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GAMCO INVESTORS, INC. ET AL - Quarter Report: 2013 September (Form 10-Q)

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

(Mark One)

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

For the quarterly period ended September 30, 2013
or
o                  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   No 
 
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).
Yes  No

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
 
 
 
Non-accelerated filer
 
Smaller reporting company
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes             No 
 
Indicate the number of shares outstanding of each of the Registrant's classes of Common Stock, as of the latest practical date.
Class
 
Outstanding at October 31, 2013
Class A Common Stock, .001 par value
 
6,586,649
Class B Common Stock, .001 par value
 
19,424,174



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 September 30, 2013 and 2012
 
-    Nine months ended September 30, 2013 and 2012
 
 
 
Condensed Consolidated Statements of Comprehensive Income:
 
-    Three months ended September 30, 2013 and 2012
 
-    Nine months ended September 30, 2013 and 2012
 
 
 
Condensed Consolidated Statements of Financial Condition:
 
-    September 30, 2013
 
-    December 31, 2012
 
-    September 30, 2012
 
 
 
Condensed Consolidated Statements of Equity:
 
-    Nine months ended September 30, 2013 and 2012
 
 
 
Condensed Consolidated Statements of Cash Flows:
 
-    Nine months ended September 30, 2013 and 2012
 
 
 
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
   
Nine Months Ended
 
 
 
September 30,
   
September 30,
 
 
 
2013
   
2012
   
2013
   
2012
 
Revenues
 
   
   
   
 
Investment advisory and incentive fees
 
$
80,438
   
$
67,790
   
$
230,488
   
$
202,783
 
Distribution fees and other income
   
13,545
     
11,139
     
37,420
     
33,768
 
Institutional research services
   
2,394
     
3,302
     
6,940
     
8,453
 
Total revenues
   
96,377
     
82,231
     
274,848
     
245,004
 
Expenses
                               
Compensation
   
39,803
     
32,948
     
113,214
     
100,423
 
Management fee
   
5,629
     
3,056
     
14,455
     
9,855
 
Distribution costs
   
12,769
     
10,386
     
35,650
     
30,575
 
Other operating expenses
   
5,448
     
6,829
     
16,290
     
17,760
 
Total expenses
   
63,649
     
53,219
     
179,609
     
158,613
 
 
                               
Operating income
   
32,728
     
29,012
     
95,239
     
86,391
 
Other income (expense)
                               
Net gain from investments
   
19,334
     
7,525
     
43,903
     
17,234
 
Extinguishment of debt
   
-
     
(6,305
)
   
(137
)
   
(6,307
)
Interest and dividend income
   
1,134
     
920
     
4,986
     
3,938
 
Interest expense
   
(2,164
)
   
(3,586
)
   
(8,448
)
   
(12,419
)
Shareholder-designated contribution
   
(313
)
   
-
     
(5,313
)
   
-
 
Total other income (expense), net
   
17,991
     
(1,446
)
   
34,991
     
2,446
 
Income before income taxes
   
50,719
     
27,566
     
130,230
     
88,837
 
Income tax provision
   
17,515
     
8,467
     
46,434
     
30,909
 
Net income
   
33,204
     
19,099
     
83,796
     
57,928
 
Net income/(loss) attributable to noncontrolling interests
   
106
     
95
     
260
     
(17
)
Net income attributable to GAMCO Investors, Inc.'s shareholders
 
$
33,098
   
$
19,004
   
$
83,536
   
$
57,945
 
 
                               
Net income attributable to GAMCO Investors, Inc.'s shareholders per share:
                               
Basic
 
$
1.29
   
$
0.72
   
$
3.25
   
$
2.20
 
 
                               
Diluted
 
$
1.29
   
$
0.72
   
$
3.25
   
$
2.19
 
 
                               
Weighted average shares outstanding:
                               
Basic
   
25,625
     
26,250
     
25,682
     
26,309
 
 
                               
Diluted
   
25,700
     
26,439
     
25,717
     
26,480
 
 
                               
Dividends declared:
 
$
0.06
   
$
0.30
   
$
0.16
   
$
0.63
 

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
   
Nine Months Ended
 
 
 
September 30,
   
September 30,
 
 
 
2013
   
2012
   
2013
   
2012
 
 
 
   
   
   
 
Net income
 
$
33,204
   
$
19,099
   
$
83,796
   
$
57,928
 
Other comprehensive income, net of tax:
                               
Foreign currency translation
   
49
     
(34
)
   
1
     
(29
)
Net unrealized gains/(losses) on securities available for sale (a)
   
(2,170
)
   
2,938
     
(3,030
)
   
3,816
 
Other comprehensive income
   
(2,121
)
   
2,904
     
(3,029
)
   
3,787
 
 
                               
Comprehensive income
   
31,083
     
22,003
     
80,767
     
61,715
 
Less: Comprehensive income/(loss) attributable to noncontrolling interests
   
(106
)
   
(95
)
   
(260
)
   
17
 
 
                               
Comprehensive income attributable to GAMCO Investors, Inc.
 
$
30,977
   
$
21,908
   
$
80,507
   
$
61,732
 

(a) Net of income tax (benefit) /  expense of ($1,274), $1,726, ($1,780) and $2,241, respectively.

See accompanying notes.
4


GAMCO INVESTORS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
UNAUDITED
(Dollars in thousands, except per share data)

 
 
September 30,
   
December 31,
   
September 30,
 
 
 
2013
   
2012
   
2012
 
ASSETS
 
   
   
 
Cash and cash equivalents
 
$
245,411
   
$
190,608
   
$
288,685
 
Investments in securities
   
237,744
     
218,843
     
235,445
 
Investments in sponsored registered investment companies
   
43,688
     
61,872
     
64,223
 
Investments in partnerships
   
97,752
     
97,549
     
102,604
 
Receivable from brokers
   
43,854
     
50,655
     
55,159
 
Investment advisory fees receivable
   
31,151
     
42,429
     
29,187
 
Income tax receivable
   
433
     
1,018
     
1,018
 
Other assets
   
34,589
     
27,759
     
22,250
 
Total assets
 
$
734,622
   
$
690,733
   
$
798,571
 
 
                       
LIABILITIES AND EQUITY
                       
Payable to brokers
 
$
14,675
   
$
14,346
   
$
28,039
 
Income taxes payable and deferred tax liabilities
   
28,726
     
25,398
     
16,445
 
Capital lease obligation
   
5,331
     
4,949
     
4,982
 
Compensation payable
   
86,174
     
10,535
     
33,998
 
Securities sold, not yet purchased
   
7,725
     
3,136
     
3,856
 
Mandatorily redeemable noncontrolling interests
   
1,327
     
1,342
     
1,356
 
Accrued expenses and other liabilities
   
28,906
     
26,365
     
30,175
 
Sub-total
   
172,864
     
86,071
     
118,851
 
 
                       
5.5% Senior notes (repaid May 15, 2013)
   
-
     
99,000
     
99,000
 
5.875% Senior notes (due June 1, 2021)
   
100,000
     
100,000
     
100,000
 
Zero coupon subordinated debentures, Face value: $20.5 million at September 30, 2013, $21.7
                       
    million at December 31, 2012 and $21.8 million at September 30, 2012 (due December 31, 2015)
   
17,347
     
17,366
     
17,118
 
Total liabilities
   
290,211
     
302,437
     
334,969
 
 
                       
Redeemable noncontrolling interests
   
5,765
     
17,362
     
20,228
 
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;
                       
   14,833,469, 14,203,146 and 13,904,190 issued, respectively; 6,592,649,
                       
   6,121,585 and 6,685,414 outstanding, respectively
   
14
     
13
     
13
 
Class B Common Stock, $0.001 par value; 100,000,000 shares authorized;
                       
   24,000,000 shares issued; 19,424,174, 19,624,174 and 19,920,730 shares
                       
   outstanding, respectively
   
19
     
20
     
20
 
Additional paid-in capital
   
281,194
     
280,089
     
267,914
 
Retained earnings
   
487,702
     
408,295
     
450,326
 
Accumulated other comprehensive income
   
23,271
     
26,300
     
26,307
 
Treasury stock, at cost (8,240,820, 8,081,561 and 7,218,776 shares, respectively)
   
(356,343
)
   
(347,109
)
   
(304,567
)
Total GAMCO Investors, Inc. stockholders' equity
   
435,857
     
367,608
     
440,013
 
Noncontrolling interests
   
2,789
     
3,326
     
3,361
 
Total equity
   
438,646
     
370,934
     
443,374
 
 
                       
Total liabilities and equity
 
$
734,622
   
$
690,733
   
$
798,571
 

See accompanying notes.
5


GAMCO INVESTORS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
UNAUDITED
(In thousands)

For the nine months ended September 30, 2013

 
 
   
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, 2012
 
$
3,326
   
$
33
   
$
280,089
   
$
408,295
   
$
26,300
   
$
(347,109
)
 
$
370,934
   
$
17,362
 
Redemptions of
                                                               
   noncontrolling interests
   
(524
)
   
-
     
-
     
-
     
-
     
-
     
(524
)
   
(15,356
)
Contributions from
                                                               
   noncontrolling
                                                               
   interests
   
-
     
-
     
-
     
-
     
-
     
-
     
-
     
3,486
 
Net income (loss)
   
(13
)
   
-
     
-
     
83,536
     
-
     
-
     
83,523
     
273
 
Net unrealized gains on
                                                               
   securities available for sale,
                                                               
   net of income tax ($5,479)
   
-
     
-
     
-
     
-
     
9,331
     
-
     
9,331
     
-
 
Amounts reclassified from
                                                               
   accumulated other
                                                               
   comprehensive income,
                                                               
   net of income tax benefit ($7,259)
   
-
     
-
     
-
     
-
     
(12,361
)
   
-
     
(12,361
)
   
-
 
Income tax effect of transaction
                                                               
  with shareholder
   
-
     
-
     
243
     
-
     
-
     
-
     
243
     
-
 
Foreign currency translation
   
-
     
-
     
-
     
-
     
1
     
-
     
1
     
-
 
Dividends declared ($0.16 per
                                                               
 share)
   
-
     
-
     
-
     
(4,129
)
   
-
     
-
     
(4,129
)
   
-
 
Stock based compensation
                                                               
   expense
   
-
     
-
     
770
     
-
     
-
     
-
     
770
     
-
 
Exercise of stock options
                                                               
   including tax benefit ($16)
   
-
     
-
     
92
     
-
     
-
     
-
     
92
     
-
 
Purchase of treasury stock
   
-
     
-
     
-
     
-
     
-
     
(9,234
)
   
(9,234
)
   
-
 
Balance at September 30, 2013
 
$
2,789
   
$
33
   
$
281,194
   
$
487,702
   
$
23,271
   
$
(356,343
)
 
$
438,646
   
$
5,765
 

See accompanying notes.
6

GAMCO INVESTORS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
UNAUDITED
(In thousands)

For the nine months ended September 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 noncontrolling
                                                               
   interests
   
-
     
-
     
-
     
-
     
-
     
-
     
-
     
(8,566
)
Contributions from
                                                               
   noncontrolling
                                                               
   interests
   
-
     
-
     
-
     
-
     
-
     
-
     
-
     
22,662
 
Net income (loss)
   
(78
)
   
-
     
-
     
57,945
     
-
     
-
     
57,867
     
61
 
Net unrealized gains on
                                                               
   securities available for sale,
                                                               
   net of income tax ($2,241)
   
-
     
-
     
-
     
-
     
3,816
     
-
     
3,816
     
-
 
Foreign currency translation
   
-
     
-
     
-
     
-
     
(29
)
   
-
     
(29
)
   
-
 
Dividends declared ($0.63 per
                                                               
   share)
   
-
     
-
     
-
     
(16,810
)
   
-
     
-
     
(16,810
)
   
-
 
Stock based compensation
                                                               
   expense
   
-
     
-
     
2,615
     
-
     
-
     
-
     
2,615
     
-
 
Exercise of stock options
                                                               
   including tax benefit ($108)
   
-
     
-
     
890
     
-
     
-
     
-
     
890
     
-
 
Purchase of treasury stock
   
-
     
-
     
-
     
-
     
-
     
(12,386
)
   
