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GAMCO INVESTORS, INC. ET AL - Quarter Report: 2014 June (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 June 30, 2014
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)

Delaware
 
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 July 31, 2014
Class A Common Stock, .001 par value
 
6,546,952
Class B Common Stock, .001 par value
 
19,325,820



INDEX
 
GAMCO INVESTORS, INC. AND SUBSIDIARIES
 
 
 
 
PART I.
FINANCIAL INFORMATION
 
 
 
 
 
Item 1.
Unaudited Condensed Consolidated Financial Statements
 
 
 
Condensed Consolidated Statements of Income:
 
-    Three months ended June 30, 2014 and 2013
 
-    Six months ended June 30, 2014 and 2013
 
 
 
Condensed Consolidated Statements of Comprehensive Income:
 
-    Three months ended June 30, 2014 and 2013
 
-    Six months ended June 30, 2014 and 2013
 
 
 
Condensed Consolidated Statements of Financial Condition:
 
-    June 30, 2014
 
-    December 31, 2013
 
-    June 30, 2013
 
 
 
Condensed Consolidated Statements of Equity:
 
-    Six months ended June 30, 2014 and 2013
 
 
 
Condensed Consolidated Statements of Cash Flows:
 
-    Six months ended June 30, 2014 and 2013
 
 
 
Notes to Unaudited Condensed Consolidated Financial Statements
 
 
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
 
 
Item 3.
Quantitative and Qualitative Disclosures About Market Risk (Included in Item 2)
 
 
Item 4.
Controls and Procedures
 
 
PART II.
OTHER INFORMATION
 
 
 
Item 1.
Legal Proceedings
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
Item 6.
Exhibits

SIGNATURES
 


2


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

 
 
Three Months Ended
   
Six Months Ended
 
 
 
June 30,
   
June 30,
 
 
 
2014
   
2013
   
2014
   
2013
 
Revenues
 
   
   
   
 
Investment advisory and incentive fees
 
$
90,156
   
$
77,443
   
$
177,953
   
$
150,050
 
Distribution fees and other income
   
15,767
     
12,522
     
30,640
     
23,875
 
Institutional research services
   
2,373
     
2,325
     
4,180
     
4,546
 
Total revenues
   
108,296
     
92,290
     
212,773
     
178,471
 
Expenses
                               
Compensation
   
44,045
     
37,759
     
87,942
     
73,411
 
Management fee
   
5,144
     
4,846
     
9,872
     
8,826
 
Distribution costs
   
15,023
     
11,871
     
28,986
     
22,881
 
Other operating expenses
   
6,547
     
6,030
     
11,937
     
10,842
 
Total expenses
   
70,759
     
60,506
     
138,737
     
115,960
 
 
                               
Operating income
   
37,537
     
31,784
     
74,036
     
62,511
 
Other income (expense)
                               
Net gain from investments
   
9,744
     
12,141
     
16,688
     
24,432
 
Interest and dividend income
   
1,332
     
2,507
     
2,473
     
3,852
 
Interest expense
   
(2,021
)
   
(2,796
)
   
(4,013
)
   
(6,284
)
Shareholder-designated contribution
   
(134
)
   
-
     
(134
)
   
(5,000
)
Total other income (expense), net
   
8,921
     
11,852
     
15,014
     
17,000
 
Income before income taxes
   
46,458
     
43,636
     
89,050
     
79,511
 
Income tax provision
   
17,135
     
15,724
     
31,751
     
28,919
 
Net income
   
29,323
     
27,912
     
57,299
     
50,592
 
Net income/(loss) attributable to noncontrolling interests
   
373
     
19
     
395
     
154
 
Net income attributable to GAMCO Investors, Inc.'s shareholders
 
$
28,950
   
$
27,893
   
$
56,904
   
$
50,438
 
 
                               
Net income attributable to GAMCO Investors, Inc.'s shareholders per share:
                               
Basic
 
$
1.14
   
$
1.09
   
$
2.24
   
$
1.96
 
 
                               
Diluted
 
$
1.13
   
$
1.09
   
$
2.22
   
$
1.96
 
 
                               
Weighted average shares outstanding:
                               
Basic
   
25,381
     
25,679
     
25,431
     
25,710
 
 
                               
Diluted
   
25,586
     
25,689
     
25,635
     
25,723
 
 
                               
Dividends declared:
 
$
0.06
   
$
0.05
   
$
0.12
   
$
0.10
 

See accompanying notes.
3


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

 
 
Three Months Ended
   
Six Months Ended
 
 
 
June 30,
   
June 30,
 
 
 
2014
   
2013
   
2014
   
2013
 
 
 
   
   
   
 
Net income
 
$
29,323
   
$
27,912
   
$
57,299
   
$
50,592
 
Other comprehensive income/(loss), net of tax:
                               
Foreign currency translation
   
22
     
1
     
30
     
(48
)
Net unrealized gains/(losses) on securities available for sale (a)
   
(1,728
)
   
(6,900
)
   
(4,425
)
   
(860
)
Other comprehensive income / (loss)
   
(1,706
)
   
(6,899
)
   
(4,395
)
   
(908
)
 
                               
Comprehensive income
   
27,617
     
21,013
     
52,904
     
49,684
 
Less: Comprehensive income/(loss) attributable to noncontrolling interests
   
(373
)
   
(19
)
   
(395
)
   
(154
)
 
                               
Comprehensive income attributable to GAMCO Investors, Inc.
 
$
27,244
   
$
20,994
   
$
52,509
   
$
49,530
 

(a) Net of income tax expense or (benefit) of ($1,015), ($4,052), ($2,599) and ($505),respectively.

See accompanying notes.
4


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

 
 
June 30,
   
December 31,
   
June 30,
 
 
 
2014
   
2013
   
2013
 
ASSETS
 
   
   
 
Cash and cash equivalents
 
$
307,490
   
$
210,451
   
$
222,776
 
Investments in securities
   
225,596
     
231,228
     
220,440
 
Investments in sponsored registered investment companies
   
40,791
     
44,042
     
52,341
 
Investments in partnerships
   
107,896
     
95,992
     
94,535
 
Receivable from brokers
   
58,945
     
49,461
     
39,669
 
Investment advisory fees receivable
   
32,228
     
51,506
     
28,240
 
Income tax receivable
   
1,077
     
445
     
413
 
Other assets
   
30,779
     
26,360
     
25,087
 
Total assets
 
$
804,802
   
$
709,485
   
$
683,501
 
 
                       
LIABILITIES AND EQUITY
                       
Payable to brokers
 
$
19,859
   
$
10,765
   
$
14,986
 
Income taxes payable and deferred tax liabilities
   
31,029
     
39,846
     
27,864
 
Capital lease obligation
   
5,290
     
5,323
     
4,877
 
Compensation payable
   
68,908
     
34,663
     
59,643
 
Securities sold, not yet purchased
   
14,329
     
6,178
     
7,598
 
Mandatorily redeemable noncontrolling interests
   
1,339
     
1,355
     
1,322
 
Accrued expenses and other liabilities
   
32,194
     
32,511
     
31,971
 
Sub-total
   
172,948
     
130,641
     
148,261
 
 
                       
5.5% Senior notes (repaid May 15, 2013)
   
-
     
0
     
0
 
5.875% Senior notes (due June 1, 2021)
   
100,000
     
100,000
     
100,000
 
Zero coupon subordinated debentures, Face value: $13.2 million at June 30, 2014, $13.8
                       
    million at December 31, 2013 and $20.5 million at June 30, 2013 (due December 31, 2015)
   
11,813
     
11,911
     
17,028
 
Total liabilities
   
284,761
     
242,552
     
265,289
 
 
                       
Redeemable noncontrolling interests
   
22,806
     
6,751
     
7,021
 
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;
                       
   15,108,373, 15,012,719 and 14,295,769 issued, respectively; 6,572,864,
                       
   6,701,930 and 6,095,806 outstanding, respectively
   
14
     
14
     
13
 
Class B Common Stock, $0.001 par value; 100,000,000 shares authorized;
                       
   24,000,000 shares issued; 19,325,820, 19,384,174 and 19,534,174 shares
                       
   outstanding, respectively
   
19
     
19
     
20
 
Additional paid-in capital
   
287,879
     
282,496
     
280,210
 
Retained earnings
   
560,238
     
506,441
     
456,163
 
Accumulated other comprehensive income
   
25,844
     
30,239
     
25,392
 
Treasury stock, at cost (8,535,509, 8,310,789 and 8,199,963 shares, respectively)
   
(379,576
)
   
(361,878
)
   
(353,385
)
Total GAMCO Investors, Inc. stockholders' equity
   
494,418
     
457,331
     
408,413
 
Noncontrolling interests
   
2,817
     
2,851
     
2,778
 
Total equity
   
497,235
     
460,182
     
411,191
 
 
                       
Total liabilities and equity
 
$
804,802
   
$
709,485
   
$
683,501
 

See accompanying notes.
5


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

For the six months ended June 30, 2014

 
 
   
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, 2013
 
$
2,851
   
$
33
   
$
282,496
   
$
506,441
   
$
30,239
   
$
(361,878
)
 
$
460,182
   
$
6,751
 
Redemptions of
                                                               
   noncontrolling interests
   
-
     
-
     
-
     
-
     
-
     
-
     
-
     
(470
)
Contributions from
                                                               
   noncontrolling
                                                               
   interests
   
-
     
-
     
-
     
-
     
-
     
-
     
-
     
16,096
 
Net income (loss)
   
(34
)
   
-
     
-
     
56,904
     
-
     
-
     
56,870
     
429
 
Net unrealized gains on
                                                               
   securities available for sale,
                                                               
   net of income tax benefit ($108)
   
-
     
-
     
-
     
-
     
(183
)
   
-
     
(183
)
   
-
 
Amounts reclassified from
                                                               
   accumulated other
                                                               
   comprehensive income,
                                                               
   net of income tax benefit ($2,491)
 
-
     
-
     
-
     
-
     
(4,242
)
   
-
     
(4,242
)
   
-
 
Foreign currency translation
   
-
     
-
     
-
     
-
     
30
     
-
     
30
     
-
 
Dividends declared ($0.12 per
                                                               
 share)
   
-
     
-
     
-
     
(3,107
)
   
-
     
-
     
(3,107
)
   
-
 
Stock based compensation
                                                               
   expense
   
-
     
-
     
3,397
     
-
     
-
     
-
     
3,397
     
-
 
Exercise of stock options
                                                               
   including tax benefit ($349)
   
-
     
-
     
1,986
     
-
     
-
     
-
     
1,986
     
-
 
Purchase of treasury stock
   
-
     
-
     
-
     
-
     
-
     
(17,698
)
   
(17,698
)
   
-
 
Balance at June 30, 2014
 
$
2,817
   
$
33
   
$
287,879
   
$
560,238
   
$
25,844
   
$
(379,576
)
 
$
497,235
   
$
22,806
 

See accompanying notes.
6

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

For the six months ended June 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
)
   
(13,394
)
Contributions from
                                                               
   noncontrolling
                                                               
   interests
   
-
     
-
     
-
     
-
     
-
     
-
     
-
     
2,875
 
Net income (loss)
   
(24
)
   
