GAMCO INVESTORS, INC. ET AL - Annual Report: 2016 (Form 10-K)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

[x]	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2016

or

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

For the transition period from ______ to ______

Commission file number 001-14761

GAMCO Investors, Inc.

(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code (914) 921-3700

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act Yes ☐ No ☒.

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act Yes ☐ No ☒.

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 Website, 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K ☐.

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, 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):

Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2) Yes ☐ No ☒.

The aggregate market value of the class A common stock held by non-affiliates of the registrant as of June 30, 2016 (the last business day of the registrant’s most recently completed second fiscal quarter) was $198,505,389.

As of March 1, 2017, 10,251,182 shares of class A common stock and 19,092,201 shares of class B common stock were outstanding. 18,373,741 shares of class B common stock were held by a subsidiary of GGCP, Inc.

DOCUMENTS INCORPORATED BY REFERENCE: Portions of the registrant’s definitive proxy statement relating to the 2017 Annual Meeting of Shareholders are incorporated by reference in Items 10, 11, 12, 13 and 14 of Part III of this report.

PART I

Forward-Looking Statements

Our disclosure and analysis in this report and in documents that are incorporated by reference contain some forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. 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.  You should not place undue reliance on these statements.  They use words such as “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe,” and other words and terms of similar meaning.  They also appear in any discussion of future operating or financial performance. In particular, these include statements relating to future actions, future performance of our products, expenses, the outcome of any legal proceedings, and financial results.

 

Although we believe that we are basing our expectations and beliefs on reasonable assumptions within the bounds of what we currently know about our business and operations, there can be no assurance that our actual results will not differ materially from what we expect or believe. Some of the factors that could cause our actual results to differ from our expectations or beliefs include, without limitation: the adverse effect from a decline in the securities markets; a decline in the performance of our products; a general downturn in the economy; changes in government policy or regulation; changes in our ability to attract or retain key employees; and unforeseen costs and other effects related to legal proceedings or investigations of governmental and self-regulatory organizations. We also direct your attention to any more specific discussions of risk contained in Item 1A below and in our other public filings or in documents incorporated by reference here or in prior filings or reports.

 

We are providing these statements as permitted by the Private Litigation Reform Act of 1995. We do not undertake to update publicly any forward-looking statements if we subsequently learn that we are unlikely to achieve our expectations or if we receive any additional information relating to the subject matters of our forward-looking statements.

Unless we have indicated otherwise, or the context otherwise requires, references in this report to “GAMCO Investors, Inc.,” the “Company,” “GBL,” “Gabelli,” “we,” “us” and “our” or similar terms are to GAMCO Investors, Inc., its predecessors and its subsidiaries.

Overview

GAMCO Investors, Inc. (New York Stock Exchange (“NYSE”): GBL), a company incorporated under the laws of Delaware, is a widely-recognized provider of investment advisory services to open and closed-end funds, institutional and private wealth management investors principally in the United States.   We generally manage assets on a discretionary basis and invest in securities through various investment styles.  Our revenues are based primarily on assets under management (“AUM”) and to a lesser extent, incentive fees.

 

Since our inception in 1977, we are identified with our research driven approach to equity investing and our proprietary Private Market Value (PMV) with a Catalyst™ stock selection process.  Over the last 39 years, the firm has generated over $25.2 billion in investment returns for our institutional and private wealth management clients.

 

As of December 31, 2016, we had $39.7 billion of AUM, of which 95% is invested in equities, principally through our two registered investment advisers: GAMCO Asset Management Inc. (“Institutional and Private Wealth Management”) and Gabelli Funds, LLC (“Funds”).  G.distributors, LLC (“G.distributors”) acts as an underwriter and distributor of our open-end funds.

 

Our AUM are organized into three groups:

 

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Institutional and Private Wealth Management: We provide advisory services to a broad range of investors, including corporate retirement plans, foundations, endowments, jointly-trusteed plans and public funds, private wealth clients and also serve as sub-advisor to third party investment funds including registered investment companies (“Institutional and Private Wealth Management”).   On December 31, 2016, we had $17.3 billion of Institutional and Private Wealth Management AUM.

●

Open and Closed-End Funds: We provide advisory services to twenty-one open-end funds, fifteen closed-end funds and one exchange traded managed fund under the Gabelli, GAMCO and Comstock brands (collectively, the “Funds”).  The Funds had $22.4 billion of AUM on December 31, 2016.  Additionally, we provide administrative services to seven open-end funds, with AUM of $1.3 billion on December 31, 2016, under the TETON Westwood brand.

●

SICAV: We provide advisory services to one fund under the GAMCO brand, the GAMCO International SICAV (the “SICAV”).  The SICAV has two sub-fund strategies, the GAMCO Merger Arbitrage Fund and the GAMCO All Cap Value Fund.  The GAMCO All Cap Value strategy had $50 million of AUM on December 31, 2016.  The GAMCO Merger Arbitrage strategy is managed by Associated Capital Group, Inc. (“AC”).

GBL is a holding company incorporated in April 1998 in advance of our initial public offering (“Offering”) in February 1999.  GGCP Holdings, LLC, a subsidiary of GGCP, Inc. owns a majority of the outstanding shares of Class B Common Stock (“Class B Stock”) of GBL.  Such ownership represented approximately 91% of the combined voting power of the outstanding common stock and approximately 62% of the equity interest on December 31, 2016.  Gabelli & Company Investment Advisers Inc. (“GCI”) (formerly called Gabelli Securities, Inc.), a majority controlled subsidiary of AC, owns 4,393,055 shares of Class A Common Stock (“Class A Stock”) representing approximately 15% of the equity interest and approximately 2% of the combined voting power on December 31, 2016.  GGCP, Inc. is majority-owned by Mr. Mario J. Gabelli (“Mr. Gabelli”).   AC is majority-owned by GGCP Holdings, LLC.  Accordingly, Mr. Gabelli is deemed to control GBL.

Our principal executive offices are located at One Corporate Center, Rye, New York 10580.  Our telephone number is (914) 921-3700.  We post or provide a link on our website, www.gabelli.com, to the following filings as soon as reasonably practicable after they are electronically filed with or furnished to the Securities and Exchange Commission (“Commission” or “SEC”): our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934.  All such filings on our website are available free of charge.

On March 20, 2009, we distributed our ownership in Teton Advisors, Inc. ("Teton"), the advisor to the TETON Westwood funds, to our shareholders.  At the time of the distribution the stock price of Teton was $2.75 per share.  At December 31, 2016 the stock price of Teton was $41.00 per share.

On November 30, 2015, we distributed our ownership in AC along with certain cash and other assets, to our shareholders.  AC owns and operates, directly or indirectly, the alternatives and the institutional research businesses previously owned and operated by GBL.  Subsequent to the Spin-off, GAMCO no longer consolidates the financial results of AC for the purposes of its own financial reporting and the historical financial results of AC have been reflected in the Company’s consolidated financial statements as discontinued operations for 2015 and 2014 within this report.  Historical AUM have similarly been adjusted to remove AUM managed by AC.

During 2016, we returned $13.2 million to shareholders through dividends and our stock buyback program.  We paid $2.4 million, or $0.08 per share, in cash dividends to our common shareholders and repurchased 348,687 shares at an average investment of $30.88 per share or $10.8 million.

Since the Offering, we have returned to shareholders $1.9 billion in total, of which $1.0 billion was in the form of spin-offs of Teton and AC, $488.6 million was from dividends and $438.8 million was through stock buybacks.

Business Strategy

 

Our business strategy targets global growth of the franchise through continued leveraging of our proven asset management strengths including our brands, long-term performance record, diverse product offerings and experienced investment, research and client relationship professionals.  In order to achieve performance and growth in AUM and profitability, we are pursuing a strategy which includes the following key elements:

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Gabelli “Private Market Value (PMV) with a CatalystTM” Investment Approach. While we have expanded our investment product offerings, our “value investing” approach remains the core of our business.  This method is based on and has evolved from the value investing principles articulated by Graham & Dodd in 1934 and enhanced by Roger Murray and Bruce Greenwald, and has been further augmented by Mr. Gabelli, CFA, with his development of Private Market Value (PMV) with a CatalystTM value investment methodology..

Private Market Value (PMV) with a Catalyst^TM investing is a disciplined, research-driven approach based on intensive security analysis.  In this process, we generally select stocks whose intrinsic value, based on our estimate of current asset value and future growth and earnings power, is significantly different from the value reflected in the public market.  We then calculate the stock’s PMV, which is defined as the price an informed industrial buyer would likely pay to acquire the business.

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Establishing Relationship Offices. We have nine offices including New York, Chicago, Greenwich, London, Morristown, Palm Beach, Reno, St. Louis, and Tokyo.  We will continue to evaluate adding additional offices throughout the world.

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Incentive Fees. SSince a growing percentage of the firm's revenues may be directly linked to performance-based fees (largely recognized in the fourth quarter), this may increase the variability of our revenues and profits.  As of December 31, 2016, approximately $2.5 billion of our AUM are managed on a performance fee basis including $1.4 billion of Institutional and Private Wealth Management assets, $729 million of preferred issues of closed-end funds and $348 million in The GDL Fund.

●

Expanding Mutual Fund Distribution. We continue to expand our distribution network primarily through national and regional brokerage firms and have developed additional classes of shares for most of our mutual funds for sale through these firms and other third party distribution channels.  We have increased our wholesaling efforts to market the multi-class shares, which have been designed to meet the needs of investors who seek advice through financial consultants.  During 2016, we launched our first exchange traded managed fund.

●

Increasing Presence in Private Wealth Management Market. Our private wealth management business focuses, in general, on serving clients who have established an account relationship of $2.5 million or more with us.  According to industry estimates, the number of households with over $2.5 million in investable assets will continue to grow, subject to ups and downs in the equity and fixed income markets.  With our 39-year history of serving this segment, long-term performance record, customized portfolios tax-sensitive investment strategy, brand name recognition and broad array of product offerings, we believe that we are well-positioned to capitalize on the growth opportunities in this market.

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Increasing Marketing for Institutional and Private Wealth Management. The Institutional and Private Wealth Management business was principally developed through direct marketing channels.  We plan to augment our institutional sales force through the addition of staff to market directly to the consultant community as well as through our traditional marketing channels.

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Attracting and Retaining Experienced Professionals. We offer significant variable compensation that provides opportunities to our staff.  The ability to attract and retain highly-experienced investment and other professionals with a long-term commitment to us and our clients has been, and will continue to be, a significant factor in our long-term growth.

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Hosting of Institutional Investor Symposiums. We have a tradition of sponsoring institutional investor symposiums that bring together prominent portfolio managers, members of academia and other leading business professionals to present, discuss and debate current issues and topics in the investment industry.  These symposiums have included:

 

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Capitalizing on Acquisitions, Alliances and Lift-outs. We intend to selectively and opportunistically pursue acquisitions, alliances and lift-outs that will broaden our product offerings and add new sources of distribution.   On October 1, 1999, we completed our alliance with Mathers and Company, Inc. and now act as investment advisor to the GAMCO Mathers Fund, and in May 2000, we added Comstock Partners Funds, Inc., (renamed Comstock Funds, Inc.).  The Mathers and Comstock funds are part of our Non-Market Correlated mutual fund product line.  In November 2002, we completed our alliance with Woodland Partners LLC, a Minneapolis-based investment advisor focused on investing in small capitalization companies.  On March 11, 2008, Gabelli Funds, LLC (“Funds Advisor”) assumed the role of investment advisor to the AXA Enterprise Mergers and Acquisitions Fund, subsequently renamed Gabelli Enterprise Mergers and Acquisitions Fund, a fund that had been sub-advised by GAMCO since the fund’s inception on February 28, 2001.  On August 1, 2010, the clients of Florida-based NMF Asset Management became part of the Institutional and Private Wealth Management operation of GAMCO Asset Management Inc. (“GAMCO Asset”).  On November 2, 2015, the investment team of Dinsmore Capital, a specialist in convertible bond investing and formerly the manager of The Bancroft Fund and the Ellsworth Growth & Income Fund joined Gabelli Funds.