(12,386
)
   
-
 
Balance at September 30, 2012
 
$
3,361
   
$
33
   
$
267,914
   
$
450,326
   
$
26,307
   
$
(304,567
)
 
$
443,374
   
$
20,228
 

See accompanying notes.
7


GAMCO INVESTORS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
(In thousands)

 
 
Nine Months Ended
 
 
 
September 30,
 
 
 
2013
   
2012
 
Operating activities
 
   
 
Net income
 
$
83,796
   
$
57,928
 
Adjustments to reconcile net income to net cash provided by operating activities:
               
Equity in net gains from partnerships
   
(1,211
)
   
(4,445
)
Depreciation and amortization
   
605
     
580
 
Stock based compensation expense
   
770
     
2,615
 
Deferred income taxes
   
1,495
     
1,708
 
Tax benefit from exercise of stock options
   
16
     
108
 
Foreign currency translation gain/(loss)
   
1
     
(29
)
Other-than-temporary loss on available for sale securities
   
14
     
20
 
Fair value of donated securities
   
1,880
     
393
 
Gains on sales of available for sale securities
   
(16,191
)
   
(1,503
)
Accretion of zero coupon debentures
   
964
     
2,908
 
Loss on extinguishment of debt
   
137
     
6,307
 
(Increase) decrease in assets:
               
Investments in trading securities
   
(11,730
)
   
(60
)
Investments in partnerships:
               
  Contributions to partnerships
   
(10,124
)
   
(26,893
)
  Distributions from partnerships
   
11,134
     
29,627
 
Receivable from brokers
   
6,801
     
(34,246
)
Investment advisory fees receivable
   
11,278
     
2,970
 
Income tax receivable and deferred tax assets
   
584
     
(979
)
Other assets
   
(7,436
)
   
6,045
 
Increase (decrease) in liabilities:
               
Payable to brokers
   
329
     
17,268
 
Income taxes payable and deferred tax liabilities
   
3,613
     
(2,802
)
Compensation payable
   
75,639
     
16,301
 
Mandatorily redeemable noncontrolling interests
   
(15
)
   
(30
)
Accrued expenses and other liabilities
   
3,144
     
5,394
 
Total adjustments
   
71,697
     
21,257
 
Net cash provided by operating activities
 
$
155,493
   
$
79,185
 

8


GAMCO INVESTORS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED (continued)
(In thousands)

 
 
Nine Months Ended
 
 
 
September 30,
 
 
 
2013
   
2012
 
Investing activities
 
   
 
Purchases of available for sale securities
 
$
(8,427
)
 
$
(1,264
)
Proceeds from sales of available for sale securities
   
32,422
     
3,068
 
Return of capital on available for sale securities
   
1,094
     
1,650
 
Net cash provided by investing activities
   
25,089
     
3,454
 
 
               
Financing activities
               
Contributions from redeemable noncontrolling interests
   
3,486
     
22,662
 
Redemptions of redeemable noncontrolling interests
   
(15,356
)
   
(8,566
)
Redemption of 5.5% Senior Notes
   
(99,000
)
   
-
 
Redemptions of noncontrolling interests
   
(524
)
   
-
 
Proceeds from exercise of stock options
   
76
     
781
 
Repurchase of zero coupon subordinated debentures
   
(1,119
)
   
(56,215
)
Dividends paid
   
(4,108
)
   
(16,558
)
Purchase of treasury stock
   
(9,234
)
   
(12,386
)
Net cash (used in) provided by financing activities
   
(125,779
)
   
(70,282
)
Effect of exchange rates on cash and cash equivalents
   
-
     
(12
)
Net increase in cash and cash equivalents
   
54,803
     
12,345
 
Cash and cash equivalents at beginning of period
   
190,608
     
276,340
 
Cash and cash equivalents at end of period
 
$
245,411
   
$
288,685
 
Supplemental disclosures of cash flow information:
               
Cash paid for interest
 
$
6,607
   
$
4,684
 
Cash paid for taxes
 
$
40,500
   
$
31,639
 
 
               
Non-cash activity:
               
- For the nine months ended September 30, 2013 and September 30, 2012, the Company accrued dividends on restricted stock awards of $21 and $203, respectively.
 

See accompanying notes.
9


GAMCO INVESTORS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2013
(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 U.S. 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.  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, 2012 from which the accompanying condensed consolidated financial statements were derived.

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 December 2011, the Financial Accounting Standards Board ("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.  In January 2013, the FASB issued guidance which clarifies the scope of the disclosure requirements.  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 adopted this guidance on January 1, 2013 and now presents the disclosures required by this guidance in Note B.

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 Company adopted this guidance on January 1, 2013 without a material impact to the financial statements.

 
10


In February 2013, the FASB issued guidance which adds new disclosure requirements for items reclassified out of accumulated other comprehensive income ("AOCI").  The guidance is intended to help entities improve the transparency of changes in other comprehensive income ("OCI") and items reclassified out of AOCI in their financial statements.  It does not amend any existing requirements for reporting net income or OCI in the financial statements.  The guidance requires entities to disclose additional information about reclassification adjustments, including changes in AOCI balances by component and significant items reclassified out of AOCI.  The guidance requires an entity to present information about significant items reclassified out of AOCI by component either on the face of the statement where net income is presented or as a separate disclosure in the notes to the financial statements.  The guidance is effective prospectively for fiscal years, and interim periods within those years, beginning after December 15, 2012.  The Company adopted this guidance on January 1, 2013 and now presents the disclosures required by this guidance in Note B.

B.  Investment in Securities

Investments in securities at September 30, 2013, December 31, 2012 and September 30, 2012 consisted of the following:

 
 
September 30, 2013
   
December 31, 2012
   
September 30, 2012
 
 
 
Cost
   
Fair Value
   
Cost
   
Fair Value
   
Cost
   
Fair Value
 
 
 
(In thousands)
 
Trading securities:
 
   
   
   
   
   
 
Government obligations
 
$
20,993
   
$
21,000
   
$
42,973
   
$
42,989
   
$
28,731
   
$
28,742
 
Common stocks
   
143,731
     
166,443
     
125,697
     
138,478
     
160,027
     
170,846
 
Mutual funds
   
11,073
     
12,010
     
1,072
     
1,484
     
1,064
     
1,461
 
Other investments
   
406
     
419
     
328
     
630
     
382
     
484
 
Total trading securities
   
176,203
     
199,872
     
170,070
     
183,581
     
190,204
     
201,533
 
 
                                               
Available for sale securities:
                                               
Common stocks
   
16,372
     
36,297
     
14,822
     
33,560
     
14,931
     
32,239
 
Mutual funds
   
843
     
1,575
     
1,105
     
1,702
     
1,105
     
1,673
 
Total available for sale securities
   
17,215
     
37,872
     
15,927
     
35,262
     
16,036
     
33,912
 
 
                                               
Total investments in securities
 
$
193,418
   
$
237,744
   
$
185,997
   
$
218,843
   
$
206,240
   
$
235,445
 

Securities sold, not yet purchased at September 30, 2013, December 31, 2012 and September 30, 2012 consisted of the following:

 
 
September 30, 2013
   
December 31, 2012
   
September 30, 2012
 
 
 
Cost
   
Fair Value
   
Cost
   
Fair Value
   
Cost
   
Fair Value
 
Trading securities:
 
(In thousands)
 
Common stocks
 
$
6,411
   
$
7,003
   
$
2,593
   
$
2,867
   
$
3,044
   
$
3,816
 
Other investments
   
526
     
722
     
184
     
269
     
-
     
40
 
Total securities sold, not yet purchased
 
$
6,937
   
$
7,725
   
$
2,777
   
$
3,136
   
$
3,044
   
$
3,856
 
11


Investments in sponsored registered investment companies at September 30, 2013, December 31, 2012 and September 30, 2012 consisted of the following:

 
 
September 30, 2013
   
December 31, 2012
   
September 30, 2012
 
 
 
Cost
   
Fair Value
   
Cost
   
Fair Value
   
Cost
   
Fair Value
 
 
 
(In thousands)
 
Trading securities:
 
   
   
   
   
   
 
Mutual funds
 
$
19
   
$
12
   
$
19
   
$
20
   
$
19
   
$
24
 
Total trading securities
   
19
     
12
     
19
     
20
     
19
     
24
 
 
                                               
Available for sale securities:
                                               
Closed-end funds
   
23,850
     
40,272
     
35,868
     
58,511
     
36,721
     
60,731
 
Mutual funds
   
2,031
     
3,404
     
2,055
     
3,341
     
2,080
     
3,468
 
Total available for sale securities
   
25,881
     
43,676
     
37,923
     
61,852
     
38,801
     
64,199
 
 
                                               
Total investments in sponsored
                                               
   registered investment companies
 
$
25,900
   
$
43,688
   
$
37,942
   
$
61,872
   
$
38,820
   
$
64,223
 

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 following table identifies all reclassifications out of accumulated other comprehensive income for the three and nine months ended September 30, 2013  (in thousands):
 
Amount
 
Affected Line Item in
Reason for
Reclassified
 
in the Statements
Reclassification
from AOCI
 
Of Income
from AOCI
Three months ended
 
Nine months ended
 
 
  
September 30, 2013
 
September 30, 2013
 
 
  
 
   
 
 
      
 
$
5,745
   
$
16,191
 
 Net gain from investments
 Realized gain / (loss) on sale of AFS securities
   
3,112
     
3,443
 
 Other operating expenses
 Donation of AFS securities
   
-
     
(14
)
 Net gain from investments
 Other than temporary impairment of AFS securities
   
8,857
     
19,620
 
 Income before income taxes
 
   
(3,277
)
   
(7,259
)
 Income tax provision
 
 
$
5,580
   
$
12,361
 
 Net 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 months ended September 30, 2013 and 2012, the Company had transactions in equity derivatives which resulted in net gains of $191,000 and net losses of ($411,000), respectively.  For the nine months ended September 30, 2013 and 2012, the Company had transactions in equity derivatives which resulted in net gains of $471,000 and net losses of ($425,000), respectively.  At September 30, 2013, December 31, 2012 and September 30, 2012, we held derivative contracts on 1.6 million equity shares, 1.2 million equity shares and 1.1 million equity shares, respectively, with a fair value of ($143,000), ($121,000) and ($6,000), respectively; that 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 Company is a party to enforceable master netting arrangements for swaps entered into as part of the Company's investment strategy. They are typically not used as hedging instruments. These swaps, while settled on a net basis with the counterparties, major U.S. financial institutions, are shown gross in assets and liabilities on the condensed consolidated statements of financial condition. The swaps have a firm contract end date and are closed out and settled when each contract expires.