-
     
-
     
50,438
     
-
     
-
     
50,414
     
178
 
Net unrealized gains on
                                                               
   securities available for sale,
                                                               
   net of income tax ($3,477)
   
-
     
-
     
-
     
-
     
5,921
     
-
     
5,921
     
-
 
Amount reclassed from
                                                               
   accumulated other
                                                               
   comprehensive income,
                                                               
   net of income tax benefit ($3,982)
 
-
     
-
     
-
     
-
     
(6,781
)
   
-
     
(6,781
)
   
-
 
Foreign currency translation
   
-
     
-
     
-
     
-
     
(48
)
   
-
     
(48
)
   
-
 
Dividends declared ($0.10 per
                                                               
   share)
   
-
     
-
     
-
     
(2,570
)
   
-
     
-
     
(2,570
)
   
-
 
Stock based compensation
                                                               
   expense
   
-
     
-
     
29
     
-
     
-
     
-
     
29
     
-
 
Exercise of stock options
                                                               
   including tax benefit
   
-
     
-
     
92
     
-
     
-
     
-
     
92
     
-
 
Purchase of treasury stock
   
-
     
-
     
-
     
-
     
-
     
(6,276
)
   
(6,276
)
   
-
 
Balance at June 30, 2013
 
$
2,778
   
$
33
   
$
280,210
   
$
456,163
   
$
25,392
   
$
(353,385
)
 
$
411,191
   
$
7,021
 

See accompanying notes.
7


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

 
 
Six Months Ended
 
 
 
June 30,
 
 
 
2014
   
2013
 
Operating activities
 
   
 
Net income
 
$
57,299
   
$
50,592
 
Adjustments to reconcile net income to net cash provided by operating activities:
               
Equity in net gains from partnerships
   
(2,884
)
   
1,418
 
Depreciation and amortization
   
336
     
406
 
Stock based compensation expense
   
3,397
     
29
 
Deferred income taxes
   
(1,512
)
   
1,421
 
Tax benefit from exercise of stock options
   
349
     
16
 
Foreign currency translation gain/(loss)
   
30
     
(48
)
Other-than-temporary loss on available for sale securities
   
69
     
14
 
Cost basis of donated securities
   
1,480
     
277
 
Gains on sales of available for sale securities
   
(3,163
)
   
(10,446
)
Accretion of zero coupon debentures
   
440
     
645
 
Loss on extinguishment of debt
   
74
     
137
 
(Increase) decrease in assets:
               
Investments in trading securities
   
9,899
     
2,538
 
Investments in partnerships:
               
  Contributions to partnerships
   
(12,098
)
   
(8,221
)
  Distributions from partnerships
   
3,077
     
9,818
 
Receivable from brokers
   
(9,484
)
   
10,986
 
Investment advisory fees receivable
   
19,278
     
14,189
 
Income tax receivable and deferred tax assets
   
(632
)
   
605
 
Other assets
   
(4,739
)
   
2,246
 
Increase (decrease) in liabilities:
               
Payable to brokers
   
9,094
     
640
 
Income taxes payable and deferred tax liabilities
   
(4,707
)
   
1,551
 
Compensation payable
   
34,240
     
49,108
 
Mandatorily redeemable noncontrolling interests
   
(16
)
   
(20
)
Accrued expenses and other liabilities
   
(405
)
   
5,530
 
Total adjustments
   
42,123
     
82,839
 
Net cash provided by operating activities
 
$
99,422
   
$
133,431
 

8


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

 
 
Six Months Ended
 
 
 
June 30,
 
 
 
2014
   
2013
 
Investing activities
 
   
 
Purchases of available for sale securities
 
$
(5,354
)
 
$
(3,953
)
Proceeds from sales of available for sale securities
   
6,518
     
21,978
 
Return of capital on available for sale securities
   
561
     
625
 
Net cash provided by investing activities
   
1,725
     
18,650
 
 
               
Financing activities
               
Contributions from redeemable noncontrolling interests
   
16,096
     
2,875
 
Redemptions of redeemable noncontrolling interests
   
(470
)
   
(13,394
)
Redemption of 5.5% Senior Notes
   
-
     
(99,000
)
Redemptions of noncontrolling interests
   
-
     
(524
)
Proceeds from exercise of stock options
   
1,637
     
76
 
Dividends paid
   
(3,050
)
   
(2,570
)
Repurchase of zero coupon subordinated debentures
   
(612
)
   
(1,119
)
Purchase of treasury stock
   
(17,698
)
   
(6,275
)
Net cash used in financing activities
   
(4,097
)
   
(119,931
)
Effect of exchange rates on cash and cash equivalents
   
(11
)
   
18
 
Net increase in cash and cash equivalents
   
97,039
     
32,168
 
Cash and cash equivalents at beginning of period
   
210,451
     
190,608
 
Cash and cash equivalents at end of period
 
$
307,490
   
$
222,776
 
Supplemental disclosures of cash flow information:
               
Cash paid for interest
 
$
3,539
   
$
6,262
 
Cash paid for taxes
 
$
37,020
   
$
25,165
 
 
               
Non-cash activity:
               
- For the six months ended June 30, 2014 and June 30, 2013, the Company accrued dividends on restricted stock awards of $57 and $0, respectively.
 

See accompanying notes.
9


GAMCO INVESTORS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2014
(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, 2013 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 May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-09, "Revenue from Contracts with Customers," which supersedes the revenue recognition requirements in the Accounting Standards Codification ("Codification") Topic 605, Revenue Recognition, and most industry-specific guidance throughout the Industry Topics of the Codification.  The core principle of the new ASU No. 2014-09 is for companies to recognize revenue from the transfer of goods or services to customers in amounts that reflect the consideration to which the company expects to be entitled in exchange for those goods or services.  The new standard provides a five-step approach to be applied to all contracts with customers and also requires expanded disclosures about revenue recognition.  The ASU is effective for annual reporting periods beginning after December 15, 2016, including interim periods and is to be retrospectively applied.  Early adoption is not permitted.  The Company is currently evaluating this guidance and the impact it will have on its consolidated financial statements.
10


B.  Investment in Securities

Investments in securities at June 30, 2014, December 31, 2013 and June 30, 2013 consisted of the following:

 
 
June 30, 2014
   
December 31, 2013
   
June 30, 2013
 
 
 
Cost
   
Fair Value
   
Cost
   
Fair Value
   
Cost
   
Fair Value
 
 
 
(In thousands)
 
Trading securities:
 
   
   
   
   
   
 
Government obligations
 
$
23,996
   
$
23,998
   
$
37,986
   
$
37,994
   
$
27,986
   
$
27,996
 
Common stocks
   
124,502
     
156,522
     
96,225
     
124,634
     
137,600
     
155,088
 
Mutual funds
   
2,418
     
3,532
     
21,074
     
23,285
     
1,074
     
1,675
 
Other investments
   
532
     
694
     
287
     
582
     
470
     
719
 
Total trading securities
   
151,448
     
184,746
     
155,572
     
186,495
     
167,130
     
185,478
 
 
                                               
Available for sale securities:
                                               
Common stocks
   
15,009
     
39,334
     
13,389
     
43,046
     
14,077
     
33,478
 
Mutual funds
   
700
     
1,516
     
843
     
1,687
     
843
     
1,484
 
Total available for sale securities
   
15,709
     
40,850
     
14,232
     
44,733
     
14,920
     
34,962
 
 
                                               
Total investments in securities
 
$
167,157
   
$
225,596
   
$
169,804
   
$
231,228
   
$
182,050
   
$
220,440
 

Securities sold, not yet purchased at June 30, 2014, December 31, 2013 and June 30, 2013 consisted of the following:

 
 
June 30, 2014
   
December 31, 2013
   
June 30, 2013
 
 
 
Proceeds
   
Fair Value
   
Proceeds
   
Fair Value
   
Proceeds
   
Fair Value
 
Trading securities:
 
(In thousands)
 
Common stocks
 
$
11,662
   
$
13,861
   
$
5,319
   
$
6,023
   
$
7,668
   
$
7,381
 
Other investments
   
170
     
468
     
-
     
155
     
71
     
217
 
Total securities sold, not yet purchased
 
$
11,832
   
$
14,329
   
$
5,319
   
$
6,178
   
$
7,739
   
$
7,598
 
11


Investments in sponsored registered investment companies at June 30, 2014, December 31,2013 and June 30, 2013 consisted of the following:

 
 
June 30, 2014
   
December 31, 2013
   
June 30, 2013
 
 
 
Cost
   
Fair Value
   
Cost
   
Fair Value
   
Cost
   
Fair Value
 
 
 
(In thousands)
 
Trading securities:
 
   
   
   
   
   
 
Mutual funds
 
$
19
   
$
14
   
$
19
   
$
10
   
$
19
   
$
11
 
Total trading securities
   
19
     
14
     
19
     
10
     
19
     
11
 
 
                                               
Available for sale securities:
                                               
Closed-end funds
   
21,531
     
37,138
     
23,100
     
40,624
     
28,435
     
49,162
 
Mutual funds
   
1,931
     
3,639
     
1,951
     
3,408
     
2,040
     
3,168
 
Total available for sale securities
   
23,462
     
40,777
     
25,051
     
44,032
     
30,475
     
52,330
 
 
                                               
Total investments in sponsored
                                               
   registered investment companies
 
$
23,481
   
$
40,791
   
$
25,070
   
$
44,042
   
$
30,494
   
$
52,341
 

Management determines the appropriate classification of debt and equity securities at the time of purchase and reevaluates such designation as of the date of each statement of financial condition.  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.  The portion of investments in securities held for resale in anticipation of short-term market movements are 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 ("OTT") which are recorded as realized losses in the condensed consolidated statements of income.

The following table identifies all reclassifications out of accumulated other comprehensive income ("AOCI") into income for the three and six months ended June 30, 2014 and 2013  (in thousands):
 
Amount
 
Affected Line Item
Reason for
Reclassified
 
in the Statements
Reclassification
from AOCI
 
Of Income
from AOCI
Three months ended June 30,
 
 
  
2014
   
2013
 
 
  
 
$
1,551
   
$
9,849
 
 Net gain from investments
 Realized gain on sale of AFS securities
   
498
     
181
 
 Other operating expenses/net gain from investments
 Realized gain on donation of AFS securities
   
(69
)
   
(14
)
 Net gain from investments
 OTT impairment of AFS securities
   
1,980
     
10,016
 
 Income before income taxes
 
   
(733
)
   
(3,706
)
 Income tax provision
 
 
$
1,247
   
$
6,310
 
 Net income
 
               
 
      
Amount
 
Affected Line Item
Reason for
Reclassified
 
in the Statements
Reclassification
from AOCI
 
Of Income
from AOCI
Six months ended June 30,
 
 
  
   
2014
     
2013
 
 
  
 
$
3,163
   
$
10,446
 
 Net gain from investments
 Realized gain on sale of AFS securities
   
3,639
     
331
 
 Other operating expenses/net gain from investments
 Realized gain on donation of AFS securities
   
(69
)
   
(14
)
 Net gain from investments
 OTT impairment of AFS securities
   
6,733
     
10,763
 
 Income before income taxes
 
   
(2,491
)
   
(3,982
)
 Income tax provision
 
 
$
4,242
   
$
6,781
 
 Net income
 
               
 
      
               
 
      
 
 
12

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 June 30, 2014 and 2013, the Company had transactions in equity derivatives which resulted in net gains of $120,000 and net losses of $1,000, respectively.  For the six months ended June 30, 2014 and 2013, the Company had transactions in equity derivatives which resulted in net losses of $167,000 and net gains of $280,000, respectively.  At June 30, 2014, December 31, 2013 and June 30, 2013, we held derivative contracts on 1.9 million equity shares, 1.3 million equity shares and 1.5 million equity shares, respectively, and the fair value was ($299,000), $120,000 and $122,000, respectively; these are included in investments in securities in the condensed consolidated statements of financial condition.  These transactions are not designated as hedges for accounting purposes, and therefore changes in fair values of these derivatives are included in net gain/(loss) from investments in the condensed consolidated statements of income. 
 
