
 
Offshore Funds
 
As Reported
 
Assets
                     
Cash and cash equivalents
  $ 323,560   $ -   $ 880   $ -   $ 324,440  
Investments in securities
    223,198     -     6,993     19,439     249,630  
Investments in sponsored registered investment companies
    59,561     -     -     -     59,561  
Investments in partnerships
    109,055     1,237     (8,173 )   -     102,119  
Receivable from brokers
    25,337     -     573     15,603     41,513  
Investment advisory fees receivable
    26,028     (1 )   (1 )   -     26,026  
Other assets
    23,226     9     -     206     23,441  
Total assets
  $ 789,965   $ 1,245   $ 272   $ 35,248   $ 826,730  
Liabilities and equity
                               
Securities sold, not yet purchased
  $ 6,788   $ -   $ -   $ 222   $ 7,010  
Accrued expenses and other liabilities
    87,569     56     20     10,305     97,950  
Total debt
    265,598     -     -     -     265,598  
Redeemable noncontrolling interests
    -     1,189     252     24,721     26,162  
Total equity
    430,010     -     -     -     430,010  
Total liabilities and equity
  $ 789,965   $ 1,245   $ 272   $ 35,248   $ 826,730  
                                 
   
December 31, 2011
 
   
Prior to
                         
   
Consolidation
 
CFFs
 
Partnerships
 
Offshore Funds
 
As Reported
 
Assets
                               
Cash and cash equivalents
  $ 259,531   $ 15,000   $ 1,809   $ -   $ 276,340  
Investments in securities
    225,599     -     6,211     6,523     238,333  
Investments in sponsored registered investment companies
    59,197     -     17     -     59,214  
Investments in partnerships
    107,981     933     (8,021 )   -     100,893  
Receivable from brokers
    17,593     -     270     3,050     20,913  
Investment advisory fees receivable
    32,157     1     (2 )   -     32,156  
Other assets
    43,889     (14,989 )   -     -     28,900  
Total assets
  $ 745,947   $ 945   $ 284   $ 9,573   $ 756,749  
Liabilities and equity
                               
Securities sold, not yet purchased
  $ 5,488   $ -   $ -   $ -   $ 5,488  
Accrued expenses and other liabilities
    69,929     51     28     4,652     74,660  
Total debt
    263,119     -     -     -     263,119  
Redeemable noncontrolling interests
    -     894     256     4,921     6,071  
Total equity
    407,411     -     -     -     407,411  
Total liabilities and equity
  $ 745,947   $ 945   $ 284   $ 9,573   $ 756,749  
                                 
   
June 30, 2011
 
   
Prior to
                         
   
Consolidation
 
CFFs
 
Partnerships
 
Offshore Funds
 
As Reported
 
Assets
                               
Cash and cash equivalents
  $ 260,740   $ -   $ 98   $ 1   $ 260,839  
Investments in securities
    218,330     -     7,048     73,047     298,425  
Investments in sponsored registered investment companies
    64,858     -     22     -     64,880  
Investments in partnerships
    160,435     1,158     (8,892 )   (54,103 )   98,598  
Receivable from brokers
    11,155     -     1,932     22,881     35,968  
Investment advisory fees receivable
    25,801     19     (1 )   (73 )   25,746  
Other assets
    26,134     11     -     57     26,202  
Total assets
  $ 767,453   $ 1,188   $ 207   $ 41,810   $ 810,658  
Liabilities and equity
                               
Securities sold, not yet purchased
  $ 2,910   $ -   $ -   $ 7,334   $ 10,244  
Accrued expenses and other liabilities
    94,928     117     31     204     95,280  
Total debt
    260,814     -     -     -     260,814  
Redeemable noncontrolling interests
    -     1,071     176     34,272     35,519  
Total equity
    408,801     -     -     -     408,801  
Total liabilities and equity
  $ 767,453   $ 1,188   $ 207   $ 41,810   $ 810,658  
                                 
 
 
15

 
 
The following table includes the net impact by line item on the condensed consolidated statements of income for each category of entity consolidated (in thousands):

   
Three Months Ended June 30, 2012
 
   
Prior to
                         
   
Consolidation
 
CFFs
   
Partnerships
   
Offshore Funds
 
As Reported
 
Total revenues
  $ 80,703     $ (1 )   $ -     $ 322     $ 81,024  
Total expenses
    50,649       25       8       (25 )     50,657  
Operating income
    30,054       (26 )     (8 )     347       30,367  
Total other income (expense), net
    (6,361 )     12       (6 )     (463 )     (6,818 )
Income before income taxes
    23,693       (14 )     (14 )     (116 )     23,549  
Income tax provision
    8,686       -       -       -       8,686  
Net income
    15,007       (14 )     (14 )     (116 )     14,863  
Net loss attributable to noncontrolling interests
    (98 )     (14 )     (14 )     (116 )     (242 )
Net income attributable to GAMCO
  $ 15,105     $ -     $ -     $ -     $ 15,105  
                                         
   
Three Months Ended June 30, 2011
 
   
Prior to
                                 
   
Consolidation
 
CFFs
   
Partnerships
   
Offshore Funds
 
As Reported
 
Total revenues
  $ 85,152     $ -     $ -     $ (71 )   $ 85,081  
Total expenses
    54,432       28       8       116       54,584  
Operating income
    30,720       (28 )     (8 )     (187 )     30,497  
Total other income, net
    1,903       (72 )     (160 )     456       2,127  
Income before income taxes
    32,623       (100 )     (168 )     269       32,624  
Income tax provision
    11,945       -       -       -       11,945  
Net income
    20,678       (100 )     (168 )     269       20,679  
Net income/(loss) attributable to noncontrolling interests
    31       (100 )     (168 )     269       32  
Net income attributable to GAMCO
  $ 20,647     $ -     $ -     $ -     $ 20,647  
                                         
                                         
   
Six Months Ended June 30, 2012
 
   
Prior to
                                 
   
Consolidation
 
CFFs
   
Partnerships
   
Offshore Funds
 
As Reported
 
Total revenues
  $ 163,282     $ (2 )   $ (1 )   $ (506 )   $ 162,773  
Total expenses
    105,170       48       19       157       105,394  
Operating income
    58,112       (50 )     (20 )     (663 )     57,379  
Total other income, net
    3,183       97       17       595       3,892  
Income before income taxes
    61,295       47       (3 )     (68 )     61,271  
Income tax provision
    22,442       -       -       -       22,442  
Net income
    38,853       47       (3 )     (68 )     38,829  
Net income/(loss) attributable to noncontrolling interests
    (88 )     47       (3 )     (68 )     (112 )
Net income attributable to GAMCO
  $ 38,941     $ -     $ -     $ -     $ 38,941  
                                         
   
Six Months Ended June 30, 2011
 
   
Prior to
                                 
   
Consolidation
 
CFFs
   
Partnerships
   
Offshore Funds
 
As Reported
 
Total revenues
  $ 162,120     $ (4 )   $ (1 )   $ (129 )   $ 161,986  
Total expenses
    110,406       59       23       241       110,729  
Operating income
    51,714       (63 )     (24 )     (370 )     51,257  
Total other income, net
    8,899       179       (64 )     922       9,936  
Income before income taxes
    60,613       116       (88 )     552       61,193  
Income tax provision
    22,233       -       -       -       22,233  
Net income
    38,380       116       (88 )     552       38,960  
Net income/(loss) attributable to noncontrolling interests
    90       116       (88 )     552       670  
Net income attributable to GAMCO
  $ 38,290     $ -     $ -     $ -     $ 38,290  
                                         
 
Variable Interest Entities

We also have sponsored a number of investment vehicles where we are the general partner or investment manager.  These vehicles are variable interest entities (“VIEs”), and we are not the primary beneficiary because we do not absorb a majority of the entities’ expected losses or expected returns.  The Company has not provided any financial or other support to these entities.  The total assets of these entities at June 30, 2012, December 31, 2011 and June 30, 2011 were $80.0 million, $73.7 million and $23.5 million, respectively.  Our maximum exposure to loss as a result of our involvement with the VIEs is limited to the investment in one VIE and the deferred carried interest that we have in another.  On June 30, 2012 and December 31, 2011, we had an investment in one of the VIE offshore funds of approximately $8.1 million and $5.0 million, respectively, which was included in investments in partnerships on the condensed consolidated statements of financial condition.  On June 30, 2012, December 31, 2011 and June 30, 2011, we had a deferred carried interest in one of the VIE offshore funds of approximately $43,000, $47,000 and $49,000, respectively, which was included in investments in partnerships on the condensed consolidated statements of financial condition.  Additionally, as the general partner or investment manager to these VIEs the Company earns fees in relation to these roles, which given a decline in AUMs of the VIEs would result in lower fee revenues earned by the Company which would be reflected on the condensed consolidated statements of income, condensed consolidated statements of financial condition and condensed consolidated statements of cash flows.
 
 
16

 
 
Prior to January 1, 2011, we were consolidating two VIEs since we had determined that we were the primary beneficiary of each because we had equity interests and absorbed a majority of each entity’s expected losses; therefore they were consolidated in the financial statements.  Effective October 1, 2011, we deconsolidated one of the VIEs upon analysis of several factors, including the redemption of $49.2 million of proprietary capital from this VIE by which, we determined that the Company was no longer deemed to be the primary beneficiary of the VIE.  The deconsolidation did not result in the recognition of any gain or loss.  The Company has not provided any financial support to these VIEs but does continue to serve as the investment manager and earn fees for this role, and it also maintains an investment in the deconsolidated VIE, which is included in investments in partnerships on the condensed consolidated statements of financial condition and is accounted for under the equity method (which approximates fair value).  The assets of these VIEs may only be used to satisfy obligations of the VIEs.  The following table presents the balances related to these VIEs that are consolidated and were included on the condensed consolidated statements of financial condition as well as GAMCO’s net interest in these VIEs.  Only one VIE is consolidated at June 30, 2012 and December 31, 2011 and two at June 30, 2011:
 
   
June 30,
   
December 31,
   
June 30,
 
   
2012
   
2011
   
2011
 
(In thousands)
                 
Cash and cash equivalents
  $ -     $ 15,000     $ 1  
Investments in securities
    -       -       73,047  
Investments in partnerships
    21,831       1,433       1,576  
Receivable from brokers
    -       -       22,881  
Other assets
    -       -       57  
Securities sold, not yet purchased
    -       -       (7,334 )
Accrued expenses and other liabilities
    (12 )     (15,006 )     (327 )
Redeemable noncontrolling interests
    (669 )     (381 )     (34,794 )
GAMCO's net interests in consolidated VIEs
  $ 21,150     $ 1,046     $ 55,107  
                         
 
D. Fair Value

All of the instruments within cash and cash equivalents, investments in securities and securities sold, not yet purchased are measured at fair value.  Certain investments in partnerships are also measured at fair value.