 
 
   
   
   
Gross Amounts Not Offset in the
 
 
 
   
   
   
Statements of Financial Condition
 
 
 
Gross
   
Gross Amounts
   
Net Amounts of
   
   
   
 
 
 
Amounts of
   
Offset in the
   
Assets Presented
   
   
   
 
 
 
Recognized
   
Statements of
   
in the Statements of
   
Financial
   
Cash Collateral
   
 
 
 
Assets
   
Financial Condition
   
Financial Condition
   
Instruments
   
Received
   
Net Amount
 
Swaps:
 
(in thousands)
 
September 30, 2013
 
$
101
   
$
-
   
$
101
   
$
(101
)
 
$
-
   
$
-
 
December 31, 2012
   
148
     
-
     
148
     
(132
)
   
-
     
16
 
September 30, 2012
 
$
197
   
$
-
   
$
197
   
$
(197
)
 
$
-
   
$
-
 
 
                                               
 
                         
Gross Amounts Not Offset in the
 
 
                         
Statements of Financial Condition
 
 
 
Gross
   
Gross Amounts
   
Net Amounts of
                         
 
 
Amounts of
   
Offset in the
   
Liabilities Presented
                         
 
 
Recognized
   
Statements of
   
in the Statements of
   
Financial
   
Cash Collateral
         
 
 
Liabilities
   
Financial Condition
   
Financial Condition
   
Instruments
   
Pledged
   
Net Amount
 
Swaps:
 
(in thousands)
 
September 30, 2013
 
$
135
   
$
-
   
$
135
   
$
(101
)
 
$
-
   
$
34
 
December 31, 2012
   
132
     
-
     
132
     
(132
)
   
-
     
-
 
September 30, 2012
 
$
200
   
$
-
   
$
200
   
$
(197
)
 
$
-
   
$
3
 

The following is a summary of the cost, gross unrealized gains, gross unrealized losses and fair value of available for sale investments as of September 30, 2013, December 31, 2012 and September 30, 2012:

 
 
September 30, 2013
 
 
 
   
Gross
   
Gross
   
 
 
 
   
Unrealized
   
Unrealized
   
 
 
 
Cost
   
Gains
   
Losses
   
Fair Value
 
 
 
(In thousands)
 
Common stocks
 
$
16,372
   
$
19,925
   
$
-
   
$
36,297
 
Closed-end Funds
   
23,850
     
16,545
     
(123
)
   
40,272
 
Mutual funds
   
2,874
     
2,141
     
(36
)
   
4,979
 
Total available for sale securities
 
$
43,096
   
$
38,611
   
$
(159
)
 
$
81,548
 

 
 
December 31, 2012
 
 
 
   
Gross
   
Gross
   
 
 
 
   
Unrealized
   
Unrealized
   
 
 
 
Cost
   
Gains
   
Losses
   
Fair Value
 
 
 
(In thousands)
 
Common stocks
 
$
14,822
   
$
18,738
   
$
-
   
$
33,560
 
Closed-end Funds
   
35,868
     
22,645
     
(2
)
   
58,511
 
Mutual funds
   
3,160
     
1,883
     
-
     
5,043
 
Total available for sale securities
 
$
53,850
   
$
43,266
   
$
(2
)
 
$
97,114
 

 
 
September 30, 2012
 
 
 
   
Gross
   
Gross
   
 
 
 
   
Unrealized
   
Unrealized
   
 
 
 
Cost
   
Gains
   
Losses
   
Fair Value
 
 
 
(In thousands)
 
Common stocks
 
$
14,931
   
$
17,308
   
$
-
   
$
32,239
 
Closed-end Funds
   
36,721
     
24,010
     
-
     
60,731
 
Mutual funds
   
3,185
     
1,956
     
-
     
5,141
 
Total available for sale securities
 
$
54,837
   
$
43,274
   
$
-
   
$
98,111
 
13


Unrealized changes in fair value, net of taxes, for the three months ended September 30, 2013 and September 30, 2012 of ($2.2) million in losses and $2.9 million in gains, respectively, have been included in other comprehensive income, a component of equity, at September 30, 2013 and September 30, 2012.  Return of capital on available for sale securities was $0.5 million and $0.8 million for the three months ended September 30, 2013 and September 30, 2012, respectively.  Proceeds from sales of investments available for sale were approximately $10.4 million and $2.3 million for the three months ended September 30, 2013 and September 30, 2012, respectively.  For the three months ended September 30, 2013 and September 30, 2012, gross gains on the sale of investments available for sale amounted to $5.7 million and $1.1 million, respectively, and were reclassified from other comprehensive income into net gain from investments in the condensed consolidated statements of income.  There were no losses on the sale of investments available for sale for the three months ended September 30, 2013 or September 30, 2012.  Unrealized changes in fair value, net of taxes, for the nine months ended September 30, 2013 and September 30, 2012 of ($3.0) million in losses and $3.8 million in gains, respectively, have been included in other comprehensive income, a component of equity, at September 30, 2013 and September 30, 2012.  Return of capital on available for sale securities was $1.1 million and $1.7 million for the nine months ended September 30, 2013 and September 30, 2012, respectively.  Proceeds from sales of investments available for sale were approximately $32.4 million and $3.1 million for the nine months ended September 30, 2013 and September 30, 2012, respectively.  For the nine months ended September 30, 2013 and September 30, 2012, gross gains on the sale of investments available for sale amounted to $16.2 million and $1.5 million, respectively, and were reclassified from other comprehensive income into net gain from investments in the condensed consolidated statements of income.  There were no losses on the sale of investments available for sale for the nine months ended September 30, 2013 or September 30, 2012.  The basis on which the cost of a security sold is determined is specific identification.

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:

 
 
September 30, 2013
   
December 31, 2012
   
September 30, 2012
 
 
 
   
Unrealized
   
   
   
Unrealized
   
   
   
Unrealized
   
 
 
 
Cost
   
Losses
   
Fair Value
   
Cost
   
Losses
   
Fair Value
   
Cost
   
Losses
   
Fair Value
 
(in thousands)
 
   
   
   
   
   
   
   
   
 
Cosed-end funds
 
$
941
   
$
(123
)
 
$
818
   
$
73
   
$
(2
)
 
$
71
   
$
-
   
$
-
   
$
-
 
Mutual Funds
   
365
     
(36
)
   
329
     
-
     
-
     
-
     
-
     
-
     
-
 
Total
 
$
1,306
   
$
(159
)
 
$
1,147
   
$
73
   
$
(2
)
 
$
71
   
$
-
   
$
-
   
$
-
 

At September 30, 2013, there were four holdings in loss positions which were not deemed to be other than temporarily impaired due to the length of time that they had been in a loss position and because they passed scrutiny in our evaluation of issuer-specific and industry-specific considerations.  In these specific instances, the investments at September 30, 2013 were open and closed-end funds with diversified holdings across multiple companies and across multiple industries.  All holdings were impaired for four months at September 30, 2013.  The value of these holdings at September 30, 2013 was $1.1 million.  If these holdings were to continue to be impaired, we may need to record an impairment in a future period on the condensed consolidated statement of income for the amount of the unrealized loss, which at September 30, 2013 was $159,000.

At December 31, 2012 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, 2012 was a closed-end fund with diversified holdings across multiple companies and across multiple industries.  The one holding was impaired for one month at December 31, 2012 . The value of this holding at December 31, 2012 was $0.1 million.

At September 30, 2012, there were no available for sale holdings in loss positions.

For the nine months ended September 30, 2013 and September 30, 2012, there was $14,000 and $20,000 of losses, respectively, on available for sale securities deemed to be other than temporary.  There were no losses for the three months ended September 30, 2013 and September 30, 2012.
14


C. Fair Value

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 September 30, 2013, December 31, 2012 and September 30, 2012 and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value:

Assets and Liabilities Measured at Fair Value on a Recurring Basis as of September 30, 2013 (in thousands)

 
 
Quoted Prices in Active
   
Significant Other
   
Significant
   
Balance as of
 
 
 
Markets for Identical
   
Observable
   
Unobservable
   
September 30,
 
Assets
 
Assets (Level 1)
   
Inputs (Level 2)
   
Inputs (Level 3)
   
2013
 
Cash equivalents
 
$
244,144
   
$
-
   
$
-
   
$
244,144
 
Investments in partnerships
   
-
     
23,146
     
-
     
23,146
 
Investments in securities:
                               
AFS - Common stocks
   
36,297
     
-
     
-
     
36,297
 
AFS - Mutual funds
   
1,575
     
-
     
-
     
1,575
 
Trading - Gov't obligations
   
21,000
     
-
     
-
     
21,000
 
Trading - Common stocks
   
165,776
     
-
     
667
     
166,443
 
Trading - Mutual funds
   
12,010
     
-
     
-
     
12,010
 
Trading - Other
   
32
     
104
     
283
     
419
 
Total investments in securities
   
236,690
     
104
     
950
     
237,744
 
Investments in sponsored registered investment companies:
                         
AFS - Closed-end Funds
   
40,272
     
-
     
-
     
40,272
 
AFS - Mutual Funds
   
3,404
     
-
     
-
     
3,404
 
Trading - Mutual funds
   
12
     
-
     
-
     
12
 
Total investments in sponsored
                               
registered investment companies
   
43,688
     
-
     
-
     
43,688
 
Total investments
   
280,378
     
23,250
     
950
     
304,578
 
Total assets at fair value
 
$
524,522
   
$
23,250
   
$
950
   
$
548,722
 
Liabilities
                               
Trading - Common stocks
 
$
7,003
   
$
-
   
$
-
   
$
7,003
 
Trading - Other
   
-
     
722
     
-
     
722
 
Securities sold, not yet purchased
 
$
7,003
   
$
722
   
$
-
   
$
7,725
 

15

Assets and Liabilities Measured at Fair Value on a Recurring Basis as of December 31, 2012 (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)
   
2012
 
Cash equivalents
 
$
190,475
   
$
-
   
$
-
   
$
190,475
 
Investments in partnerships
   
-
     
26,128
     
-
     
26,128
 
Investments in securities:
                               
AFS - Common stocks
   
33,560
     
-
     
-
     
33,560
 
AFS - Mutual funds
   
1,702
     
-
     
-
     
1,702
 
Trading - Gov't obligations
   
42,989
     
-
     
-
     
42,989
 
Trading - Common stocks
   
137,796
     
7
     
675
     
138,478
 
Trading - Mutual funds
   
1,484
     
-
     
-
     
1,484
 
Trading - Other
   
120
     
148
     
362
     
630
 
Total investments in securities
   
217,651
     
155
     
1,037
     
218,843
 
Investments in sponsored registered investment companies:
                         
AFS - Closed-end Funds
   
58,511
     
-
     
-
     
58,511
 
AFS - Mutual Funds
   
3,341
     
-
     
-
     
3,341
 
Trading - Mutual funds
   
20
     
-
     
-
     
20
 
Total investments in sponsored
                               
registered investment companies
   
61,872
     
-
     
-
     
61,872
 
Total investments
   
279,523
     
26,283
     
1,037
     
306,843
 
Total assets at fair value
 
$
469,998
   
$
26,283
   
$
1,037
   
$
497,318
 
Liabilities
                               
Trading - Common stocks
 
$
2,867
   
$
-
   
$
-
   
$
2,867
 
Trading - Other
   
-
     
269
     
-
     
269
 
Securities sold, not yet purchased
 
$
2,867
   
$
269
   
$
-
   
$
3,136
 

Assets and Liabilities Measured at Fair Value on a Recurring Basis as of September 30, 2012 (in thousands)

 
 
Quoted Prices in Active
   
Significant Other
   
Significant
   
Balance as of
 
 
 
Markets for Identical
   
Observable
   
Unobservable
   
September 30,
 
Assets
 
Assets (Level 1)
   
Inputs (Level 2)
   
Inputs (Level 3)
   
2012
 
Cash equivalents
 
$
288,450
   
$
-
   
$
-
   
$
288,450
 
Investments in partnerships
   
-
     
24,976
     
-
     
24,976
 
Investments in securities:
                               
AFS - Common stocks
   
32,239
     
-
     
-
     
32,239
 
AFS - Mutual funds
   
1,673
     
-
     
-
     
1,673
 
Trading - Gov't obligations
   
28,742
     
-
     
-
     
28,742
 
Trading - Common stocks
   
170,159
     
10
     
677
     
170,846
 
Trading - Mutual funds
   
1,461
     
-
     
-
     
1,461
 
Trading - Other
   
59
     
77
     
348
     
484
 
Total investments in securities
   
234,333
     
87
     
1,025
     
235,445
 
Investments in sponsored registered investment companies:
                         
AFS - Closed-end Funds
   
60,731
     
-
     
-
     
60,731
 
AFS - Mutual Funds
   
3,468
     
-
     
-
     
3,468
 
Trading - Mutual funds
   
24
     
-
     
-
     
24
 
Total investments in sponsored
                               
registered investment companies
   
64,223
     
-
     
-
     
64,223
 
Total investments
   
298,556
     
25,063
     
1,025
     
324,644
 
Total assets at fair value
 
$
587,006
   
$
25,063
   
$
1,025
   
$
613,094
 
Liabilities
                               
Trading - Common stocks
 
$
3,816
   
$
-
   
$
-
   
$
3,816
 
Trading - Other
   
-
     
40
     
-
     
40
 
Securities sold, not yet purchased
 
$
3,816
   
$
40
   
$
-
   
$
3,856
 
16


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 September 30, 2013 (in thousands)

 
 
   
   
Total
   
   
   
   
   
 
 
 
   
   
Unrealized
   
   
   
   
   
 
 
 
   
   
Gains or
   
Total
   
   
   
   
 
 
 
   
Total Realized and
   
(Losses)
   
Realized
   
   
   
   
 
 
 
June
   
Unrealized Gains or
   
Included in
   
and
   
   
   
Transfers
   
 
 
  30, 2013    
(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
 
$
669
   
$
(2
)
 
$
-
   
$
-
   
$
(2
)
 
$
-
   
$
-
   
$
-
   
$
667
 
Trading - Other
   
284
     
(1
)
   
-
     
-
     
(1
)
   
-
     
-
     
-
     
283
 
Total
 
$
953
   
$
(3
)
 
$
-
   
$
-
   
$
(3
)
   
-
   
$
-
   
$
-
   
$
950
 

There were no transfers between any Levels during the three months ended September 30, 2013.