The Company is a party to enforceable master netting arrangements for swaps entered into as part of the investment strategy of the Company's proprietary portfolio. 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)
 
June 30, 2014
 
$
156
   
$
-
   
$
156
   
$
(156
)
 
$
-
   
$
-
 
December 31, 2013
   
275
     
-
     
275
     
(155
)
   
-
     
120
 
June 30, 2013
 
$
237
   
$
-
   
$
237
   
$
(177
)
 
$
-
   
$
60
 
 
                                               
 
                         
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)
 
June 30, 2014
 
$
205
   
$
-
   
$
205
   
$
(156
)
 
$
-
   
$
49
 
December 31, 2013
   
155
     
-
     
155
     
(155
)
   
-
     
-
 
June 30, 2013
 
$
177
   
$
-
   
$
177
   
$
(177
)
 
$
-
   
$
-
 
 

 
13

The following is a summary of the cost, gross unrealized gains, gross unrealized losses and fair value of available for sale investments as of June 30, 2014, December 31, 2013 and June 30, 2013:

 
 
June 30, 2014
 
 
 
   
Gross
   
Gross
   
 
 
 
   
Unrealized
   
Unrealized
   
 
 
 
Cost
   
Gains
   
Losses
   
Fair Value
 
 
 
(In thousands)
 
Common stocks
 
$
15,009
   
$
24,325
   
$
-
   
$
39,334
 
Closed-end Funds
   
21,531
     
15,607
     
-
     
37,138
 
Mutual funds
   
2,631
     
2,524
     
-
     
5,155
 
Total available for sale securities
 
$
39,171
   
$
42,456
   
$
-
   
$
81,627
 

 
 
December 31, 2013
 
 
 
   
Gross
   
Gross
   
 
 
 
   
Unrealized
   
Unrealized
   
 
 
 
Cost
   
Gains
   
Losses
   
Fair Value
 
 
 
(In thousands)
 
Common stocks
 
$
13,389
   
$
29,657
   
$
-
   
$
43,046
 
Closed-end Funds
   
23,100
     
17,654
     
(130
)
   
40,624
 
Mutual funds
   
2,794
     
2,325
     
(24
)
   
5,095
 
Total available for sale securities
 
$
39,283
   
$
49,636
   
$
(154
)
 
$
88,765
 

 
 
June 30, 2013
 
 
 
   
Gross
   
Gross
   
 
 
 
   
Unrealized
   
Unrealized
   
 
 
 
Cost
   
Gains
   
Losses
   
Fair Value
 
 
 
(In thousands)
 
Common stocks
 
$
14,077
   
$
19,401
   
$
-
   
$
33,478
 
Closed-end Funds
   
28,435
     
20,773
     
(46
)
   
49,162
 
Mutual funds
   
2,883
     
1,850
     
(81
)
   
4,652
 
Total available for sale securities
 
$
45,395
   
$
42,024
   
$
(127
)
 
$
87,292
 
 
Unrealized changes in fair value, net of taxes, for the three months ended June 30, 2014 and June 30, 2013 of $1.7 million in losses and $6.9 million in losses, respectively, have been included in other comprehensive income, a component of equity, at June 30, 2014 and June 30, 2013.  Return of capital on available for sale securities was $238,000 and $14,000 for the three months ended June 30, 2014 and June 30, 2013, respectively.  Proceeds from sales of investments available for sale were approximately $2.6 million and $16.6 million for the three months ended June 30, 2014 and June 30, 2013, respectively.  For the three months ended June 30, 2014 and June 30, 2013, gross gains on the sale of investments available for sale amounted to $1.6 million and $9.8 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 June 30, 2014 or June 30, 2013.  Unrealized changes in fair value, net of taxes, for the six months ended June 30, 2014 and June 30, 2013 of $4.4 million in losses and $0.9 million in losses, respectively, have been included in other comprehensive income, a component of equity, at June 30, 2014 and June 30, 2013.  Return of capital on available for sale securities was $0.6 million and $0.6 million for the six months ended June 30, 2014 and June 30, 2013, respectively.  Proceeds from sales of investments available for sale were approximately $6.5 million and $22.0 million for the six months ended June 30, 2014 and June 30, 2013, respectively.  For the six months ended June 30, 2014 and June 30, 2013, gross gains on the sale of investments available for sale amounted to $3.2 million and $10.4 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 six months ended June 30, 2014 or June 30, 2013.The basis on which the cost of a security sold is determined is specific identification.
 
14

Investments classified as available for sale that are in an unrealized loss position for which other-than-temporary impairment has not been recognized consisted of the following:

 
 
June 30, 2014
   
December 31, 2013
   
June 30, 2013
 
 
 
   
Unrealized
   
   
   
Unrealized
   
   
   
Unrealized
   
 
 
 
Cost
   
Losses
   
Fair Value
   
Cost
   
Losses
   
Fair Value
   
Cost
   
Losses
   
Fair Value
 
(in thousands)
 
   
   
   
   
   
   
   
   
 
Cosed-end funds
 
$
-
   
$
-
   
$
-
   
$
912
   
$
(130
)
 
$
782
   
$
1,449
   
$
(46
)
 
$
1,403
 
Mutual Funds
   
-
     
-
     
-
     
303
     
(24
)
   
279
     
365
     
(72
)
   
293
 
Total
 
$
-
   
$
-
   
$
-
   
$
1,215
   
$
(154
)
 
$
1,061
   
$
1,814
   
$
(118
)
 
$
1,696
 

At June 30, 2014, there were no holdings in loss positions which were not deemed to be other than temporarily impaired.

At December 31, 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 December 31, 2013 were open-end funds and closed-end funds with diversified holdings across multiple companies and across multiple industries.  One holding was impaired for one month, one for two months, one for four months and one for seven months at December 31, 2013. The value of these holdings at December 31, 2013 was $1.1 million.

At June 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 June 30, 2013 were closed-end funds with diversified holdings across multiple companies and across multiple industries.  All holdings were impaired for one month at June 30, 2013.  The value of these holdings at June 30, 2013 was $1.7 million.

For the three and six months ended June 30, 2014, there were $69,000 of losses on available for sale securities deemed to be other than temporary and a loss has been recorded in net gain from investments.  For the three and six months ended June 30, 2013, there was $14,000 of losses on available for sale securities deemed to be other than temporary in the condensed consolidated statements of income.
15


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 June 30, 2014, December 31, 2013 and June 30, 2013 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 June 30, 2014 (in thousands)

 
 
Quoted Prices in Active
   
Significant Other
   
Significant
   
Balance as of
 
 
 
Markets for Identical
   
Observable
   
Unobservable
   
June 30,
 
Assets
 
Assets (Level 1)
   
Inputs (Level 2)
   
Inputs (Level 3)
   
2014
 
Cash equivalents
 
$
307,154
   
$
-
   
$
-
   
$
307,154
 
Investments in partnerships
   
-
     
24,855
     
-
     
24,855
 
Investments in securities:
                               
AFS - Common stocks
   
39,334
     
-
     
-
     
39,334
 
AFS - Mutual funds
   
1,516
     
-
     
-
     
1,516
 
Trading - Gov't obligations
   
23,998
     
-
     
-
     
23,998
 
Trading - Common stocks
   
155,805
     
1
     
716
     
156,522
 
Trading - Mutual funds
   
3,532
     
-
     
-
     
3,532
 
Trading - Other
   
243
     
157
     
294
     
694
 
Total investments in securities
   
224,428
     
158
     
1,010
     
225,596
 
Investments in sponsored registered investment companies:
                         
AFS - Closed-end Funds
   
37,138
     
-
     
-
     
37,138
 
AFS - Mutual Funds
   
3,639
     
-
     
-
     
3,639
 
Trading - Mutual funds
   
14
     
-
     
-
     
14
 
Total investments in sponsored
                               
registered investment companies
   
40,791
     
-
     
-
     
40,791
 
Total investments
   
265,219
     
25,013
     
1,010
     
291,242
 
Total assets at fair value
 
$
572,373
   
$
25,013
   
$
1,010
   
$
598,396
 
Liabilities
                               
Trading - Common stocks
 
$
13,861
   
$
-
   
$
-
   
$
13,861
 
Trading - Other
   
-
     
468
     
-
     
468
 
Securities sold, not yet purchased
 
$
13,861
   
$
468
   
$
-
   
$
14,329
 

16

Assets and Liabilities Measured at Fair Value on a Recurring Basis as of December 31, 2013 (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)
   
2013
 
Cash equivalents
 
$
209,913
   
$
-
   
$
-
   
$
209,913
 
Investments in partnerships
   
-
     
25,253
     
-
     
25,253
 
Investments in securities:
                               
AFS - Common stocks
   
43,046
     
-
     
-
     
43,046
 
AFS - Mutual funds
   
1,687
     
-
     
-
     
1,687
 
Trading - Gov't obligations
   
37,994
     
-
     
-
     
37,994
 
Trading - Common stocks
   
123,927
     
7
     
700
     
124,634
 
Trading - Mutual funds
   
23,285
     
-
     
-
     
23,285
 
Trading - Other
   
23
     
275
     
284
     
582
 
Total investments in securities
   
229,962
     
282
     
984
     
231,228
 
Investments in sponsored registered investment companies:
                         
AFS - Closed-end Funds
   
40,624
     
-
     
-
     
40,624
 
AFS - Mutual Funds
   
3,408
     
-
     
-
     
3,408
 
Trading - Mutual funds
   
10
     
-
     
-
     
10
 
Total investments in sponsored
                               
registered investment companies
   
44,042
     
-
     
-
     
44,042
 
Total investments
   
274,004
     
25,535
     
984
     
300,523
 
Total assets at fair value
 
$
483,917
   
$
25,535
   
$
984
   
$
510,436
 
Liabilities
                               
Trading - Common stocks
 
$
6,023
   
$
-
   
$
-
   
$
6,023
 
Trading - Other
   
-
     
155
     
-
     
155
 
Securities sold, not yet purchased
 
$
6,023
   
$
155
   
$
-
   
$
6,178
 

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

 
 
Quoted Prices in Active
   
Significant Other
   
Significant
   
Balance as of
 
 
 
Markets for Identical
   
Observable
   
Unobservable
   
June 30,
 
Assets
 
Assets (Level 1)
   
Inputs (Level 2)
   
Inputs (Level 3)
   
2013
 
Cash equivalents
 
$
222,647
   
$
-
   
$
-
   
$
222,647
 
Investments in partnerships
   
-
     
22,513
     
-
     
22,513
 
Investments in securities:
                               