We believe that our growth to date is traceable to the following factors:

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Strong Industry Fundamentals: According to data compiled by the U.S. Federal Reserve, the investment management industry has grown faster than more traditional segments of the financial services industry, including the banking and insurance industries. Since GBL began managing assets for institutional and private wealth management clients in 1977, world equity markets have grown at a 10.0% compound annual growth rate through December 31, 2016 to approximately $66.9 trillion(a).  The U.S. equity market comprises about $25.3 trillion(a) or roughly 38% of world equity markets.  We believe that demographic trends and the growing role of money managers in the placement of capital compared to the traditional role played by banks and life insurance companies will result in continued growth of the investment management industry.

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Long-Term Performance: We have a superior long-term record of achieving relatively high returns for our Institutional and Private Wealth Management clients.  We believe that our performance record represents a competitive advantage and a recognized component of our franchise.

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Stock Market Gains: Since we began managing for institutional and private wealth management clients in 1977, our traditional value-oriented Institutional and Private Wealth Management composite has earned a compound annual return of 16.2% gross and 15.3% net of fees versus a compound annual return of 11.5% for the S&P 500 through December 31, 2016.  For 2016, the GAMCO composite rose 16.7% gross and 16.3% net of fees versus a gain of 12.0% for the S&P 500.

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Widely-Recognized “Gabelli” and “GAMCO” Brand Names: For much of our history, our portfolio managers and investment products have been featured in a variety of financial print media, including both U.S. and international publications such as The Wall Street Journal, Financial Times, Money Magazine, Barron's, Fortune, Business Week, Nikkei Financial News, Forbes Magazine, Consumer Reports and Investor's Business Daily.  We also underwrite publications written by our investment professionals, including  Deals…Deals…and More Deals, which examines the history and current practice of merger arbitrage and is published in English, Japanese, Chinese and Italian, Global Convertible Investing: The Gabelli Way, a comprehensive guide to effective investing in convertible securities.

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Diversified Product Offerings: Since the inception of our investment management activities, we have sought to expand the breadth of our product offerings.  We currently offer a wide spectrum of investment products and strategies, including product offerings in U.S. equities, U.S. fixed income, global and international equities, and convertible securities.

Business Description

Our AUM's are clustered in two groups:  Institutional and Private Wealth Management and Funds.

Institutional and Private Wealth Management:   At December 31, 2016, we had $17.3 billion of AUM in approximately 1,700 Institutional and Private Wealth Management accounts, representing 43.6% of our total AUM.  The Private Wealth Management clients – defined as individuals generally having minimum investable assets of $5 million comprised approximately 79% of the total number of management accounts and approximately $5.0 billion, or 29%, of the Institutional and Private Wealth Management assets as of December 31, 2016.  We believe that Private Wealth Management clients for the taxable portion of their assets are attracted to us by our returns and the tax efficient nature of the underlying investment process.  As of December 31, 2016, institutional client accounts represented approximately $6.9 billion, or 40%, of the Institutional and Private Wealth Management assets and 9% of the accounts.  Foundation and endowment fund assets represented 11% of the number of Institutional and Private Wealth Management accounts and approximately $1.6 billion, or 9%, of the Institutional and Private Wealth Management AUM.  The sub-advisory clients, (where we act as sub-advisor to third party investment funds) held approximately $3.8 billion, or 22%, of total Institutional and Private Wealth Management assets with 1% of the total number of accounts.

 

The ten largest Institutional and Private Wealth Management relationships comprised approximately 43% of GAMCO Asset Management AUM and approximately 19% of our total AUM and approximately 27% of GAMCO Asset Management revenues and approximately 8% of our total revenues for the year ended December 31, 2016.

 

In general, our Institutional and Private Wealth Management AUM are managed to meet the specific needs and objectives of each client by utilizing investment strategies that are within our areas of expertise: “all cap value”, “large cap value”, “small cap value”, “large cap growth”, “international growth” and “convertible”.  

(a) Source: Birinyi Associates, LLC

Investment advisory agreements for our Institutional and Private Wealth Management clients are typically subject to termination by the client without penalty on 30 days’ notice or less.

 

Funds:  We provide advisory services to twenty-one open-end funds, fifteen closed-end funds and one exchange traded managed fund.  At December 31, 2016, we had $22.4 billion of AUM in Fund AUM, representing 56.4% of our total AUM.  Our equity funds and closed-end funds were $20.6 billion in AUM on December 31, 2016, 1.5% ahead of the $20.3 billion on December 31, 2015.

Open-end Funds

 

On December 31, 2016, we had $13.5 billion of AUM in twenty open-end equity funds and $1.8 billion in our Gabelli U.S. Treasury Money Market Fund.  We market our open-end funds primarily through third party distribution programs, including no-transaction fee (“NTF”) programs, and have developed additional share classes for many of our funds for distribution through additional third party distribution channels.  At December 31, 2016, third party distribution programs accounted for approximately 79% of all assets in open-end equity funds.  At December 31, 2016, approximately 21% of our AUM in open-end, equity funds was sourced through direct sales relationships.

Closed-end Funds

 

We act as investment advisor to fifteen closed-end funds, fourteen of which trade on the NYSE or its affiliated exchange: Gabelli Equity Trust (GAB), GDL Fund (GDL), Gabelli Multimedia Trust (GGT), Gabelli Healthcare & Wellness ^Rx Trust (GRX), Gabelli Convertible and Income Securities Fund (GCV), Gabelli Utility Trust (GUT), Gabelli Dividend & Income Trust (GDV), Gabelli Global Utility & Income Trust (GLU), GAMCO Global Gold, Natural Resources & Income Trust (GGN), GAMCO Natural Resources, Gold & Income Trust (GNT), The Gabelli Global Small and Mid Cap Value Trust (GGZ), the Bancroft Fund Ltd. (BCV), the Ellsworth Growth and Income Fund Ltd. (ECF), and the Gabelli Go Anywhere Trust (GGO).  In 2015, we launched the Gabelli Value Plus+ Trust Plc (GVP) that trades on the London Stock Exchange.  As of December 31, 2016, the fifteen closed-end funds had total assets of $7.2 billion, representing 32.1% of the total assets in our Funds business.

Exchange Traded Managed Funds

During 2016, we launched our first exchange traded managed fund (“ETMF”).  The Gabelli Media Mogul NextShares trades on the Nasdaq Stock Market LLC under the symbol “MOGLC” and is the first member of the Gabelli NextShares Trust offered under an agreement with NextShares Solutions, LLC.  As of December 31, 2016, the one ETMF had AUM of $2.2 million.

Assets Under Management

The following table sets forth total AUM by product type as of the dates shown:

Assets Under Management

By Product Type

(Dollars in millions)

 

(a)	The Fund is 100% invested in short-term U.S. Treasury obligations which have remaining maturities of 397 days or less.

(b)	Historical AUM has been restated to remove the AUM managed by AC.

Summary of Investment Products

We manage assets in the following wide spectrum of investment products and strategies, many of which are focused on fast-growing areas:

Additional Information on Mutual Funds

Through Funds Advisor, we act as advisor to all of the Funds, except with respect to the GAMCO Mathers Fund for which GAMCO Asset Management Inc. act as the advisor.

Shareholders of the open-end funds are allowed to exchange shares among the same class of shares of the other open-end funds as economic and market conditions and investor needs change at no additional cost.  However, as noted below, certain open-end funds impose a 2% redemption fee on shares redeemed within seven days or less after a purchase.  We periodically introduce new funds designed to complement and expand our investment product offerings, respond to competitive developments in the financial marketplace and meet the changing needs of investors.

 

Our marketing efforts for the open-end funds are currently focused on increasing the distribution and sales of our existing funds as well as creating new products for sale through our distribution channels.  We believe that our marketing efforts for the funds will continue to generate additional revenues from investment advisory fees.  We had traditionally distributed most of our open-end funds by using a variety of direct response marketing techniques, including telemarketing and advertising, and as a result we maintain direct relationships with many of our no-load open-end fund shareholders.  Beginning in late 1995, we expanded our product distribution by offering several of our open-end funds through third party distribution programs, including NTF programs.  In 1998 and 1999, we further expanded these efforts to include substantially all of our open-end funds in third party distribution programs.  Approximately 21% of the AUM in the open-end equity funds are still attributable to our direct response marketing efforts.  Third party distribution programs have become an increasingly important source of asset growth for us.  Of the $13.5 billion of AUM in the open-end equity funds as of December 31, 2016, approximately 79% were generated through third party distribution programs.  We are responsible for paying the service and distribution fees charged by many of the third party distribution programs, although a portion of such service fees under certain circumstances are payable by the funds.  The multi-class shares are available in all of the Gabelli Funds, with the exception of the Gabelli Capital Asset Fund and the GAMCO Mathers Fund.  We believe that the use of multi-class shares expands the distribution of our open-end funds into the advised sector of the mutual fund investment community.  We introduced Class I shares, which are no-load shares with higher minimum initial investment and without distribution fees available directly through G.distributors or brokers that have entered into selling agreements with respect to Class I shares.  The no-load shares are designated as Class AAA shares and are available for new and current investors.  In general, distribution through third party programs has greater variable cost components and lower fixed cost components than distribution through our traditional direct sales methods.

We provide investment advisory and management services pursuant to an investment management agreement with each fund.  The investment management agreements with the funds generally provide that we are responsible for the overall investment and administrative services, subject to the oversight of each fund's Board of Directors or Trustees and in accordance with each fund's fundamental investment objectives and policies.  The investment management agreements permit us to enter into separate agreements for administrative and accounting services on behalf of the respective funds.

Our affiliated advisors provide the funds with administrative services pursuant to the management contracts.  Such services include, without limitation, supervision of the calculation of net asset value, preparation of financial reports for shareholders of the funds, internal accounting, tax accounting and reporting, regulatory filings and other services.  Most of these administrative services are provided through sub-contracts with independent third parties.  Transfer agency and custodial services are provided directly to the funds by independent third parties.

Our funds’ investment management agreements may continue in effect from year to year only if specifically approved at least annually by (i) the fund's Board of Directors or Trustees or (ii) the fund's shareholders and, in either case, the vote of a majority of the fund's directors or trustees who are not parties to the agreement or “interested persons” of any such party, within the meaning of the Investment Company Act of 1940 as amended (the “Company Act”).  Each fund may terminate its investment management agreement at any time upon 60 days' written notice by (i) a vote of the majority of the Board of Directors or Trustees cast in person at a meeting called for the purpose of voting on such termination or (ii) a vote at a meeting of shareholders of the lesser of either 67% of the voting shares represented in person or by proxy (if at least 50% of the shares are present at the meeting) or 50% of the outstanding voting shares of such Fund.  Each investment management agreement automatically terminates in the event of its assignment, as defined in the Company Act.  We may terminate an investment management agreement without penalty on 60 days' written notice.