Changes in Level 3 Assets and Liabilities Measured at Fair Value on a Recurring Basis for the Three Months Ended September 30, 2012 (in thousands)

 
 
   
   
Total
   
   
   
   
   
 
 
 
   
   
Unrealized
   
   
   
   
   
 
 
 
   
   
Gains or
   
Total
   
   
   
   
 
 
 
   
Total Realized and
   
(Losses)
   
Realized
   
   
   
   
 
 
 
June
   
Unrealized Gains or
   
Included in
   
and
   
   
   
Transfers
   
 
 
  30, 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
 
$
671
   
$
6
   
$
-
   
$
-
   
$
6
   
$
-
   
$
-
   
$
-
   
$
677
 
Trading - Other
   
351
     
15
     
-
     
-
     
15
     
-
     
(18
)
   
-
     
348
 
Total
 
$
1,022
   
$
21
   
$
-
   
$
-
   
$
21
   
$
-
   
$
(18
)
 
$
-
   
$
1,025
 

There were no transfers between any Levels during the three months ended September 30, 2012.

Changes in Level 3 Assets and Liabilities Measured at Fair Value on a Recurring Basis for the Nine Months Ended September 30, 2013 (in thousands)

 
 
 
   
   
Total
   
   
   
   
   
 
 
 
   
   
Unrealized
   
   
   
   
   
 
 
 
   
   
Gains or
   
Total
   
   
   
   
 
 
 
   
Total Realized and
   
(Losses)
   
Realized
   
   
   
   
 
 
 
December
   
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
 
$
675
   
(8
)
 
$
-
   
$
-
   
(8
)
 
$
-
   
$
-
   
$
-
   
$
667
 
Trading - Other
   
362
     
(3
)
   
-
     
-
     
(3
)
   
3
     
(79
)
   
-
     
283
 
Total
 
$
1,037
   
(11
)
 
$
-
   
$
-
   
(11
)
 
$
3
   
(79
)
 
$
-
   
$
950
 

There were no transfers between any Levels during the nine months ended September 30, 2013.
17

Changes in Level 3 Assets and Liabilities Measured at Fair Value on a Recurring Basis for the Nine Months Ended September 30, 2012 (in thousands)

 
 
   
   
Total
   
   
   
   
   
 
 
 
   
   
Unrealized
   
   
   
   
   
 
 
 
   
   
Gains or
   
Total
   
   
   
   
 
 
 
   
Total Realized and
   
(Losses)
   
Realized
   
   
   
   
 
 
 
December
   
Unrealized Gains or
   
Included in
   
 and
   
   
   
Transfer
   
 
 
  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
   
$
30
   
$
-
   
$
-
   
$
30
   
$
57
   
(80
)
 
$
-
     
677
 
Trading - Other
   
284
     
72
     
-
     
-
     
72
     
18
     
(26
)
   
-
     
348
 
Total
 
$
954
   
$
102
   
$
-
   
$
-
   
$
102
   
$
75
   
(106
)
 
$
-
     
1,025
 

There were no transfers between any Levels during the nine months ended September 30, 2012.

D. Investments in Partnerships, Offshore Funds and Variable Interest Entities ("VIEs")
 
The Company is general partner or co-general partner of various affiliated entities in which the Company has investments totaling $84.3 million, $83.9 million and $88.3 million at September 30, 2013, December 31, 2012 and September 30, 2012, respectively, and whose underlying assets consist primarily of marketable securities (the "affiliated entities"). We also have investments in unaffiliated entities of $13.5 million, $13.6 million and $14.3 million at September 30, 2013, December 31, 2012 and September 30, 2012, respectively (the "unaffiliated entities").  We evaluate each entity for the appropriate accounting treatment and disclosure.  Certain of the affiliated entities, and none of the unaffiliated entities, are consolidated.

For those entities where consolidation is not deemed to be appropriate, we report them in our condensed consolidated statement of financial condition under the caption "Investments in partnerships".  This caption 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 C.  The Company reflects the equity in earnings of these equity method investees and the change in fair value of the consolidated feeder funds ("CFFs") under the caption "Net gain from investments" on the condensed consolidated statements of income.

The following table highlights the number of entities, including voting interest entities ("VOEs"), that we consolidate as well as under which accounting guidance they are consolidated, including 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, 2011
 
1
2
 
-
1
 
-
1
 
1
4
Additional consolidated entities
 
-
-
 
-
-
 
-
-
 
-
-
Deconsolidated entities
 
-
-
 
-
-
 
-
-
 
-
-
Entities consolidated at September 30, 2012
 
1
2
 
-
1
 
-
1
 
1
4
Additional consolidated entities
 
-
-
 
-
-
 
-
-
 
-
-
Deconsolidated entities
 
-
-
 
-
-
 
-
-
 
-
-
Entities consolidated at December 31, 2012
 
1
2
 
-
1
 
-
1
 
1
4
Additional consolidated entities
 
-
-
 
-
-
 
-
-
 
-
-
Deconsolidated entities
 
-
-
 
-
-
 
-
-
 
-
-
Entities consolidated at September 30, 2013
 
1
2
 
-
1
 
-
1
 
1
4
18


At and for the nine months ended September 30, 2013 and 2012 and at December 31, 2012, one CFF VIE is consolidated, as the Company has been determined to be the primary beneficiary because it has an equity interest and absorbs the majority of the expected losses and/or expected gains. At and for the nine months ended September 30, 2013 and 2012 and at December 31, 2012, the two CFF VOEs, the one Partnership VOE and the one Offshore Fund VOE are consolidated because the unaffiliated partners or shareholders lack substantive rights, and the Company, as either the general partner or investment manager, is deemed to have control.

The following table breaks down the investments in partnerships line by accounting method, either fair value or equity method, and investment type.

 
 
September 30, 2013
 
 
 
Investment Type
 
 
 
Affiliated
   
Unaffiliated
   
 
 
 
Consolidated
   
   
   
   
   
 
Accounting method
 
Feeder Funds
   
Partnerships
   
Offshore Funds
   
Partnerships
   
Offshore Funds
   
Total
 
 
 
   
   
   
   
   
 
Fair Value
 
$
23,146
   
$
-
   
$
-
   
$
-
   
$
-
   
$
23,146
 
Equity Method
   
-
     
26,717
     
34,460
     
6,080
     
7,349
     
74,606
 
 
                                               
Total
 
$
23,146
   
$
26,717
   
$
34,460
   
$
6,080
   
$
7,349
   
$
97,752
 

 
 
December 31, 2012
 
 
 
Investment Type
 
 
 
Affiliated
   
Unaffiliated
   
 
 
 
Consolidated
   
   
   
   
   
 
Accounting method
 
Feeder Funds
   
Partnerships
   
Offshore Funds
   
Partnerships
   
Offshore Funds
   
Total
 
 
 
   
   
   
   
   
 
Fair Value
 
$
26,128
   
$
-
   
$
-
   
$
-
   
$
-
   
$
26,128
 
Equity Method
   
-
     
28,158
     
29,679
     
6,505
     
7,079
     
71,421
 
 
                                               
Total
 
$
26,128
   
$
28,158
   
$
29,679
   
$
6,505
   
$
7,079
   
$
97,549
 

 
 
September 30, 2012
 
 
 
Investment Type
 
 
 
Affiliated
   
Unaffiliated
   
 
 
 
Consolidated
   
   
   
   
   
 
Accounting method
 
Feeder Funds
   
Partnerships
   
Offshore Funds
   
Partnerships
   
Offshore Funds
   
Total
 
 
 
   
   
   
   
   
 
Fair Value
 
$
24,976
   
$
-
   
$
-
   
$
-
   
$
-
   
$
24,976
 
Equity Method
   
-
     
32,475
     
30,901
     
7,518
     
6,734
     
77,628
 
 
                                               
Total
 
$
24,976
   
$
32,475
   
$
30,901
   
$
7,518
   
$
6,734
   
$
102,604
 
19


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):

 
 
September 30, 2013
 
 
 
Prior to
   
   
   
Offshore
   
 
 
 
Consolidation
   
CFFs
   
Partnerships
   
Funds
   
As Reported
 
Assets
 
   
   
   
   
 
Cash and cash equivalents
 
$
243,995
   
$
1,082
   
$
334
   
$
-
   
$
245,411
 
Investments in securities
   
240,113
     
-
     
7,400
     
(9,769
)
   
237,744
 
Investments in sponsored investment companies
   
43,677
     
-
     
11
     
-
     
43,688
 
Investments in partnerships
   
104,010
     
3,253
     
(9,511
)
   
-
     
97,752
 
Receivable from brokers
   
26,981
     
-
     
2,115
     
14,758
     
43,854
 
Investment advisory fees receivable
   
31,241
     
(8
)
   
(1
)
   
(81
)
   
31,151
 
Other assets
   
34,947
     
-
     
-
     
75
     
35,022
 
Total assets
 
$
724,964
   
$
4,327
   
$
348
   
$
4,983
   
$
734,622
 
Liabilities and equity
                                       
Securities sold, not yet purchased
 
$
7,577
   
$
-
   
$
-
   
$
148
   
$
7,725
 
Accrued expenses and other liabilities
   
161,394
     
1,146
     
32
     
2,567
     
165,139
 
Total debt
   
117,347
     
-
     
-
     
-
     
117,347
 
Redeemable noncontrolling interests
   
-
     
3,181
     
316
     
2,268
     
5,765
 
Total equity
   
438,646
     
-
     
-
     
-
     
438,646
 
Total liabilities and equity
 
$
724,964
   
$
4,327
   
$
348
   
$
4,983
   
$
734,622
 

 
 
December 31, 2012
 
 
 
Prior to
   
   
   
Offshore
   
 
 
 
Consolidation
   
CFFs
   
Partnerships
   
Funds
   
As Reported
 
Assets
 
   
   
   
   
 
Cash and cash equivalents
 
$
189,743
   
$
-
   
$
865
   
$
-
   
$
190,608
 
Investments in securities
   
213,639
     
-
     
6,944
     
(1,740
)
   
218,843
 
Investments in sponsored investment companies
   
61,852
     
-
     
20
     
-
     
61,872
 
Investments in partnerships
   
100,164
     
5,388
     
(8,003
)
   
-
     
97,549
 
Receivable from brokers
   
25,972
     
-
     
1,480
     
23,203
     
50,655
 
Investment advisory fees receivable
   
42,425
     
9
     
(5
)
   
-
     
42,429
 
Other assets
   
32,673
     
(2,986
)
   
(1,000
)
   
90
     
28,777
 
Total assets
 
$
666,468
   
$
2,411
   
$
301
   
$
21,553
   
$
690,733
 
Liabilities and equity
                                       
Securities sold, not yet purchased
 
$
3,033
   
$
-
   
$
-
   
$
103
   
$
3,136
 
Accrued expenses and other liabilities
   
76,135
     
384
     
21
     
6,395
     
82,935
 
Total debt
   
216,366
     
-
     
-
     
-
     
216,366
 
Redeemable noncontrolling interests
   
-
     
2,027
     
280
     
15,055
     
17,362
 
Total equity
   
370,934
     
-
     
-
     
-
     
370,934
 
Total liabilities and equity
 
$
666,468
   
$
2,411
   
$
301
   
$
21,553
   
$
690,733
 

 
 
September 30, 2012
 
 
 
Prior to
   
   
   
Offshore
   
 
 
 
Consolidation
   
CFFs
   
Partnerships
   
Funds
   
As Reported
 
Assets
 
   
   