AFS - Common stocks
   
33,478
     
-
     
-
     
33,478
 
AFS - Mutual funds
   
1,484
     
-
     
-
     
1,484
 
Trading - Gov't obligations
   
27,996
     
-
     
-
     
27,996
 
Trading - Common stocks
   
154,411
     
8
     
669
     
155,088
 
Trading - Mutual funds
   
1,675
     
-
     
-
     
1,675
 
Trading - Other
   
98
     
337
     
284
     
719
 
Total investments in securities
   
219,142
     
345
     
953
     
220,440
 
Investments in sponsored registered investment companies:
                         
AFS - Closed-end Funds
   
49,162
     
-
     
-
     
49,162
 
AFS - Mutual Funds
   
3,168
     
-
     
-
     
3,168
 
Trading - Mutual funds
   
11
     
-
     
-
     
11
 
Total investments in sponsored
                               
registered investment companies
   
52,341
     
-
     
-
     
52,341
 
Total investments
   
271,483
     
22,858
     
953
     
295,294
 
Total assets at fair value
 
$
494,130
   
$
22,858
   
$
953
   
$
517,941
 
Liabilities
                               
Trading - Common stocks
 
$
7,381
   
$
-
   
$
-
   
$
7,381
 
Trading - Other
   
-
     
217
     
-
     
217
 
Securities sold, not yet purchased
 
$
7,381
   
$
217
   
$
-
   
$
7,598
 
17


The following tables present additional information about assets by major categories measured at fair value on a recurring basis and for which the Company has utilized Level 3 inputs to determine fair value:

Changes in Level 3 Assets and Liabilities Measured at Fair Value on a Recurring Basis for the Three Months Ended June 30, 2014 (in thousands)

 
 
   
   
Total
   
   
   
   
   
 
 
 
   
   
Unrealized
   
   
   
   
   
 
 
 
   
   
Gains or
   
Total
   
   
   
   
 
 
 
   
Total Realized and
   
(Losses)
   
Realized
   
   
   
   
 
 
 
March
   
Unrealized Gains or
   
Included in
   
and
   
   
   
Transfers
   
 
 
   31, 2014    
(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
 
$
700
   
$
16
   
$
-
   
$
-
   
$
16
   
$
-
   
$
-
   
$
-
   
$
716
 
Trading - Other
   
284
     
-
     
-
     
-
     
-
     
10
     
-
     
-
     
294
 
Total
 
$
984
   
$
16
   
$
-
   
$
-
   
$
16
     
10
   
$
-
   
$
-
   
$
1,010
 

There were no transfers between any Levels during the three months ended June 30, 2014.

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

 
 
   
   
Total
   
   
   
   
   
 
 
 
   
   
Unrealized
   
   
   
   
   
 
 
 
   
   
Gains or
   
Total
   
   
   
   
 
 
 
   
Total Realized and
   
(Losses)
   
Realized
   
   
   
   
 
 
 
March
   
Unrealized Gains or
   
Included in
   
and
   
   
   
Transfers
   
 
 
   31, 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
 
$
667
   
$
2
   
$
-
   
$
-
   
$
2
   
$
-
   
$
-
   
$
-
   
$
669
 
Trading - Other
   
299
     
(3
)
   
-
     
-
     
(3
)
   
3
     
(15
)
   
-
     
284
 
Total
 
$
966
   
$
(1
)
 
$
-
   
$
-
   
$
(1
)
 
$
3
   
$
(15
)
 
$
-
   
$
953
 

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

 
18


 
Changes in Level 3 Assets and Liabilities Measured at Fair Value on a Recurring Basis for the Six Months Ended June 30, 2014 (in thousands)

 
 
   
   
Total
   
   
   
   
   
 
 
 
   
   
Unrealized
   
   
   
   
   
 
 
 
   
   
Gains or
   
Total
   
   
   
   
 
 
 
   
Total Realized and
   
(Losses)
   
Realized
   
   
   
   
 
 
 
December
   
Unrealized Gains or
   
Included in
   
and
   
   
   
Transfers
   
 
 
   31, 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
 
$
700
   
$
16
   
$
-
   
$
-
   
$
16
   
$
-
   
$
-
   
$
-
   
$
716
 
Trading - Other
   
284
     
-
     
-
     
-
     
-
     
10
     
-
     
-
     
294
 
Total
 
$
984
   
$
16
   
$
-
   
$
-
   
$
16
     
10
   
$
-
   
$
-
   
$
1,010
 

There were no transfers between any Levels during the six months ended June 30, 2014.

Changes in Level 3 Assets and Liabilities Measured at Fair Value on a Recurring Basis for the Six Months Ended June 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
   
$
(6
)
 
$
-
   
$
-
   
$
(6
)
 
$
-
   
$
-
   
$
-
   
$
669
 
Trading - Other
   
362
     
(2
)
   
-
     
-
     
(2
)
   
3
     
(79
)
   
-
     
284
 
Total
 
$
1,037
   
$
(8
)
 
$
-
   
$
-
   
$
(8
)
 
$
3
   
$
(79
)
 
$
-
   
$
953
 

There were no transfers between any Levels during the six months ended June 30, 2013.


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 $93.0 million, $82.0 million and $81.5 million at June 30, 2014, December 31, 2013 and June 30, 2013, respectively, and whose underlying assets consist primarily of marketable securities (the "affiliated entities"). We also have investments in unaffiliated entities of $14.9 million, $14.0 million and $13.0 million at June 30, 2014, December 31, 2013 and June 30, 2013, respectively (the "unaffiliated entities").  On a quarterly basis 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 in consolidation, partnerships and offshore funds.
 
 
19


Entities consolidated
 
   
   
   
   
   
   
   
 
 
 
CFFs
   
Partnerships
   
Offshore Funds
   
Total
 
 
 
VIEs
   
VOEs
   
VIEs
   
VOEs
   
VIEs
   
VOEs
   
VIEs
   
VOEs
 
Entities consolidated at December 31, 2012
   
1
     
2
     
-
     
1
     
-
     
1
     
1
     
4
 
Additional consolidated entities
   
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
 
Deconsolidated entities
   
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
 
Entities consolidated at June 30, 2013
   
1
     
2
     
-
     
1
     
-
     
1
     
1
     
4
 
Additional consolidated entities
   
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
 
Deconsolidated entities
   
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
 
Entities consolidated at December 31, 2013
   
1
     
2
     
-
     
1
     
-
     
1
     
1
     
4
 
Additional consolidated entities
   
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
 
Deconsolidated entities
   
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
 
Entities consolidated at June 30, 2014
   
1
     
2
     
-
     
1
     
-
     
1
     
1
     
4
 
 
 
At and for the six months ended June 30, 2014 and 2013 and at December 31, 2013, the 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 six months ended June 30, 2014 and 2013 and at December 31, 2013, 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 (in thousands):

 
 
June 30, 2014
 
 
Investment Type
 
 
Affiliated
   
Unaffiliated
   
 
 
Consolidated
   
   
   
   
   
Accounting method
 
Feeder Funds
   
Partnerships
   
Offshore Funds
   
Partnerships
   
Offshore Funds
   
Total
 
 
   
   
   
   
   
Fair Value
 
$
24,856
   
$
-
   
$
-
   
$
-
   
$
-
   
$
24,856
Equity Method
   
-
     
32,830
     
35,268
     
6,699
     
8,243
     
83,040
 
                                             
Total
 
$
24,856
   
$
32,830
   
$
35,268
   
$
6,699
   
$
8,243
   
$
107,896

 
 
December 31, 2013
 
 
Investment Type
 
 
Affiliated
   
Unaffiliated
   
 
 
Consolidated
   
   
   
   
   
Accounting method
 
Feeder Funds
   
Partnerships
   
Offshore Funds
   
Partnerships
   
Offshore Funds
   
Total
 
 
   
   
   
   
   
Fair Value
 
$
25,253
   
$
-
   
$
-
   
$
-
   
$
-
   
$
25,253
Equity Method
   
-
     
21,669
     
35,030
     
6,509
     
7,531
     
70,739
 
                                             
Total
 
$
25,253
   
$
21,669
   
$
35,030
   
$
6,509
   
$
7,531
   
$
95,992

 
 
June 30, 2013
 
 
Investment Type
 
 
Affiliated
   
Unaffiliated
   
 
 
Consolidated
   
   
   
   
   
Accounting method
 
Feeder Funds
   
Partnerships
   
Offshore Funds
   
Partnerships
   
Offshore Funds
   
Total
 
 
   
   
   
   
   
Fair Value
 
$
22,514
   
$
-
   
$
-
   
$
-
   
$
-
   
$
22,514
Equity Method
   
-
     
26,429
     
32,616
     
5,942
     
7,034
     
72,021
 
                                             
Total
 
$
22,514
   
$
26,429
   
$
32,616
   
$
5,942
   
$
7,034
   
$
94,535
20


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

 
 
June 30, 2014
 
 
Prior to
   
   
   
Offshore
   
 
 
Consolidation
   
CFFs
   
Partnerships
   
Funds
   
As Reported
Assets
 
   
   
   
   
Cash and cash equivalents
 
$
307,197
   
$
6
   
$
287
   
$
-
   
$
307,490
Investments in securities
   
209,181
     
-
     
8,602
     
7,813
     
225,596
Investments in sponsored investment companies
   
40,777
     
-
     
14
     
-
     
40,791
Investments in partnerships
   
112,305
     
4,962
     
(9,371
)
   
-
     
107,896
Receivable from brokers
   
38,266
     
-
     
792
     
19,887
     
58,945
Investment advisory fees receivable
   
32,269
     
28
     
(2
)
   
(67
)
   
32,228
Other assets
   
31,673
     
40
     
8
     
135
     
31,856
Total assets
 
$
771,668
   
$
5,036
   
$
330
   
$
27,768
   
$
804,802
Liabilities and equity
                                     
Securities sold, not yet purchased
 
$
13,995
   
$
-
   
$
-
   
$
334
   
$
14,329
Accrued expenses and other liabilities
   
148,625
     
84
     
21
     
9,889
     
158,619
Total debt
   
111,813
     
-
     
-
     
-
     
111,813
Redeemable noncontrolling interests
   
-
     
4,952
     
309
     
17,545
     
22,806
Total equity
   
497,235
     
-
     
-
     
-
     
497,235
Total liabilities and equity
 
$
771,668
   
$
5,036
   
$
330
   
$
21,768
   
$
804,802

 
 
December 31, 2013
 
 
Prior to
   
   
   
Offshore
   
 
 
Consolidation
   
CFFs
   
Partnerships
   
Funds
   
As Reported
Assets
 
   
   
   
   
Cash and cash equivalents
 
$
209,667
   
$
450
   
$
334
   
$
-
   
$
210,451
Investments in securities
   
232,211
     
-
     
7,464
     
(8,447
)
   
231,228
Investments in sponsored investment companies
   
44,033
     
-
     
9
     
-
     
44,042
Investments in partnerships
   
98,494
     
6,517
     
(9,019
)
   
-
     
95,992
Receivable from brokers
   
35,151
     
-
     
-
     
14,310
     
49,461
Investment advisory fees receivable
   
52,509
     
(24
)
   
