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EX-31.1 - EXHIBIT 31.1, DATED NOVEMBER 5, 2010 - GAMCO INVESTORS, INC. ET ALex31_1093010.htm
EX-31.2 - EXHIBIT 31.2, DATED NOVEMBER 5, 2010 - GAMCO INVESTORS, INC. ET ALex31_2093010.htm
EX-32.2 - EXHIBIT 32.2, DATED NOVEMBER 5, 2010 - GAMCO INVESTORS, INC. ET ALex32_2093010.htm
EX-32.1 - EXHIBIT 32.1, DATED NOVEMBER 5, 2010 - GAMCO INVESTORS, INC. ET ALex32_1093010.htm


 

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

(Mark One)

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

For the quarterly period ended September 30, 2010
or

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

For the transition period from ___ to ___

Commission File No. 1-106

GAMCO INVESTORS, INC.
(Exact name of Registrant as specified in its charter)
       
New York
   
13-4007862
(State of other jurisdiction of incorporation or organization)
   
(I.R.S. Employer Identification No.)
   
     
One Corporate Center, Rye, NY
   
10580-1422
(Address of principle executive offices)
   
(Zip Code)
       
(914) 921-5100
Registrant’s telephone number, including area code
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes
x
No
o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yeso    Noo
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer", "accelerated filer", and "smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer ¨
 
Accelerated filer x
 
       
Non-accelerated filer o
 
Smaller reporting company o
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes
o
No
x
 
Indicate the number of shares outstanding of each of the Registrant’s classes of Common Stock, as of the latest practical date.
Class
 
Outstanding at October 31, 2010
 
Class A Common Stock, .001 par value
 
6,970,210
 
Class B Common Stock, .001 par value
 
20,291,904
 
 
 
 

 
 
INDEX
 
GAMCO INVESTORS, INC. AND SUBSIDIARIES
   
   
PART I.
FINANCIAL INFORMATION
 
   
   
Item 1.
Unaudited Condensed Consolidated Financial Statements
   
 
Condensed Consolidated Statements of Income:
 
-    Three months ended September 30, 2010 and 2009
   
 
-    Nine months ended September 30, 2010 and 2009
   
 
Condensed Consolidated Statements of Financial Condition:
 
-    September 30, 2010
 
-    December 31, 2009
 
-    September 30, 2009
   
 
Condensed Consolidated Statements of Equity and Comprehensive Income:
 
-    Nine months ended September 30, 2010 and 2009
   
 
Condensed Consolidated Statements of Cash Flows:
 
-    Nine months ended September 30, 2010 and 2009
   
 
Notes to Unaudited Condensed Consolidated Financial Statements
   
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
   
Item 3.
Quantitative and Qualitative Disclosures About Market Risk (Included in Item 2)
   
Item 4.
Controls and Procedures
   
PART II.
OTHER INFORMATION
 
   
Item 1.
Legal Proceedings
   
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
   
Item 6.
Exhibits
   
SIGNATURES
 
   
 
 
2

 
 
GAMCO INVESTORS, INC. AND SUBSIDIARIES
 
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
 
UNAUDITED
 
(Dollars in thousands, except per share data)
 
                         
                         
   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
   
2010
   
2009
   
2010
   
2009
 
Revenues
                       
  Investment advisory and incentive fees
  $ 50,249     $ 40,957     $ 149,862     $ 112,145  
  Institutional research services
    4,005       4,588       11,953       12,187  
  Distribution fees and other income
    8,189       6,037       23,125       15,780  
Total revenues
    62,443       51,582       184,940       140,112  
Expenses
                               
  Compensation
    26,661       21,590       78,745       62,056  
  Management fee
    3,540       2,638       7,368       6,291  
  Distribution costs
    7,710       6,089       21,840       17,094  
  Other operating expenses
    5,023       4,405       15,528       13,648  
Total expenses
    42,934       34,722       123,481       99,089  
                                 
Operating income
    19,509       16,860       61,459       41,023  
Other income (expense)
                               