The Company’s assets and liabilities recorded at fair value have been categorized based upon a fair value hierarchy in accordance with the FASB’s guidance on fair value measurement.  The levels of the fair value hierarchy and their applicability to the Company are described below:

-  
Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities at the reporting date.  Level 1 assets include cash equivalents, government obligations, open-end mutual funds, closed-end funds and equities.
-  
Level 2 inputs utilize inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly.  Level 2 inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities that are not active and inputs other than quoted prices that are observable for the asset or liability, such as interest rates and yield curves that are observable at commonly-quoted intervals.  Assets that generally are included in this category may include certain limited partnership interests in private funds in which the valuations for substantially all of the investments within the fund are based upon Level 1 or Level 2 inputs and over the counter derivatives that have inputs to the valuations that can generally be corroborated by observable market data.
-  
Level 3 inputs are unobservable inputs for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability.  Assets included in this category generally include equities that trade infrequently and direct private equity investments held within consolidated partnerships.
 
In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy.  In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level input that is significant to the fair value measurement in its entirety.  The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.  Investments are transferred into or out of any level at their beginning period values.
 
 
17

 
 
The availability of observable inputs can vary from product to product and is affected by a wide variety of factors, including, for example, the type of product, whether the product is new and not yet established in the marketplace, and other characteristics particular to the transaction.  To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment.  Accordingly, the degree of judgment exercised by the Company in determining fair value is greatest for instruments categorized as Level 3.

The valuation process and policies reside with the financial reporting and accounting group which reports to the Chief Financial Officer.  The Company uses the “market approach” valuation technique to value its investments in Level 3 investments.  The Company’s valuation of the Level 3 investments has been based upon either i) the recent sale prices of the issuer’s equity securities or ii) the net assets, book value or cost basis of the issuer when there is no recent sales prices available.

In the absence of a closing price, an average of the bid and ask price is used.  Bid prices reflect the highest price that the market is willing to pay for an asset.  Ask prices represent the lowest price that the market is willing to accept for an asset.

Cash equivalents – Cash equivalents primarily consist of an affiliated money market mutual fund which is invested solely in U.S. Treasuries.  U.S. Treasury Bills and Notes with maturities of three months or less at the time of purchase are also considered cash equivalents.  Cash equivalents are valued using quoted market prices.

Investments in securities and securities sold, not yet purchased – Investments in securities and securities sold, not yet purchased are generally valued based on quoted prices from an exchange.  To the extent these securities are actively traded, valuation adjustments are not applied, and they are categorized in Level 1 of the fair value hierarchy.  Securities categorized in Level 2 investments are valued using other observable inputs.  Nonpublic and infrequently traded investments are included in Level 3 of the fair value hierarchy because significant inputs to measure fair value are unobservable.

Investments in Partnerships – The Company’s investments include limited partner investments in consolidated feeder funds.  The Company considers the net asset value of the master funds held by the consolidated feeder fund to be the best estimate of fair value.  Investments in private funds that are redeemable at the measurement date or within the near term, are categorized in Level 2 of the fair value hierarchy.  These funds primarily invest in long and short investments in debt and equity securities that are traded in public and over-the-counter exchanges in the United States and are generally classified as Level 1 assets or liabilities in the master funds’ financial statements.  We may redeem our investments in these funds monthly with 30 days’ notice.

The following tables present information about the Company’s assets and liabilities by major categories measured at fair value on a recurring basis as of June 30, 2012, December 31, 2011 and June 30, 2011 and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value:
 
 
18

 

Assets and Liabilities Measured at Fair Value on a Recurring Basis as of June 30, 2012 (in thousands)
 
   
Quoted Prices in Active
 
Significant Other
   
Significant
   
Balance as of
 
   
Markets for Identical
 
Observable
   
Unobservable
   
June 30,
 
Assets
 
Assets (Level 1)
   
Inputs (Level 2)
   
Inputs (Level 3)
   
2012
 
Cash equivalents
  $ 324,156     $ -     $ -     $ 324,156  
Investments in partnerships
    -       23,704       -       23,704  
Investments in securities:
                               
  AFS - Common stocks
    32,815       -       -       32,815  
  AFS - Mutual funds
    2,013       -       -       2,013  
  Trading - Gov't obligations
    50,139       -       -       50,139  
  Trading - Common stocks
    161,956       256       671       162,883  
  Trading - Mutual funds
    1,406       -       -       1,406  
  Trading - Other
    23       -       351       374  
Total investments in securities
    248,352       256       1,022       249,630  
Investments in sponsored registered investment companies:
                 
  AFS - Closed-end Funds
    56,171       -       -       56,171  
  AFS - Mutual Funds
    3,371       -       -       3,371  
  Trading - Mutual funds
    19       -       -       19  
Total investments in sponsored
                               
  registered investment companies
    59,561       -       -       59,561  
Total investments
    307,913       23,960       1,022       332,895  
Total assets at fair value
  $ 632,069     $ 23,960     $ 1,022     $ 657,051  
Liabilities
                               
  Trading - Common stocks
  $ 6,687     $ -     $ -     $ 6,687  
  Trading - Other
    -       323       -       323  
Securities sold, not yet purchased
  $ 6,687     $ 323     $ -     $ 7,010  
                                 
 
Assets and Liabilities Measured at Fair Value on a Recurring Basis as of December 31, 2011 (in thousands)
 
   
Quoted Prices in Active
 
Significant Other
   
Significant
   
Balance as of
 
   
Markets for Identical
 
Observable
   
Unobservable
   
December 31,
 
Assets
 
Assets (Level 1)
   
Inputs (Level 2)
   
Inputs (Level 3)
   
2011
 
Cash equivalents
  $ 260,969     $ -     $ -     $ 260,969  
Investments in partnerships
    -       27,122       -       27,122  
Investments in securities:
                               
  AFS - Common stocks
    33,282       -       -       33,282  
  AFS - Mutual funds
    1,905       -       -       1,905  
  Trading - Gov't obligations
    42,126       -       -       42,126  
  Trading - Common stocks
    158,623       21       670       159,314  
  Trading - Mutual funds
    1,307       -       -       1,307  
  Trading - Other
    55       60       284       399  
Total investments in securities
    237,298       81       954       238,333  
Investments in sponsored registered investment companies:
                 
  AFS - Closed-end Funds
    55,855       -       -       55,855  
  AFS - Mutual Funds
    3,341       -       -       3,341  
  Trading - Mutual funds
    18       -       -       18  
Total investments in sponsored
                               
  registered investment companies
    59,214       -       -       59,214  
Total investments
    296,512       27,203       954       324,669  
Total assets at fair value
  $ 557,481     $ 27,203     $ 954     $ 585,638  
Liabilities
                               
  Trading - Common stocks
  $ 5,415     $ -     $ -     $ 5,415  
  Trading - Other
    -       73       -       73  
Securities sold, not yet purchased
  $ 5,415     $ 73     $ -     $ 5,488  
                                 
 
 
19

 

Assets and Liabilities Measured at Fair Value on a Recurring Basis as of June 30, 2011 (in thousands)
 
   
Quoted Prices in Active
 
Significant Other
   
Significant
   
Balance as of
 
   
Markets for Identical
 
Observable
   
Unobservable
   
June 30,
 
Assets
 
Assets (Level 1)
   
Inputs (Level 2)
   
Inputs (Level 3)
   
2011
 
Cash equivalents
  $ 260,177     $ -     $ -     $ 260,177  
Investments in partnerships
    -       27,977       -       27,977  
Investments in securities:
                               
  AFS - Common stocks
    35,296       -       -       35,296  
  AFS - Mutual funds
    2,098       -       -       2,098  
  Trading - Gov't obligations
    7,925       -       -       7,925  
  Trading - Common stocks
    250,524       10       584       251,118  
  Trading - Mutual funds
    1,501       -       -       1,501  
  Trading - Other
    118       -       369       487  
Total investments in securities
    297,462       10       953       298,425  
Investments in sponsored registered investment companies:
                 
  AFS - Closed-end Funds
    60,900       -       -       60,900  
  AFS - Mutual Funds
    3,956       -       -       3,956  
  Trading - Mutual funds
    24       -       -       24  
Total investments in sponsored
                               
  registered investment companies
    64,880       -       -       64,880  
Total investments
    362,342       27,987       953       391,282  
Total assets at fair value
  $ 622,519     $ 27,987     $ 953     $ 651,459  
Liabilities
                               
  Trading - Common stocks
  $ 10,238     $ -     $ -     $ 10,238  
  Trading - Other
    6       -       -       6  
Securities sold, not yet purchased
  $ 10,244     $ -     $ -     $ 10,244  
                                 
 
The following tables present additional information about assets by major categories measured at fair value on a recurring basis and for which the Company has utilized Level 3 inputs to determine fair value.

Changes in Level 3 Assets and Liabilities Measured at Fair Value on a Recurring Basis for the Three Months Ended June 30, 2012 (in thousands)
 
               
Total
                     
               
Unrealized
                     
               
Gains or
 
Total
                 
       
Total Realized and
 
(Losses)
 
Realized
                 
   
March
 
Unrealized Gains or
 
Included in
 
and
         
Transfers
     
    31, 2012   
(Losses) in Income
 
Other
 
Unrealized
         
In and/or
     
   
Beginning
     
AFS
 
Comprehensive
 
Gains or
         
(Out) of
 
Ending
 
Asset
 
Balance
 
Trading
 
Investments
 
Income
 
(Losses)
 
Purchases
 
Sales
 
Level 3
 
Balance
 
Financial
                                       
instruments owned:
                                 
Trading - Common
                                 
  stocks
  $ 647   $ 24   $ -   $ -   $ 24   $ -   $ -   $ -   $ 671  
Trading - Other
    278     59     -     -     59     14     -     -     351  
Total
  $ 925   $ 83   $ -   $ -   $ 83   $ 14   $ -   $ -   $ 1,022  
                                                         
 
There were no transfers between any Levels during the three months ended June 30, 2012.
 