Open-End Fund Distribution

G.distributors, a wholly-owned subsidiary of GBL, is a broker-dealer registered under the Securities Exchange Act of 1934 and is regulated by FINRA.  G.distributors' revenues are derived primarily from the distribution of our open-end funds.  G.distributors distributes our open-end funds pursuant to distribution agreements with each fund.  It also distributes the TETON Westwood Funds.  Under each distribution agreement with an open-end fund, G.distributors offers and sells such open-end fund's shares on a continuous basis and pays the majority of the costs of marketing and selling the shares, including printing and mailing prospectuses and sales literature, advertising and maintaining sales and customer service personnel and sales and services fulfillment systems, and payments to the sponsors of third party distribution programs, financial intermediaries and G.distributors sales personnel.  G.distributors receives fees for such services pursuant to distribution plans adopted under provisions of Rule 12b-1 (“12b-1”) of the Company Act.  Distribution fees from the open-end funds are computed daily based on average net assets.  Distribution fees from the open-end funds amounted to $41.0 million, $47.7 million and $56.1 million while payments to third-parties for selling the open-end funds totaled $39.7 million, $45.8 million and $53.8 million for the years ended December 31, 2016, 2015 and 2014, respectively.  G.distributors is the principal underwriter for funds distributed in multiple classes of shares which carry either a front-end, back-end or no sales charge.  Underwriting fees and sales charges retained amounted to $1.2 million, $1.0 million and $2.7 million for the years ended December 31, 2016, 2015 and 2014, respectively.

 

Under the distribution plans, the open-end Class AAA shares of the funds (except The Gabelli U.S. Treasury Money Market Fund, Gabelli Capital Asset Fund and The Gabelli ABC Fund) and the Class A and V shares of various funds pay G.distributors a distribution or service fee of .25% per year (except the Class A shares of the TETON Westwood Funds and Gabelli Enterprise Mergers & Acquisition Fund which pay .50% and 0.45% per year, respectively, and the TETON Westwood Intermediate Bond Fund which pays .35%) on the average daily net assets of the fund.  Class C shares have a 12b-1 distribution plan with a service and distribution fee totaling 1%.  Class B shares were discontinued in 2014.  G.distributors’ distribution agreements with the funds may continue in effect from year to year only if specifically approved at least annually by (i) the fund's Board of Directors or Trustees or (ii) the fund's shareholders and, in either case, the vote of a majority of the fund's directors or trustees who are not parties to the agreement or “interested persons” of any such party, within the meaning of the Company Act.  Each fund may terminate its distribution agreement, or any agreement thereunder, at any time upon 60 days' written notice by (i) a vote of the majority of its directors or trustees cast in person at a meeting called for the purpose of voting on such termination or (ii) a vote at a meeting of shareholders of the lesser of either 67% of the voting shares represented in person or by proxy (if at least 50% of the shares are present at the meeting) or 50% of the outstanding voting shares of such fund. Each distribution agreement automatically terminates in the event of its assignment, as defined in the Company Act.  G.distributors may terminate a distribution agreement without penalty upon 60 days' written notice.

 

Competition

We compete with other investment management firms and mutual fund companies, insurance companies, banks, brokerage firms and other financial institutions that offer products that have similar features and investment objectives.  Many of these investment management firms are subsidiaries of large diversified financial companies.  Many others are much larger in terms of AUM and revenues and, accordingly, have much larger sales organizations and marketing budgets.  Historically, we have competed primarily on the basis of the long-term investment performance of many of our investment products.  However, we have taken steps to increase our distribution channels, brand name awareness and marketing efforts.

 

The market for providing investment management services to Institutional and Private Wealth Management clients is also highly competitive.  Approximately 34% of our investment advisory fee revenue for the year ended December 31, 2016 was derived from our Institutional and Private Wealth Management business.  Selection of investment advisors by U.S. institutional investors is often subject to a screening process and to favorable recommendations by investment industry consultants.  Many of these investors require their investment advisors to have a successful and sustained performance record, often five years or longer with focus also on one-year and three-year performance records.  We have significantly increased our AUM on behalf of U.S. institutional investors since our entry into the institutional asset management business in 1977.

Intellectual Property

Service marks and brand name recognition are important to our business.  We have rights to the service marks under which our products are offered.  We have registered certain service marks in the United States and will continue to do so as new trademarks and service marks are developed or acquired.  We have rights to use the “Gabelli” name, the “GAMCO” name, and other names.  Pursuant to an assignment agreement, Mr. Gabelli has assigned to us all of his rights, title and interests in and to the “Gabelli” name for use in connection with investment management services, mutual funds and securities brokerage services.  However, under the agreement, Mr. Gabelli will retain any and all rights, title and interests he has or may have in the “Gabelli” name for use in connection with (i) charitable foundations controlled by Mr. Gabelli or members of his family and (ii) entities engaged in private investment activities for Mr. Gabelli or members of his family.  In addition, the funds managed by Mr. Gabelli outside GBL have entered into a license agreement with us permitting them to continue limited use of the “Gabelli” name under specified circumstances.  We have taken, and will continue to take, action to protect our interests in these service marks.

Regulation

Virtually all aspects of our businesses are subject to various federal, state and foreign laws and regulations.  These laws and regulations are primarily intended to protect investment advisory clients and shareholders of investment funds. Under such laws and regulations, agencies that regulate investment advisors and broker-dealers have broad powers, including the power to limit, restrict or prohibit such an advisor or broker-dealer from carrying on its business in the event that it fails to comply with such laws and regulations.  In such an event, the possible sanctions that may be imposed include civil and criminal liability, the suspension of individual employees, injunctions, limitations on engaging in certain lines of business for specified periods of time, revocation of the investment advisor and other registrations, censures, and fines.

Our business is subject to extensive regulation at the federal, state and foreign level by the SEC and other regulatory bodies.  Certain of our subsidiaries are registered with the SEC under the Investment Advisers Act of 1940 (“Advisers Act”), and the funds are registered with the SEC under the Company Act.  We also have a subsidiary that is registered as a broker-dealer with the SEC and is subject to regulation by FINRA and various states.

 

The subsidiaries of GBL that are registered with the Commission under the Advisers Act (Funds Advisor, Gabelli Fixed Income LLC and GAMCO Asset) are regulated by and subject to examination by the SEC.  The Advisers Act imposes numerous obligations on registered investment advisors including fiduciary duties, disclosure obligations and record keeping, operational and marketing requirements.  The Commission is authorized to institute proceedings and impose sanctions for violations of the Advisers Act, ranging from censure to termination of an investment advisor's registration.  The failure of an advisory subsidiary to comply with the requirements of the SEC could have a material adverse effect on us.

We derive a substantial majority of our revenues from investment advisory services through our various investment management agreements.  Under the Advisers Act, our investment management agreements may not be assigned without the client's consent.  Under the Company Act, advisory agreements with registered investment companies such as our Funds terminate automatically upon assignment.  The term “assignment” is broadly defined and includes direct as well as assignments that may be deemed to occur, under certain circumstances, upon the transfer, directly or indirectly, of a controlling interest in GBL.

 

In its capacity as a broker-dealer, G.distributors is required to maintain certain minimum net capital amounts.  These requirements also provide that equity capital may not be withdrawn, advances to affiliates may not be made or cash dividends paid if certain minimum net capital requirements are not met.  G.distributors’ net capital, as defined, met or exceeded all minimum requirements as of December 31, 2016.  As a registered broker-dealer, G.distributors is also subject to periodic examination by FINRA, the SEC and the states.

Subsidiaries of GBL are subject to the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), and to regulations promulgated thereunder, insofar as they are “fiduciaries” under ERISA with respect to certain of their clients. ERISA and applicable provisions of the Internal Revenue Code of 1986, as amended (the “Code”), impose certain duties on persons who are fiduciaries under ERISA and prohibit certain transactions involving ERISA plan clients.  Our failure to comply with these requirements could have a material adverse effect on us.

Investments by GBL and on behalf of our advisory clients and investment funds often represent a significant equity ownership position in an issuer's class of stock.  As of December 31, 2016, we had five percent or more beneficial ownership with respect to 112 equity securities.  This activity raises frequent regulatory, legal, and disclosure issues regarding our aggregate beneficial ownership level with respect to portfolio securities, including issues relating to issuers' shareholder rights plans or “poison pills,” and various federal and state regulatory limitations, including state gaming laws and regulations, federal communications laws and regulations and federal and state public utility laws and regulations, as well as federal proxy rules governing shareholder communications and federal laws and regulations regarding the reporting of beneficial ownership positions.  Our failure to comply with these requirements could have a material adverse effect on us.

 

The USA Patriot Act of 2001 contains anti-money laundering and financial transparency laws and mandates the implementation of various new regulations applicable to broker-dealers, mutual funds and other financial services companies, including standards for verifying client identification at account opening, and obligations to monitor client transactions and report suspicious activities.  Anti-money laundering laws outside of the U.S. contain some similar provisions.  Our failure to comply with these requirements could have a material adverse effect on us.

We and certain of our affiliates are subject to the laws of non-U.S. jurisdictions and non-U.S. regulatory agencies or bodies.  In connection with our office in London and our plans to market certain products in Europe, we are required to comply with the laws of the United Kingdom and other European countries regarding these activities.  Our subsidiary, GAMCO Asset Management (UK) Limited, is regulated by the Financial Conduct Authority (“FCA”).  In connection with our registration in the United Kingdom, we have minimum capital requirements that have been consistently met or exceeded.  We opened offices in Shanghai and Tokyo and therefore are subject to national and local laws in those jurisdictions.  We are subject to requirements in numerous jurisdictions regarding reporting of beneficial ownership positions in securities issued by companies whose securities are publicly-traded in those countries.

Regulatory matters

The investment management industry is likely to continue facing a high level of regulatory scrutiny and become subject to additional rules designed to increase disclosure, tighten controls and reduce potential conflicts of interest.  In addition, the Commission has substantially increased its use of focused inquiries which request information from investment advisors and a number of fund complexes regarding particular practices or provisions of the securities laws.  We participate in some of these inquiries in the normal course of our business.  Changes in laws, regulations and administrative practices by regulatory authorities, and the associated compliance costs, have increased our cost structure and could in the future have a material adverse impact.  Although we have installed procedures and utilize the services of experienced administrators, accountants and lawyers to assist us in adhering to regulatory guidelines and satisfying these requirements, and maintain insurance to protect ourselves in the case of client losses, there can be no assurance that the precautions and procedures that we have instituted and installed, or the insurance that we maintain to protect ourselves in case of client losses, will protect us from all potential liabilities.

See Item 3: LEGAL PROCEEDINGS below.

Personnel

On February 28, 2017, we had a full-time staff of 156 individuals, of whom 40 served in the portfolio management, portfolio management support and trading areas (including 21 portfolio managers for the Funds, Institutional and Private Wealth Management), 55 served in the marketing and shareholder servicing areas and 61 served in the administrative area.

 

We caution the reader that the following risks and those risks described elsewhere in this report and in our other SEC filings could have a material adverse effect on our business, prospects, financial condition, results of operations or cash flow or could cause a decline in the Company’s stock price.

Risks Related to Our Industry

We earn substantially all of our revenue based on assets under management and therefore a reduction in assets under management would reduce our revenues and profitability.  Assets under management fluctuate based on many factors including: market conditions, investment performance, and terminations of investment contracts.

 

Substantially all of our revenues are directly related to the amount of our AUM. Under our investment advisory contracts with our clients, the investment advisory fees we receive are typically based on the market value of AUM.  In addition, we receive asset-based distribution and/or service fees with respect to the open-end funds managed by Funds Advisor or Teton Advisors, Inc. (“Teton”) over time pursuant to distribution plans adopted under provisions of Rule 12b-1 under the Company Act.  Rule 12b-1 fees typically are based on the average AUM and represented approximately 11.6%, 12.5% and 13.3% of our total revenues for the years ended December 31, 2016, 2015 and 2014, respectively.  Accordingly, a decline in the prices of securities generally may cause our revenues and net income to decline by either causing the value of our AUM to decrease, which would result in lower investment advisory and Rule 12b-1 fees, or causing our clients to withdraw funds in favor of investments they perceive to offer greater opportunity or lower risk, which would also result in lower fees.  The securities markets are highly volatile, and securities prices may increase or decrease for many reasons beyond our control, including but not limited to economic and political events, war (whether or not directly involving the U.S.), acts of terrorism, unanticipated changes in currency exchange rates, interest rates, inflation rates, the yield curve, defaults by derivative counterparties, bond default risks, sovereign debt crisis and other factors that are difficult or impossible to predict.  If a decline in securities prices caused our revenues to decline, it could have a material adverse effect on our earnings.