(14
)
   
(965
)
   
51,506
Other assets
   
27,433
     
(2,339
)
   
1,592
     
119
     
26,805
Total assets
 
$
699,498
   
$
4,604
   
$
366
   
$
5,017
   
$
709,485
Liabilities and equity
                                     
Securities sold, not yet purchased
 
$
6,049
   
$
-
   
$
-
   
$
129
   
$
6,178
Accrued expenses and other liabilities
   
121,356
     
165
     
29
     
2,913
     
124,463
Total debt
   
111,911
     
-
     
-
     
-
     
111,911
Redeemable noncontrolling interests
   
-
     
4,439
     
337
     
1,975
     
6,751
Total equity
   
460,182
     
-
     
-
     
-
     
460,182
Total liabilities and equity
 
$
699,498
   
$
4,604
   
$
366
   
$
5,017
   
$
709,485

 
 
June 30, 2013
 
 
Prior to
   
   
   
Offshore
   
 
 
Consolidation
   
CFFs
   
Partnerships
   
Funds
   
As Reported
Assets
 
   
   
   
   
Cash and cash equivalents
 
$
222,441
   
$
-
   
$
335
   
$
-
   
$
222,776
Investments in securities
   
215,755
     
-
     
7,292
     
(2,607
)
   
220,440
Investments in sponsored investment companies
   
52,332
     
-
     
9
     
-
     
52,341
Investments in partnerships
   
100,342
     
3,189
     
(8,996
)
   
-
     
94,535
Receivable from brokers
   
27,347
     
-
     
1,680
     
10,642
     
39,669
Investment advisory fees receivable
   
28,326
     
(10
)
   
-
     
(76
)
   
28,240
Other assets
   
25,412
     
-
     
-
     
88
     
25,500
Total assets
 
$
671,955
   
$
3,179
   
$
320
   
$
8,047
   
$
683,501
Liabilities and equity
                                     
Securities sold, not yet purchased
 
$
7,427
   
$
-
   
$
-
   
$
171
   
$
7,598
Accrued expenses and other liabilities
   
136,309
     
59
     
21
     
4,274
     
140,663
Total debt
   
117,028
     
-
     
-
     
-
     
117,028
Redeemable noncontrolling interests
   
-
     
3,120
     
299
     
3,602
     
7,021
Total equity
   
411,191
     
-
     
-
     
-
     
411,191
Total liabilities and equity
 
$
671,955
   
$
3,179
   
$
320
   
$
8,047
   
$
683,501
21


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

 
 
Three Months Ended June 30, 2014
 
 
Prior to
   
   
   
Offshore
   
 
 
Consolidation
   
CFFs
   
Partnerships
   
Funds
   
As Reported
Total revenues
 
$
108,513
   
$
(7
)
 
$
(1
)
 
$
(209
)
 
$
108,296
Total expenses
   
70,515
     
(20
)
   
14
     
250
     
70,759
Operating income
   
37,998
     
13
     
(15
)
   
(459
)
   
37,537
Total other income, net
   
8,093
     
130
     
33
     
665
     
8,921
Income before income taxes
   
46,091
     
143
     
18
     
206
     
46,458
Income tax provision
   
17,135
     
-
     
-
     
-
     
17,135
Net income
   
28,956
     
143
     
18
     
206
     
29,323
Net income attributable to noncontrolling interests
   
6
     
143
     
18
     
206
     
373
Net income attributable to GAMCO
 
$
28,950
   
$
-
   
$
-
   
$
-
   
$
28,950

 
 
Three Months Ended June 30, 2013
 
 
Prior to
   
   
   
Offshore
   
 
 
Consolidation
   
CFFs
   
Partnerships
   
Funds
   
As Reported
Total revenues
 
$
92,613
   
$
(6
)
 
$
-
   
$
(317
)
 
$
92,290
Total expenses
   
60,243
     
35
     
15
     
213
     
60,506
Operating income
   
32,370
     
(41
)
   
(15
)
   
(530
)
   
31,784
Total other income, net
   
11,219
     
24
     
33
     
576
     
11,852
Income before income taxes
   
43,589
     
(17
)
   
18
     
46
     
43,636
Income tax provision
   
15,724
     
-
     
-
     
-
     
15,724
Net income
   
27,865
     
(17
)
   
18
     
46
     
27,912
Net income attributable to noncontrolling interests
   
(28
)
   
(17
)
   
18
     
46
     
19
Net income attributable to GAMCO
 
$
27,893
   
$
-
   
$
-
   
$
-
   
$
27,893


 
 
Six Months Ended June 30, 2014
 
 
Prior to
   
   
   
Offshore
   
 
 
Consolidation
   
CFFs
   
Partnerships
   
Funds
   
As Reported
Total revenues
 
$
213,214
   
$
(14
)
 
$
(2
)
 
$
(425
)
 
$
212,773
Total expenses
   
138,227
     
14
     
26
     
470
     
138,737
Operating income
   
74,987
     
(28
)
   
(28
)
   
(895
)
   
74,036
Total other income, net
   
13,634
     
206
     
37
     
1,137
     
15,014
Income before income taxes
   
88,621
     
178
     
9
     
242
     
89,050
Income tax provision
   
31,751
     
-
     
-
     
-
     
31,751
Net income
   
56,870
     
178
     
9
     
242
     
57,299
Net income attributable to noncontrolling interests
   
(34
)
   
178
     
9
     
242
     
395
Net income attributable to GAMCO
 
$
56,904
   
$
-
   
$
-
   
$
-
   
$
56,904

 
 
Six Months Ended June 30, 2013
 
 
Prior to
   
   
   
Offshore
   
 
 
Consolidation
   
CFFs
   
Partnerships
   
Funds
   
As Reported
Total revenues
 
$
179,069
   
$
(12
)
 
$
(1
)
 
$
(585
)
 
$
178,471
Total expenses
   
115,458
     
88
     
25
     
389
     
115,960
Operating income
   
63,611
     
(100
)
   
(26
)
   
(974
)
   
62,511
Total other income, net
   
15,721
     
134
     
48
     
1,097
     
17,000
Income before income taxes
   
79,332
     
34
     
22
     
123
     
79,511
Income tax provision
   
28,919
     
-
     
-
     
-
     
28,919
Net income
   
50,413
     
34
     
22
     
123
     
50,592
Net income attributable to noncontrolling interests
   
(25
)
   
34
     
22
     
123
     
154
Net income attributable to GAMCO
 
$
50,438
   
$
-
   
$
-
   
$
-
   
$
50,438


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 and/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 June 30, 2014, December 31, 2013 and June 30, 2013 were $74.4 million, $72.7 million and $73.4 million, respectively.  Our maximum exposure to loss as a result of our involvement with the non-consolidated VIEs is limited to the investment in two VIEs and the deferred carried interest that we have in another.  On June 30, 2014, we had an investment in two of the non-consolidated VIE offshore funds of approximately $8.9 million.  On December 31, 2013 and June 30, 2013, we had an investment in one of the non-consolidated VIE offshore funds of approximately $10.0 million and $9.0 million, respectively, which was included in investments in partnerships on the condensed consolidated statements of financial condition.  On June 30, 2014, December 31, 2013 and June 30, 2013, we had a deferred carried interest in one of the non-consolidated VIE offshore funds of $47,000, $45,000 and $46,000, 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.
22


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.  Only one VIE was consolidated at June 30, 2014, December 31, 2013 and June 30, 2013:

 
 
June 30, 2014
   
December 31, 2013
   
June 30, 2013
 
(In thousands)
 
   
   
 
Cash and cash equivalents
 
$
     
$
     
$
   
Investments in partnerships
   
14,125
     
15,540
     
13,457
 
Accrued expenses and other liabilities
   
(18
)
   
(2,022
)
   
(6
)
Redeemable noncontrolling interests
   
(1,155
)
   
(1,120
)
   
-
 
GAMCO's net interests in consolidated VIE
 
$
12,952
   
$
12,398
   
$
13,451
 

E. Income Taxes
 
The effective tax rate for the three months ended June 30,2014 was 36.9% compared to 36.0% for the prior year three month period.  The effective tax rate for the six months ended June 30, 2014 was 35.7% compared to 36.4% for the prior year six month period.  During the six month period ended June 30, 2014 we benefitted from the donation of appreciated securities used to fund our shareholder designated charitable contribution program.  We expect the effective tax rate for the remainder of 2014 to approximate the prior year rate of 36.1%.

F. Earnings Per Share

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

 
 
Three Months Ended June 30,
   
Six Months Ended June 30,
 
(in thousands, except per share amounts)
 
2014
   
2013
   
2014
   
2013
 
Basic:
 
   
   
   
 
Net income attributable to GAMCO Investors, Inc.'s shareholders
 
$
28,950
   
$
27,893
   
$
56,904
   
$
50,438
 
Weighted average shares outstanding
   
25,381
     
25,679
     
25,431
     
25,710
 
Basic net income attributable to GAMCO Investors, Inc.'s
                               
shareholders per share
 
$
1.14
   
$
1.09
   
$
2.24
   
$
1.96
 
 
                               
Diluted:
                               
Net income attributable to GAMCO Investors, Inc.'s shareholders
 
$
28,950
   
$
27,893
   
$
56,904
   
$
50,438
 
 
                               
Weighted average share outstanding
   
25,381
     
25,679
     
25,431
     
25,710
 
Dilutive stock options and restricted stock awards
   
205
     
10
     
204
     
13
 
Total
   
25,586
     
25,689
     
25,635
     
25,723
 
Diluted net income attributable to GAMCO Investors, Inc.'s
                               
shareholders per share
 
$
1.13
   
$
1.09
   
$
2.22
   
$
1.96
 
23


G. Debt

Debt consists of the following:

 
 
June 30, 2014
   
December 31, 2013
   
June 30, 2013
 
 
 
Carrying
   
Fair Value
   
Carrying
   
Fair Value
   
Carrying
   
Fair Value
 
 
 
Value
   
Level 2
   
Value
   
Level 2
   
Value
   
Level 2
 
(In thousands)
 
   
   
   
   
   
 
5.875% Senior notes
 
$
100,000
   
$
108,521
   
$
100,000
   
$
108,500
   
$
100,000
   
$
104,125
 
0% Subordinated debentures
   
11,813
     
13,206
     
11,911
     
13,819
     
17,028
     
18,924
 
Total
 
$
111,813
   
$
121,727
   
$
111,911
   
$
122,319
   
$
117,028
   
$
123,049
 

5.5% Senior notes

On May 15, 2003, the Company issued 10-year, $100 million senior notes.  The senior notes, which matured and were fully repaid on May 15, 2013, 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.  During the three month periods ended June 30, 2014 and June 30, 2013 the Company repurchased 5,717 Debentures and 11,942 Debentures, respectively, having a face value of $572,000 and $1.2 million, respectively.  The redemptions were accounted for as extinguishments of debt and resulted in losses of $69,000 and $137,000, respectively, which were included in net gain from investments on the condensed consolidated statements of income.  During the six month periods ended June 30, 2014 and June 30, 2013 the Company repurchased 6,133 Debentures and 11,974 Debentures, respectively, having a face value of $613,000 and $1.2 million, respectively.  The redemptions were accounted for as extinguishments of debt and resulted in losses of $74,000 and $137,000, respectively. The debt is being accreted to its face value using the effective rate on the date of issuance of 7.45%.  At June 30, 2014, December 31, 2013 and June 30, 2013, the debt was recorded at its accreted value of $11.8 million, $11.9 million and $17.0 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 June 30, 2014, $400 million is available on the shelf.
H. Stockholders' Equity
 
Shares outstanding were 25.9 million, 26.1 million and 25.6 million on June 30, 2014, December 31, 2013 and June 30, 2013, respectively.
 