 
20

 

Changes in Level 3 Assets and Liabilities Measured at Fair Value on a Recurring Basis for the Three Months Ended June 30, 2011 (in thousands)
 
               
Total
                     
               
Unrealized
                     
               
Gains or
 
Total
                 
       
Total Realized and
 
(Losses)
 
Realized
                 
   
March
 
Unrealized Gains or
 
Included in
 
and
         
Transfers
     
    31, 2011   
(Losses) in Income
 
Other
 
Unrealized
         
In and/or
     
   
Beginning
     
AFS
 
Comprehensive
 
Gains or
         
(Out) of
 
Ending
 
Asset
 
Balance
 
Trading
 
Investments
 
Income
 
(Losses)
 
Purchases
 
Sales
 
Level 3
 
Balance
 
Financial
                                       
instruments owned:
                                 
Trading - Common
                                 
  stocks
  $ 568   $ 16   $ -   $ -   $ 16   $ 14   $ (14 ) $ -   $ 584  
Trading - Other
    356     (3 )   -     -     (3 )   10     -     6     369  
Total
  $ 924   $ 13   $ -   $ -   $ 13   $ 24   $ (14 ) $ 6   $ 953  
                                                         
 
There were no transfers between Level 1 and Level 2 during the three months ended June 30, 2011.  Transfers are based on the value at the beginning of the period.  During the three months ended June 30, 2011, the Company reclassed approximately $6,000 of investments from Level 1 to Level 3.  The reclassifications were due to decreased availability of market price quotations and were based on the values at the beginning of the period in which the reclass occurred.

Changes in Level 3 Assets and Liabilities Measured at Fair Value on a Recurring Basis for the Six Months Ended June 30, 2012 (in thousands)
 
               
Total
                     
               
Unrealized
                     
               
Gains or
 
Total
                 
       
Total Realized and
 
(Losses)
 
Realized
                 
   
December
 
Unrealized Gains or
 
Included in
 
and
         
Transfers
     
    31, 2011   
(Losses) in Income
 
Other
 
Unrealized
         
In and/or
     
   
Beginning
     
AFS
 
Comprehensive
 
Gains or
         
(Out) of
 
Ending
 
Asset
 
Balance
 
Trading
 
Investments
 
Income
 
(Losses)
 
Purchases
 
Sales
 
Level 3
 
Balance
 
Financial
                                       
instruments owned:
                                 
Trading - Common
                                 
  stocks
  $ 670   $ 24   $ -   $ -   $ 24   $ 57   $ (80 ) $ -   $ 671  
Trading - Other
    284     57     -     -     57     18     (8 )   -     351  
Total
  $ 954   $ 81   $ -   $ -   $ 81   $ 75   $ (88 ) $ -   $ 1,022  
                                                         
 
There were no transfers between any Levels during the six months ended June 30, 2012.
 
 
21

 

Changes in Level 3 Assets and Liabilities Measured at Fair Value on a Recurring Basis for the Six Months Ended June 30, 2011 (in thousands)
 
               
Total
                     
               
Unrealized
                     
               
Gains or
 
Total
                 
       
Total Realized and
 
(Losses)
 
Realized
                 
   
December
 
Unrealized Gains or
 
Included in
 
and
         
Transfers
     
    31, 2010   
(Losses) in Income
 
Other
 
Unrealized
         
In and/or
     
   
Beginning
     
AFS
 
Comprehensive
 
Gains or
         
(Out) of
 
Ending
 
Asset
 
Balance
 
Trading
 
Investments
 
Income
 
(Losses)
 
Purchases
 
Sales
 
Level 3
 
Balance
 
Financial
                                       
instruments owned:
                                 
Trading - Common
                                 
  stocks
  $ 147   $ 37   $ -   $ -   $ 37   $ 414   $ (14 ) $ -   $ 584  
Trading - Other
    278     123     -     -     123     10     (48 )   6     369  
Total
  $ 425   $ 160   $ -   $ -   $ 160   $ 424   $ (62 ) $ 6   $ 953  
                                                         
 
There were no transfers between Level 1 and Level 2 during the six months ended June 30, 2011.  Transfers are based on the value at the beginning of the period.  During the six months ended June 30, 2011, the Company reclassed approximately $6,000 of investments from Level 1 to Level 3.  The reclassifications were due to decreased availability of market price quotations and were based on the values at the beginning of the period in which the reclass occurred.

E. Debt

Debt consists of the following:
 
   
June 30, 2012
   
December 31, 2011
   
June 30, 2011
 
   
Carrying
   
Fair Value
   
Carrying
   
Fair Value
   
Carrying
   
Fair Value
 
   
Value
   
Level 2
   
Value
   
Level 2
   
Value
   
Level 2
 
(In thousands)
                                   
5.5% Senior notes
  $ 99,000     $ 100,955     $ 99,000     $ 100,733     $ 99,000     $ 103,455  
5.875% Senior notes
    100,000       99,950       100,000       93,070       100,000       97,440  
0% Subordinated debentures
    66,598       75,184       64,119       58,899       61,814       57,956  
Total
  $ 265,598     $ 276,089     $ 263,119     $ 252,702     $ 260,814     $ 258,851  
                                                 
 
On May 31, 2011, the Company issued $100 million of senior unsecured notes at par.  The net proceeds of $99.1 million were used for working capital and general corporate purposes.  The issuance costs of $0.9 million have been capitalized and are being amortized over the term of the debt.  The notes mature on June 1, 2021 and bear interest at 5.875% per annum, payable semi-annually on June 1 and December 1 of each year and commenced on December 1, 2011.  Upon the occurrence of a change of control triggering event, as defined in the indenture, the Company would be required to offer to repurchase the notes at 101% of their principal amount.

On December 31, 2010, the Company issued $86.4 million in par value of five year zero coupon subordinated debentures due December 31, 2015 (“Debentures”) to its shareholders of record on December 15, 2010 through the declaration of a special dividend of $3.20 per share.  The Debentures have a par value of $100 and are callable at the option of the Company, in whole or in part, at any time or from time to time, at a redemption price equal to 100% of the principal amount of the Debentures to be redeemed.  During the six months ended June 30, 2012, the Company repurchased 229 Debentures having a face value of $22,900.  The redemption was accounted for as an extinguishment of debt and resulted in a loss of $1,000, which was included in net gain from investments on the condensed consolidated statements of income.  There were no repurchases for the three months ended June 30, 2012 or for the three and six month periods ended June 30, 2011.  The debt is being accreted to its face value using the effective rate on the date of issuance of 7.45%.  At June 30, 2012, December 31, 2011 and June 30, 2011, the debt was recorded at its accreted value of $66.6 million, $64.1 million and $61.8 million, respectively.

The fair value of the Company’s debt, which is a Level 2 valuation, is estimated based on either quoted market prices for the same or similar issues or on the current rates offered to the Company for debt of the same remaining maturities or using market standard models.  Inputs in these standard models include credit rating, maturity and interest rate.
 
 
22

 
 
On May 30, 2012, the Securities and Exchange Commission (“SEC”) declared effective the “shelf” registration statement filed by the Company.  The “shelf” provides the Company with the flexibility of issuing any combination of senior and subordinated debt securities, convertible securities and common and preferred securities up to a total amount of $500 million and replaced the existing shelf registration which was due to expire in July 2012.  $400 million is available on the shelf.

F. Income Taxes
 
The effective tax rate for the three months ended June 30, 2012 was 36.9% compared to 36.6% for the prior year three month period.  The effective tax rate for the six months ended June 30, 2012 was 36.6% compared to 36.3% for the prior year six month period.

G. Earnings Per Share
 
The computations of basic and diluted net income per share are as follows:
 
   
Three Months Ended June 30,
   
Six Months Ended June 30,
 
(in thousands, except per share amounts)
 
2012
   
2011
   
2012
   
2011
 
Basic:
                       
Net income attributable to GAMCO Investors, Inc.'s shareholders
  $ 15,105     $ 20,647     $ 38,941     $ 38,290  
Weighted average shares outstanding
    26,258       26,665       26,338       26,783  
Basic net income attributable to GAMCO Investors, Inc.'s
                               
  shareholders per share
  $ 0.58     $ 0.77     $ 1.48     $ 1.43  
                                 
Diluted:
                               
Net income attributable to GAMCO Investors, Inc.'s shareholders
  $ 15,105     $ 20,647     $ 38,941     $ 38,290  
                                 
Weighted average share outstanding
    26,258       26,665       26,338       26,783  
Dilutive stock options and restricted stock awards
    168       68       163       89  
Total
    26,426       26,733       26,501       26,872  
Diluted net income attributable to GAMCO Investors, Inc.'s
                               
  shareholders per share
  $ 0.57     $ 0.77     $ 1.47     $ 1.42  
                                 
                                 
 
H. Stockholders’ Equity
 
Shares outstanding were 26.6 million on June 30, 2012, 26.8 million on December 31, 2011, and 26.8 million on June 30, 2011.

Dividends
 
 
Payment
Record
     
 
Date
Date
 
Amount
 
           
Three months ended March 31, 2012
March 27, 2012
March 13, 2012
  $ 0.04  
Three months ended June 30, 2012
June 26, 2012
June 12, 2012
    0.29  
Six months ended June 30, 2012
      $ 0.33  
             
Three months ended March 31, 2011
March 29, 2011
March 15, 2011
  $ 0.03  
Three months ended June 30, 2011
June 28, 2011
June 14, 2011
    0.04  
Six months ended June 30, 2011
      $ 0.07  
             
 
Voting Rights

The holders of Class A Common stock (“Class A Stock”) and Class B Common stock (“Class B Stock”) have identical rights except that (i) holders of Class A Stock are entitled to one vote per share, while holders of Class B Stock are entitled to ten votes per share on all matters to be voted on by shareholders in general, and (ii) holders of Class A Stock are not eligible to vote on matters relating exclusively to Class B Stock and vice versa.

Stock Award and Incentive Plan
 
The Company maintains two plans approved by the shareholders, which are designed to provide incentives which will attract and retain individuals key to the success of GAMCO through direct or indirect ownership of our common stock.  Benefits under the Plans may be granted in any one or a combination of stock options, stock appreciation rights, restricted stock, restricted stock units, stock awards, dividend equivalents and other stock or cash based awards.  A maximum of 1.5 million shares of Class A Stock have been reserved for issuance under each of the Plans by a committee of the Board of Directors responsible for administering the Plans (“Compensation Committee”).  Under the Plans, the committee may grant RSAs and either incentive or nonqualified stock options with a term not to exceed ten years from the grant date and at an exercise price that the committee may determine.  Options granted under the plans typically vest 75% after three years and 100% after four years from the date of grant and expire after ten years.  Restricted stock award (“RSA”) shares granted under the Plans typically vest 30% after three years and 100% after five years.