Changes in laws or regulations or in governmental policies and compliance with existing laws or regulations could limit the sources and amounts of our revenues, increase our costs of doing business, decrease our profitability and materially and adversely affect our business.

 

Our business is subject to extensive regulation in the United States, primarily at the federal level, including regulation by the SEC under the Company Act and the Advisers Act as well as other securities laws, by the Department of Labor under ERISA, and regulation by FINRA and state regulators. The Funds managed by Funds Advisor are registered with the SEC as investment companies under the Company Act.  The Advisers Act imposes numerous obligations on investment advisors, including record-keeping, advertising and operating requirements, fiduciary and disclosure obligations, custodial requirements and prohibitions on fraudulent activities.  The Company Act imposes similar obligations, as well as additional detailed operational requirements, on registered investment companies and investment advisors.  In addition, our businesses are also subject to regulation by the Financial Services Authority in the United Kingdom, and we are also subject to the laws of other non-U.S. jurisdictions and non-U.S. regulatory agencies or bodies.

Our failure to comply with applicable laws or regulations could result in fines, censure, suspensions of personnel or other sanctions, including revocation of our subsidiaries’ registrations as an investment advisor or broker-dealer.  Industry regulations are designed to protect our clients and investors in our funds and other third parties who deal with us and to ensure the integrity of the financial markets.  Our industry is frequently altered by new laws or regulations and by revisions to, and evolving interpretations of, existing laws and regulations, both in the U.S. and in other nations.  Changes in laws or regulations or in governmental policies could limit the sources and amounts of our revenues including but not limited to distribution revenue under the Company Act, increase our costs of doing business, decrease our profitability and materially and adversely affect our business.

 

To the extent we are forced to compete on the basis of price, we may not be able to maintain our current fee structure.

 

The investment management business is highly competitive and has relatively low barriers to entry.  To the extent we are forced to compete on the basis of price, we may not be able to maintain our current fee structure.  Although our investment management fees vary from product to product, historically we have competed primarily on the performance of our products and not on the level of our investment management fees relative to those of our competitors.  In recent years, however, there has been a trend toward lower fees in the investment management industry.  In order to maintain our fee structure in a competitive environment, we must be able to continue to provide clients with investment returns and service that make investors willing to pay our fees.  In addition, the board of directors or trustees of each fund managed by Funds Advisor must make certain findings as to the reasonableness of its fees.  We cannot be assured that we will succeed in providing investment returns and service that will allow us to maintain our current fee structure.  Fee reductions on existing or new business could have an adverse effect on our profit margins and results of operations.

 

We derive a substantial portion of our revenues from investment advisory contracts that may be terminated on short notice or may not be renewed by clients.

 

A substantial majority of our revenues are derived from investment management agreements and distribution arrangements.  Investment management agreements and distribution arrangements with the Funds are terminable without penalty on 60 days' notice (subject to certain additional procedural requirements in the case of termination by a Fund) and must be specifically approved at least annually, as required by law.  Such annual renewal requires, among other things, approval by the disinterested members of each Fund's board of directors or trustees.  Investment advisory agreements with our Institutional and Private Wealth Management clients are typically terminable by the client without penalty on 30 days' notice or less.  Any failure to renew or termination of a significant number of these agreements or arrangements would have a material adverse effect on us.

Investors in the open-end funds can redeem their investments in these funds at any time without prior notice, which could adversely affect our earnings.

 

Open-end fund investors may redeem their investments in those funds at any time without prior notice.  Investors may reduce the aggregate amount of AUM for any number of reasons, including investment performance, changes in prevailing interest rates and financial market performance.  In a declining stock market, the pace of mutual fund redemptions could accelerate.  Poor performance relative to other asset management firms tends to result in decreased purchases of mutual fund shares and increased redemptions of mutual fund shares.  The redemption of investments in mutual funds managed by Funds Advisor would adversely affect our revenues, which are substantially dependent upon the AUM in our funds.  If redemptions of investments in mutual funds caused our revenues to decline, it could have a material adverse effect on our earnings.

Certain changes in control of our company would automatically terminate our investment management agreements with our clients, unless our Institutional and Private Wealth Management clients consent and, in the case of Fund clients, the Funds’ boards of directors and shareholders vote to continue the agreements, and could prevent us for a two-year period from increasing the investment advisory fees we are able to charge our mutual fund clients.

 

Under the Company Act, an investment management agreement with a fund must provide for its automatic termination in the event of its assignment. The fund’s board and shareholders must vote to continue the agreement following its assignment, the cost of which ordinarily would be borne by us.  Under the Advisers Act, a client’s investment management agreement may not be “assigned” by the investment advisor without the client’s consent.  An investment management agreement is considered to be assigned to another party when a controlling block of the advisor’s ownership is transferred.  In our case, an assignment of our investment management agreements may occur if, among other things, we sell or issue a certain number of additional common shares in the future.  We cannot be certain that our clients will consent to assignments of our investment management agreements or approve new agreements with us if an assignment occurs.  Under the Company Act, if a fund’s investment advisor engages in a transaction that results in the assignment of its investment management agreement with the fund, the advisor may not impose an “unfair burden” on that fund as a result of the transaction for a two-year period after the transaction is completed.  The term “unfair burden” has been interpreted to include certain increases in investment advisory fees.  This restriction may discourage potential purchasers from acquiring a controlling interest in our company.

 

Catastrophic and unpredictable events could have a material adverse effect on our business.

 

A terrorist attack, political unrest, war (whether or not directly involving the U.S.), power failure, cyber-attack, technology failure, natural disaster or many other possible catastrophic or unpredictable events could adversely affect our future revenues, expenses and earnings by, among other things: causing disruptions in U.S., regional or global economic conditions; interrupting our normal business operations; inflicting employee casualties, including loss of our key executives; requiring substantial expenditures and expenses to repair, replace and restore normal business operations; and reducing investor confidence.

 

We have a disaster recovery plan to address certain contingencies, but it cannot be assured that this plan will be effective or sufficient in responding to, eliminating or ameliorating the effects of all disaster scenarios.  If our employees or vendors we rely upon for support in a catastrophic event are unable to respond adequately or in a timely manner, we may lose clients resulting in a decrease in AUM which may have a material adverse effect on revenues and net income.

The soundness of other financial institutions could adversely affect our business.

Financial services institutions are interrelated as a result of trading, clearing, counterparty or other relationships. We and the investments we manage may have exposure to many different industries and counterparties, and we routinely execute transactions with counterparties in the financial services industry, including: brokers and dealers, commercial banks, investment banks, clearing organizations, mutual and hedge funds, and other institutions. Many of these transactions expose us, or the accounts we manage, to credit risk in the event of the counterparty’s default.  There is no assurance that any such losses would not materially and adversely impact the Company’s revenues and earnings.

Risks Related to Our Business

Control by Mr. Gabelli of a majority of the combined voting power of our common stock may give rise to conflicts of interests.

 

Since our Offering in 1999, Mr. Gabelli, through his control and majority ownership of GGCP, has beneficially owned a majority of our outstanding Class B Stock, representing 91% of voting control.  As long as Mr. Gabelli indirectly beneficially owns a majority of the combined voting power of our common stock, he will have the ability to elect all of the members of our Board of Directors and thereby control our management and affairs, including determinations with respect to acquisitions, dispositions, borrowings, issuances of common stock or other securities, and the declaration and payment of dividends on the common stock.  In addition, Mr. Gabelli will be able to determine the outcome of matters submitted to a vote of our shareholders for approval and will be able to cause or prevent a change in control of our company.  As a result of Mr. Gabelli's control, none of our agreements with Mr. Gabelli and other companies controlled by him can be assumed to have been arrived at through “arm's-length” negotiations, although we believe that the parties endeavor to implement market-based terms.  There can be no assurance that we would not have received more favorable terms, or offered less favorable terms to, an unaffiliated party.

 

On February 6, 2008, Mr. Gabelli entered into an amended and restated employment agreement (the “2008 Employment Agreement”) with the Company, which was initially approved by the Company’s shareholders on November 30, 2007 and approved again on May 6, 2011 and May 5, 2015, and which limits his activities outside of the Company.  Under the 2008 Employment Agreement, the manner of computing Mr. Gabelli’s remuneration from GAMCO is unchanged.   

Mr. Gabelli has agreed that while he is employed by us he will not provide investment management services outside of GAMCO, except for certain permitted accounts.  These permitted accounts, excluding personal accounts, held assets at December 31, 2016 and 2015 of approximately $252.3 million and $266.8 million, respectively.  Mr. Gabelli continues to be a member of the team that manages the TETON Westwood Mighty Mites^SM Fund, whose advisor, Teton, was spun-off from GBL in March 2009.  The assets in the TETON Westwood Mighty Mites^SM Fund at December 31, 2016 were $1.1 billion.  The 2008 Employment Agreement may not be amended without the approval of the Compensation Committee and Mr. Gabelli.

We depend on Mr. Gabelli and other key personnel.

 

We are dependent on the efforts of Mr. Gabelli, our Chairman of the Board, Chief Executive Officer and the primary portfolio manager for a significant majority of our AUM.  The loss of Mr. Gabelli's services could have a material adverse effect on us.

 

In addition to Mr. Gabelli, our future success depends to a substantial degree on our ability to retain and attract other qualified personnel to conduct our investment management business including, Christopher Marangi and Kevin Dreyer, the other Co-Chief Investment Officers of the Value team.  The market for qualified portfolio managers is extremely competitive.  We anticipate that it will be necessary for us to add portfolio managers and investment analysts as we further diversify our investment products and strategies.  There can be no assurance, however, that we will be successful in our efforts to recruit and retain personnel.  In addition, our investment professionals and senior marketing personnel have direct contact with our Institutional and Private Wealth Management clients, which can lead to strong client relationships.  The loss of these personnel could jeopardize our relationships with certain Institutional and Private Wealth Management clients, and result in the loss of such accounts.  The loss of key management professionals or the inability to recruit and retain sufficient portfolio managers and marketing personnel could have a material adverse effect on our business.

 

There may be adverse effects on our business from a decline in the performance of the securities markets.

 

Our results of operations are affected by many economic factors, including the performance of the securities markets.  The securities markets in general have experienced significant volatility, and such volatility may continue or increase in the future.  At December 31, 2016, approximately 95% of our AUM were invested in portfolios consisting primarily of equity securities. Any decline in the securities markets, in general, and the equity markets, in particular, could reduce our AUM and consequently reduce our revenues.  In addition, any such decline in the equity markets, failure of these markets to sustain their prior levels of growth, or continued short-term volatility in these markets could result in investors withdrawing from the equity markets or decreasing their rate of investment, either of which would be likely to adversely affect us.  Also, from time to time, a relatively high proportion of the assets we manage may be concentrated in particular economic or industry sectors.  A general decline in the performance of securities in those industry sectors could have an adverse effect on our AUM and revenues.

 

Since the separation, certain of our directors and officers may have actual or potential conflicts of interest because of their positions or relationships with AC.