   
   
 
Cash and cash equivalents
 
$
287,806
   
$
-
   
$
879
   
$
-
   
$
288,685
 
Investments in securities
   
222,489
     
-
     
6,908
     
6,048
     
235,445
 
Investments in sponsored investment companies
   
64,223
     
-
     
-
     
-
     
64,223
 
Investments in partnerships
   
109,801
     
1,540
     
(8,737
)
   
-
     
102,604
 
Receivable from brokers
   
27,597
     
-
     
1,255
     
26,307
     
55,159
 
Investment advisory fees receivable
   
29,182
     
6
     
(1
)
   
-
     
29,187
 
Other assets
   
23,047
     
9
     
-
     
212
     
23,268
 
Total assets
 
$
764,145
   
$
1,555
   
$
304
   
$
32,567
   
$
798,571
 
Liabilities and equity
                                       
Securities sold, not yet purchased
 
$
3,879
   
$
-
   
$
-
   
$
(23
)
 
$
3,856
 
Accrued expenses and other liabilities
   
100,774
     
68
     
30
     
14,123
     
114,995
 
Total debt
   
216,118
     
-
     
-
     
-
     
216,118
 
Redeemable noncontrolling interests
   
-
     
1,487
     
274
     
18,467
     
20,228
 
Total equity
   
443,374
     
-
     
-
     
-
     
443,374
 
Total liabilities and equity
 
$
764,145
   
$
1,555
   
$
304
   
$
32,567
   
$
798,571
 
20


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 September 30, 2013
 
 
 
Prior to
   
   
   
Offshore
   
 
 
 
Consolidation
   
CFFs
   
Partnerships
   
Funds
   
As Reported
 
Total revenues
 
$
96,620
   
$
(8
)
 
$
(1
)
 
$
(234
)
 
$
96,377
 
Total expenses
   
63,400
     
46
     
11
     
192
     
63,649
 
Operating income
   
33,220
     
(54
)
   
(12
)
   
(426
)
   
32,728
 
Total other income, net
   
17,404
     
94
     
31
     
462
     
17,991
 
Income before income taxes
   
50,624
     
40
     
19
     
36
     
50,719
 
Income tax provision
   
17,515
     
-
     
-
     
-
     
17,515
 
Net income
   
33,109
     
40
     
19
     
36
     
33,204
 
Net income attributable to noncontrolling interests
   
11
     
40
     
19
     
36
     
106
 
Net income attributable to GAMCO
 
$
33,098
   
$
-
   
$
-
   
$
-
   
$
33,098
 

 
 
Three Months Ended September 30, 2012
 
 
 
Prior to
   
   
   
Offshore
   
 
 
 
Consolidation
   
CFFs
   
Partnerships
   
Funds
   
As Reported
 
Total revenues
 
$
82,489
   
$
(2
)
 
$
(1
)
 
$
(255
)
 
$
82,231
 
Total expenses
   
52,976
     
28
     
11
     
204
     
53,219
 
Operating income
   
29,513
     
(30
)
   
(12
)
   
(459
)
   
29,012
 
Total other income, net
   
(2,032
)
   
78
     
34
     
474
     
(1,446
)
Income before income taxes
   
27,481
     
48
     
22
     
15
     
27,566
 
Income tax provision
   
8,467
     
-
     
-
     
-
     
8,467
 
Net income
   
19,014
     
48
     
22
     
15
     
19,099
 
Net income attributable to noncontrolling interests
   
10
     
48
     
22
     
15
     
95
 
Net income attributable to GAMCO
 
$
19,004
   
$
-
   
$
-
   
$
-
   
$
19,004
 

 
 
Nine Months Ended September 30, 2013
 
 
 
Prior to
   
   
   
Offshore
   
 
 
 
Consolidation
   
CFFs
   
Partnerships
   
Funds
   
As Reported
 
Total revenues
 
$
275,689
   
$
(20
)
 
$
(2
)
 
$
(819
)
 
$
274,848
 
Total expenses
   
178,858
     
134
     
36
     
581
     
179,609
 
Operating income
   
96,831
     
(154
)
   
(38
)
   
(1,400
)
   
95,239
 
Total other income, net
   
33,125
     
228
     
79
     
1,559
     
34,991
 
Income before income taxes
   
129,956
     
74
     
41
     
159
     
130,230
 
Income tax provision
   
46,434
     
-
     
-
     
-
     
46,434
 
Net income
   
83,522
     
74
     
41
     
159
     
83,796
 
Net income attributable to noncontrolling interests
   
(14
)
   
74
     
41
     
159
     
260
 
Net income attributable to GAMCO
 
$
83,536
   
$
-
   
$
-
   
$
-
   
$
83,536
 

 
 
Nine Months Ended September 30, 2012
 
 
 
Prior to
   
   
   
Offshore
   
 
 
 
Consolidation
   
CFFs
   
Partnerships
   
Funds
   
As Reported
 
Total revenues
 
$
245,771
   
$
(4
)
 
$
(2
)
 
$
(761
)
 
$
245,004
 
Total expenses
   
158,146
     
76
     
30
     
361
     
158,613
 
Operating income
   
87,625
     
(80
)
   
(32
)
   
(1,122
)
   
86,391
 
Total other income, net
   
1,151
     
175
     
51
     
1,069
     
2,446
 
Income before income taxes
   
88,776
     
95
     
19
     
(53
)
   
88,837
 
Income tax provision
   
30,909
     
-
     
-
     
-
     
30,909
 
Net income
   
57,867
     
95
     
19
     
(53
)
   
57,928
 
Net income attributable to noncontrolling interests
   
(78
)
   
95
     
19
     
(53
)
   
(17
)
Net income attributable to GAMCO
 
$
57,945
   
$
-
   
$
-
   
$
-
     
57,945
 

Variable Interest Entities

We sponsor a number of investment vehicles where we are the general partner or investment manager.  Certain of these vehicles are VIEs, but we are not the primary beneficiary, in all but one case, because we do not absorb a majority of the entities' expected losses or expected returns, and they are, therefore, not consolidated.  We consolidate the one VIE where we are the primary beneficiary.  The Company has not provided any financial or other support to those VIEs where we are not the primary beneficiary.  The total net assets of these non-consolidated VIEs at September 30, 2013, December 31, 2012 and September 30, 2012 were $77.7 million, $75.0 million and $78.6 million, respectively.  Our maximum exposure to loss as a result of our involvement with the nonconsolidated VIEs is limited to the investment in one VIE and the deferred carried interest that we have in another.  On September 30, 2013, December 31, 2012 and September 30, 2012, we had an investment in one of the non-consolidated VIE offshore funds of approximately $9.9 million, $7.7 million and $8.2 million, respectively, which was included in investments in partnerships on the condensed consolidated statements of financial condition.  On September 30, 2013, December 31, 2012 and September 30, 2012, we had a deferred carried interest in one of the non-consolidated VIE offshore funds of approximately $45,000, $45,000 and $42,000, 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 statement of income, condensed consolidated statement of financial condition and condensed consolidated statement of cash flows.
21


The assets of these VIEs may only be used to satisfy obligations of the VIEs.  The following table presents the balances related to the VIE that is consolidated and is included on the condensed consolidated statements of financial condition as well as GAMCO's net interest in this VIE:

 
 
September 30, 2013
   
December 31, 2012
   
September 30, 2012
 
(In thousands)
 
   
   
 
Cash and cash equivalents
 
$
1,082
   
$
-
   
$
-
 
Investments in partnerships
   
13,782
     
18,507
     
23,086
 
Accrued expenses and other liabilities
   
(1,088
)
   
(3,010
)
   
(15
)
Redeemable noncontrolling interests
   
-
     
(411
)
   
(962
)
GAMCO's net interests in consolidated VIE
 
$
13,776
   
$
15,086
   
$
22,109
 

E. Income Taxes
 
The effective tax rate for the three months ended September 30, 2013 was 34.5% compared to 30.7% for the prior year three month period.  The effective tax rate for the nine months ended September 30, 2013 was 35.7% compared to 34.8% for the prior year nine month period.  The third quarter 2012 rate included a benefit of 5.1% resulting from the difference between the tax and book basis of Subordinated Debentures repurchased, including the tender offer completed in July 2012.  The 2012 nine month rate included a benefit of 1.6% resulting from the difference between the tax and book basis of Subordinated Debentures repurchased, including the tender offer completed in July 2012.


F. Earnings Per Share

The computations of basic and diluted net income per share are as follows:

 
 
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
(in thousands, except per share amounts)
 
2013
   
2012
   
2013
   
2012
 
Basic:
 
   
   
   
 
Net income attributable to GAMCO Investors, Inc.'s shareholders
 
$
33,098
   
$
19,004
   
$
83,536
   
$
57,945
 
Weighted average shares outstanding
   
25,625
     
26,250
     
25,682
     
26,309
 
Basic net income attributable to GAMCO Investors, Inc.'s
                               
shareholders per share
 
$
1.29
   
$
0.72
   
$
3.25
   
$
2.20
 
 
                               
Diluted:
                               
Net income attributable to GAMCO Investors, Inc.'s shareholders
 
$
33,098
   
$
19,004
   
$
83,536
   
$
57,945
 
 
                               
Weighted average share outstanding
   
25,625
     
26,250
     
25,682
     
26,309
 
Dilutive stock options and restricted stock awards
   
75
     
189
     
35
     
171
 
Total
   
25,700
     
26,439
     
25,717
     
26,480
 
Diluted net income attributable to GAMCO Investors, Inc.'s
                               
shareholders per share
 
$
1.29
   
$
0.72
   
$
3.25
   
$
2.19
 
22


G. Debt

Debt consists of the following:

 
 
September 30, 2013
   
December 31, 2012
   
September 30, 2012
 
 
 
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
   
$
100,485
   
$
99,000
   
$
100,832
 
5.875% Senior notes
   
100,000
     
108,000
     
100,000
     
106,250
     
100,000
     
104,458
 
0% Subordinated debentures
   
17,347
     
19,349
     
17,366
     
19,638
     
17,118
     
19,612
 
Total
 
$
117,347
   
$
127,349
   
$
216,366
   
$
226,373
   
$
216,118
   
$
224,902
 

5.5% Senior notes

On May 15, 2003, the Company issued 10-year, $100 million senior notes, of which $99 million was outstanding at December 31, 2012 and September 30, 2012.  These senior notes matured and were repaid on May 15, 2013.  They paid interest semi-annually at 5.5%.

5.875% Senior notes

On May 31, 2011, the Company issued 10-year, $100 million senior notes.  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.

Zero coupon Subordinated debentures due December 31, 2015

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.  There were no repurchases during the three month period ended September 30, 2013.  During the three months ended September 30, 2012, the Company repurchased 645,779 Debentures having a face value of $64.6 million.  The redemption was accounted for as an extinguishment of debt and resulted in a loss of $6.3 million, which was included in extinguishment of debt on the condensed consolidated statements of income.  During the nine month periods ended September 30, 2013 and September 30, 2012, the Company repurchased 11,974 Debentures and 646,008 Debentures, respectively, having a face value of $1.2 million and $64.6 million, respectively. The redemptions were accounted for as extinguishments of debt and resulted in a loss of $137,000 and a loss of $6.3 million, respectively.  Gains and losses from the extinguishment of debt are included in net gain/(loss) from investments on the condensed consolidated statements of income.  The debt is being accreted to its face value using the effective rate on the date of issuance of 7.45%.  At September 30, 2013, December 31, 2012 and September 30, 2012, the debt was recorded at its accreted value of $17.3 million, $17.4 million and $17.1 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.

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 expired in July 2012.  As of September 30, 2013, $400 million is available on the shelf, which will expire in May 2015.
23


H. Stockholders' Equity
 
Shares outstanding were 26.0 million, 25.7 million and 26.6 million on September 30, 2013, December 31, 2012 and September 30, 2012, respectively.