On January 3, 2012, the Company approved the granting of 105,300 RSA shares at a grant date fair value of $43.49 per share.  On January 15, 2011, and February 9, 2011, the Company approved the granting of 193,900 RSA shares and 3,300 RSA shares, respectively, at a grant date fair value of $48.85 per share and $45.77 per share, respectively.  As of June 30, 2012, December 31, 2011 and June 30, 2011, there were 373,500 RSA shares, 275,600 RSA shares and 289,800 RSA shares, respectively, outstanding that were previously issued at an average weighted grant price of $45.15, $45.56 and $45.50, respectively.  All grants of the RSA shares were recommended by the Company's Chairman, who did not receive a RSA, and approved by the Compensation Committee.  This expense, net of forfeitures, is recognized over the vesting period for these awards which is 30% over three years from the date of grant and 70% over five years from the date of grant.  During the vesting period, dividends to RSA holders are held for them until the RSA vesting dates and are forfeited if the grantee is no longer employed by the Company on the vesting dates.  Dividends declared on these RSAs, less estimated forfeitures, are charged to retained earnings on the declaration date.
 
For the three months ended June 30, 2012 and June 30, 2011, we recognized stock-based compensation expense of $0.9 million and $0.7 million, respectively.  For the six months ended June 30, 2012 and June 30, 2011, we recognized stock-based compensation expense of $1.7 million and $1.3 million, respectively.  Actual and projected stock-based compensation expense for RSA shares and options for the years ended December 31, 2011 through December 31, 2016 (based on awards currently issued or granted) is as follows ($ in thousands):
 
     
2011
   
2012
   
2013
   
2014
   
2015
   
2016
 
  Q1     $ 577     $ 871     $ 870     $ 625     $ 494     $ 175  
  Q2       686       869       848       588       462       128  
  Q3       655       870       805       588       399       128  
  Q4       670       870       805       588       399       128  
Full Year
    $ 2,588     $ 3,480     $ 3,328     $ 2,389     $ 1,754     $ 559  
                                                     
 
The total compensation cost related to non-vested RSAs and options not yet recognized is approximately $9.8 million as of June 30, 2012.  For the three and six months ended June 30, 2012, proceeds from the exercise of 2,000 stock options were $58,000 resulting in a tax benefit to GAMCO of $3,000.  There were no options exercised in either the three or six month periods ended June 30, 2011.  The Company recognized $21,000 in tax benefits from 3,900 RSAs that vested during the six months ended June 30, 2012.

Stock Repurchase Program
 
In March 1999, GAMCO's Board of Directors established the Stock Repurchase Program to grant management the authority to repurchase shares of our Class A Common Stock.  On May 6, 2011, our Board of Directors authorized an incremental 500,000 shares to be added to the current buyback authorization.  For the three months ended June 30, 2012 and June 30, 2011, the Company repurchased 3,369 shares and 268,621 shares, respectively, at an average price per share of $44.08 and $46.21, respectively.  For the six months ended June 30, 2012 and June 30, 2011, the Company repurchased 228,102 shares and 430,209 shares, respectively, at an average price per share of $44.34 and $45.34, respectively.  From the inception of the program through June 30, 2012, 7,572,154 shares have been repurchased at an average price of $40.74 per share.  At June 30, 2012, the total shares available under the program to be repurchased in the future were 345,265.
 
 
24

 

I. Goodwill and Identifiable Intangible Assets
 
At June 30, 2012, $3.5 million of goodwill is reflected within other assets on the condensed consolidated statements of financial condition with $3.3 million related to a 93%-owned subsidiary, Gabelli Securities, Inc. and $0.2 million related to G.distributors, LLC.  The Company assesses the recoverability of goodwill at least annually, or more often should events warrant, using a qualitative assessment of whether it is more likely than not that an impairment has occurred to determine if a quantitative analysis is required.  There were no indicators of impairment for the three and six months ended June 30, 2012 or the three and six months ended June 30, 2011, and as such there was no impairment analysis performed or charge recorded.

As a result of becoming the advisor to the Gabelli Enterprise Mergers and Acquisitions Fund and the associated consideration paid, the Company maintains an identifiable intangible asset of $1.9 million within other assets on the condensed consolidated statements of financial condition at June 30, 2012, December 31, 2011 and June 30, 2011.  The investment advisory agreement is subject to annual renewal by the fund's Board of Directors, which the Company expects to be renewed, and the Company does not expect to incur additional expense as a result, which is consistent with other investment advisory agreements entered into by the Company.  The advisory contract is next up for renewal in February 2013.  The Company assesses the recoverability of this intangible asset at least annually, or more often should events warrant.  There were no indicators of impairment for the three and six months ended June 30, 2012 or June 30, 2011, and as such there was no impairment analysis performed or charge recorded.

J.  Commitments and Contingencies
 
From time to time, the Company is named in legal actions and proceedings.  These actions may seek substantial or indeterminate compensatory as well as punitive damages or injunctive relief.  The Company is also subject to governmental or regulatory examinations or investigations.  The examinations or investigations could result in adverse judgments, settlements, fines, injunctions, restitutions or other relief.  The Company cannot predict the ultimate outcome of such matters.  The consolidated financial statements include the necessary provisions for losses that the Company believes are probable and estimable.  Furthermore, the Company evaluates whether there exist losses which may be reasonably possible and, if material, makes the necessary disclosures.  Such amounts, both those that are probable and those that are reasonably possible, are not considered material to the Company’s financial condition, operations or cash flows.

The Company indemnifies the clearing brokers of Gabelli & Company, our broker-dealer subsidiary, for losses they may sustain from the customer accounts that trade on margin introduced by it.  At June 30, 2012, the total amount of customer balances subject to indemnification (i.e. unsecured margin debits) was immaterial.  The Company also has entered into arrangements with various other third parties many of which provide for indemnification of the third parties against losses, costs, claims and liabilities arising from the performance of obligations under the agreements.  The Company has had no claims or payments pursuant to these or prior agreements and believes the likelihood of a claim being made is remote.  The Company’s estimate of the value of such agreements is de minimis, and therefore an accrual has not been made on the condensed consolidated financial statements.
 
K. Subsequent Events
 
On July 2, 2012, the Company completed a tender offer (the “Offer”) for its 0% Subordinated Debentures due December 31, 2015 (“Debentures”).  In connection with the Offer, the Company purchased $64.1 million in face value of Debentures at a price of $870 per $1,000 principal amount for a total cash consideration of $55.8 million.  This transaction reduces the Company’s cash and cash equivalents by $55.8 million, debt outstanding by $49.5 million and results in a one-time loss on extinguishment of debt, net of management fees and tax benefit, of approximately $2.1 million or $0.08 per fully diluted share to be recorded during the third quarter of 2012.  Interest expense is expected to be reduced by $1.8 million in the second half of 2012 and, annually, by $4.0 million in 2013, $4.3 million in 2014 and $4.6 million in 2015.

On August 7, 2012, our Board of Directors increased its quarterly dividend by 25% to $0.05 per share to all of its Class A and Class B shareholders in addition to declaring a special dividend of $0.25 per share payable on September 25, 2012 to its Class A and Class B shareholders of record on September 11, 2012.
 
 
25

 

ITEM 2:  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (INCLUDING QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK)

Overview
 
GAMCO through the Gabelli brand, 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. (“Gabelli & Company”), we provide institutional research and brokerage services to institutional clients and investment partnerships.  Through G.distributors, LLC (“G.distributors”), we provide mutual fund distribution.  We generally manage assets on a fully discretionary basis and invest in a variety of U.S. and international securities through various investment styles.  Our revenues are based primarily on the Company’s levels of assets under management and fees associated with our various investment products.
 
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.  General stock market trends will have the greatest impact on our level of assets under management and hence, on revenues.

We conduct our investment advisory business principally through: GAMCO Asset Management Inc. (Institutional and High Net Worth), Gabelli Funds, LLC (Mutual Funds) and Gabelli Securities, Inc. (Investment Partnerships).  We also act as an underwriter and provide institutional research through Gabelli & Company, one of our broker-dealer subsidiaries.  The distribution of our open-end funds is conducted through G.distributors.
 
Assets under management (“AUM”) were $35.7 billion as of June 30, 2012, a decrease of 1.3% from AUM of $36.1 billion at June 30, 2011 and down 2.8% from the March 31, 2012 AUM of $36.7 billion.  Fund flows in the second quarter of 2012 were a negative $1.0 billion consisting of market depreciation of $1.0 billion and net cash inflows of $2 million.  Average total AUM was $35.5 billion in the 2012 quarter versus $35.7 billion in the prior year period, a decrease of 0.6%.  Average AUM in our open-end equity funds, a key driver to our investment advisory fees, was $12.5 billion in the second quarter of 2012, down 0.8% from the 2011 quarter average AUM of $12.6 billion.

In addition to management fees, we earn incentive fees for certain institutional client assets, assets attributable to preferred issues for our closed-end funds, our Gabelli Global Deal Fund (NYSE: GDL) and investment partnership assets.  As of June 30, 2012, assets with incentive based fees were $3.9 billion, 2.6% higher than the $3.8 billion on June 30, 2011 and 5.4% above the $3.7 billion on March 31, 2012. 
 
 
26

 
 
The Company reported Assets Under Management as follows (in millions):
             
                               
Table I: Fund Flows - 2nd Quarter 2012
                         
                  Closed-end Fund        
         
Market
         
distributions,
       
   
March 31,
   
appreciation/
   
Net cash
   
net of
   
June 30,
 
   
2012
   
(depreciation)
   
flows
   
reinvestments
   
2012
 
Equities:
                             
Open-end Funds
  $ 12,996     $ (306 )   $ (194 )   $ -     $ 12,496  
Closed-end Funds
    6,067       (203 )     105       (109 )     5,860  
Institutional & PWM - direct
    12,031       (343 )     (33 )     -       11,655  
Institutional & PWM - sub-advisory
    2,924       (160 )     24       -       2,788  
Investment Partnerships
    594       (5 )     192       -       781  
SICAV (a)
    118       (1 )     9       -       126  
Total Equities
    34,730       (1,018 )     103       (109 )     33,706  
Fixed Income:
                                       
Money-Market Fund
    1,922       -       (29 )     -       1,893  
Institutional & PWM
    26       -       37       -       63  
Total Fixed Income
    1,948       -       8       -       1,956  
Total Assets Under Management
  $ 36,678     $ (1,018 )   $ 111     $ (109 )   $ 35,662  
                                         
 
The Company reported Assets Under Management as follows (in millions):
             
                               
Table II: Fund Flows - Six months ended June 30, 2012
                   
             Closed-end Fund        
         
Market
         
distributions,
       
   
December 31,
   
appreciation/
   
Net cash
   
net of
   
June 30,
 
   
2011
   
(depreciation)
   
flows
   
reinvestments
   
2012
 
Equities:
                             
Open-end Funds
  $ 12,273     $ 552     $ (329 )   $ -     $ 12,496  
Closed-end Funds
    5,799       133       145       (217 )     5,860  
Institutional & PWM - direct
    10,853       540       262       -       11,655  
Institutional & PWM - sub-advisory
    2,600       92       96       -       2,788  
Investment Partnerships
    605       10       166       -       781  
SICAV (a)
    105       1       20       -       126  
Total Equities
    32,235       1,328       360       (217 )     33,706  
Fixed Income:
                                       
Money-Market Fund
    1,824       -       69       -       1,893  
Institutional & PWM
    26       -       37       -       63  
Total Fixed Income
    1,850       -       106       -       1,956  
Total Assets Under Management
  $ 34,085     $ 1,328     $ 466     $ (217 )   $ 35,662  
                                         
 
 
27

 

Table III: Assets Under Management
                 
   
June 30,
   
June 30,
   
%
 
   
2011
   
2012
   
Inc.(Dec.)
 