  Net gain from investments
    13,916       9,659       11,351       22,981  
  Interest and dividend income
    2,012       598       3,916       2,677  
  Interest and other expense
    (3,295 )     (3,296 )     (9,993 )     (9,965 )
Total other income (expense), net
    12,633       6,961       5,274       15,693  
Income before income taxes
    32,142       23,821       66,733       56,716  
Income tax provision
    11,686       8,913       24,381       20,034  
Net income
    20,456       14,908       42,352       36,682  
Net income attributable to noncontrolling interests
    350       257       471       503  
Net income attributable to GAMCO Investors, Inc.'s shareholders
  $ 20,106     $ 14,651     $ 41,881     $ 36,179  
                                 
Net income attributable to GAMCO Investors, Inc.'s shareholders
                               
  per share:
                               
Basic
  $ 0.75     $ 0.54     $ 1.55     $ 1.32  
                                 
Diluted
  $ 0.73     $ 0.53     $ 1.53     $ 1.32  
                                 
Weighted average shares outstanding:
                               
Basic
    26,828       27,366       26,996       27,376  
                                 
Diluted
    28,364       27,505       27,818       27,464  
                                 
Dividends declared:
  $ 0.93     $ 0.03     $ 0.99     $ 0.09  
                                 
See accompanying notes.
                               
 
 
3

 
 
GAMCO INVESTORS, INC. AND SUBSIDIARIES
 
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
 
UNAUDITED
 
(Dollars in thousands, except per share data)
 
                   
   
September 30,
   
December 31,
   
September 30,
 
   
2010
   
2009
   
2009
 
ASSETS
                 
Cash and cash equivalents, including restricted cash of $62,308,
                 
  $62,258 and $62,246, respectively
  $ 294,271     $ 400,528     $ 463,361  
Investments in securities
    228,210       157,403       172,571  
Investments in partnerships
    79,244       62,655       63,997  
Receivable from brokers
    62,209       30,072       21,991  
Investment advisory fees receivable
    17,145       35,685       13,957  
Income tax receivable and deferred tax assets
    -       -       4,536  
Other assets
    21,140       21,466       18,247  
  Total assets
  $ 702,219     $ 707,809     $ 758,660  
                         
LIABILITIES AND EQUITY
                       
Payable to brokers
  $ 4,151     $ 395     $ 10,006  
Income taxes payable and deferred tax liabilities
    4,533       8,523       -  
Capital lease obligation
    5,197       5,265       5,278  
Compensation payable
    23,575       13,302       20,974  
Securities sold, not yet purchased
    18,446       9,569       9,738  
Mandatorily redeemable noncontrolling interests
    1,367       1,622       1,586  
Accrued expenses and other liabilities
    25,436       25,157       24,879  
  Sub-total
    82,705       63,833       72,461  
                         
5.5% Senior notes (due May 15, 2013)
    99,000       99,000       99,000  
6% Convertible note (due August 14, 2011)
    -       39,851       39,829  
6.5% Convertible note (due October 2, 2018, repaid October 13, 2010)
    60,000       60,000       60,000  
  Total liabilities
    241,705       262,684       271,290  
                         
Redeemable noncontrolling interests
    15,994       1,464       1,424  
Commitments and contingencies (Note J)
                       
Equity
                       
  GAMCO Investors, Inc. stockholders' equity
                       
    Class A Common Stock, $0.001 par value; 100,000,000
                       
      shares authorized; 13,202,489, 13,120,276 and 13,108,526
                       
      issued, respectively; 6,970,410, 7,311,997 and 7,337,347
                       
      outstanding, respectively
    13       13       13  
    Class B Common Stock, $0.001 par value; 100,000,000
                       
      shares authorized; 24,000,000 shares issued;
                       
      20,292,104, 20,292,917 and 20,292,917 shares
                       
      outstanding, respectively
    20       20       20  
    Additional paid-in capital
    255,860       251,591       249,889  
    Retained earnings
    425,383       410,473       447,145  
    Accumulated comprehensive income
    19,306       19,088       24,870  
    Treasury stock, at cost (6,232,079, 5,808,279 and 5,771,179
                       
    shares, respectively)
    (259,442 )     (241,567 )     (239,939 )
  Total GAMCO Investors, Inc. stockholders' equity
    441,140       439,618       481,998  
Noncontrolling interests
    3,380       4,043       3,948  
Total equity
    444,520       443,661       485,946  
                         
Total liabilities and equity
  $ 702,219     $ 707,809     $ 758,660  
                         
See accompanying notes.
                       