Dividends

 
Payment Date
Record Date
 
Amount
 
Type
 
 
 
 
 
     
Three months ended March 31, 2013
March 26, 2013
March 12, 2013
 
$
0.05
 
Regular
Three months ended June 30, 2013
June 25, 2013
June 11, 2013
 
$
0.05
 
Regular
Three months ended September 30, 2013
September 24, 2013
September 10, 2013
 
$
0.06
 
Regular
Nine months ended September 30, 2013
 
  
 
$
0.16
 
 
 
 
 
       
     
Three months ended March 31, 2012
March 27, 2012
March 13, 2012
 
$
0.04
 
Regular
Three months ended June 30, 2012
June 26, 2012
June 12, 2012
 
$
0.04
 
Regular
Three months ended June 30, 2012
June 26, 2012
June 12, 2012
 
$
0.25
 
Special
Three months ended September 30, 2012
September 25, 2012
September 11, 2012
 
$
0.05
 
Regular
Three months ended September 30, 2012
September 25, 2012
September 11, 2012
 
$
0.25
 
Special
Nine months ended September 30, 2012
 
  
 
$
0.63
 
 

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 restricted stock awards ("RSA") 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.  RSA shares granted under the Plans prior to 2013 vested 30% after three years and 100% after five years while RSAs granted during 2013 vest 30% after three years and 10% each year after years four through ten.

On August 6, 2013, the Company approved the granting of 431,700 RSA shares at a grant date fair value of $57.86 per share.  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.  As of September 30, 2013 and September 30, 2012, there were 427,700 and 371,500 RSA shares outstanding, respectively, that were previously issued at an average weighted grant price of $57.86 and $45.15, respectively.  All grants of the RSA shares were recommended by the Company's Chairman, who did not receive a RSA award, and approved by the Compensation Committee.  For the RSA grant issued in 2013 this expense, net of forfeitures, was recognized over the vesting period for these awards which is 30% over three years from the date of grant and 10% each year over years four through ten from the date of grant.  For the RSA grants issued prior to 2013 this expense, net of forfeitures, was 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 were being held for them until the RSA vesting dates and were forfeited if the grantee was no longer employed by the Company on the vesting dates.  Dividends declared on these RSAs, less estimated forfeitures, were charged to retained earnings on the declaration date.  During November 2012, the Board of Directors accelerated the lapsing of restrictions on all outstanding RSAs resulting in recognition of $10.1 million in stock compensation expense during 2012 that would have been recorded in 2013 through 2016.  There were no RSAs outstanding at December 31, 2012.
24


For the three months ended September 30, 2013 and September 30, 2012, we recognized stock-based compensation expense of $0.7 million and $0.9 million, respectively.  For the nine months ended September 30, 2013 and September 30, 2012, we recognized stock-based compensation expense of $0.8 million and $2.6 million, respectively.  Actual and projected stock-based compensation expense for RSA shares and options for the years ended December 31, 2012 through December 31, 2023 (based on awards currently issued or granted) is as follows ($ in thousands):

   
2012
   
2013
   
2014
   
2015
   
2016
   
2017
 
 
Q1
   
$
871
   
$
15
   
$
1,096
   
$
1,090
   
$
1,089
   
$
558
 
 
Q2
     
869
     
15
     
1,092
     
1,089
     
1,089
     
558
 
 
Q3
     
875
     
741
     
1,092
     
1,089
     
735
     
471
 
 
Q4
     
10,968
     
1,104
     
1,092
     
1,089
     
558
     
428
 
Full Year
   
$
13,583
   
$
1,875
   
$
4,372
   
$
4,357
   
$
3,471
   
$
2,015
 
                                                     
         
2018
     
2019
     
2020
     
2021
     
2022
     
2023
 
 
Q1
   
$
428
   
$
325
   
$
240
   
$
168
   
$
105
   
$
50
 
 
Q2
     
428
     
325
     
240
     
168
     
105
     
50
 
 
Q3
     
359
     
268
     
192
     
126
     
68
     
17
 
 
Q4
     
325
     
240
     
168
     
105
     
50
     
-
 
Full Year
   
$
1,540
   
$
1,158
   
$
840
   
$
567
   
$
328
   
$
117
 
                                                     

The total compensation cost related to non-vested options not yet recognized is approximately $19.9 million as of September 30, 2013.  There were no options exercised for the three months ended September 30, 2013.  For the three months ended September 30, 2012, proceeds from the exercise of 24,977 stock options were $723,000 resulting in a tax benefit to GAMCO of $84,000.  For the nine months ended September 30, 2013 and 2012, proceeds from the exercise of 2,623 and 26,977 stock options, respectively, were $76,000 and $781,000, respectively, resulting in a tax benefit to GAMCO of $16,000 and $87,000, respectively.  The Company recognized $21,000 in tax benefits from 3,900 RSAs that vested during the nine months ended September 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 February 5, 2013, our Board of Directors authorized an incremental 500,000 shares to be added to the current buyback authorization.  For the three months ended September 30, 2013 and September 30, 2012, the Company repurchased 40,857 shares and 47,426 shares, respectively, at an average price per share of $72.40 and $47.79, respectively.  For the nine months ended September 30, 2013 and September 30, 2012, the Company repurchased 159,259 shares and 275,528 shares, respectively, at an average price per share of $57.97 and $44.94, respectively.  From the inception of the program through September 30, 2013, 8,641,624 shares have been repurchased at an average price of $41.95 per share.  At September 30, 2013, the total shares available under the program to be repurchased in the future were 493,184.

I. Goodwill and Identifiable Intangible Assets

At September 30, 2013, $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 94%-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 months ended September 30, 2013 or September 30, 2012, 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 in 2008 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 September 30, 2013, December 31, 2012 and September 30, 2012.  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 2014.  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 months ended September 30, 2013 or September 30, 2012, and as such there was no impairment analysis performed or charge recorded.
25


J. Commitments and Contingencies

From time to time, the Company may be named in legal actions and proceedings.  These actions may seek substantial or indeterminate compensatory as well as punitive damages or injunctive relief.  The Company is also subject to governmental or regulatory examinations or investigations.  The examinations or investigations could result in adverse judgments, settlements, fines, injunctions, restitutions or other relief.  The Company cannot predict the ultimate outcome of such matters.  For all such matters, the condensed 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 G.research, Inc. (formerly known as Gabelli & Company, Inc.), our broker-dealer subsidiary, for losses they may sustain from the customer accounts that trade on margin introduced by it.  At September 30, 2013, 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. Shareholder-Designated Contribution Plan

During the first quarter of 2013, the Company recorded a charge of $5.0 million, or $0.11 per diluted share, net of management fee and tax benefit, related to a newly-adopted Shareholder Designated Charitable Contribution program.  Under the program, each shareholder will be eligible to designate a charity to which the company will make a donation based upon the actual number of shares registered in the shareholder's name.  Shares held in nominee or street name are not eligible to participate.  Annually, the Board of Directors determines amounts, if any, which will be contributed per registered share.  The Board approved an initial contribution for 2013 of $0.25 per registered share.  The Company recorded the initial $5.0 million charge, which is included in accrued expenses and other liabilities in the condensed consolidated statements of financial condition, based on the number of registered shares at the adoption of the program.  Based upon the number of registered shares that participated in the program, the Company recorded an additional charge of $0.3 million, or $0.01 per diluted share, net of management fee and tax benefit, during the third quarter of 2013.  For the nine months ended September 30, 2013, the Company recorded a charge of $5.3 million, or $0.12 per diluted share, net of management fee and tax benefit.

L. Subsequent Events
 
From October 1, 2013 to November 6, 2013, the Company repurchased 7,000 shares at $70.24 per share.  On November 6, 2013, the Board of Directors increased the authorization under the Stock Repurchase Program by an additional 500,000 shares.  As a result, there are 986,184 shares available to be repurchased under this existing buyback plan at November 6, 2013.

The Company filed a proxy on October 29, 2013 to approve changing the Company's state of incorporation to Delaware from New York and to approve an amendment to the Company's 2002 Stock Award and Incentive Plan to increase the number of shares of Class A Common Stock authorized and reserved for issuance thereunder by 2 million shares.

On November 6, 2013, GAMCO's Board of Directors declared a special dividend of $0.50 per share and a regular quarterly dividend of $0.06 per share both payable on December 24, 2013 to its Class A and Class B shareholders of record on December 10, 2013.

On November 6, 2013, GAMCO's Board of Directors approved a contribution under its Shareholder Designated Charitable Contribution program of $0.25 per share for all eligible shares of record on December 31, 2013.  Based on the estimated participation of shareholders in this program, the Company expects to record a $5.3 million charge during the fourth quarter of 2013.



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

Overview
 
GAMCO Investors, Inc. ("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 G.research, Inc. (formerly Gabelli & Company, Inc.) ("G.research"), 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.  Stated another way, our ability to enhance client assets on a risk-adjusted basis, and for taxable provate wealth clients, on a tax adjusted basis, will continue to have an impact on our level of assets under management and hence, on revenues.

We conduct our investment advisory business principally through the following subsidiaries: 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 G.research, one of our broker-dealer subsidiaries.  The distribution of our open-end funds is conducted through G.distributors, our other broker-dealer subsidiary.
 
Assets under management ("AUM") were $43.5 billion as of September 30, 2013, an increase of 7.5% from AUM of $40.5 billion at June 30, 2013 and an increase of 17.8% from the September 30, 2012 AUM of $36.9 billion.  The third quarter 2013 AUM increased $3.0 billion and consisted of market appreciation of $2.6 billion, net cash inflows of $618 million and recurring distributions, net of reinvestments, from open-end and closed-end funds of $146 million.  Average total AUM was $42.6 billion in the 2013 quarter versus $36.4 billion in the prior year period, an increase of 17.0%.  Average AUM in our open-end equity funds, a key driver to our investment advisory fees, was $15.1 billion in the third quarter of 2013, rising 19.8% from the 2012 quarter average AUM of $12.6 billion.

In addition to management fees, we earn incentive fees for certain institutional client assets, certain assets attributable to preferred issues of our closed-end funds and to our GDL Fund (NYSE: GDL) and investment partnership assets.  As of September 30, 2013, assets with incentive based fees were $4.1 billion, 5.1% higher than the $3.9 billion on June 30, 2013 and 2.5% higher than the $4.0 billion on September 30, 2012. 
 
27


The Company reported Assets Under Management as follows (in millions):
   
   
   
 
 
 
   
   
   
   
 
Table I: Fund Flows - 3rd Quarter 2013
   
   
   
   
 
 
 
   
   
   
Fund
   
 
 
 
   
Market
   
   
distributions,
   
 
 
 
June 30,
   
appreciation/
   
Net cash
   
net of
   
September 30,
 
 
 
2013
   
(depreciation)
   
flows
   
reinvestments
   
2013
 
Equities:
 
   
   
   
   
 
Open-end Funds
 
$
14,188
   
$
924
   
$
497
   
$
(28
)
 
$
15,581
 
Closed-end Funds
   
6,409
     
374
     
56
     
(118
)
   
6,721
 
Institutional & PWM - direct
   
14,069
     
946
     
11
     
-
     
15,026
 
Institutional & PWM - sub-advisory
   
3,185
     
294
     
24
     
-
     
3,503
 
Investment Partnerships
   
778
     
17
     
10
     
-
     
805
 
SICAV (a)
   
93
     
2
     
(1
)
   
-
     
94
 
Total Equities
   
38,722
     
2,557
     
597
     
(146
)
   
41,730
 
Fixed Income:
                                       
Money-Market Fund
   
1,689
     
-
     
25
     
-
     
1,714
 
Institutional & PWM
   
67
     
-
     
(4
)
   
-
     
63
 
Total Fixed Income
   
1,756
     
-
     
21
     
-
     
1,777
 
Total Assets Under Management
 
$
40,478
   
$
2,557
   
$
618
   
$
(146
)
 
$
43,507
 
 
                                       

The Company reported Assets Under Management as follows (in millions):
   
   
   
 
 
 
   
   
   
   
 
Table II: Fund Flows - Nine months ended September 30, 2013
   
   
   
 
 
 
   
   
   
Fund
   
 
 
 
   
Market
   
   
distributions,
   
 
 
 
December 31,
   
appreciation/
   
Net cash
   
net of
   
September 30,
 
 
 
2012
   
(depreciation)
   
flows
   
reinvestments
   
2013
 
Equities:
 
   
   
   
   
 
Open-end Funds
 
$
12,502
   
$
2,053
   
$
1,116
   
$
(90
)
 
$
15,581
 
Closed-end Funds
   
6,288
     
627
     
152
     
(346
)
   
6,721
 
Institutional & PWM - direct
   
12,030
     
2,789
     
207
     
-
     
15,026
 
Institutional & PWM - sub-advisory
   
2,924
     
679
     
(100
)
   
-
     
3,503
 
Investment Partnerships
   
801
     
30
     
(26
)
   
-
     
805
 
SICAV (a)
   
119
     
4
     
(29
)
   
-
     
94
 
Total Equities
   
34,664
     
6,182
     
1,320
     
(436
)
   
41,730
 
Fixed Income:
                                       
Money-Market Fund
   
1,681
     
-
     
33
     
-
     
1,714
 
Institutional & PWM
   
60
     
-
     
3
     
-
     
63
 
Total Fixed Income
   
1,741
     
-
     
36
     
-
     
1,777
 
Total Assets Under Management
 
$
36,405
   
$
6,182
   
$
1,356
   
$
(436
)
 
$
43,507
 
 
                                       

28


Table III: Assets Under Management
   
   
 
 
 
September 30,
   
September 30,
   
%
 
 
 
2012
   
2013
   
Inc.(Dec.)
 