Equities:
                 
Open-end Funds
  $ 12,912     $ 12,496       (3.2 %)
Closed-end Funds
    6,259       5,860       (6.4 )
Institutional & PWM - direct
    11,735       11,655       (0.7 )
Institutional & PWM - sub-advisory
    2,953       2,788       (5.6 )
Investment Partnerships
    609       781       28.2  
SICAV (a)
    -       126       n/m  
Total Equities
    34,468       33,706       (2.2 )
Fixed Income:
                       
Money-Market Fund
    1,643       1,893       15.2  
Institutional & PWM
    26       63       142.3  
Total Fixed Income
    1,669       1,956       17.2  
Total Assets Under Management
  $ 36,137     $ 35,662       (1.3 %)
                         
 
Table IV: Assets Under Management by Quarter
                               
                                 
% Increase/
 
                                 
(decrease) from
 
      6/11       9/11       12/11       3/12       6/12       6/11       3/12  
Equities:
                                                       
Open-end Funds
  $ 12,912     $ 11,469     $ 12,273     $ 12,996     $ 12,496       (3.2 %)     (3.8 %)
Closed-end Funds
    6,259       5,355       5,799       6,067       5,860       (6.4 )     (3.4 )
Institutional & PWM - direct
    11,735       9,644       10,853       12,031       11,655       (0.7 )     (3.1 )
Institutional & PWM - sub-advisory
    2,953       2,326       2,600       2,924       2,788       (5.6 )     (4.7 )
Investment Partnerships
    609       627       605       594       781       28.2       31.5  
SICAV (a)
    -       -       105       118       126       n/m       6.8  
Total Equities
    34,468       29,421       32,235       34,730       33,706       (2.2 )     (2.9 )
Fixed Income:
                                                       
Money-Market Fund
    1,643       1,895       1,824       1,922       1,893       15.2       (1.5 )
Institutional & PWM
    26       26       26       26       63       142.3       142.3  
Total Fixed Income
    1,669       1,921       1,850       1,948       1,956       17.2       0.4  
Total Assets Under Management
  $ 36,137     $ 31,342     $ 34,085     $ 36,678     $ 35,662       (1.3 %)     (2.8 %)
                                                         
(a) Includes $100 million, $102 million and $101 million of proprietary seed capital at December 31, 2011, March 31, 2012
 
and June 30, 2012, respectively.
                                                 
 
 
28

 

Relative long-term investment performance remained strong with approximately 40%,35%, 65% and 72% of firm wide mutual funds performing in the top half of their Lipper categories on a one-, three-, five-, and ten-year total return basis, respectively as of June 30, 2012.  Also, 44% of the firm’s mutual funds that are rated have a 4- or 5-star overall Morningstar RatingTM.
 
Gabelli/GAMCO Funds Morningstar Ratings Based on Risk Adjusted returns as of June 30, 2012 for funds that we manage
     
   
Overall Rating
3 Year Rating
5 Year Rating
10 Year Rating
 
Morningstar
 
# of
 
# of
 
# of
 
# of
FUND
Category
Stars
Funds
Stars
Funds
Stars
Funds
Stars
Funds
Gabelli ABC AAA
Mid-Cap Growth
êêêê
678
ê
678
êêêêê
598
êêêê
430
Gabelli Asset AAA
Large Blend
êêêêê
1539
êêêêê
1539
êêêê
1346
êêêêê
838
Gabelli Dividend Growth AAA
Large Blend
êêêê
1539
êê
1539
êêê
1346
êêêêê
838
Gabelli Equity Income AAA
Large Blend
êêêê
1539
êêêê
1539
êêêê
1346
êêêêê
838
Gabelli Small Cap Growth AAA
Small Blend
êêêêê
598
êêê
598
êêêêê
518
êêêêê
310
Gabelli SRI Green AAA
World Stock
êêêê
706
êêê
706
êêêê
515
n/a
n/a
Gabelli Utilities AAA
Specialty-Utilities
êêê
75
êê
75
êêêê
73
êê
51
Gabelli Value A
Large Blend
êêê
1539
êêêêê
1539
êê
1346
êêê
838
Gabelli Focus Five AAA
Small Blend
êêê
598
êê
598
êêê
518
n/a
n/a
GAMCO Vertumnus AAA
Convertibles
êê
64
êêê
64
êê
47
êê
39
GAMCO Global Growth AAA
World Stock
êêêê
706
êêêê
706
êêêê
515
êêêê
290
GAMCO Global Opportunity AAA
World Stock
êêêê
706
êêê
706
êêê
515
êêêê
290
GAMCO Global Telecommunications AAA
Specialty-Communications
êêê
46
êê
46
êêê
38
êêêê
29
Gabelli Gold AAA
Specialty-Precious Metals
êêê
70
êêê
70
êêê
62
êêê
45
GAMCO Growth AAA
Large Growth
êê
1510
êê
1510
êê
1297
êê
855
GAMCO International Growth AAA
Foreign Large Growth
êêê
210
êêêê
210
êêê
171
êêê
96
GAMCO Mathers
Conservative Allocation
ê
569
ê
569
ê
482
ê
182
Gabelli Enterprise Mergers & Acquisitions A
Mid-Cap Blend
êêê
385
ê
385
êêêê
311
êêê
195
Percent of Rated funds rated 4 or 5 stars
 
44.44%
 
27.78%
 
44.44%
 
50.00%
 
                   
The Overall Morningstar Rating™ is derived from a weighted average of the performance figures associated with its three, five and ten year (if applicable) Morningstar Rating
metrics.  Data presented reflects past performance, which is no guarantee of future results.  Ratings are for Class AAA or A shares noted above.  Other classes may have different
performance characteristics.  Unrated funds and closed-end funds are not listed above.  The percentage of 4 and 5 star funds are calculated based on the total number of GAMCO
/Gabelli Funds that are rated for a given period.  For each fund with at least a three year history, Morningstar calculates a Morningstar Rating based on a Morningstar Risk-Adjusted
Retrun measure (including the effects of sales charges, loads, and redemption fees) that accounts for variation in a fund's monthly performance, placing more emphasis on
downward variations and rewarding consistent performance.  The top 10% of the funds in each category receive 5 stars, the next 22.5% receive 4 stars, the next 35% receive 3 stars,
the next 22.5% receive 2 stars, and the bottom 10% receive 1 star.  (Each share class is counted as a fraction of one fund within this scale and rated separately, which may cause
slight variations in the distribution percentages.)  Strong relative performance is not indicative of positive fund returns.  Performance for some funds was negative for certain
periods.  © 2012 Morningstar, Inc.  All rights reserved.  The information contained herein:  (1) is proprietaryto 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 contentproviders are responsible for any damages or losses arising from any use
of this information. Investors should carefully consider the investment objectives, risks, charges, andexpenses of each fund before investing.  Each fund's prospectus contains
information about these and other matters and should be read carefully before investing.  Each fund's share price will fluctuate with changes in the market value of the fund's
portfolio securities.  Stocks are subject to market, economic and business risks that cause their prices to fluctuate.  When you sell fund shares, they may be worth less than what
you paid for them.  Consequently, you can lose money by investing in any of the funds.  You can obtain a prospectus by calling 800-GABELLI (422-3554), online at
www.gabelli.com, or from your financial advisor. Distributed by G.distributors, LLC, One Corporate Center, Rye New York, 10580.
The inception date for the Gabelli SRI Green Fund was June 1, 2007.  The inception date for the Gabelli Focus Five Fund was December 31, 2002.
                   
 
 
29

 
 
GABELLI/GAMCO FUNDS
 
Gabelli/GAMCO Funds Lipper Rankings as of June 30, 2012
   
1 Yr - 6/30/11-6/30/12
3 Yrs - 6/30/09-6/30/12
5 Yrs - 6/30/07-6/30/12
10 Yrs - 6/30/02-6/30/12
   
Percentile
Rank /
Percentile
Rank /
Percentile
Rank /
Percentile
Rank /
Fund Name
Lipper Category
Rank
Total Funds
Rank
Total Funds
Rank
Total Funds
Rank
Total Funds
Gabelli Asset; AAA
Multi-Cap Core Funds
48
348/724
14
84/632
12
62/545
9
26/292
Gabelli Value Fund; A
Multi-Cap Core Funds
58
416/724
2
12/632
26
138/545
17
47/292
Gabelli SRI; AAA
Global Small/Mid-Cap Funds
72
63/87
74
58/78
8
5/66
-
-
Gabelli Eq:Eq Inc; AAA
Equity Income Funds
74
218/296
37
90/248
34
71/214
12
12/105
GAMCO Growth; AAA
Large-Cap Core Funds
41
423/1,042
77
720/941
42
335/807
58
315/550
Gabelli Eq:SC Gro; AAA
Small-Cap Core Funds
60
409/681
66
403/613
15
76/519
11
32/300
Gabelli Focus Five Fund;AAA
Small-Cap Core Funds
58
389/681
74
451/613
36
183/519
-
-
GAMCO Gl:Oppty; AAA
Global Large-Cap Growth
76
84/110
57
50/87
55
40/72
32
16/49
GAMCO Gl:Growth; AAA
Global Large-Cap Growth
19
20/110
20
17/87
25
18/72
22
11/49
Gabelli Gold; AAA
Precious Metal Funds
10
7/74
45
27/59
34
17/50
37
13/35
GAMCO Intl Gro; AAA
International Large-Cap Growth
21
45/219
4
8/207
23
40/179
39
46/118
Gabelli Dividend Growth Fund; AAA
Large-Cap Core Funds
64
660/1,042
82
771/941
58
464/807
3
15/550
Gabelli Inv:ABC; AAA
Specialty Diversified Equity Funds
35
16/46
54
17/31
38
10/26
10
1/9
GAMCO Mathers; AAA
Specialty Diversified Equity Funds
71
33/46
72
23/31
71
19/26
30
3/9
Comstock Cap Val; A
Specialty Diversified Equity Funds
81
38/46
91
29/31
86
23/26
70
7/9
GAMCO Gl:Telecom; AAA
Telecommunications Funds
75
30/39
75
26/34
52
14/26
27
5/18
GAMCO Gl:Vertumnus; AAA
Convertible Securities Funds
52
37/71
66
36/54
95
37/38
91
29/31
Gabelli Utilities; AAA
Utility Funds
66
49/74
73
49/67
13
8/62
75
32/42
787:Gabelli Merg&Acq; A
Mid-Cap Core Funds
15
45/309
98
275/280
60
137/230
94
150/160
Gabelli Capital Asset Fund
Distributed through Insurance Channel
46
137/295
4
11/282
27
67/247
11
16/147
% of funds in top half
 
40.0%
 
35.0%
 
65.0%
 
72.2%
 
                   
Data presented reflects past performance, which is no guarantee of future results. Strong rankings are not indicative of positive fund performance.  Absolute performance for some
funds was negative for certain periods.  Other share classes are available which may have different performance characteristics.
                   