 
24


 
Dividends

 
            Payment Date
Record Date
 
Amount
 
 
 
 
 
 
Three months ended March 31, 2014
March 25, 2014
March 11, 2014
 
$
0.06
 
Three months ended June 30, 2014
June 24, 2014
June 10, 2014
 
$
0.06
 
Six months ended June 30, 2014
 
  
 
$
0.12
 
 
 
 
       
Three months ended March 31, 2013
March 26, 2013
March 12, 2013
 
$
0.05
 
Three months ended June 30, 2013
June 25, 2013
June 11, 2013
 
$
0.05
 
Six months ended June 30, 2013
 
  
 
$
0.10
 

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, the 1999 Plan and the 2002 Plan, 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 both the 1999 and 2002 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 were originally reserved for issuance under each of the 1999 and 2002 Plans by a committee of the Board of Directors responsible for administering the Plans ("Compensation Committee").  In November 2013, the shareholders approved an amendment to the Company's 2002 Stock Award and Incentive Plan to increase the number of shares of Class A Stock authorized and reserved for issuance by 2 million.  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 Compensation 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 typically vest 30% after three years and 100% after five years.

On January 9, 2014, the Company approved the granting of 2,100 RSA shares at a grant date fair value of $81.99 per share.  As of June 30, 2014 and December 31, 2013, there were 564,250 RSA shares and 566,950 RSA shares outstanding, respectively, that were previously issued at an average weighted grant price of $63.93 and $63.93, respectively.  All grants of the RSA shares were recommended by the Company's Chairman, who did not receive a RSA, and approved by the Compensation Committee.  This expense, net of estimated forfeitures, is recognized over the vesting period for these awards which is 30% over three years from the date of grant and 70% over five years from the date of grant, except for the August 2013 grant 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.  During the vesting period, dividends to RSA holders are held for them until the RSA vesting dates and are forfeited if the grantee is no longer employed by the Company on the vesting dates.  Dividends declared on these RSAs, less estimated forfeitures, are charged to retained earnings on the declaration date.  There were no RSAs outstanding at June 30, 2013.
25


For the three months ended June 30, 2014 and June 30, 2013, we recognized stock-based compensation expense of $1.7 million and $15,000, respectively.  For the six months ended June 30, 2014 and June 30, 2013, we recognized stock-based compensation expense of $3.4 million and $29,000, respectively. Actual and projected stock-based compensation expense for RSA shares and options for the years ended December 31, 2014 through December 31, 2023 (based on awards currently issued or granted) is as follows ($ in thousands):

   
2013
   
2014
   
2015
   
2016
   
2017
   
2018
 
Q1
   
$
15
   
$
1,700
   
$
1,695
   
$
1,694
   
$
903
   
$
771
 
Q2
     
15
     
1,697
     
1,694
     
1,694
     
903
     
771
 
Q3
     
741
     
1,697
     
1,694
     
1,339
     
816
     
702
 
Q4
     
1,301
     
1,697
     
1,694
     
1,078
     
773
     
554
Full Year
   
$
2,072
   
$
6,791
   
$
6,777
   
$
5,805
   
$
3,395
   
$
2,798
                                                   
         
2019
     
2020
     
2021
     
2022
     
2023
       
 
Q1
   
$
325
   
$
240
   
$
168
   
$
105
   
$
50
       
 
Q2
     
325
     
240
     
168
     
105
     
50
       
 
Q3
     
268
     
192
     
126
     
68
     
17
       
 
Q4
     
240
     
168
     
105
     
50
     
-
       
Full Year
   
$
1,158
   
$
840
   
$
567
   
$
328
   
$
117
       
                                                   

The total compensation cost related to non-vested options not yet recognized is approximately $25.2 million as of June 30, 2014.  For the three months ended June 30, 2014, proceeds from the exercise of 20,000 stock options were $792,000 resulting in a tax benefit to GAMCO of $175,000.  There were no options exercised for the three months ended June 30, 2013.  For the six months ended June 30, 2014 and 2013, proceeds from the exercise of 40,000 stock options and 2,623 stock options, respectively, were $1.6 million and $76,000, respectively, resulting in a tax benefit to GAMCO of $349,000 and $16,000, respectively.

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 June 30, 2014 and June 30, 2013, the Company repurchased 103,528 shares and 81,726 shares, respectively, at an average price per share of $77.76 and $52.73, respectively.  For the six months ended June 30, 2014 and June 30, 2013, the Company repurchased 224,720 shares and 118,402 shares, respectively, at an average price per share of $78.75 and $52.99, respectively.  From the inception of the program through June 30, 2014, 8,936,313 shares have been repurchased at an average price of $43.17 per share.  At June 30, 2014, the total shares available under the program to be repurchased in the future were 698,495.

I. Goodwill and Identifiable Intangible Assets

At June 30, 2014, $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 June 30, 2014 or June 30, 2013, and as such there was no impairment analysis performed or charge recorded.

As a result of becoming the advisor to the Gabelli Enterprise Mergers and Acquisitions Fund and the associated consideration paid, the Company maintains an identifiable intangible asset of $1.9 million within other assets on the condensed consolidated statements of financial condition at June 30, 2014, December 31, 2013 and June 30, 2013.  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 2015.  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 June 30, 2014 or June 30, 2013, and as such there was no impairment analysis performed or charge recorded.
26


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.  For any 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., our broker-dealer subsidiary, for losses they may sustain from the customer accounts that trade on margin introduced by it.  At June 30, 2014, 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 2013, the Company established a Shareholder Designated Charitable Contribution program.  Under the program, each shareholder is eligible to designate a charity to which the Company would make a donation based upon the actual number of shares registered in the shareholder's name.  Shares held in nominee or street name were not eligible to participate.  The Board of Directors approved two contributions during 2013 of $0.25 per registered share each.  During the first half 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 the contributions which was included in shareholder-designated contribution in the condensed consolidated statements of income.

During the fourth quarter of 2013, the Company recorded a charge of $5.3 million, or $0.12 per diluted share, net of management fee and tax benefit, as an estimate of the expected contribution to be made relating to the $0.25 per share contribution approved by the Board in November 2013. Based upon the number of registered shares that participated in the program, the Company recorded an additional charge of $134,000 during the second quarter of 2014.


L. Subsequent Events
 
From July 1, 2014 to August 5, 2014, the Company repurchased 28,762 shares at $82.90 per share.

On August 5, 2014, the Board of Directors declared a regular quarterly dividend of $0.06 per share to all of its shareholders, payable on September 30, 2014 to shareholders of record on September 16, 2014.
27


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

Overview
 
GAMCO, through the Gabelli brand, well known for its Private Market Value (PMV) with a CatalystTM investment approach, is a widely-recognized provider of investment advisory services to open- and closed-end funds, institutional and high net worth investors, and investment partnerships, principally in the United States.  Through G.research, 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.  At times, the performance of our equity products may differ markedly from popular market indices, and this can also impact our revenues.  General stock market trends will have the greatest impact on our level of assets under management and hence, on revenues.

We conduct our investment advisory business principally through the following subsidiaries: GAMCO Asset Management Inc. (Institutional and High Net Worth), Gabelli Funds, LLC (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 a record $49.4 billion as of June 30, 2014, an increase of 3.8% from AUM of $47.6 billion at March 31, 2014 and up 22.0% from the June 30, 2013 AUM of $40.5 billion.  The second quarter 2014 AUM rose $1.8 billion and consisted of market appreciation of $2.0 billion, net cash outflows of $47 million and recurring distributions, net of reinvestments, from open-end and closed-end funds of $150 million.  Average total AUM was $48.1 billion in the 2014 quarter versus $40.3 billion in the prior year period, an increase of 19.4%.  Average AUM in our open-end equity funds, a key driver to our investment advisory fees, was $17.8 billion in the second quarter of 2014, rising 26.2% from the 2013 quarter average AUM of $14.1 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, to our GDL Fund (NYSE: GDL) and investment partnership assets.  As of June 30, 2014, assets with incentive based fees were $4.6 billion, an increase of $0.1 billion, or 2.2%, from the $4.5 billion at March 31, 2014 and 17.9% higher than the $3.9 billion on June 30, 2013. 
 
28


The Company reported Assets Under Management as follows (in millions):
   
   
   
 
 
 
   
   
   
   
 
Table I: Fund Flows - 2nd Quarter 2014
   
   
   
   
 
 
 
   
   
   
Fund
   
 
 
 
   
Market
   
   
distributions,
   
 
 
 
March 31,
   
appreciation/
   
Net cash
   
net of
   
June 30,
 
 
 
2014
   
(depreciation)
   
flows
   
reinvestments
   
2014
 
Equities:
 
   
   
   
   
 
Open-end Funds
 
$
17,531
   
$
768
   
$
241
   
$
(32
)
 
$
18,508
 
Closed-end Funds
   
6,967
     
366
     
9
     
(118
)
   
7,224
 
Institutional & PWM - direct
   
16,403
     
733
     
(195
)
   
-
     
16,941
 
Institutional & PWM - sub-advisory
   
3,822
     
132
     
(71
)
   
-
     
3,883
 
Investment Partnerships
   
865
     
17
     
15
     
-
     
897
 
SICAV (a)
   
91
     
1
     
2
     
-
     
94
 
Total Equities
   
45,679
     
2,017
     
1
     
(150
)
   
47,547
 
Fixed Income:
                                       
Money-Market Fund
   
1,812
     
-
     
(46
)
   
-
     
1,766
 
Institutional & PWM
   
64
     
-
     
-
     
-
     
64
 
Total Fixed Income
   
1,876
     
-
     
(46
)
   
-
     
1,830
 
Total Assets Under Management
 
$
47,555
   
$
2,017
   
$
(45
)
 
$
(150
)
 
$
49,377
 
 
                                       

 
 
   
   
   
   
 
Table II: Fund Flows - Six Months ended June 30, 2014
   
   
   
   
 
 
 
   
   
   
Fund
   
 
 
 
   
Market
   
   
distributions,
   
 
 
 
December 31,
   
appreciation/
   
Net cash
   
net of
   
June 30,
 
 
 
2013
   
(depreciation)
   
flows
   
reinvestments
   
2014
 
Equities:
 
   
   
   
   
 
Open-end Funds
 
$
17,078
   
$
997
   
$
495
   
$
(62
)
 
$
18,508
 
Closed-end Funds
   
6,945
     
506
     
4
     
(231
)
   
7,224
 
Institutional & PWM - direct
   
16,486
     
929
     
(474
)
   
-
     
16,941
 
Institutional & PWM - sub-advisory
   
3,797
     
184
     
(98
)
   
-
     
3,883
 
Investment Partnerships
   
811
     
24
     
62
     
-
     
897
 
SICAV (a)
   
96
     
2
     
(4
)
   
-
     
94
 
Total Equities
   
45,213
     
2,642
     
(15
)
   
(293
)
   
47,547
 
Fixed Income:
                                       
Money-Market Fund
   
1,735
     
-
     
31
     
-
     
1,766
 
Institutional & PWM
   
62
     
-
     
2
     
-
     
64
 
Total Fixed Income
   
1,797
     
-
     
33
     
-
     
1,830
 
Total Assets Under Management
 
$
47,010
   
$
2,642
   
$
18
   
$
(293
)
 
$
49,377
 
 
                                       
 
 
29

 

Table III: Assets Under Management
   
   
 
 
 
June 30,
   
June 30,
   
%
 
 
 
2013
   
2014
   
Inc.(Dec.)
 