Since the separation of AC from GAMCO, Mario J. Gabelli has continued to serve as our Chairman and Chief Executive Officer and also serves as Executive Chairman of AC.  Marc Gabelli, a son of Mario J. Gabelli, continues to have responsibilities relating to GAMCO, including participating on GAMCO’s portfolio management team and also serves as a Director of AC.  Kevin Handwerker, GAMCO’s Executive Vice President, General Counsel and Secretary, also serves AC in the same capacities.  Douglas R. Jamieson has continued to serve as President and Director of GAMCO Asset Management Inc. and also serves as President and Chief Executive Officer of AC.  Agnes Mullady has continued to serve as President and COO of the Fund Division of Gabelli Funds, LLC and also serves as an Executive Vice President of AC.  In addition, some of our portfolio managers and employees will be provided to AC pursuant to the Transitional Services Agreement with AC and will be officers or employees of AC.  Such dual assignments could create, or appear to create, potential conflicts of interest when our and AC’s officers and directors face decisions that could have different implications for the two companies.

Also, some of our directors, executive officers, portfolio managers and teammates own shares of AC common stock and AC restricted stock awards (“RSAs”).

Mario J. Gabelli is deemed to control AC by his control of GGCP Holdings, LLC, an intermediate subsidiary of GGCP, Inc., a private company controlled by Mario J. Gabelli.

In addition, potential conflicts of interest could arise in connection with the resolution of any dispute that may arise between GAMCO and AC regarding the terms of the agreements governing the separation and the relationship thereafter between the companies. The executive officers and other personnel of AC who serve as directors or executive management of GAMCO may interpret these agreements in their capacity as AC employees in a manner that would adversely affect the business of GAMCO.

Also, certain subsidiaries of AC are investment advisers.  The executive officers and other personnel of AC who also serve as directors or executive management of GAMCO may be confronted with the possibility of making decisions in their AC capacity that would adversely affect the business of GAMCO.

Both GAMCO and AC expect to be vigilant in attempting to identify and resolve any potential conflicts of interest, including but not limited to the types described above, at the earliest possible time.  However, there can be no guarantee that the interests of GAMCO may not be adversely affected at some point by such a conflict.

Our reputation is critical to our success.

 

Our reputation is critical to acquiring, maintaining and developing relationships with our clients, Mutual Fund shareholders and third party intermediaries.   Misconduct by our staff, or even unsubstantiated allegations, could result not only in direct financial harm but also in harm to our reputation, causing injury to the value of our brands and our ability to retain or attract AUM.  Moreover, reputational harm may cause us to lose current employees and we may be unable to attract new employees with similar qualification or skills. Damage to our reputation could substantially reduce our AUM and impair our ability to maintain or grow our business, which could have a material adverse effect on us.

 

There is a possibility of losses associated with proprietary investment activities.

 

Currently, we maintain a relatively large proprietary investment position in securities.  Market fluctuations and other factors may result in substantial losses in our proprietary accounts, which could have an adverse effect on our balance sheet, reduce our ability or willingness to make new investments or impair our credit ratings.

 

Future investment performance could reduce revenues and other income.

 

Success in the investment management and mutual fund businesses is dependent on investment performance as well as distribution and client servicing.  Good performance generally stimulates sales of our investment products and tends to keep withdrawals and redemptions low, which generates higher management fees (which are based on the amount of AUM).  Conversely, poor performance, both in absolute terms and/or relative to peers and industry benchmarks, tends to result in decreased sales, increased withdrawals and redemptions in the case of the open-end Funds, and in the loss of Institutional and Private Wealth Management clients, with corresponding decreases in revenues to us.  Many analysts of the mutual fund industry believe that investment performance is the most important factor for the growth of open and closed-end funds, such as those we offer.  Failure of our investment products to perform well or failure of the Funds to maintain ratings or rankings could, therefore, have a material adverse effect on us.

In addition, when our investment products experience strong results relative to the market or other asset classes, clients' investments in our products may increase beyond their target levels, and we could, therefore, suffer withdrawals as our clients rebalance their investments to fit their asset allocation preferences.

Loss of significant Institutional and Private Wealth Management accounts could affect our revenues.

 

We had approximately 1,700 Institutional and Private Wealth Management accounts as of December 31, 2016, of which the ten largest accounts generated approximately 8% of our total revenues during the year ended December 31, 2016.  Account turnover for any reason would have an adverse effect on our revenues.  Notwithstanding performance, we have from time to time experienced account turnover of large Institutional and Private Wealth Management accounts as a result of corporate mergers and restructurings, and we could continue to lose accounts under these or other circumstances.

A decline in the market for closed-end funds could reduce our ability to raise future assets to manage.

 

Market conditions may preclude us from increasing the assets we manage in closed-end funds.  A significant portion of our recent growth in the assets we manage has resulted from public offerings of the common and preferred shares of closed-end funds.  We have raised approximately $4.9 billion in gross assets through closed-end fund offerings since January 2004.  The market conditions for these offerings may not be as favorable in the future, which could adversely impact our ability to grow our AUM and our revenue.

We rely on third party distribution programs.

 

A significant share of sales of our open-end funds come through third party distribution programs, which are programs sponsored by third party intermediaries that offer their mutual fund customers a variety of competing products and administrative services.  A substantial component of sales growth is from third party distribution programs with no transaction fees payable by the customer, which we refer to as NTF programs.  Approximately $4.2 billion of our AUM in the open-end equity funds as of December 31, 2016 were obtained through NTF programs.  The cost of participating in third party distribution programs is higher than our direct distribution costs, and it is anticipated that the cost of third party distribution programs will increase in the future.  Any increase would be likely to have an adverse effect on our profit margins and results of operations.  In addition, there can be no assurance that the third party distribution programs will continue to distribute the Funds.  At December 31, 2016, approximately 95% of the NTF program net assets in the Gabelli/GAMCO families of funds are attributable to two NTF programs.  The decision by these third party distribution programs to discontinue distribution of the funds, or a decision by us to withdraw one or more of the funds from the programs, could have an adverse effect on our growth of AUM.

 

Operational risks may disrupt our businesses, result in regulatory action against us or limit our growth.

 

We face operational risk arising from errors made in the execution, confirmation or settlement of transactions or from transactions not being properly recorded, evaluated or accounted for.  Our business is highly dependent on our ability to process, on a daily basis, transactions across markets in an efficient and accurate manner.  Consequently, we rely heavily on our financial, accounting and other data processing systems.  Despite the reliability of these systems, and the training and skill of our employees and third parties we rely on, it remains likely that errors may occasionally occur due to the extremely large number of transactions we process.  In addition, if systems we use are unable to accommodate an increasing volume of transactions our ability to expand our businesses could be constrained. If any of these systems do not operate properly or are disabled, we could suffer financial loss, a disruption of our businesses, liability to clients, regulatory intervention or reputational damage.

Failure to maintain adequate infrastructure could impede the Company’s productivity and growth.  Additionally, failure to implement effective information and cyber security policies, procedures and capabilities could disrupt operations and cause financial losses that could result in a decrease in the Company’s earnings or stock price.

 

The Company’s infrastructure, including its information systems and technology, is vital to the competitiveness of its business.  The failure to maintain an adequate infrastructure commensurate with the size and scope of our business could impede our productivity and growth, which could cause our earnings or stock price to decline.  We outsource a significant portion of our information systems operations to third parties who are responsible for providing the management, maintenance and updating of such systems.  Technology is subject to rapid change and we cannot guarantee that our competitors may not implement more advanced technology platforms for their products than we do for ours.  In addition, there can be no assurance that the cost of maintaining such outsourcing arrangements will not increase from its current level, which could have a material adverse effect on us.

In addition, any inaccuracies, delays, system failures or security breaches in these and other systems could subject us to client dissatisfaction and losses. Breach of our technology systems could result in the loss of valuable information, liability for stolen assets or information, remediation costs to repair damage caused by the breach, additional security costs to mitigate against future incidents and litigation costs resulting from the incident. Moreover, loss of confidential customer identification information could harm our reputation and subject us to liability under laws that protect confidential personal data, resulting in increased costs or loss of revenues. Further, although we take precautions to password protect and encrypt our laptops and other mobile electronic hardware, if such hardware is stolen, misplaced or left unattended, it may become vulnerable to hacking or other unauthorized use, creating a possible security risk and resulting in potentially costly actions by us. 

Our operations rely on the secure processing, storage and transmission of confidential and other information in our computer systems and networks.  We may be the target of cyber-attacks, including denial-of-service attacks, and must continuously monitor and develop our systems to protect our technology infrastructure and data from misappropriation or corruption.  Although we take protective measures and endeavor to modify them as circumstances warrant, our computer systems, software and networks may be vulnerable to unauthorized access, misuse, computer viruses or other malicious code and other events that could have a security impact.  If one or more of such events occur, this potentially could jeopardize our or our clients’ or counterparties’ confidential and other information processed and stored in our, our clients’, our counterparties’ or third parties’ operations, which could impact their ability to transact with us or otherwise result in significant losses or reputational damage.  The increased use of mobile technologies can heighten these and other operational risks.  We expect to expend significant additional resources on an ongoing basis to modify our protective measures and to investigate and remediate vulnerabilities or other exposures, and we may be subject to litigation and financial losses that are either not insured against or not fully covered through any insurance maintained by us.

We routinely transmit and receive personal, confidential and proprietary information by email and other electronic means.  We have discussed and worked with clients, vendors, service providers, counterparties and other third parties to develop secure transmission capabilities and protect against cyber-attacks, but we do not have, and may be unable to put in place, secure capabilities with all of our clients, vendors, service providers, counterparties and other third parties and we may not be able to ensure that these third parties have appropriate controls in place to protect the confidentiality of the information.  An interception, misuse or mishandling of personal, confidential or proprietary information being sent to or received from a client, vendor, service provider, counterparty or other third party could result in legal liability, regulatory action and reputational harm.

The failure of one of our vendors to fulfill its obligations to us could have a material adverse effect on the Company and its products.

The Company depends on a number of key vendors for various fund administration, accounting, custody and transfer agent roles and other operational needs. The failure or inability of the Company to diversify its sources for key services or the failure of any key vendors to fulfill their obligations could lead to operational issues for the Company and in certain products, which could result in financial losses for the Company and its clients.

Our ability to meet cash needs may be adversely affected by a number of factors.

Our ability to meet anticipated cash needs is affected by factors such as the market value of our assets, our operating cash flows and our creditworthiness as perceived by lenders. Adverse developments in any of these areas could have significantly adverse effects on our business.  If we are unable to obtain funds and financing in a timely manner or on acceptable terms, we may be forced to incur unanticipated costs or revise our business plans. Further, our access to the capital markets depends significantly on our credit ratings. A reduction in our credit ratings could increase our borrowing costs and limit our access to the capital markets. Volatility in the U.S., regional or global financing markets may also impact our ability to access the capital markets should we seek to do so, and we may be forced to incur unanticipated costs or experience other adverse effects on our business.  We currently have a credit rating of investment grade with one rating agency and one below investment grade with another rating agency.  We believe that if our credit rating was below investment grade with both credit agencies it would increase our long-term borrowing costs, on future borrowings, by 50 basis points, while a two notch downgrade would increase our long-term borrowing costs, on future borrowings, by approximately 80-100 basis points. Our current outstanding debt issuances would not be impacted by any changes in our ratings.

We face exposure to legal actions, including litigation and arbitration claims and regulatory and governmental examinations and/or investigations. Insurance coverage for these matters may be inadequate.

 

The volume of litigation and arbitration claims against financial services firms and the amount of damages claimed has increased over the past several years.  The types of claims that we may face are varied.  For example, we may face claims against us for purchasing securities that are inconsistent with a client’s investment objectives or guidelines, in connection with the operation of the Funds or arising from an employment dispute.  The risk of litigation is difficult to predict, assess or quantify, and may occur years after the activities or events at issue.  In addition, from time to time we may become the subject of governmental or regulatory investigations and/or examinations.  Even if we prevail in a legal or regulatory action, the costs alone of defending against the action or the harm to our reputation could have a material adverse effect on us.  The insurance coverage that we maintain with respect to legal and regulatory actions may be inadequate or may not cover certain proceedings.