Lipper, a wholly-owned subsidiary of Reuters, provides independent insight on global collective investments including mutual funds, retirement funds, hedge funds, fund fees and
expenses to the asset management and media communities. Lipper ranks the performance of mutual funds within a classification of funds that have similar investment objectives.
Rankings are historical with capital gains and dividends reinvested and do not include the effect of loads. If an expense waiver was in effect, it may have had a material effect on the
total return or yield for the period. 
Relative long-term investment performance remained strong with approximately 40%, 35%, 65% and 72% of firmwide mutual funds in the top half of their Lipper categories on a one-,
three-, five-, and ten-year total-return basis, respectively, as of June 30, 2012.
                   
Investors should carefully consider the investment objective, risks, charges, and expenses of each fund before investing.  Each fund's prospectus contains information about these
and other matters and should be read carefully before investing.  Each fund’s share price will fluctuate with changes in the market value of the fund’s portfolio securities. Stocks
are subject to market, economic and business risks that cause their prices to fluctuate.  When you sell fund shares, they may be worth less than what you paid for them.
Consequently, you can lose money by investing in a fund.  You can obtain a prospectus by calling 800-GABELLI (422-3554), online at www.gabelli.com, or from your financial
advisor.  Distributed by G.distributors, LLC., One Corporate Center, Rye New York, 10580.  Other share classes are available that have different performance characteristics.
                   
The inception date for the Gabelli SRI Green Fund was June 1, 2007.  The inception date for the Gabelli Focus Five Fund was December 31, 2002.
                   
 
 
30

 
 
The following discussion should be read in conjunction with the Condensed Consolidated Financial Statements and the notes thereto included in Item 1 to this report.

RESULTS OF OPERATIONS
 
Three Months Ended June 30, 2012 Compared To Three Months Ended June 30, 2011
 
(Unaudited; in thousands, except per share data)
           
   
2012
   
2011
 
Revenues
           
  Investment advisory and incentive fees
  $ 67,210     $ 69,252  
  Distribution fees and other income
    11,006       11,588  
  Institutional research services
    2,808       4,241  
Total revenues
    81,024       85,081  
Expenses
               
  Compensation
    32,921       34,365  
  Management fee
    2,615       3,626  
  Distribution costs
    10,012       9,588  
  Other operating expenses
    5,109       7,005  
Total expenses
    50,657       54,584  
Operating income
    30,367       30,497  
Other income (expense)
               
  Net gain/(loss) from investments
    (4,171 )     3,669  
  Interest and dividend income
    1,782       1,861  
  Interest expense
    (4,429 )     (3,403 )
Total other income (expense), net
    (6,818 )     2,127  
Income before income taxes
    23,549       32,624  
Income tax provision
    8,686       11,945  
Net income
    14,863       20,679  
Net income/(loss) attributable to noncontrolling interests
    (242 )     32  
Net income attributable to GAMCO Investors, Inc.'s shareholders
  $ 15,105     $ 20,647  
                 
Net income attributable to GAMCO Investors, Inc.'s shareholders per share:
 
Basic
  $ 0.58     $ 0.77  
Diluted
  $ 0.57     $ 0.77  
                 
Reconciliation of net income attributable to GAMCO Investors, Inc.'s shareholders
 
  to Adjusted EBITDA:
               
                 
Net income attributable to GAMCO Investors, Inc.'s shareholders
  $ 15,105     $ 20,647  
Interest expense
    4,429       3,403  
Income tax provision and net income attributable to noncontrolling interests
    8,444       11,977  
Depreciation and amortization
    179       184  
Adjusted EBITDA (a)
  $ 28,157     $ 36,211  
                 
 
(a) Adjusted EBITDA is defined as earnings before interest, taxes, depreciation and amortization, and noncontrolling interests.  Adjusted EBITDA is a non-GAAP measure and should not be considered as an alternative to any measure of performance as promulgated under accounting principles generally accepted in the United States nor should it be considered as an indicator of our overall financial performance.  We use Adjusted EBITDA as a supplemental measure of performance as we believe it gives investors a more complete understanding of our operating results before the impact of financing activities as a tool for determining the private market value of an enterprise.
 
 
31

 

Overview

Net income attributable to shareholders of GAMCO Investors, Inc. for the quarter was $15.1 million or $0.57 per fully diluted share versus $20.6 million or $0.77 per fully diluted share in the prior year’s quarter.  The quarter to quarter comparison was lower due to a decrease in total revenues, largely driven by lower AUM, an investment loss in our proprietary portfolios, higher interest expense on higher average debt balances outstanding and a higher effective tax rate which were partially offset by decreased operating expenses.

Revenues
 
Investment advisory and incentive fees for the second quarter 2012 were $67.2 million, 3.0% below the 2011 comparative figure of $69.3 million.  Open-end mutual fund revenues decreased by 0.6% to $30.6 million from $30.8 million in second quarter 2011 driven by a 0.6% decrease in average open-end equity AUM resulting from both net outflows and negative market performance.  Our closed-end fund revenues fell 7.9% to $11.7 million in the second quarter 2012 from $12.7 million in 2011 due to a 7.9% decrease in non-performance fee based average AUM.  Institutional and private wealth management account revenues, excluding incentive fees, which are generally based on beginning of quarter AUM, increased $0.8 million, or 3.7%, to $22.3 million from $21.5 million in second quarter 2011.  During the second quarter 2012, we earned $1.1 million in incentive fees, a decrease of $2.2 million from the $3.3 million recognized in the 2011 quarter.  Investment partnership revenues were $1.5 million, an increase of 50.0% from $1.0 million in second quarter 2011 due to an increase in average AUM resulting from net inflows.
 
Open-end fund distribution fees and other income were $11.0 million for the second quarter 2012, a decrease of $0.6 million or 5.2% from $11.6 million in the prior year period, primarily due to lower quarterly average AUM in open-end equity mutual funds that generate such fees and a decreased level of sales of load shares of mutual funds.

Our institutional research subsidiary had revenues of $2.8 million in the second quarter 2012, down 33.3% from $4.2 million in the prior year quarter due to both lower trading volume and a drop in average commission rates.

Expenses
 
Compensation costs, which are largely variable, were $32.9 million or 4.4% lower than the $34.4 million incurred in the prior year period.  The quarter over quarter decrease was largely comprised of $0.5 million less in variable compensation related to the lower AUM and a $1.2 million decrease in commissions and payouts related to lower trading volume and sales of open-end funds partially offset by $0.2 million in amortization expense for RSAs issued in January 2012.
 
Management fee expense, which is wholly variable and based on pretax income, decreased to $2.6 million in the second quarter of 2012 from $3.6 million in the 2011 period.
 
Distribution costs were $10.0 million, an increase of $0.4 million or 4.2% from $9.6 million in the prior year’s period.  This increase in distribution costs was mostly due to a higher percentage of AUM coming through third-party distributors and an increase in expense reimbursements.
 
Other operating expenses were $5.1 million in the second quarter of 2012, a decline of $1.9 million, or 27.1%, from $7.0 million in the second quarter of 2011.  The quarter comparison benefited from a combination of reimbursements received in the 2012 period for previously incurred legal expenses and one-time accruals for client service matters in 2011 totaling $1.7 million.  Excluding these items other operating expenses fell $0.2 million or 3.2%.

Total expenses, excluding the management fee, were $48.0 million in the second quarter of 2012, a 5.9% decrease from $51.0 million in the second quarter of 2011.
 
Operating income for the second quarter of 2012 was $30.4 million, a decrease of $0.1 million from the second quarter 2011’s $30.5 million.  Operating income, as a percentage of revenues, was 37.5% in the 2012 quarter as compared to 35.8% in the 2011 quarter.

Other
 
Total other income (expense), net of interest expense, was an expense of $6.8 million for the second quarter 2012 versus income of $2.1 million in the prior year’s quarter.  Realized and unrealized losses in our trading portfolio were $4.2 million in the 2012 quarter, a decrease of $7.9 million versus $3.7 million of gains in the 2011 quarter largely from the relative weakness in the U.S. equity markets.  Interest and dividend income was lower by $0.1 million.  Interest expense increased by $1.0 million to $4.4 million in the second quarter of 2012 from the $3.4 million in second quarter of 2011 due to an increase in total debt outstanding.
 
The effective tax rate for the three months ended June 30, 2012 was 36.9% as compared to the prior year period’s effective rate of 36.6%.
 