Equities:
 
   
   
 
Open-end Funds
 
$
12,758
   
$
15,581
     
22.1
%
Closed-end Funds
   
6,365
     
6,721
     
5.6
 
Institutional & PWM - direct
   
12,189
     
15,026
     
23.3
 
Institutional & PWM - sub-advisory
   
2,912
     
3,503
     
20.3
 
Investment Partnerships
   
785
     
805
     
2.5
 
SICAV (a)
   
121
     
94
     
(22.3
)
Total Equities
   
35,130
     
41,730
     
18.8
 
Fixed Income:
                       
Money-Market Fund
   
1,752
     
1,714
     
(2.2
)
Institutional & PWM
   
63
     
63
     
-
 
Total Fixed Income
   
1,815
     
1,777
     
(2.1
)
Total Assets Under Management
 
$
36,945
   
$
43,507
     
17.8
%
 
                       

Table IV: Assets Under Management by Quarter
   
   
   
   
   
 
 
 
   
   
   
   
   
% Increase/
 
 
 
   
   
   
   
   
(decrease) from
 
 
   
9/12
     
12/12
     
3/13
     
6/13
     
9/13
     
9/12
     
6/13
 
Equities:
                                                       
Open-end Funds
 
$
12,758
   
$
12,502
   
$
13,813
   
$
14,188
   
$
15,581
     
22.1
%
   
9.8
%
Closed-end Funds
   
6,365
     
6,288
     
6,557
     
6,409
     
6,721
     
5.6
     
4.9
 
Institutional & PWM - direct
   
12,189
     
12,030
     
13,690
     
14,069
     
15,026
     
23.3
     
6.8
 
Institutional & PWM - sub-advisory
   
2,912
     
2,924
     
3,299
     
3,185
     
3,503
     
20.3
     
10.0
 
Investment Partnerships
   
785
     
801
     
796
     
778
     
805
     
2.5
     
3.5
 
SICAV (a)
   
121
     
119
     
113
     
93
     
94
     
(22.3
)
   
1.1
 
Total Equities
   
35,130
     
34,664
     
38,268
     
38,722
     
41,730
     
18.8
     
7.8
 
Fixed Income:
                                                       
Money-Market Fund
   
1,752
     
1,681
     
1,758
     
1,689
     
1,714
     
(2.2
)
   
1.5
 
Institutional & PWM
   
63
     
60
     
64
     
67
     
63
     
-
     
(6.0
)
Total Fixed Income
   
1,815
     
1,741
     
1,822
     
1,756
     
1,777
     
(2.1
)
   
1.2
 
Total Assets Under Management
 
$
36,945
   
$
36,405
   
$
40,090
   
$
40,478
   
$
43,507
     
17.8
%
   
7.5
%
 
                                                       
(a) Includes $102 million, $104 million, $99 million, $90 million and $92 million of proprietary seed capital at September 30, 2012,
         
December 31, 2012, March 31, 2013, June 30, 2013 and September 30, 2013, respectively.
         

29

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 September 30, 2013 Compared To Three Months Ended September 30, 2012
 
(Unaudited; in thousands, except per share data)
 
 
 
 
2013
   
2012
 
Revenues
 
   
 
  Investment advisory and incentive fees
 
$
80,438
   
$
67,790
 
  Distribution fees and other income
   
13,545
     
11,139
 
  Institutional research services
   
2,394
     
3,302
 
Total revenues
   
96,377
     
82,231
 
Expenses
               
  Compensation
   
39,803
     
32,948
 
  Management fee
   
5,629
     
3,056
 
  Distribution costs
   
12,769
     
10,386
 
  Other operating expenses
   
5,448
     
6,829
 
Total expenses
   
63,649
     
53,219
 
Operating income
   
32,728
     
29,012
 
Other income (expense)
               
  Net gain from investments
   
19,334
     
7,525
 
  Extinguishment of debt
   
-
     
(6,305
)
  Interest and dividend income
   
1,134
     
920
 
  Interest expense
   
(2,164
)
   
(3,586
)
  Shareholder-designated contribution
   
(313
)
   
-
 
Total other income (expense), net
   
17,991
     
(1,446
)
Income before income taxes
   
50,719
     
27,566
 
Income tax provision
   
17,515
     
8,467
 
Net income
   
33,204
     
19,099
 
Net income attributable to noncontrolling interests
   
106
     
95
 
Net income attributable to GAMCO Investors, Inc.'s shareholders
 
$
33,098
   
$
19,004
 
 
               
Net income attributable to GAMCO Investors, Inc.'s shareholders per share:
               
Basic
 
$
1.29
   
$
0.72
 
Diluted
 
$
1.29
   
$
0.72
 
 
               

Overview

Net income attributable to shareholders of GAMCO for the quarter was $33.1 million or $1.29 per fully diluted share versus $19.0 million or $0.72 per fully diluted share in the prior year's quarter.  The quarter to quarter comparison was positively impacted by higher revenues, lower interest expense and higher income from gains realized from certain of our proprietary investments.

Revenues
 
Investment advisory and incentive fees for the third quarter 2013 were $80.4 million, 18.6% above the comparable 2012 figure of $67.8 million.  Open-end fund revenues increased by 19.6% to $37.3 million from $31.2 million in third quarter 2012 driven by a 19.8% increase in average open-end equity AUM.  Our closed-end fund revenues, excluding incentive fees, rose 13.5% to $14.3 million in the third quarter 2013 from $12.6 million in 2012 due to a 13.9% increase in non-performance fee based average AUM.  During the third quarter of 2012, we earned $0.5 million in performance based fees.  There were no such fees earned during the 2013 quarter.  Institutional and private wealth management account revenues, excluding incentive fees, which are generally based on beginning of quarter AUM, increased $5.2 million, or 24.1%, to $26.8 million from $21.6 million in third quarter 2012.  Incentive fees

30

increased to $0.5 million in the 2013 quarter from $0.3 million in the prior year period.  Investment partnership revenues were $1.5 million, a decrease of 6.3% from $1.6 million in third quarter 2012.
 
Open-end fund distribution fees and other income were $13.5 million for the third quarter 2013, an increase of $2.4 million or 21.6% from $11.1 million in the prior year period, primarily due to higher quarterly average AUM in open-end equity funds that generate distribution fees and increased level of sales of load shares of mutual funds.

Our institutional research revenues were $2.4 million in the third quarter 2013 versus $3.3 million in the prior year period.  Although commission revenues were higher in most areas of that business, dealer manager fee revenues from underwriting closed-end fund offerings declined $1.2 million from the prior year period.

Expenses
 
Compensation costs, which are largely variable, were $39.8 million or 21.0% higher than prior year compensation costs of $32.9 million.  The quarter over quarter increase was comprised of variable compensation of $5.3 million related to the increased levels of AUM and $1.7 million in fixed compensation partially offset by a $0.1 million decrease in amortization expense for RSAs.

Management fee expense, which is wholly variable and based on pretax income, increased to $5.6 million in the third quarter of 2013 from $3.1 million in the 2012 period.
 
Distribution costs were $12.8 million, an increase of $2.4 million or 23.1% from $10.4 million in the prior year's period.  The increase in distribution costs was driven by increased AUM, largely from the direct to intermediary channel, which resulted in an increase in payments to third-party distributors of $2.2 million.
 
Other operating expenses were $5.4 million in the third quarter of 2013, a decrease of $1.4 million, or 20.6%, from $6.8 million in the third quarter of 2012.  The quarter to quarter comparison was impacted by decreases in charitable contributions as well as higher insurance reimbursements for legal and regulatory costs previously incurred and expensed.

Operating income for the third quarter of 2013 was $32.7 million, an increase of $3.7 million, or 12.8%, from the third quarter 2012's $29.0 million.  Operating income, as a percentage of revenues, was 34.0% in the 2013 quarter as compared to 35.3% in the 2012 quarter.

Other
 
Total other income, net of interest expense, was $18.0 million for the third quarter 2013 versus an expense of $1.4 million in the prior year's quarter.  Realized and unrealized gains in our trading portfolio were $19.3 million in the 2013 quarter, an increase of $11.8 million from the $7.5 million reported in the 2012 quarter.  Included in the 2012 results are $6.3 million in charges related to total purchases of $64.6 million (face value) of the Company's 0% Subordinated Debentures due 2015.  We had repurchased $64.1 million (face value) of these 0% Subordinated Debentures through a tender offer which was completed in July 2012.  Interest and dividend income increased by $0.2 million.  Interest expense decreased by $1.4 million to $2.2 million in the third quarter of 2013 from $3.6 million in third quarter of 2012 due to a decrease in total average debt outstanding.  On May 15, 2013, the $99 million of 5.5% Senior notes matured and were repaid.
 
The effective tax rate ("ETR") for the three months ended September 30, 2013 and September 30, 2012 were 34.5% and 30.7%, respectively.  The 2012 ETR included a benefit of 5.1% resulting from the difference between the tax and book basis of Subordinated Debentures repurchased, largely through a tender offer completed in July 2012.  In 2013 the ETR benefitted from an increase in donations of appreciated securities.
31

Nine Months Ended September 30, 2013 Compared To Nine Months Ended September 30, 2012
 
(Unaudited; in thousands, except per share data)
 
 
 
 
2013
   
2012
 
Revenues
 
   
 
  Investment advisory and incentive fees
 
$
230,488
   
$
202,783
 
  Distribution fees and other income
   
37,420
     
33,768
 
  Institutional research services
   
6,940
     
8,453
 
Total revenues
   
274,848
     
245,004
 
Expenses
               
  Compensation
   
113,214
     
100,423
 
  Management fee
   
14,455
     
9,855
 
  Distribution costs
   
35,650
     
30,575
 
  Other operating expenses
   
16,290
     
17,760
 
Total expenses
   
179,609
     
158,613
 
Operating income
   
95,239
     
86,391
 
Other income (expense)
               
  Net gain from investments
   
43,903
     
17,234
 
  Extinguishment of debt
   
(137
)
   
(6,307
)
  Interest and dividend income
   
4,986
     
3,938
 
  Interest expense
   
(8,448
)
   
(12,419
)
  Shareholder-designated contribution
   
(5,313
)
   
-
 
Total other income, net
   
34,991
     
2,446
 
Income before income taxes
   
130,230
     
88,837
 
Income tax provision
   
46,434
     
30,909
 
Net income
   
83,796
     
57,928
 
Net income/(loss) attributable to noncontrolling interests
   
260
     
(17
)
Net income attributable to GAMCO Investors, Inc.'s shareholders
 
$
83,536
   
$
57,945
 
 
               
Net income attributable to GAMCO Investors, Inc.'s shareholders per share:
               
Basic
 
$
3.25
   
$
2.20
 
Diluted
 
$
3.25
   
$
2.19
 
 
               

Overview

Net income attributable to shareholders of GAMCO for the first nine months of 2013 was $83.5 million or $3.25 per fully diluted share versus $57.9 million or $2.19 per fully diluted share in the prior year's first nine months.   Included in the 2013 results is a $5.3 million charge, or $0.12 per diluted share, net of management fee and tax benefit, for our shareholder designated charitable contribution program.  The period to period comparison, excluding this charge, benefitted from higher revenues, lower interest expense, lower loss on extinguishment of debt and higher income from gains realized from certain of our proprietary investments.