Equities:
 
   
   
 
Open-end Funds
 
$
14,188
   
$
18,508
     
30.4
%
Closed-end Funds
   
6,409
     
7,224
     
12.7
 
Institutional & PWM - direct
   
14,069
     
16,941
     
20.4
 
Institutional & PWM - sub-advisory
   
3,185
     
3,883
     
21.9
 
Investment Partnerships
   
778
     
897
     
15.3
 
SICAV (a)
   
93
     
94
     
1.1
 
Total Equities
   
38,722
     
47,547
     
22.8
 
Fixed Income:
                       
Money-Market Fund
   
1,689
     
1,766
     
4.6
 
Institutional & PWM
   
67
     
64
     
(4.5
)
Total Fixed Income
   
1,756
     
1,830
     
4.2
 
Total Assets Under Management
 
$
40,478
   
$
49,377
     
22.0
%
 
                       

Table IV: Assets Under Management by Quarter
   
   
   
   
   
 
 
 
   
   
   
   
   
% Increase/
 
 
 
   
   
   
   
   
(decrease) from
 
 
   
6/13
     
9/13
     
12/13
     
3/14
     
6/14
     
6/13
     
3/14
 
Equities:
                                                       
Open-end Funds
 
$
14,188
   
$
15,581
   
$
17,078
   
$
17,531
   
$
18,508
     
30.4
%
   
5.6
%
Closed-end Funds
   
6,409
     
6,721
     
6,945
     
6,967
     
7,224
     
12.7
     
3.7
 
Institutional & PWM - direct
   
14,069
     
15,026
     
16,486
     
16,403
     
16,941
     
20.4
     
3.3
 
Institutional & PWM - sub-advisory
   
3,185
     
3,503
     
3,797
     
3,822
     
3,883
     
21.9
     
1.6
 
Investment Partnerships
   
778
     
805
     
811
     
865
     
897
     
15.3
     
3.7
 
SICAV (a)
   
93
     
94
     
96
     
91
     
94
     
1.1
     
3.3
 
Total Equities
   
38,722
     
41,730
     
45,213
     
45,679
     
47,547
     
22.8
     
4.1
 
Fixed Income:
                                                       
Money-Market Fund
   
1,689
     
1,714
     
1,735
     
1,812
     
1,766
     
4.6
     
(2.5
)
Institutional & PWM
   
67
     
63
     
62
     
64
     
64
     
(4.5
)
   
-
 
Total Fixed Income
   
1,756
     
1,777
     
1,797
     
1,876
     
1,830
     
4.2
     
(2.5
)
Total Assets Under Management
 
$
40,478
   
$
43,507
   
$
47,010
   
$
47,555
   
$
49,377
     
22.0
%
   
3.8
%
 
                                                       
(a) Includes $90 million, $92 million, $94 million, $88 million and $77 million of proprietary seed capital at June 30, 2013,
         
September 30, 2013, December 31, 2013, March 31, 2014 and June 30, 2014, respectively.
         

30

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

RESULTS OF OPERATIONS
 
Three Months Ended June 30, 2014 Compared To Three Months Ended June 30, 2013
 
(Unaudited; in thousands, except per share data)
 
 
 
 
2014
   
2013
 
Revenues
 
   
 
  Investment advisory and incentive fees
 
$
90,156
   
$
77,443
 
  Distribution fees and other income
   
15,767
     
12,522
 
  Institutional research services
   
2,373
     
2,325
 
Total revenues
   
108,296
     
92,290
 
Expenses
               
  Compensation
   
44,045
     
37,759
 
  Management fee
   
5,144
     
4,846
 
  Distribution costs
   
15,023
     
11,871
 
  Other operating expenses
   
6,547
     
6,030
 
Total expenses
   
70,759
     
60,506
 
Operating income
   
37,537
     
31,784
 
Other income (expense)
               
  Net gain from investments
   
9,744
     
12,141
 
  Interest and dividend income
   
1,332
     
2,507
 
  Interest expense
   
(2,021
)
   
(2,796
)
  Shareholder-designated contribution
   
(134
)
   
-
 
Total other income, net
   
8,921
     
11,852
 
Income before income taxes
   
46,458
     
43,636
 
Income tax provision
   
17,135
     
15,724
 
Net income
   
29,323
     
27,912
 
Net income attributable to noncontrolling interests
   
373
     
19
 
Net income attributable to GAMCO Investors, Inc.'s shareholders
 
$
28,950
   
$
27,893
 
 
               
Net income attributable to GAMCO Investors, Inc.'s shareholders per share:
               
Basic
 
$
1.14
   
$
1.09
 
Diluted
 
$
1.13
   
$
1.09
 
 
               

Overview

Net income attributable to shareholders of GAMCO for the quarter was $29.0 million, or $1.13 per fully diluted share, versus $27.9 million, or $1.09 per fully diluted share, in the prior year's quarter.   The quarter to quarter comparison was positively impacted by higher revenues and lower interest expense partially offset by increased stock compensation costs and lower income from our proprietary investments.

Revenues
 
Investment advisory and incentive fees for the second quarter 2014 were $90.2 million, 16.5% above the 2013 comparative figure of $77.4 million.  Open-end fund revenues increased by 24.9% to $43.1 million from $34.5 million in the second quarter of 2013 driven by a 26.6% increase in average open-end equity AUM.  Our closed-end fund revenues rose 8.7% to $15.0 million in the second quarter 2014 from $13.8 million in 2013 due to a 8.8% increase in non-performance fee based average AUM.  Institutional and private wealth management account revenues, excluding incentive fees, which are generally based on beginning of quarter AUM, increased $4.5 million, or 17.7%, to $29.9 million from $25.4 million in second quarter 2013.  Incentive fees declined $1.8 million quarter to quarter to $0.5 million in the 2014 quarter versus $2.3 million in the prior year period.  Investment partnership revenues were $1.6 million, an increase of 14.3% from $1.4 million in second quarter 2013 due to an increase in average AUM resulting from a combination of market performance and net inflows.
31

Open-end fund distribution fees and other income were $15.8 million for the second quarter 2014, an increase of $3.3 million or 26.4% from $12.5 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 second quarter 2014 versus $2.3 million in the prior year period.

Expenses
 
Compensation costs, which are largely variable, were $44.0 million or 16.4% higher than prior year compensation costs of $37.8 million.  The quarter over quarter increase was comprised of variable compensation of $3.6 million related to the increased levels of AUM, $0.9 million in fixed compensation and a $1.7 million increase in stock compensation expense for RSAs issued in the second half of 2013.

Management fee expense, which is wholly variable and based on pretax income, increased to $5.1 million in the second quarter of 2014 from $4.8 million in the 2013 period.
 
Distribution costs were $15.0 million, an increase of $3.1 million or 26.1% from $11.9 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 $2.4 million.
 
Other operating expenses were $6.5 million in the second quarter of 2014, an increase of $0.5 million, or 8.3%, from $6.0 million in the second quarter of 2013.  The prior year quarter benefitted from insurance reimbursements of $0.4 million in legal and regulatory costs previously incurred and expensed.  Excluding this reimbursement other operating expenses were up less than 2%.

Operating income for the second quarter of 2014 was $37.5 million, an increase of $5.7 million, or 17.9%, from the $31.8 million in the second quarter of 2013.  Operating income, as a percentage of revenues, was 34.7% in the 2014 quarter as compared to 34.4% in the 2013 quarter.

Other
 
Total other income, net of interest expense, was $8.9 million for the second quarter 2014 versus $11.9 million in the prior year's quarter.  Realized and unrealized gains in our trading portfolio were $9.7 million in the 2014 quarter; $2.4 million lower than the $12.1 million reported in the 2013 quarter.  Interest and dividend income was lower by $1.2 million.  Interest expense decreased by $0.8 million to $2.0 million in the second quarter of 2014 from $2.8 million in second quarter of 2013 due to a decrease in total average debt outstanding.
 
The effective tax rates ("ETR") for the three months ended June 30, 2014 and June 30, 2013 were 36.9% and 36.0%, respectively.  During the 2013 quarter the Company's ETR was lowered by one percentage point from the reversal of certain prior year state tax accruals.
32


Six Months Ended June 30, 2014 Compared To Six Months Ended June 30, 2013
 
(Unaudited; in thousands, except per share data)
 
 
 
 
2014
   
2013
 
Revenues
 
   
 
  Investment advisory and incentive fees
 
$
177,953
   
$
150,050
 
  Distribution fees and other income
   
30,640
     
23,875
 
  Institutional research services
   
4,180
     
4,546
 
Total revenues
   
212,773
     
178,471
 
Expenses
               
  Compensation
   
87,942
     
73,411
 
  Management fee
   
9,872
     
8,826
 
  Distribution costs
   
28,986
     
22,881
 
  Other operating expenses
   
11,937
     
10,842
 
Total expenses
   
138,737
     
115,960
 
Operating income
   
74,306
     
62,511
 
Other income (expense)
               
  Net gain from investments
   
16,688
     
24,432
 
  Interest and dividend income
   
2,473
     
3,852
 
  Interest expense
   
(4,013
)
   
(6,284
)
  Shareholder-designated contribution
   
(134
)
   
(5,000
)
Total other income, net
   
15,014
     
17,000
 
Income before income taxes
   
89,050
     
79,511
 
Income tax provision
   
31,751
     
28,919
 
Net income
   
57,299
     
50,592
 
Net income attributable to noncontrolling interests
   
395
     
154
 
Net income attributable to GAMCO Investors, Inc.'s shareholders
 
$
56,904
   
$
50,438
 
 
               
Net income attributable to GAMCO Investors, Inc.'s shareholders per share:
               
Basic
 
$
2.24
   
$
1.96
 
Diluted
 
$
2.22
   
$
1.96
 
 
               

Overview

Net income attributable to shareholders of GAMCO for the first six months of 2014 was $56.9 million or $2.22 per fully diluted share versus $50.4 million or $1.96 per fully diluted share in the prior year's first six months.   Included in the 2013 results is a $5.0 million charge, or $0.11 per diluted share, net of management fee and tax benefit, for the shareholder designated charitable contribution program.  The period to period comparison, excluding this charge, was positively impacted by higher revenues, lower interest expense offset partially by increased stock compensation costs and lower income from our proprietary investments.