 
32

 
 
Six Months Ended June 30, 2012 Compared To Six Months Ended June 30, 2011
 
(Unaudited; in thousands, except per share data)
           
   
2012
   
2011
 
Revenues
           
  Investment advisory and incentive fees
  $ 134,993     $ 132,163  
  Distribution fees and other income
    22,629       21,933  
  Institutional research services
    5,151       7,890  
Total revenues
    162,773       161,986  
Expenses
               
  Compensation
    67,475       67,782  
  Management fee
    6,799       6,739  
  Distribution costs
    20,189       23,017  
  Other operating expenses
    10,931       13,191  
Total expenses (a)
    105,394       110,729  
Operating income
    57,379       51,257  
Other income
               
  Net gain from investments
    9,707       12,409  
  Interest and dividend income
    3,018       3,797  
  Interest expense
    (8,833 )     (6,270 )
Total other income, net
    3,892       9,936  
Income before income taxes
    61,271       61,193  
Income tax provision
    22,442       22,233  
Net income
    38,829       38,960  
Net income/(loss) attributable to noncontrolling interests
    (112 )     670  
Net income attributable to GAMCO Investors, Inc.'s shareholders
  $ 38,941     $ 38,290  
                 
Net income attributable to GAMCO Investors, Inc.'s shareholders per share:
 
Basic
  $ 1.48     $ 1.43  
Diluted
  $ 1.47     $ 1.42  
                 
Reconciliation of net income attributable to GAMCO Investors, Inc.'s shareholders
 
  to Adjusted EBITDA:
               
                 
Net income attributable to GAMCO Investors, Inc.'s shareholders
  $ 38,941     $ 38,290  
Interest expense
    8,833       6,270  
Income tax provision and net income attributable to noncontrolling interests
    22,330       22,903  
Depreciation and amortization
    359       456  
Adjusted EBITDA (b)
  $ 70,463     $ 67,919  
                 
 
(a)   Six months ended June 30, 2011 includes $5.6 million in costs directly related to the launch of a new closed-end fund.
(b) Adjusted EBITDA is defined as earnings before interest, taxes, depreciation and amortization, and noncontrolling interests.  Adjusted EBITDA is a non-GAAP measure and should not be considered as an alternative to any measure of performance as promulgated under accounting principles generally accepted in the United States nor should it be considered as an indicator of our overall financial performance.  We use Adjusted EBITDA as a supplemental measure of performance as we believe it gives investors a more complete understanding of our operating results before the impact of financing activities as a tool for determining the private market value of an enterprise.
 
 
33

 

Overview

Net income attributable to shareholders of GAMCO Investors, Inc. for the first half of 2012 was $38.9 million or $1.47 per fully diluted share versus $38.3 million or $1.42 per fully diluted share in the first half of 2011.  The period to period comparison benefited from an increase in total revenues, largely driven by higher AUM, and a decrease in operating expenses which were offset by a decrease in investment gains in our proprietary portfolios, an increase in interest expense on higher average debt balances outstanding and a higher effective tax rate.

Revenues
 
Investment advisory and incentive fees for the six months ended June 30, 2012 were $135.0 million, 2.1% above the 2011 comparative figure of $132.2 million.  Open-end mutual fund revenues increased by 4.9% to $62.1 million from $59.2 million in first half of 2011 driven by a 4.3% increase in average open-end equity AUM resulting from both net inflows and positive market performance.  Our closed-end fund revenues fell 1.6% to $24.0 million in the first half of 2012 from $24.4 million in 2011 due to a 2.0% decrease in non-performance fee based average AUM.  Institutional and private wealth management account revenues, excluding incentive fees, which are generally based on beginning of quarter AUM, increased $1.3 million, or 3.2%, to $42.5 million from $41.2 million in first half of 2011, largely due to an increase in billable AUM.  During the first half of 2012, we earned $3.6 million in incentive fees, a decrease of $1.9 million from $5.5 million earned in the first half of 2011.  Investment partnership revenues were $2.7 million, an increase of 42.1% from $1.9 million for the six months ended June 30, 2011.
 
Open-end fund distribution fees and other income were $22.6 million for the first six months of 2012, an increase of $0.7 million or 3.2% from $21.9 million in the prior year period, primarily due to higher quarterly average AUM in open-end equity mutual funds that generate such fees.

Our institutional research subsidiary had revenues of $5.2 million in the first half of 2012, down 34.2% from $7.9 million in the prior year period principally due to lower trading volume.

Expenses
 
Compensation costs, which are largely variable, were $67.5 million or 0.4% lower than the $67.8 million incurred in the prior year period.  Included in the 2011 period was $0.4 million in one-time costs related to the launch of a new closed-end fund.  Excluding these costs, the period over period increase was $0.1 million or 0.1% and was largely comprised of a $2.4 million decrease in commissions and payouts related to lower trading volume and sales of open-end funds partially offset by $1.4 million of increased variable compensation related to the increased levels of AUM, $0.5 million in increased amortization expense for RSAs issued in January 2012 and $0.2 million in increased fixed compensation.
 
Management fee expense, which is wholly variable and based on pretax income, increased to $6.8 million for the six months ended June 30, 2012 from $6.7 million in the 2011 period.
 
Distribution costs were $20.2 million, a decrease of $2.8 million or 12.2% from $23.0 million in the prior year’s period.  Costs were lower on a comparable basis due to $4.7 million in one-time charges related to the launch of a closed-end fund, the GAMCO Natural Resources, Gold & Income Trust by Gabelli (“GNT”), during the first half of 2011.  Excluding these one-time charges, distribution costs increased $1.9 million, or 10.4%, to $20.2 million from $18.3 million for the first half of 2011.  This increase in distribution costs was mostly due to the 4.3% increase in average AUM in our open-end equity funds, increased amortization of costs associated with sales of Class C shares and higher expense reimbursements.
 
Other operating expenses were $10.9 million in the first six months of 2012, a decline of $2.3 million or 17.4% from the $13.2 million in the first half of 2011 largely due to the one-time charges of $0.5 million related to the launch of GNT and for client service matters totaling $1.7 million in the 2011 period and reimbursements received in 2012 for previously incurred legal expenses.  Excluding these items, other operating expenses fell $0.1 million or 0.8%.
 
Total expenses, excluding the management fee, were $98.6 million for the six months ended June 30, 2012, a 5.2% decrease from $104.0 million in the first half of 2011, primarily due to the $5.6 million in one-time charges related to the launch of GNT in the first half of 2011.
 
Operating income for the first six months of 2012 was $57.4 million, an increase of $6.1 million from the first half 2011’s $51.3 million.  Operating income, as a percentage of revenues, was 35.3% in the 2012 period as compared to 31.6% in the 2011 period.  The 2011 operating income and operating margin were negatively impacted by $5.6 million in one-time charges related to the launch of GNT.
 
 
34

 
 
Other
 
Total other income, net of interest expense, was $3.9 million for the first six months of 2012 versus $9.9 million in the prior year’s first half.  Realized and unrealized gains in our trading portfolio were $9.7 million in the 2012 period, a decrease of $2.7 million versus $12.4 million in the first half of 2011.  Interest and dividend income was lower by $0.8 million.  Interest expense increased by $2.5 million to $8.8 million in the first half of 2012 from the $6.3 million in the first half of 2011 due to an increase in total debt outstanding.
 
The effective tax rate for the six months ended June 30, 2012 was 36.6% as compared to the prior year period’s effective rate of 36.3%.

LIQUIDITY AND CAPITAL RESOURCES

Our principal assets consist of cash and cash equivalents, short-term investments, securities held for investment purposes, investments in mutual funds, and investment partnerships and offshore funds, both proprietary and external.  Cash and cash equivalents are comprised primarily of money market funds managed by GAMCO.  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:
 
   
Six months ended
 
   
June 30,
 
   
2012
   
2011
 
Cash flows provided by:
 
(in thousands)
 
  Operating activities
  $ 45,138     $ 692  
  Investing activities
    1,614       2,092  
  Financing activities
    1,351       89,714  
  Effect of exchange rates on cash and cash equivalents
    (3 )     (9 )
  Net increase
    48,100       92,489  
  Cash and cash equivalents at beginning of period
    276,340       169,601  
  Decrease in cash from deconsolidation
    -       (1,251 )
  Cash and cash equivalents at end of period
  $ 324,440     $ 260,839  
                 
 
Cash requirements and liquidity needs have historically been met through cash generated by operating activities and our borrowing capacity.  We filed a shelf registration with the SEC in 2009 which, among other things, provides us the flexibility to sell any combination of senior and subordinate debt securities, convertible debt securities, equity securities (including common and preferred stock), and other securities up to a total amount of $400 million.  We replaced this shelf registration with a new filing for up to $500 million on May 14, 2012.  On May 31, 2011, the Company issued $100 million of senior unsecured notes at par.  The net proceeds of $99.1 million were used for working capital and general corporate purposes.  The notes mature June 1, 2021 and bear interest, payable semi-annually, at 5.875% per annum.  The notes were issued pursuant to the Company’s shelf registration and there remains $400 million available under the shelf for future use.  On May 21, 2012, the Company commenced a tender offer (the “Offer”) to purchase up to $50 million aggregate principal amount (“face value”) of its 0% Subordinated Debentures (“Debentures”) due 2015 at a price to be determined under a “Modified Dutch Auction” procedure.  On June 19, 2012, we amended the Offer to increase the maximum principal amount of Debentures the Company would purchase to the entire amount outstanding and extended the expiration date of the Offer to July 2, 2012.  At the expiration of the Offer, the Company purchased $64.1 million in face value of Debentures (accreted value of $49.5 million) at a price of $870 per $1,000 principal amount for a total cost of $55.8 million.  This transaction reduces the Company’s cash and cash equivalents by $55.8 million, debt outstanding by $49.5 million and results in a one-time loss on extinguishment of debt, net of management fees and tax benefit, of approximately $2.1 million.  Interest expense is expected to be reduced by $1.8 million in the second half of 2012 and, annually, by $4.0 million in 2013, $4.3 million in 2014 and $4.6 million in 2015.

At June 30, 2012, we had total cash and cash equivalents of $324.4 million, an increase of $63.6 million from December 31, 2011.  Cash and cash equivalents of $0.9 million and investments in securities of $7.0 million held by consolidated investment partnerships and offshore funds may not be readily available for the Company to access.  Total debt outstanding at June 30, 2012 was $265.6 million, consisting of $66.6 million in five year zero coupon subordinated debentures due 2015 (“Debentures”), with a face value of $86.3 million, $100 million of 5.875% senior notes due 2021 and $99 million of 5.5% senior notes due 2013.
 
 
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For the six months ended June 30, 2012, cash provided by operating activities was $45.1 million, an increase of $44.4 million from cash provided in the prior year period of $0.7 million.  Cash was provided through an increase in net distributions received from partnerships of $8.9 million, a $60.8 million decrease in trading investments, $4.4 million in increased payables and $8.9 million from other sources.  Reducing cash was a decrease in net income of $0.1 million, $25.6 million increase in receivable from brokers and $12.9 million increase in investment advisory fees receivables.  Cash provided by investing activities, related to purchases and proceeds from sales of available for sale securities, was $1.6 million in the first six months of 2012.  Cash provided by financing activities in the first six months of 2012 was $1.4 million, including $20.1 million in net contributions from redeemable noncontrolling interests partially offset by $8.7 million paid in dividends and $10.1 million paid for the purchase of treasury stock.

For the six months ended June 30, 2011, cash provided by operating activities was $0.7 million.  Cash provided by investing activities, related to purchases and proceeds from sales of available for sale securities, was $2.1 million in the first six months of 2011.  Cash provided by financing activities in the first six months of 2011 was $89.7 million.