 
 
4

 
 
GAMCO INVESTORS, INC. AND SUBSIDIARIES
 
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY AND COMPREHENSIVE INCOME
 
UNAUDITED
 
(In thousands)
 
                                                       
For the nine months ended September 30, 2010
 
         
GAMCO Investors, Inc. shareholders
             
               
Additional
         
Accumulated
               
Redeemable
       
   
Noncontrolling
   
Common
   
Paid-in
   
Retained
   
Comprehensive
   
Treasury
         
Noncontrolling
   
Comprehensive
 
   
Interests
   
Stock
   
Capital
   
Earnings
   
Income
   
Stock
   
Total
   
Interests
   
Income
 
Balance at December 31, 2009
  $ 4,043     $ 33     $ 251,591     $ 410,473     $ 19,088     $ (241,567 )   $ 443,661     $ 1,464     $ -  
Redemptions of redeemable
                                                                       
 noncontrolling interests
    -       -       -       -       -       -       -       (475 )     -  
Contributions from redeemable
                                                                       
 noncontrolling interests
    -       -       -       -       -       -       -       14,700       -  
Dividends paid to noncontrolling
                                                                       
 interests
    (829 )     -       -       -       -       -       (829 )     -       -  
Net income
    166       -       -       41,881       -       -       42,047       305       42,352  
Net unrealized losses on
                                                                       
 securities available for sale,
                                                                       
 net of income tax benefit ($129)
    -       -       -       -       220       -       220       -       220  
Foreign currency translation
    -       -       -       -       (2 )     -       (2 )     -       (2 )
Dividends declared ($0.99 per
                                                                       
 share)
    -       -       -       (26,971 )     -       -       (26,971 )     -       -  
Stock based compensation
                                                                       
 expense
    -       -       4,221       -       -       -       4,221       -       -  
Exercise of stock options
                                                                       
 including tax benefit
    -       -       48       -       -       -       48       -       -  
Purchase of treasury stock
    -       -       -       -       -       (17,875 )     (17,875 )     -       -  
Balance at September 30, 2010
  $ 3,380     $ 33     $ 255,860     $ 425,383     $ 19,306     $ (259,442 )   $ 444,520     $ 15,994     $ 42,570  
Comprehensive income attributable                                                                       
 to noncontrolling interest                                                                      (471
Total comprehensive income                                                                         
 attributable to GAMCO Investors, Inc.                                                               42,099  
                                                                         
See accompanying notes.
                                                                 
 
 
5

 
 
GAMCO INVESTORS, INC. AND SUBSIDIARIES
 
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY AND COMPREHENSIVE INCOME
 
UNAUDITED
 
(In thousands)
 
                                                       
For the nine months ended September 30, 2009
 
         
GAMCO Investors, Inc. shareholders
             
               
Additional
         
Accumulated
               
Redeemable
       
   
Noncontrolling
   
Common
   
Paid-in
   
Retained
   
Comprehensive
   
Treasury
         
Noncontrolling
   
Comprehensive
 
   
Interests
   
Stock
   
Capital
   
Earnings
   
Income
   
Stock
   
Total
   
Interests
   
Income
 
Balance at December 31, 2008
  $ 4,788     $ 33     $ 245,973     $ 413,761     $ 14,923     $ (234,537 )   $ 444,941     $ 4,201     $ -  
Purchase of subsidiary shares
                                                                       
 from noncontrolling interest
    (747 )     -       -       -       -       -       (747 )     -       -  
Redemptions of redeemable
                                                                       
 noncontrolling interests
    -       -       -       -       -       -       -       (2,961 )     -  
Spin-off of subsidiary shares
                                                                       
 to noncontrolling interests
    (412 )     -       -       -       -       -       (412 )     -       -  
Net income
    319       -       -       36,179       -       -       36,498       184       36,682  
Net unrealized gains on
                                                                       