Compliance failures could adversely affect us.

 

Our investment management activities are subject to client guidelines, and our Mutual Fund business involves compliance with numerous investment, asset valuation, distribution, and tax requirements.  A failure to comply with these guidelines or contractual requirements could result in damage to the Company’s reputation or in its clients seeking to recover losses, withdrawing their AUM or terminating their contracts, any of which could cause the Company’s revenues and earnings to decline.  There can be no assurance that the precautions and procedures that we have instituted and installed or the insurance we maintain to protect ourselves in case of client losses will protect us from potential liabilities.

We face strong competition from numerous and, in many instances, larger companies.

 

The asset management business is intensely competitive.  We compete with numerous investment management companies, stock brokerage and investment banking firms, insurance companies, banks, savings and loan associations and other financial institutions.  The periodic establishment of new investment management companies and other competitors increases the competition that we face. At the same time, consolidation in the financial services industry has created stronger competitors with greater financial resources and broader distribution channels than our own. Competition is based on various factors, including, among others, business reputation, investment performance, product mix and offerings, service quality and innovation, distribution relationships and fees charged.  Our competitive success in any or all of these areas cannot be assured. Additionally, competing securities dealers whom we rely upon to distribute our mutual funds also sell their own proprietary funds and investment products, which could limit the distribution of our investment products.  To the extent that existing or potential customers, including securities dealers, decide to invest in or distribute the products of our competitors, the sales of our products as well as our market share, revenues and net income could decline.

Fee pressures could reduce our profit margins.

 

There has been a trend toward lower fees in some segments of the investment management industry.  In order for us to maintain our fee structure in a competitive environment, we must be able to provide clients with investment returns and service that will encourage them to be willing to pay such fees.  Accordingly, there can be no assurance that we will be able to maintain our current fee structure.  Fee reductions on existing or future new business could have an adverse effect on our profit margins and results of operations.

Risks Related to the Company

The disparity in the voting rights among the classes of shares may have a potential adverse effect on the price of our Class A Stock.

 

The holders of Class A Common Stock (“Class A Stock”) and 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.  Since our Offering in 1999, Mr. Gabelli, through his control and majority ownership of GGCP, has beneficially owned a majority of our outstanding Class B Stock, representing approximately 91% of voting control.  As long as Mr. Gabelli indirectly beneficially owns a majority of the combined voting power of our common stock, he will have the ability to elect all of the members of our Board of Directors and thereby control our management and affairs, including among other things any determinations with respect to acquisitions, dispositions, borrowings, issuances of common stock or other securities, and the declaration and payment of dividends on the common stock.  The differential in voting rights and the ability of our company to issue additional Class B Stock could adversely affect the value of the Class A Stock to the extent the investors, or any potential future purchaser of our company, view the superior voting rights of the Class B Stock to have value.  On May 6, 2014, Class A Stock shareholders approved an advisory proposal for the Board of Directors to consider the conversion and reclassification of our shares of Class B Stock into Class A Stock at a ratio in the range of 1.15 to 1.25 shares of Class A Stock for each share of Class B Stock.  The Board of Directors has made no decision on this matter.

Future sales of our Class A Stock in the public market or sales or distributions of our Class B Stock could lower our stock price, and any additional capital raised by us through the sale of equity or convertible securities may dilute our stockholders’ ownership in us.

 

We may sell additional shares of Class A Stock in subsequent public offerings.  We also may issue additional shares of Class A Stock or convertible debt securities.  In addition, sales by our current shareholders could be perceived negatively.

 

No prediction can be made as to the effect, if any, that future sales or distributions of Class B Stock owned by GGCP Holdings LLC will have on the market price of the Class A Stock from time to time.  Sales or distributions of substantial amounts of Class A Stock or Class B Stock, or the perception that such sales or distributions are likely to occur, could adversely affect the prevailing market price for the Class A Stock.

Our common stock has relatively limited trading volume, and ownership of a large percentage is concentrated with a small number of shareholders, which could increase the volatility in our stock trading and dramatically affect our share price.

A large percentage of our common stock is held by a limited number of shareholders.  If our larger shareholders decide to liquidate their positions, it could cause significant fluctuation in the share price of our common stock.

ITEM 1B: UNRESOLVED STAFF COMMENTS

None.

Our principal offices, consisting of a single 60,000 square foot building, are located at 401 Theodore Fremd Avenue, Rye, New York, under a lease agreement which expires on December 31, 2028 from an entity controlled by members of Mr. Gabelli's immediate family.  In addition we lease office space in Connecticut, Florida, Illinois, Missouri, New Jersey, Nevada and, internationally, in London, Shanghai, and Tokyo.

ITEM 3: 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 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.

ITEM 4: MINE SAFETY DISCLOSURES

Not applicable.

PART II

Our shares of Class A Stock are traded on the NYSE under the symbol GBL.

 

As of February 1, 2017, there were 246 Class A Stockholders of record and 25 Class B Stockholders of record.  These figures do not include approximately 3,600 stockholders with shares held under beneficial ownership in nominee name.

The following table sets forth the high and low prices of our Class A Stock and historical dividends declared per share to both Class A Stock and Class B Stock for each quarter of 2016 and 2015 as reported by the NYSE.

(a) Post Spin-off of AC

As of December 31, 2016, since the Offering, we have returned to shareholders $1.9 billion in total of which $1.0 billion was in the form of the Spin-off of AC, $488.6 million was from dividends and $438.8 million was through our stock buyback program.

The following table provides information with respect to the shares of our Class A Stock we repurchased during the three months ended December 31, 2016:

In 1999, the Board of Directors established the stock repurchase program.  Our stock repurchase program is not subject to an expiration date.

We are required to provide a comparison of the cumulative total return on our Class A Stock as of December 31, 2016 with that of a broad equity market index and either a published industry index or a peer group index selected by us.  The following chart compares the return on the Class A Stock with the return on the S&P 500 Index and an index comprised of public asset managers (“SNL Asset Manager”).  The comparison assumes that $100 was invested in the Class A Stock and in each of the named indices, including the reinvestment of dividends, on December 31, 2011.  This chart is not intended to forecast future performance of our common stock.

 

The following table shows information regarding outstanding options and shares reserved for future issuance under our equity compensation plans as of December 31, 2016.

The number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in the first column above) are 51,530.

ITEM 6: SELECTED FINANCIAL DATA

General

The selected historical financial data presented below has been derived in part from, and should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in Item 7 and “Financial Statements and Supplementary Data” included in Item 8 of this report.  Amounts included in the tables related to income statement data and balance sheet data are derived from audited financial statements.  See Note P. Discontinued Operations for further details.

 

(a)	Includes unvested RSAs of 424,340, 553,100, 710,750, 566,950 and 0 at December 31, 2016, 2015, 2014, 2013, and 2012, respectively.

 

 

(a)	Total assets and long-term obligations have been decreased by $128, $627, $724, and $846 at December 31, 2015, 2014, 2013, and 2012, respectively, for the adoption of ASU 2015-03 to present the debt issuance costs as a reduction of the related debt rather than as an asset.

 

ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the Consolidated Financial Statements and the notes thereto included in Item 8 to this report.

Introduction

On November 30, 2015 (the “Spin-Off Date”), GBL distributed to its stockholders all of the outstanding common stock of Associated Capital Group, Inc. (“AC”) and its subsidiaries along with certain cash and other assets (the “Spin-off”).  AC owns and operates, directly or indirectly, the alternatives and the institutional research businesses previously owned and operated by GBL.  In the Spin-off, each holder of GAMCO’s Class A Common Stock (“Class A Stock”) of record as of 5:00 p.m. New York City time on November 12, 2015 (the “Record Date”), received one share of AC Class A common stock for each share of GAMCO Class A Stock held on the Record Date.  Each record holder of GAMCO’s Class B Stock received one share of AC Class B common stock for each share of GAMCO Class B Stock held on the Record Date.  Subsequent to the Spin-off, GAMCO no longer consolidates the financial results of AC for the purposes of its own financial reporting and the historical financial results of AC have been reflected in the Company’s consolidated financial statements as discontinued operations for all periods presented through the Spin-off Date.  Historical AUM have similarly been adjusted to remove AUM managed by AC.

Our revenues are highly correlated to the level of AUM and fees associated with our various investment products, rather than our own corporate assets.  AUM, which are directly influenced by the level and changes of the overall equity markets, can also fluctuate through acquisitions, the creation of new products, the addition of new accounts or the loss of existing accounts.  Since various equity products have different fees, changes in our business mix may also affect revenues.  At times, the performance of our equity products may differ markedly from popular market indices, and this can also impact our revenues.  It is our belief that general stock market trends will have the greatest impact on our level of AUM and hence, revenues.  

 

As of December 31, 2016, we had $39.7 billion of AUM.  We conduct our investment advisory business principally through: GAMCO (Institutional and Private Wealth Management), and Funds Advisor (Funds). We also are a distributor of our open-end funds through our broker-dealer subsidiary G.distributors.

Organizational Chart

Subsequent to the Spin-off, this is the current organizational chart of the Company.

2016 Business and Investment Highlights

·

On December 1, 2016, the Company launched Gabelli Media Mogul (NYSE: MOGLC), its first in a series of actively managed, non-transparent exchange traded managed funds (“ETMFs”).  Gabelli Media Mogul will invest primarily in the media industry; specifically in companies that were spun-off from Dr. John Malone’s Liberty Media Corporation (“Liberty Media”) as constituted in 2001, including companies formed through subsequent mergers of those spin-offs and companies in which Liberty Media and its successors have invested.

·

On October 4, 2016, the Company announced that Katrina O’Leary joined GAMCO’s institutional team as Vice President, head of Consultant Relations.  Ms. O’Leary will launch a dedicated effort to develop the firm’s relationships with the global consulting community.  The role underscores GAMCO’s commitment to delivering superior risk adjusted returns and providing best in class client service in a rapidly changing investment environment.

·	On August 15, 2016, the Company issued a $110 million five year convertible note to Cascade Investment, L.L.C. in a private transaction.  The note has a coupon of 4.5% and is convertible into GBL Class A common stock at $55 per share.

·

On September 2, 2016, GAMCO completed the initial public offering of The Gabelli Go Anywhere Trust, the Company’s 15th closed-end fund.  This newly organized closed-end fund initially traded on the NYSE MKT as a $100 combination consisting of one preferred share at $40 and three common shares at $19 each under the symbol GGO.C.  This innovative offering demonstrates the flexibility of the closed-end fund structure.  Separate trading on the NYSE MKT for the common shares (“GGO”) and the Series A Preferred shares (“GGO.A”) commenced on November 2, 2016.

·

2016 was the first full year of advising the Bancroft Fund, and Ellsworth Growth and Income Fund.  The Dinsmore team now manages over $350 million in AUM across three closed-end funds.  2016 was also the first full year of advising The Gabelli Value Plus+ Trust, our first London Stock Exchange listed closed-end fund.  The Fund had $171 million of AUM at December 31, 2016.

 

·	Net debt improved from $262.4 million at December 31, 2015 to $156.9 million at December 31, 2016.

Overview

Consolidated Statements of Income

 

Investment advisory and incentive fees, which are based on the amount and composition of AUM in our Funds, Institutional and Private Wealth Management accounts, represent our largest source of revenues.  In addition to the general level and trends of the stock market, growth in revenues depends on good investment performance, which influences the value of existing AUM as well as contributes to higher investment and lower redemption rates and facilitates the ability to attract additional investors while maintaining current fee levels.  Growth in AUM is also dependent on being able to access various distribution channels, which is usually based on several factors, including performance and service.  A majority of our cash inflows to mutual fund products have come through third party distribution programs, including NTF programs.  We have also been engaged to act as a sub-advisor for other much larger financial services companies with much larger sales distribution organizations.  These sub-advisory clients are subject to business combinations that may result in the termination of the relationship.  The loss of a sub-advisory relationship could have a significant impact on our financial results in the future.