Revenues
 
Investment advisory and incentive fees for the six months ended June 30, 2014 were $178.0 million, 18.6% above the comparable 2013 figure of $150.1 million.  Open-end mutual fund revenues increased by 26.2% to $83.9 million from $66.5 million in first half 2013 driven by a 27.9% increase in average open-end equity AUM.  Our closed-end fund revenues rose 8.0% to $29.6 million in the first half of 2014 from $27.4 million in 2013 due to a 8.3% increase in non-performance fee based average AUM.  Institutional and private wealth management account revenues, excluding incentive fees, which are generally based on beginning of quarter AUM, increased $11.9 million, or 24.5%, to $60.4 million from $48.5 million in first half of 2013.  During the first half of 2014, we earned $0.8 million in incentive fees, a decrease of $3.9 million from $4.7 million earned in the first half of 2013.  Investment partnership revenues were $3.2 million, an increase of 10.3% from $2.9 million for the six months ended June 30, 2013 due to an increase in average AUM resulting from net inflows.
 
Open-end fund distribution fees and other income were $30.6 million for the first six months of 2014, an increase of $6.7 million or 28.0% from $23.9 million in the prior year period, primarily due to higher quarterly average AUM in open-end equity mutual funds that generate distribution fees and an increased level of sales of load shares of mutual funds.
 
33

Our institutional research revenues were $4.2 million in the first half of 2014 versus $4.5 million in the prior year period.  Although commission revenues were largely unchanged in most areas of that business, dealer manager fee revenues from underwriting closed-end fund offerings declined $0.3 million from the prior year period.

Expenses
 
Compensation costs, which are largely variable, were $87.9 million or 19.8% higher than prior year compensation costs of $73.4 million.  The period over period increase was comprised of variable compensation of $8.4 million related to the increased levels of AUM, $2.7 million in fixed compensation and a $3.4 million increase in stock compensation expense for RSAs issued in the second half of 2013.

Management fee expense, which is wholly variable and based on pretax income, increased to $9.9 million for the six months ended June 30, 2014 from $8.8 million in the 2013 period.
 
Distribution costs were $29.0 million, an increase of $6.1 million or 26.6% from $22.9 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 $4.6 million.
 
Other operating expenses were $11.9 million in the first six months of 2014, an increase of $1.1 million, or 10.2%, from $10.8 million in the first half of 2013. The period to period comparison was impacted by decreases in insurance reimbursements for legal and regulatory costs previously incurred and expensed for a legal matter which was successfully concluded in the first half of 2014.

Operating income for the first six months of 2014 was $74.0 million, an increase of $11.5 million, or 18.4%, from the $62.5 million in the first half of 2013.  Operating income, as a percentage of revenues, was 34.8% in the 2014 period as compared to 35.0% in the 2013 period.

Other
 
Total other income, net of interest expense, was $15.0 million for the first six months of 2014 versus $17.0 million in the prior year's quarter.  Realized and unrealized gains in our trading portfolio were $16.7 million in the 2014 period, $7.7 million lower than the $24.4 million reported in the 2013 period.  Interest and dividend income was lower by $1.4 million.  Interest expense decreased by $2.3 million to $4.0 million in the first half of 2014 from $6.3 million in first half of 2013 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.  Expenses for the shareholder-designated charitable contribution program were $0.1 million during the first half of 2014 and $5.0 million for the first half of 2013.
 
The effective tax rate for the six months ended June 30, 2014 was 35.7% as compared to the prior year period's effective rate of 36.4%.  During the 2014 period the ETR benefitted from the donation of appreciated securities used to fund our shareholder designated charitable contribution program.  We expect the effective tax rate for 2014 to approximate the prior year ETR of 36.1%.

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 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 as to 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.

34

Summary cash flow data is as follows:
 
 
Six months ended
 
 
 
June 30,
 
 
 
2014
   
2013
 
Cash flows provided by (used in):
 
(in thousands)
 
  Operating activities
 
$
99,422
   
$
133,431
 
  Investing activities
   
1,725
     
18,650
 
  Financing activities
   
(4,097
)
   
(119,931
)
  Effect of exchange rates on cash and cash equivalents
   
(11
)
   
18
 
  Net increase
   
97,039
     
32,168
 
  Cash and cash equivalents at beginning of period
   
210,451
     
190,608
 
  Cash and cash equivalents at end of period
 
$
307,490
   
$
222,776
 
 
               

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

At June 30, 2014, we had total cash and cash equivalents of $307.5 million, an increase of $97.0 million from December 31, 2013.  Cash and cash equivalents of $0.3 million and investments in securities of $4.2 million held by consolidated investment partnerships and offshore funds may not be readily available for the Company to access.  Total debt outstanding at June 30, 2014 was $111.8 million, consisting of $11.8 million in Debentures (face value of $13.2 million) and $100 million of 5.875% senior notes due 2021.
 
For the six months ended June 30, 2014, cash provided by operating activities was $99.4 million, a decrease of $34.0 million from cash provided in the prior year period of $133.4 million.  Cash was provided through an increase in net income of $6.7 million, a $7.4 million decrease in trading securities, an increase in investment advisory fees receivables collected of $5.1 million, a $3.4 million increase in stock compensation, an increase of $1.2 million in donated securities and $1.1 million from other sources.  Reducing cash was a decrease in compensation payable of $14.9 million, a $10.6 million decrease in net contributions and distributions to/from partnerships, a decrease in receivable from brokers of $20.5 million, a $5.9 million reduction to accrued expenses and other liabilities and a decrease of $7.0 million in other assets.  Cash provided by investing activities, related to purchases and proceeds from sales of available for sale securities, was $1.7 million in the first six months of 2014.  Cash used in financing activities in the first six months of 2014 was $4.1 million, including $3.1 million paid in dividends, and $17.7 million paid for the purchase of treasury stock less $15.6 million in net contributions from redeemable noncontrolling interests and $1.6 million in proceeds from exercise of stock options.

For the six months ended June 30, 2013, cash provided by operating activities was $133.4 million.  Cash provided by investing activities, related to purchases and proceeds from sales of available for sale securities, was $18.7 million in the first six months of 2013.  Cash used in financing activities in the first six months of 2013 was $119.9 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 June 30, 2014.  At June 30, 2014, G.research had net capital, as defined, of approximately $2.6 million, exceeding the regulatory requirement by approximately $2.3 million, and G.distributors had net capital, as defined, of approximately $3.0 million, exceeding the regulatory requirement by approximately $2.7 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.

35

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 substantially all 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 $225.6 million and investments in sponsored registered investment companies of $40.8 million at June 30, 2014 were investments in United States Treasury Bills and Notes of $24.0 million, open-end funds and closed-end funds, largely invested in equity products, of $45.8 million, a selection of common and preferred stocks totaling $195.9 million, and other investments of approximately $0.7 million.  In addition, we may alter our investment holdings from time to time in response to changes in market risks and other factors considered appropriate by management.  Of the approximately $195.9 million invested in common and preferred stocks at June 30, 2014, $39.3 million represented our investment in Westwood Holdings Group Inc., and $56.3 million was invested by the Company in risk arbitrage opportunities in connection with mergers, consolidations, acquisitions, tender offers or other similar transactions.  Risk arbitrage generally involves announced deals with agreed upon terms and conditions, including pricing, which typically involve less market risk than common stocks held in a trading portfolio.  The principal risk associated with risk arbitrage transactions is the inability of the companies involved to complete the transaction.  Securities sold, not yet purchased are stated at fair value and are subject to market risks resulting from changes in price and volatility.  At June 30, 2014, the fair value of securities sold, not yet purchased was $14.3 million.  Investments in partnerships totaled $107.9 million at June 30, 2014, $55.6 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 June 30, 2014 and December 31, 2013.  The sensitivity analysis assumes a 10% increase or decrease in the value of these investments (in thousands):


 
 
   
Fair Value
   
Fair Value
 
 
 
   
assuming
   
assuming
 
 
 
   
10% decrease in
   
10% increase in
 
  (unaudited)
 
Fair Value
   
equity prices
   
equity prices
 
At June 30, 2014:
 
   
   
 
Equity price sensitive investments, at fair value
 
$
262,384
   
$
236,146
   
$
288,622
 
At December 31, 2013:
                       
Equity price sensitive investments, at fair value
 
$
291,346
   
$
262,211
   
$
320,481
 
 
                       

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 June 30, 2014 cash and cash equivalent balance of $307.5 million, a 1% increase in interest rates would increase our interest income by $3.1 million annually.  Given that our current return on these cash equivalent investments in this low interest rate environment is approximately 0.0% annually, an analysis of a 1% decrease is not meaningful.

36

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 2013 Annual Report on Form 10-K filed with the SEC on March 6, 2014 for details on Critical Accounting Policies.
 
Item 3.  Quantitative and Qualitative Disclosures About Market Risk
 
In the normal course of its business, GAMCO is exposed to risk of loss due to fluctuations in the securities market and general economy. Management is responsible for identifying, assessing and managing market and other risks. 

Our exposure to pricing risk in equity securities is directly related to our role as financial intermediary and advisor for AUM in our affiliated open-end and closed-end funds, institutional and private wealth management accounts, and investment partnerships as well as our proprietary investment and trading activities.  At June 30, 2014, we had equity investments, including open-end funds largely invested in equity products, of $266.4 million.  Investments in open-end funds and closed-end funds, $45.8 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 $107.9 million, of which $55.6 million were invested in partnerships which invest in risk arbitrage.  Risk arbitrage is primarily dependent upon deal closure rather than the overall market environment.  The equity investment portfolio is at fair value and will move in line with the equity markets.  The trading portfolio changes 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 June 30, 2014.  Disclosure controls and procedures as defined under the Exchange Act Rule 13a-15(e), are designed to ensure that the information we are required to disclose in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time period specified in SEC rules and regulations.  Disclosure controls and procedures include, without limitation, controls and procedures accumulated and communicated to our management, including our Chief Executive Officer ("CEO"), Chief Financial Officer ("CFO"), and Co-Chief Accounting Officers ("CAOs"), to allow timely decisions regarding required disclosure.  Our CEO, CFO, and CAOs participated in this evaluation and concluded that, as of the date of June 30, 2014, 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.
37


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.  For any 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 June 30, 2014:

 
 
   
   
(c) Total Number of
   
(d) Maximum
 
 
 
(a) Total
   
(b) Average
   
Shares Repurchased as
   
Number of Shares
 
 
 
Number of
   
Price Paid Per
   
Part of Publicly
   
That May Yet Be
 
 
 
Shares
   
Share, net of
   
Announced Plans
   
Purchased Under
 
Period
 
Repurchased
   
Commissions
   
or Programs
   
the Plans or Programs
 
4/01/14 - 4/30/14
   
28,477
   
$
76.11
     
28,477
     
773,546
 
5/01/14 - 5/31/14
   
29,395
     
76.10
     
29,395
     
744,151
 
6/01/14 - 6/30/14
   
45,656
     
79.86
     
45,656
     
698,495
 
Totals
   
103,528
   
$
77.76
     
103,528
         
 
                               

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

38


SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

GAMCO INVESTORS, INC.
(Registrant)

By: /s/ Kieran Caterina
 
By: /s/ Diane M. LaPointe
 
Name: Kieran Caterina
Name: Diane M. LaPointe
Title:   Co-Chief Accounting Officer
Title:   Co-Chief Accounting Officer
 
 
Date: August 5, 2014
Date: August 5, 2014
39