Based upon our current level of operations and anticipated growth, we expect that our current cash balances plus cash flows from operating activities and our borrowing capacity will be sufficient to finance our working capital needs for the foreseeable future.  We have no material commitments for capital expenditures.
 
We have two broker-dealers, Gabelli & Company and G.distributors, which are subject to certain net capital requirements.  Both broker-dealers compute their net capital under the alternative method permitted, which requires minimum net capital of the greater of $250,000 or 2% of the aggregate debit items in the reserve formula for those broker-dealers subject to Rule 15c3-3 promulgated under the Securities Exchange Act of 1934.  The requirement was $250,000 at June 30, 2012.  At June 30, 2012, Gabelli & Company had net capital, as defined, of approximately $6.0 million, exceeding the regulatory requirement by approximately $5.7 million and G.distributors, which became the distributor of the open-end mutual funds on August 1, 2011, had net capital, as defined, of approximately $3.4 million, exceeding the regulatory requirement by approximately $3.2 million.  Net capital requirements for our affiliated broker-dealers may increase in accordance with rules and regulations to the extent they engage in other business activities.

Market Risk
 
Our primary market risk exposure is to changes in equity prices and interest rates.  Since over 90% of our AUM are equities, our financial results are subject to equity-market risk as revenues from our investment management services are sensitive to stock market dynamics.  In addition, returns from our proprietary investment portfolio are exposed to interest rate and equity market risk.

The Company’s Chief Investment Officer oversees the proprietary investment portfolios and allocations of proprietary capital among the various strategies.  The Chief Investment Officer and the Board of Directors review the proprietary investment portfolios throughout the year.  Additionally, the Company has a risk committee which monitors the proprietary investment portfolios to ensure that they are in compliance with the Company’s guidelines.

Equity Price Risk
 
The Company earns substantially all of its revenue as advisory and distribution fees from our affiliated open-end and closed-end funds, Institutional and Private Wealth Management, and Investment Partnership assets.  Such fees represent a percentage of AUM, and the majority of these assets are in equity investments.  Accordingly, since revenues are proportionate to the value of those investments, a substantial increase or decrease in equity markets overall will have a corresponding effect on the Company's revenues.
 
With respect to our proprietary investment activities, included in investments in securities of $249.6 million and investments in sponsored registered investment companies of $59.6 million at June 30, 2012 were investments in United States Treasury Bills and Notes of $50.1 million, mutual funds and closed-end funds, largely invested in equity products, of $63.0 million, a selection of common and preferred stocks totaling $195.7 million, and other investments of approximately $0.4 million.  In addition, we may alter our investment holdings from time to time in response to changes in market risks and other factors considered appropriate by management.  Of the approximately $195.7 million invested in common and preferred stocks at June 30, 2012, $32.8 million represented our investment in Westwood Holdings Group Inc., and $71.8 million was invested by the Company in risk arbitrage opportunities in connection with mergers, consolidations, acquisitions, tender offers or other similar transactions.  Risk arbitrage generally involves announced deals with agreed upon terms and conditions, including pricing, which typically involve less market risk than common stocks held in a trading portfolio.  The principal risk associated with risk arbitrage transactions is the inability of the companies involved to complete the transaction.  Securities sold, not yet purchased are stated at fair value and are subject to market risks resulting from changes in price and volatility.  At June 30, 2012, the fair value of securities sold, not yet purchased was $7.0 million.  Investments in partnerships totaled $102.1 million at June 30, 2012, $51.5 million of which consisted of investment partnerships and offshore funds which invest in risk arbitrage opportunities.
 
 
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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 June 30, 2012.  The sensitivity analysis assumes a 10% increase or decrease in the value of these investments (in thousands):
 
         
Fair Value
   
Fair Value
 
         
assuming
   
assuming
 
         
10% decrease in
   
10% increase in
 
  (unaudited)
 
Fair Value
   
equity prices
   
equity prices
 
At June 30, 2012:
                 
Equity price sensitive investments, at fair value
  $ 281,049     $ 252,944     $ 309,154  
At December 31, 2011:
                       
Equity price sensitive investments, at fair value
  $ 261,024     $ 234,922     $ 287,126  
                         
 
Interest Rate Risk
 
Our exposure to interest rate risk results, principally, from our investment of excess cash in a money market fund that holds U.S. Government securities.  These investments are primarily short term in nature, and the carrying value of these investments generally approximates fair value.  Based on June 30, 2012 cash and cash equivalent balance of $324.4 million, a 1% increase in interest rates would increase our interest income by $3.2 million annually.  Given that our current return on these cash equivalent investments is approximately 0.01% annually, an analysis of a 1% decrease is not meaningful.

As the advisor to a money market fund that invests 100% in U.S. Government securities, our exposure to interest rate risk results from the fund’s potential inability to earn a return in excess of the fund’s expenses.  If the fund were to earn no return on its $1.9 billion in assets, the advisor could be responsible to cover the fund’s expenses of approximately $570,000, or 0.03%, annually.

Critical Accounting Policies and Estimates
 
The preparation of the condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods.  Actual results could differ significantly from those estimates.  See Note A and the Company’s Critical Accounting Policies in Management’s Discussion and Analysis of Financial Condition and Results of Operations in GAMCO’s 2011 Annual Report on Form 10-K filed with the SEC on March 7, 2012 for details on Significant Accounting Policies.
 
Item 3.  Quantitative and Qualitative Disclosures About Market Risk
 
In the normal course of its business, GAMCO is exposed to risk of loss due to fluctuations in the securities market and general economy. Management is responsible for identifying, assessing and managing market and other risks. 

Our exposure to pricing risk in equity securities is directly related to our role as financial intermediary and advisor for AUM in our affiliated open-end and closed-end funds, institutional and private wealth management accounts, and investment partnerships as well as our proprietary investment and trading activities.  At June 30, 2012, we had equity investments, including mutual funds largely invested in equity products, of $309.2 million.  Investments in mutual funds and closed-end funds, $63.0 million, usually generate 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 which invest primarily in equity securities and which are subject to changes in equity prices.  Investments in partnerships totaled $102.1 million, of which $51.5 million were invested in partnerships which invest in risk arbitrage.  Risk arbitrage is primarily dependent upon deal closure rather than the overall market environment.  The equity investment portfolio is at fair value and will move in line with the equity markets.  The trading portfolio changes will be recorded as net gain from investments in the condensed consolidated statements of income while the available for sale portfolio changes will be recorded in other comprehensive income in the condensed consolidated statements of financial condition.
 
 
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Item 4.  Controls and Procedures
 
We evaluated the effectiveness of our disclosure controls and procedures as of June 30, 2012.  Disclosure controls and procedures as defined under the Exchange Act Rule 13a-15(e), are designed to ensure that the information we are required to disclose in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time period specified in SEC rules and regulations.  Disclosure controls and procedures include, without limitation, controls and procedures accumulated and communicated to our management, including our Chief Executive Officer (“CEO”), Chief Financial Officer (“CFO”), and Co-Chief Accounting Officers (“CAOs”), to allow timely decisions regarding required disclosure.  Our CEO, CFO, and CAOs participated in this evaluation and concluded that, as of the date of June 30, 2012, our disclosure controls and procedures were effective.
 
There have been no changes in our internal control over financial reporting as defined by Rule 13a-15(f) that occurred during our most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Forward-Looking Information
 
Our disclosure and analysis in this report contain some forward-looking statements.  Forward-looking statements give our current expectations or forecasts of future events. You can identify these statements because they do not relate strictly to historical or current facts. They use words such as “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe,” and other words and terms of similar meaning. They also appear in any discussion of future operating or financial performance. In particular, these include statements relating to future actions, future performance of our products, expenses, the outcome of any legal proceedings, and financial results.  Although we believe that we are basing our expectations and beliefs on reasonable assumptions within the bounds of what we currently know about our business and operations, there can be no assurance that our actual results will not differ materially from what we expect or believe. Some of the factors that could cause our actual results to differ from our expectations or beliefs include, without limitation: the adverse effect from a decline in the securities markets; a decline in the performance of our products; a general downturn in the economy; changes in government policy or regulation; changes in our ability to attract or retain key employees; and unforeseen costs and other effects related to legal proceedings or investigations of governmental and self-regulatory organizations. We also direct your attention to any more specific discussions of risk contained in our Form 10-Q and other public filings.  We are providing these statements as permitted by the Private Litigation Reform Act of 1995. We do not undertake to update publicly any forward-looking statements if we subsequently learn that we are unlikely to achieve our expectations or if we receive any additional information relating to the subject matters of our forward-looking statements.
 
Part II:  Other Information

 Item 1.
Legal Proceedings
   
From time to time, the Company is named in legal actions and proceedings.  These actions may seek substantial or indeterminate compensatory as well as punitive damages or injunctive relief.  The Company is also subject to governmental or regulatory examinations or investigations.  The examinations or investigations could result in adverse judgments, settlements, fines, injunctions, restitutions or other relief.  The Company cannot predict the ultimate outcome of such matters.  The consolidated financial statements include the necessary provisions for losses that the Company believes are probable and estimable.  Furthermore, the Company evaluates whether there exist losses which are reasonably possible and, if material, makes the necessary disclosures.  Such amounts, both those that are probable and those that are reasonably possible, are not considered material to the Company’s financial condition, operations or cash flows.
 
 
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 Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
   
 
The following table provides information with respect to the repurchase of Class A Common Stock of GAMCO during the three months ended June 30, 2012:
 
               
(c) Total Number of
   
(d) Maximum
 
   
(a) Total
   
(b) Average
   
Shares Repurchased as
   
Number of Shares
 
   
Number of
   
Price Paid Per
   
Part of Publicly
   
That May Yet Be
 
   
Shares
   
Share, net of
   
Announced Plans
   
Purchased Under
 
Period
 
Repurchased
   
Commissions
   
or Programs
   
the Plans or Programs
 
4/01/12 - 4/30/12
    -     $ -       -       348,634  
5/01/12 - 5/31/12
    2,969       44.16       2,969       345,665  
6/01/12 - 6/30/12
    400       43.55       400       345,265  
Totals
    3,369     $ 44.08       3,369          
                                 
 
Our stock repurchase programs are not subject to expiration dates.

 
Item 6.
  (a) Exhibits
   
 
 
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.
  
SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
GAMCO INVESTORS, INC.
(Registrant)
 
By: /s/ Kieran Caterina
 
By: /s/ Diane M. LaPointe
 
Name: Kieran Caterina
Name: Diane M. LaPointe
Title:   Co-Chief Accounting Officer
Title:   Co-Chief Accounting Officer
   
Date: August 7, 2012
Date: August 7, 2012
 
 
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