Revenues
 
Investment advisory and incentive fees for the nine months ended September 30, 2013 were $230.5 million, 13.7% above the comparable 2012 figure of $202.8 million.  Open-end fund revenues increased by 11.3% to $103.8 million from $93.3 million in first nine months of 2012 driven by a 12.0% increase in average open-end equity AUM.  Our closed-end fund revenues, excluding incentive fees, rose 13.9% to $41.8 million in the first nine months of 2013 from $36.7 million in 2012 due to a 13.9% increase in non-performance fee based average AUM.  During the third quarter of 2012, we earned $0.5 million in performance based fees.  There were no such fees earned during the 2013 quarter.  Institutional and private wealth management account revenues, excluding incentive fees, which are generally based on beginning of quarter AUM, increased $11.2 million, or 17.5%, to $75.3 million from $64.1 million in first nine months of 2012.  During the 2013 period, we earned $5.2 million in incentive fees, an increase of $1.3 million from $3.9 million earned in the 2012 period.  Investment partnership revenues were $4.4 million, an increase of 2.3% from $4.3 million for the nine months ended September 30, 2012 resulting from an increase in average AUM.

32

Open-end fund distribution fees and other income were $37.4 million for the first nine months of 2013, an increase of $3.6 million or 10.7% from $33.8 million in the prior year period, primarily due to higher quarterly average AUM in open-end equity funds that generate distribution fees and an increased level of sales of load shares of mutual funds.

Our institutional research revenues were $6.9 million in the first nine months of 2013 versus $8.5 million in the prior year period.  Revenues were lower despite an increase in commissions from trading activities of $0.5 million due to decreased dealer manager fees from underwriting closed-end fund offerings which totaled $2.1 million.

Expenses
 
Compensation costs, which are largely variable, were $113.2 million or 12.7% higher than prior year compensation costs of $100.4 million.  The period over period increase was comprised of variable compensation of $11.5 million related to the increased levels of AUM and $3.1 million in fixed compensation partially offset by $1.8 million decrease in amortization expense for RSAs.

Management fee expense, which is wholly variable and based on pretax income, increased to $14.5 million for the nine months ended September 30, 2013 from $9.9 million in the 2012 period.
 
Distribution costs were $35.7 million, an increase of $5.1 million or 16.7% from $30.6 million in the prior year's period.  This increase in distribution costs was largely due to an increase in payments to third-party distributors of $6.2 million partially offset by lower amortization of upfront commissions paid to third-party distributors of $0.9 million and a reduction in expense reimbursements to our open-end funds of $0.4 million.
 
Other operating expenses were $16.3 million in the first nine months of 2013, a decrease of $1.5 million, or 8.4%, from $17.8 million in the first nine months of 2012.  The decrease was principally the result of decreases in charitable contributions as well as higher insurance reimbursements for legal and regulatory costs previously incurred and expensed.

Operating income for the first nine months of 2013 was $95.2 million, an increase of $8.8 million, or 10.2%, from 2012's $86.4 million.  Operating income, as a percentage of revenues, was 34.7% in the 2013 period as compared to 35.3% in the 2012 period.

Other
 
Total other income, net of interest expense, was $35.0 million for the first nine months of 2013 versus $2.4 million in the prior year's period.  Realized and unrealized gains in our trading portfolio were $43.9 million in the 2013 period, $26.7 million higher than the $17.2 million reported in the 2012 period.  Interest and dividend income was higher by $1.1 million.  Interest expense decreased by $4.0 million to $8.4 million in the 2013 period from $12.4 million in 2012 due to a decrease in total average debt outstanding.  On May 15, 2013, the $99 million of 5.5% Senior notes matured, and were repaid.  Additionally, during the third quarter of 2012, we reduced our overall debt through the repurchase of $64.1 million (face value) five year zero coupon subordinated debentures due 2015 ("Debentures") incurring a $6.3 million loss on extinguishment of debt.  The 2013 period includes a $5.3 million charge related to the newly established Shareholder-designated charitable contribution program in which registered shareholders have the opportunity to participate in determining which 501(c)(3) organizations will receive company contributions.
 
The effective tax rate for the nine months ended September 30, 2013 and 2012 were 35.7% and 34.8%, respectively.  The 2012 ETR included a benefit of 1.6% resulting from the difference between the tax and book basis of Subordinated Debentures repurchased, including those acquired through the tender offer completed in July 2012.  In 2013 the ETR benefitted from an increase in donations of appreciated securities.

LIQUIDITY AND CAPITAL RESOURCES

Our principal assets are highly liquid in nature and consist of cash and cash equivalents, short-term investments, securities held for investment purposes, investments in open- and closed-end funds and investment partnerships.  Cash and cash equivalents are comprised primarily of 100% U.S. Treasury money market funds managed by GAMCO.  Although investments in partnerships and offshore funds are subject to restrictions on the timing of distributions, the underlying investments of such partnerships or funds are, for the most part, liquid, and the valuations of these products reflect that underlying liquidity.

33

Summary cash flow data is as follows:
 
 
Nine months ended
 
 
 
September 30,
 
 
 
2013
   
2012
 
Cash flows provided by (used in):
 
(in thousands)
 
  Operating activities
 
$
155,493
   
$
79,185
 
  Investing activities
   
25,089
     
3,454
 
  Financing activities
   
(125,779
)
   
(70,282
)
  Effect of exchange rates on cash and cash equivalents
   
-
     
(12
)
  Net increase
   
54,803
     
12,345
 
  Cash and cash equivalents at beginning of period
   
190,608
     
276,340
 
  Cash and cash equivalents at end of period
 
$
245,411
   
$
288,685
 
 
               

Cash and liquidity requirements have historically been met through cash generated by operating income and our borrowing capacity.  We filed a shelf registration with the SEC in 2012 which, among other things, provides us the flexibility to sell any combination of senior and subordinate debt securities, convertible debt securities, equity securities (including common and preferred stock), and other securities up to a total amount of $500 million.  The shelf has $400 million which remains available through May 30, 2015.

At September 30, 2013, we had total cash and cash equivalents of $245.4 million, an increase of $54.8 million from December 31, 2012.  Cash and cash equivalents of $1.4 million and investments in securities of $7.4 million held by consolidated investment partnerships and offshore funds may not be readily available for the Company to access.  Total debt outstanding at September 30, 2013 was $117.3 million, consisting of $17.3 million in Debentures, with a face value of $20.5 million, and $100 million of 5.875% senior notes due 2021.
 
For the nine months ended September 30, 2013, cash provided by operating activities was $155.5 million, an increase of $76.3 million from cash provided in the prior year period of $79.2 million.  Cash was provided through an increase in net income of $25.9 million, a $59.3 million increase in compensation payable, a $41.0 million decrease in receivable from brokers, a decrease in contributions to partnerships of $16.8 million, a $8.3 million decrease in investment advisory fees receivable and a $6.5 million increase in income taxes payable and deferred tax liabilities.  Reducing cash was an $18.5 million decrease in distributions from partnerships, a $14.7 million increase in gains from sales of available for sale securities and a $16.9 million decrease in payable to brokers, an $11.7 million increase in trading investments and $19.7 million from other sources.  Cash provided by investing activities, related to purchases and proceeds from sales of available for sale securities, was $25.1 million in the first nine months of 2013.  Cash used in financing activities in the first nine months of 2013 was $125.8 million, including $99.0 million used to repay the 5.5% Senior notes that matured on May 15, 2013, $4.1 million paid in dividends, $9.2 million paid for the purchase of treasury stock and $11.9 million in net redemptions from redeemable noncontrolling interests.

For the nine months ended September 30, 2012, cash provided by operating activities was $79.2 million.  Cash provided by investing activities, related to purchases and proceeds from sales of available for sale securities, was $3.5 million in the first nine months of 2012.  Cash used in financing activities in the first nine months of 2012 was $70.3 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, G.research 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 for each broker-dealer at September 30, 2013.  At September 30, 2013, G.research had net capital, as defined, of approximately $4.6 million, exceeding the regulatory requirement by approximately $4.4 million, and G.distributors had net capital, as defined, of approximately $3.5 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.

34

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 monitors its proprietary investment portfolios to ensure that they are in compliance with the Company's guidelines.

Equity Price Risk
 
The Company earns substantially all of its revenue as advisory and distribution fees from our affiliated open-end and closed-end funds, Institutional and Private Wealth Management assets, 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 $237.7 million and investments in sponsored registered investment companies of $43.7 million at September 30, 2013 were investments in United States Treasury Bills and Notes of $21.0 million, mutual funds and closed-end funds, largely invested in equity products, of $57.3 million, a selection of common and preferred stocks totaling $202.7 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 the Chief Investment Officer.  Of the approximately $202.7 million invested in common and preferred stocks at September 30, 2013, $36.3 million represented our investment in Westwood Holdings Group Inc., and $72.4 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.  Risk arbitrage has many risks including, but not limited to, (i) deals not being completed, (ii) changes in terms, (iii) regulatory or country risk and (iv) delays in closing.  Securities sold, not yet purchased are stated at fair value and are subject to market risks resulting from changes in price and volatility.  At September 30, 2013, the fair value of securities sold, not yet purchased was $7.7 million.  Investments in partnerships totaled $97.8 million at September 30, 2013, $52.0 million of which consisted of investment partnerships and offshore funds which invest in risk arbitrage opportunities.

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 September 30, 2013 and December 31, 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 September 30, 2013:
 
   
   
 
Equity price sensitive investments, at fair value
 
$
254,815
   
$
229,334
   
$
280,297
 
At December 31, 2012:
                       
Equity price sensitive investments, at fair value
 
$
273,271
   
$
245,944
   
$
300,598
 
 
                       

Interest Rate Risk
 
Our exposure to interest rate risk results, principally, from our investment of excess cash in a sponsored 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 September 30, 2013 cash and cash equivalent balance of $245.4 million, a 1% increase in interest rates would increase our interest income by $2.5 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.

35

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 2012 Annual Report on Form 10-K filed with the SEC on March 8, 2013 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 September 30, 2013, we had equity investments, including mutual funds largely invested in equity products, of $281.4 million.  Investments in mutual funds and closed-end funds, $57.3 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 $97.8 million, of which $52.0 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.  This portfolio holds stocks which have specific attributes which, in part, are influenced by changes in the equity markets.  The trading portfolio changes are recorded as net gain from investments in the condensed consolidated statements of income while the available for sale portfolio changes are recorded in other comprehensive income in the condensed consolidated statements of financial condition.

Item 4.  Controls and Procedures
 
We evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2013.  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 September 30, 2013, 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.
36


Part II:  Other Information

Item 1. Legal Proceedings

From time to time, the Company may be named in legal actions and proceedings.  These actions may seek substantial or indeterminate compensatory as well as punitive damages or injunctive relief.  The Company is also subject to governmental or regulatory examinations or investigations.  The examinations or investigations could result in adverse judgments, settlements, fines, injunctions, restitutions or other relief.  The Company cannot predict the ultimate outcome of such matters.  For all such matters, the condensed 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.

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 September 30, 2013:

 
 
   
   
(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
 
7/01/13 - 7/31/13
   
-
   
$
-
     
-
     
534,041
 
8/01/13 - 8/31/13
   
1,945
     
58.14
     
1,945
     
532,096
 
9/01/13 - 9/30/13
   
38,912
     
73.11
     
38,912
     
493,184
 
Totals
   
40,857
   
$
72.40
     
40,857
         
 
                               

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.

 
101.INS
 
XBRL Instance Document
 
 
 
101.SCH
 
XBRL Taxonomy Extension Schema Document
 
 
 
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document
 
 
 
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase Document
 
 
 
101.LAB
 
XBRL Taxonomy Extension Label Linkbase Document
 
 
 
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document

37


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: November 6, 2013
Date: November 6, 2013
38