 

Advisory fees from the open-end funds, closed-end funds and sub-advisory accounts are computed daily or weekly based on average net assets.  Advisory fees from Institutional and Private Wealth Management clients are generally computed quarterly based on account values as of the end of the preceding quarter.  These revenues are based on AUM which is highly correlated to the stock market and can vary in direct proportion to movements in the stock market and the level of sales compared with redemptions, financial market conditions and the fee structure for AUM.  Revenues derived from the equity-oriented portfolios generally have higher management fee rates than fixed income portfolios.

 

We also receive incentive fees from certain Institutional and Private Wealth Management clients, which are based upon meeting or exceeding a specific benchmark index or indices.  These fees are recognized at the end of the stipulated contract period, which may be quarterly or annually, for the respective account.  Management fees on assets attributable to a majority of the closed-end preferred shares are earned at year-end if the total return to common shareholders of the closed-end fund for the calendar year exceeds the dividend rate of the preferred shares.  These fees are recognized at the end of the measurement period.

Distribution fees and other income primarily include distribution fee revenue earned in accordance with Rule 12b-1 of the Company Act, as amended, along with sales charges and underwriting fees associated with the sale of the mutual funds plus other revenues.  Distribution fees fluctuate based on the level of AUM and the amount and type of mutual funds sold directly by G.distributors or through various distribution channels.

 

Compensation costs include variable and fixed compensation and related expenses paid to officers, portfolio managers, sales, trading, research and all other professional staff.  Variable compensation paid to sales personnel and portfolio management generally represents 40% of revenues and is the largest component of total compensation costs.  Distribution costs include marketing, product distribution and promotion costs.  Management fee is incentive-based and entirely variable compensation in the amount of 10% of the aggregate pre-tax profits which is paid to Mr. Gabelli or his designee for acting as CEO pursuant to his 2008 Employment Agreement so long as he is an executive of GBL and devotes the substantial majority of his working time to the business.  Other operating expenses include general and administrative operating costs.

 

Other income and expenses include net gains and losses from investments (which includes both realized and unrealized gains and losses from trading securities), interest and dividend income, and interest expense.  Net gains and losses from investments are derived from our proprietary investment portfolio consisting of various public and private investments.

 

Net income (loss) attributable to noncontrolling interests represents the share of net income attributable to the minority stockholders, as reported on a separate company basis, of our consolidated majority-owned subsidiaries and net income attributable to third party limited partners of certain partnerships and offshore funds we consolidate.  Please refer to Note A in our consolidated financial statements included elsewhere in this report.

Income/(loss) on discontinued operations, net of taxes represents the results of the businesses and assets that were part of the Spin-off of AC.  Please refer to Note P in our consolidated financial statements included elsewhere in this report.

Consolidated Statements of Financial Condition

We ended the 2016 year with approximately $77.1 million in cash and investments.  The $77.1 million consists of $39.8 million cash and cash equivalents, primarily invested in our 100% U.S. Treasury Money Market Fund, $0.1 million invested in common stocks and available for sale (“AFS”) securities of $37.2 million.  Of the $37.2 million of AFS securities, $37.1 million represent our investment in shares of Westwood Holdings Group.

 

The face value of our debt consisted of $100 million of a 4% PIK Note due to AC, $110 million of a 4.5% convertible note due August 15, 2021 and $24.2 million of 5.875% senior notes due June 1, 2021.

Equity was a negative $166.6 million on December 31, 2016 compared to a negative $276.3 million on December 31, 2015.

We filed a shelf registration with the SEC in 2015 which, among other things, provides us the flexibility to sell any combination of senior and subordinate debt securities, convertible debt securities, equity securities (including common and preferred stock), and other securities up to a total amount of $500 million.  The shelf is available through April 10, 2018, at which time it may be renewed.

 

Our primary short-term goal is to use our liquid resources to pay down our existing debt.  As a secondary goal, we will look to opportunistically and strategically grow operating income at what we consider a margin of safety.  We will also consider alternatives to return capital to our shareholders including stock repurchases and dividends.

Assets Under Management Highlights

We reported assets under management as follows (dollars in millions):

Our net cash inflows or outflows by product line were as follows (in millions):

(a)

Compound annual growth rate.

(b)

Our net cash inflows or outflows for Closed-End equity funds includes distributions, net of reinvestments, to fund holders of $500 million, $461 million, $479 million, $484 million and $454 million in 2016, 2015, 2014, 2013 and 2012, respectively.

Our net appreciation and depreciation by product line were as follows (in millions):

AUM at December 31, 2016 were $39.7 billion, an increase of 2.6% from AUM of $38.7 billion at December 31, 2015.  Equity AUM were $37.9 billion on December 31, 2016, 2.2% above the $37.1 billion on December 31, 2015.  We earn incentive fees for certain institutional client assets, assets attributable to certain preferred issues for our closed-end funds and our GDL Fund (NYSE: GDL).  As of December 31, 2016, assets with incentive based fees were $2.5 billion, 7.4% below the $2.7 billion on December 31, 2015.  The majority of these assets have calendar year-end measurement periods; therefore, our incentive fees are primarily recognized in the fourth quarter when the uncertainty is removed at the end of the annual measurement period.

Operating Results for the Year Ended December 31, 2016 as Compared to the Year Ended December 31, 2015

Revenues

Total revenues were $353.0 million in 2016, $28.0 million or 7.3% lower than the total revenues of $381.0 million in 2015.  The change in total revenues by revenue component was as follows (dollars in millions):

Investment Advisory and Incentive Fees:  Investment advisory fees, which comprised 83.0% of total revenues in 2016, are directly influenced by the level and mix of average AUM.  Average total AUM declined 10.0% to $38.9 billion in 2016 as compared to $43.2 billion in 2015.  Average equity AUM fell 10.6% to $37.2 billion in 2016 from $41.6 billion in 2015, primarily from net outflows.  Incentive fees, which comprised 4.4% of total revenues in 2016, result from our ability to either generate an absolute return in a portfolio or meet or exceed a specific benchmark index or indices and can vary significantly from one period to another.  Incentive fees were higher in 2016 as a greater number of portfolios exceeded their respective benchmarks as compared to 2015.

 

Fund revenues decreased $14.9 million or 7.0%, to $199.3 million, driven by lower average AUM.  Revenue from open-end funds decreased $21.9 million, or 14.4%, to $130.0 million from the prior year as average AUM in 2016 decreased $2.2 billion, or 12.6%, to $15.2 billion from the $17.4 billion in 2014.  Closed-end fund revenues increased $7.0 million, or 11.2%, to $69.3 million from the prior year and was comprised of an increase of $7.8 million in incentive fees on certain closed-end fund AUM partially reduced by a decrease of $0.8 million in investment advisory fees attributable to lower average AUM.  Revenue from Institutional and Private Wealth Management accounts, excluding incentive fees, which are generally billed on beginning quarter AUM, decreased $11.7 million, or 10.3%, principally due to lower billable AUM levels throughout the course of 2016.  Incentive fees earned on certain accounts increased by $1.7 million.  In 2016, average AUM in our equity Institutional and Private Wealth Management business decreased $2.1 billion, or 11.1%, for the year to $16.8 billion.

 

Distribution Fees and Other Income: Distribution fees and other income decreased $6.5 million, or 12.7%, to $44.5 million in 2016 from $51.0 million in 2015.  Lower distribution fees of $41.0 million in 2016 versus $47.7 million for the prior year, principally as a result of decreased average AUM in our open-end equity mutual funds of 13.7%, offset by an increase of $0.2 million in fees from the sale of load shares of mutual funds and other income, contributed to this decrease.

Expenses

Compensation:  Total compensation costs, which are largely variable in nature, decreased $53.9 million, or 39.5%, to $82.6 million in 2016 from $136.5 million in 2015.  Variable compensation costs, principally portfolio manager and relationship manager fees, decreased $53.6 million to $56.6 million in 2016 from $110.2 million in 2015 and decreased as a percent of revenues to 16.0% in 2016 from 28.9% in 2015.  The principle reason was the December 2015 Restricted Stock Units (“RSU”) agreement with Mr. Gabelli which reduced variable compensation by $44.6 million in 2016. (see page 34)  Variable compensation is also driven by revenue levels which decreased in 2016 from 2015.  Fixed compensation costs decreased slightly to $26.0 million in 2016 from $26.3 million in 2015.

Stock based compensation:  Stock based compensation was $4.0 million in 2016, a decrease of $5.9 million, as compared to $9.9 million in 2015.  The decrease primarily results from the acceleration of 130,650 RSAs during 2015 for an additional expense of $3.5 million that would have been recognized in future years.

Management Fee:  In 2016 management fee expense decreased to $6.5 million versus $15.5 million in 2015.  Management fee expense is incentive-based and entirely variable in the amount of 10% of the aggregate pre-tax profits which is paid to Mr. Gabelli (or his designee) in accordance with his employment agreement.  Most importantly the December 2015 RSU agreement reduced the management fee by $12.4 million in 2016. (see page 34)

Distribution Costs: Distribution costs, which include marketing, promotion and distribution costs decreased $7.8 million, or 15.0%, to $44.2 million in 2016 from $52.0 million in 2015 driven by a decrease in average open-end equity mutual funds AUM of 13.7%.

Other Operating Expenses: Our other operating expenses were $23.9 million in 2016 compared to $19.2 million in 2015, an increase of $4.7 million or 24.4%.  The largest components of this increase were additional donated securities expense of $1.6 million and an increase to the research services fee of $1.5 million.

Operating Income and Margin

Operating income increased $43.9 million, or 29.7%, to $191.8 million for 2016 versus $147.9 million in the prior year period.  This increase was primarily due to higher incentive fees of $11.0 million and reduced variable compensation expense relating to the RSU agreement of $57.0 million partially offset by lower non-incentive fee revenues of $39.0 million.   Operating margin was 54.3% for the year ended December 31, 2016, versus 38.8% in the prior year period.  The increase in operating margin was due primarily to lower variable compensation costs and management fee expense related to the RSU agreement. (see page 34)

Operating income before management fee was $198.3 million for the year ended of 2016, versus $163.5 million in the prior year. Operating margin before management fee was 56.2% in the 2016 period versus 42.9% in the 2015 period.  The reconciliation of operating income before management fee and operating margin before management fee, both of which are non-GAAP measures to their respective GAAP measures, is provided at the end of this section.

Other Income and Expense

Total other income (expense), net of interest expense, was an expense of $9.6 million for the year ended December 31, 2016 compared to an expense of $8.9 million in 2015.  This is comprised of net gain from investments of $1.6 million in 2016 as compared to $5.0 million in 2015; loss on extinguishment of debt of $1.1 million in 2015; interest and dividend income of $1.5 million in 2016 versus $2.2 million in 2015; interest expense of $12.7 million in 2016 as compared to $8.6 million in 2015 and Shareholder-designated contribution expense of $6.4 million in 2015.

Interest expense increased $4.1 million to $12.7 million in 2016, from $8.6 million in 2015 primarily related to the higher average amount of debt outstanding in 2016 versus 2015.

In 2015, the Board of Directors of GBL again adopted a Shareholder Designated Charitable Contribution program on behalf of all registered Class A and Class B shareholders.  Under the programs the Board approved a $0.25 per share contribution, resulting in a charge of $6.4 million in 2015.

Income Taxes

The effective tax rate (“ETR”) was 35.7% for the year ended December 31, 2016, versus 37.2% for the year ended December 31, 2015.  The ETR for 2016 benefitted by 1.4% due to the reversal of tax accruals related to the closing out of a state audit.

Shareholder Compensation and Initiatives

During 2016, we returned $13.2 million of our earnings to shareholders through dividends and stock repurchases.  We returned to shareholders a total of $0.08 per share in regular quarterly cash dividends in 2016 totaling $2.4 million.  During 2015, we returned $34.7 million of our earnings to shareholders through dividends and stock repurchases.  We returned to shareholders a total of $0.28 per share in regular quarterly cash dividends totaling $7.5 million.

Through our stock buyback program, we repurchased 348,687 and 426,628 shares in 2016 and 2015, respectively, for approximately $10.8 million and $27.2 million, or $30.88 and $63.85 per share, respectively (For 2015, 413,228 shares were at an average investment of $64.86 per share prior to the distribution of AC on November 30, 2015 and 13,400 shares were at an average price of $32.56 following the distribution of AC).  Approximately 233,000 shares remain authorized under our stock buyback program at December 31, 2016.  Since our IPO we have repurchased 9,901,340 shares for a total investment of $438.8 million, or $44.32 per share.

Weighted average shares outstanding on a diluted basis in 2016 and 2015 were 30.2 million and 25.7 million, respectively.  

 

Operating income before management fee expense is used by management for purposes of evaluating its business operations.  We believe this measure is useful in illustrating the operating results of the Company as management fee expense is based on pre-tax income before management fee expense, which includes non-operating items including investment gains and losses from the Company’s proprietary investment portfolio and interest expense.  We believe that an investor would find this useful in analyzing the business operations of the Company without the impact of the non-operating items such as trading and investment portfolios or interest expense.

Reconciliation of non-GAAP financial measures to GAAP:

Operating Results for the Year Ended December 31, 2015 as Compared to the Year Ended December 31, 2014

Revenues

Total revenues were $381.0 million in 2015, $40.9 million or 9.7% lower than the total revenues of $421.9 million in 2014.  The change in total revenues by revenue component was as follows (dollars in millions):

Investment Advisory and Incentive Fees:  Investment advisory fees, which comprised 85.5% of total revenues in 2015, are directly influenced by the level and mix of average AUM.  Average total AUM declined 7.5% to $43.2 billion in 2015 as compared to $46.7 billion in 2014.  Average equity AUM fell 7.3% to $41.6 billion in 2015 from $44.9 billion in 2014, primarily from net outflows.  Incentive fees, which comprised 1.2% of total revenues in 2015, result from our ability to either generate an absolute return in a portfolio or meet or exceed a specific benchmark index or indices and can vary significantly from one period to another.  Incentive fees were lower in 2015 as fewer portfolios exceeded their respective benchmarks.

Fund revenues decreased $23.9 million or 10.1%, to $214.2 million, driven by lower average AUM.  Revenue from open-end funds decreased $19.0 million, or 11.1%, from the prior year as average AUM in 2015 decreased $2.0 billion, or 10.3%, to $17.4 billion from the $19.4 billion in 2014.  Closed-end fund revenues decreased $5.0 million, or 7.4%, to $62.3 million from the prior year and was comprised of a decline of $3.4 million in incentive fees on certain closed-end fund AUM and a decrease of $1.6 million in investment advisory fees attributable to lower average AUM.  Revenue from Institutional and Private Wealth Management accounts, excluding incentive fees, which are generally billed on beginning quarter AUM, decreased $6.1 million, or 5.0%, principally due to lower billable AUM levels throughout the course of 2015.  Incentive fees earned on certain accounts declined by $1.1 million.  In 2015, average AUM in our equity Institutional and Private Wealth Management business decreased $1.3 billion, or 6.3%, for the year to $18.9 billion.

 

Distribution Fees and Other Income: Distribution fees and other income decreased $10.4 million, or 16.9%, to $51.0 million in 2015 from $61.4 million in 2014.  Lower distribution fees of $47.7 million in 2015 versus $56.1 million for the prior year, principally as a result of decreased average AUM in our open-end equity mutual funds of 10.7% and a decrease of $2.0 million in fees from the sale of load shares of mutual funds and other income contributed to this decrease.

Expenses

Compensation:  Total compensation costs, which are largely variable in nature, decreased $14.8 million, or 9.8%, to $136.5 million in 2015 from $151.3 million in 2014.  Variable compensation costs, principally portfolio manager and relationship manager fees, decreased $11.6 million to $110.2 million in 2015 from $121.8 million in 2014 and remained steady as a percent of revenues at 28.9% in both 2015 and 2014.  Variable compensation is driven by revenue levels which decreased in 2015 from 2014.  Fixed compensation costs decreased to $26.3 million in 2015 from $29.5 million in 2014.

Stock based compensation:  Stock based compensation was $9.9 million in 2015, an increase of $4.6 million, as compared to $5.3 million in 2014.  The increase primarily results from the acceleration of 130,650 RSAs during 2015 for an additional expense of $3.5 million that would have been recognized in future years.

Management Fee:  In 2015 management fee expense decreased to $15.5 million versus $18.7 million in 2014.  Management fee expense is incentive-based and entirely variable in the amount of 10% of the aggregate pre-tax profits which is paid to Mr. Gabelli (or his designee) in accordance with his employment agreement. 

Distribution Costs: Distribution costs, which include marketing, promotion and distribution costs decreased $7.7 million, or 12.9%, to $52.0 million in 2015 from $59.7 million in 2014 driven by a decrease in average open-end equity mutual funds AUM of 10.7%.

Other Operating Expenses: Our other operating expenses were $19.2 million in 2015 compared to $17.5 million in 2014, an increase of $1.7 million or 9.7%.  The year over year increase was attributable to recovery of legal expense in 2014 related to prior years of $1.3 million.  The remainder of $0.4 million increase was spread among multiple categories of expense.

Operating Income and Margin

Operating income decreased $21.6 million, or 12.7%, to $147.9 million for 2015 versus $169.5 million in the prior year period.  This decrease was primarily due to the declines in revenues which were largely attributable to the lower levels of average AUM in 2015 versus 2014.  Operating margin was 38.8% for the year ended December 31, 2015, versus 40.2% in the prior year period.  The decline in operating margin was due to increased fixed costs as a percentage of revenues partially offset by lower management fee expense.

Operating income before management fee was $163.5 million for the year ended of 2015, versus $188.1 million in the prior year. Operating margin before management fee was 42.9% in the 2015 period versus 44.6% in the 2014 period.  The reconciliation of operating income before management fee and operating margin before management fee, both of which are non-GAAP measures to their respective GAAP measures, is provided at the end of this section.

Other Income and Expense

Total other income (expense), net of interest expense, was an expense of $8.9 million for the year ended December 31, 2015 compared to an expense of $1.4 million in 2014.  This is comprised of net gain from investments of $5.0 million in 2015 as compared to $4.3 million in 2014; loss on extinguishment of debt of $1.1 million in 2015 and $0.1 million in 2014; interest and dividend income of $2.2 million in 2015 versus $2.2 million in 2014; interest expense of $8.6 million in 2015 as compared to $7.7 million in 2014 and Shareholder-designated contribution expense of $6.4 million in 2015 and $0.1 million in 2014.

Interest expense increased $0.9 million to $8.7 million in 2015, from $7.7 million in 2014 primarily related to the 4% PIK Note payable to AC that was outstanding for one month in 2015.

In 2015, the Board of Directors of GBL again adopted a Shareholder Designated Charitable Contribution program on behalf of all registered Class A and Class B shareholders.  Under the program the Board approved a $0.25 per share contribution, resulting in a charge of $6.4 million in 2015.  During 2013, the Board had approved a $0.25 per share contribution that was not finalized as to which shareholders would participate until 2014.  As a result there was $0.1 million of expense recorded in 2014.

Income Taxes

The effective tax rate (“ETR”) was 37.2% for the year ended December 31, 2015, versus 36.7% for the year ended December 31, 2014.

Shareholder Compensation and Initiatives

During 2015, we returned $34.7 million of our earnings to shareholders through dividends and stock repurchases.  We returned to shareholders a total of $0.28 per share in regular quarterly cash dividends in 2015 totaling $7.5 million.  During 2014, we returned $45.6 million of our earnings to shareholders through dividends and stock repurchases.  We returned to shareholders a total of $0.25 per share in regular quarterly cash dividends and one special cash dividend of $0.25 per share in 2014 totaling $12.9 million.

Through our stock buyback program, we repurchased 426,628 and 414,432 shares in 2015 and 2014, respectively, for approximately $27.2 million and $32.7 million, or $63.85 and $78.99 per share, respectively (for 2015, 413,228 shares were at an average investment of $64.86 per share prior to the distribution of AC on November 30, 2015 and 13,400 shares were at an average price of $32.56 following the distribution of AC).  Approximately 582,000 shares remain authorized under our stock buyback program at December 31, 2015.  Since our IPO we have repurchased 9,552,653 shares for a total investment of $428.0 million, or $44.81 per share.

Weighted average shares outstanding on a diluted basis in 2015 and 2014 were 25.7 million and 25.6 million, respectively.  

 

There were no stock options outstanding at December 31, 2015.

Operating income before management fee expense is used by management for purposes of evaluating its business operations.  We believe this measure is useful in illustrating the operating results of the Company as management fee expense is based on pre-tax income before management fee expense, which includes non-operating items including investment gains and losses from the Company’s proprietary investment portfolio and interest expense.  We believe that an investor would find this useful in analyzing the business operations of the Company without the impact of the non-operating items such as trading and investment portfolios or interest expense.

Reconciliation of non-GAAP financial measures to GAAP:

DEFERRED COMPENSATION

On December 21, 2015, GAMCO entered into a deferred compensation agreement with Mr. Gabelli whereby his variable compensation for 2016 will be in the form of Restricted Stock Units (“RSUs”) determined by the volume-weighted average price (“VWAP”) of the Company’s Class A Stock during 2016.  When the restrictions lapse on January 1, 2020 (the “Lapse Date”), this RSU agreement can be settled in either cash or stock.  Notwithstanding its ability to settle the RSU agreement in stock, GAMCO currently intends to make a cash payment to Mr. Gabelli on the Lapse Date in an amount, under the terms of the agreement, equal to the number of RSUs valued at the lesser of the VWAP of the Company’s Class A Stock for the 2016 fiscal year or the value on the Lapse Date or, if not a trading day, then the first trading date thereafter.  The Board’s decision to grant these RSUs and thereby defer the cash payment of his 2016 variable compensation until January 1, 2020 was to provide the Company with greater financial flexibility.  While the issuance of the award itself does not change Mr. Gabelli’s compensation, the Generally Accepted Accounting Principles (“GAAP”) reporting for his compensation has changed.  The 2016 results were materially bolstered by the GAAP-mandated treatment of these RSUs.  Margins for 2016 therefore are not comparable with prior periods.

Under GAAP, only 25% of this deferred compensation expense is being recognized in the current year with the remainder amortized ratably over 2017, 2018, and 2019.  Expressed another way, 2016 benefitted from a reduction of 75% of the compensation, and 2017, 2018, and 2019 will, in turn, be impacted by an additional 25% of the compensation from 2016 in each year.

The balance sheet is also impacted; the compensation payable at December 31, 2016 is only 25% of the full amount of the 2016 compensation that will be due once the RSUs are fully vested.  At December 31, 2016, the amount of unrecognized compensation was $53.5 million.

The following tables show a reconciliation of our results for 2016, and our balance sheet at December 31, 2016 between the GAAP basis and a non-GAAP adjusted basis of the deferred compensation (the RSU grant) as if all of the expense was recognized in 2016.  We believe this adjusted measure is useful in evaluating the ongoing operating results of the Company absent the material adjustment related to the treatment of the deferred compensation agreement.

DEFERRED COMPENSATION (continued)