 securities available for sale,
                                                                       
 net of income tax ($5,814)
    -       -       -       -       9,898       -       9,898       -       9,898  
Foreign currency translation
    -       -       -       -       49       -       49       -       49  
Dividends declared ($0.09 per
                                                                       
 share)
    -       -       -       (2,795 )     -       -       (2,795 )     -       -  
Income tax effect of transaction
                                                                 
 with shareholders
    -       -       (243 )     -       -       -       (243 )     -       -  
Stock based compensation
                                                                       
 expense
    -       -       3,821       -       -       -       3,821       -       -  
Exercise of stock options
                                                                       
 including tax benefit
    -       -       338       -       -       -       338       -       -  
Purchase of treasury stock
    -       -       -       -       -       (5,402 )     (5,402 )     -       -  
Balance at September 30, 2009
  $ 3,948     $ 33     $ 249,889     $ 447,145     $ 24,870     $ (239,939 )   $ 485,946     $ 1,424     $ 46,629  
Comprehensive income attributable                                                                    
 to noncontrolling interest                                                                      (503
Total comprehensive income                                                                         
 attributable to GAMCO Investors, Inc.                                                              46,126  
                                                                         
See accompanying notes.
                                                                 
 
 
6

 
 
GAMCO INVESTORS, INC. AND SUBSIDIARIES
 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
UNAUDITED
 
(In thousands)
 
             
   
Nine Months Ended
 
   
September 30,
 
   
2010
   
2009
 
Operating activities
           
Net income
  $ 42,352     $ 36,682  
 Adjustments to reconcile net income to net cash provided by operating activities:
               
  Equity in net gains from partnerships and affiliates
    (4,869 )     (9,569 )
  Depreciation and amortization
    520       487  
  Stock based compensation expense
    4,221       3,821  
  Deferred income taxes
    724       2,644  
  Tax benefit from exercise of stock options
    8       112  
  Foreign currency translation gain/(loss)
    (2 )     49  
  Fair value of donated securities
    (608 )     370  
  Gains on sales of available for sale securities
    (13 )     (2,150 )
  Amortization of discount on debt
    52       63  
  Loss on extinguishment of debt
    497       -  
(Increase) decrease in assets:
               
  Investments in trading securities
    (64,863 )     77,327  
  Investments in partnerships:
               
    Contributions to partnerships
    (18,143 )     (1,432 )
    Distributions from partnerships
    6,423       7,711  
  Receivable from brokers
    (32,137 )     (5,531 )
  Investment advisory fees receivable
    18,539       (2,022 )
  Income tax receivable and deferred tax assets
    -       10,943  
  Other assets
    (194 )     916  
Increase (decrease) in liabilities:
               
  Payable to brokers
    3,756       8,149  
  Income taxes payable and deferred tax liabilities
    (4,843 )     -  
  Compensation payable
    10,273       6,377  
  Mandatorily redeemable noncontrolling interests
    (255 )     190  
  Accrued expenses and other liabilities
    (192 )     1,176  
Total adjustments
    (81,106 )     99,631  
Net cash (used in)/provided by operating activities
   $ (38,754 )    $ 136,313  
 
 
7

 
 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
UNAUDITED (continued)
 
(In thousands)
 
             
   
Nine Months Ended
 
   
September 30,
 
   
2010
   
2009
 
Investing activities
           
Purchases of available for sale securities
  $ (12 )   $ (6,183 )
Proceeds from sales of available for sale securities
    2,014       4,329  
Return of capital on available for sale securities
    1,901       2,748  
Increase in restricted cash
    (50 )     (55,090 )
Net cash provided by (used in) investing activities
    3,853       (54,196 )
                 
Financing activities
               
Contributions from redeemable noncontrolling interests
    14,700       -  
Redemptions of redeemable noncontrolling interests
    (475 )     (2,961 )
Repayment of 6% Convertible notes due August 14, 2011
    (40,400 )     -  
Proceeds from exercise of stock options
    40       226  
Dividends paid
    (26,565 )     (3,375 )
Dividends paid to noncontrolling interests
    (829 )     -  
Purchase of subsidiary shares from noncontrolling interests
    -       (747 )
Purchase of treasury stock
    (17,875 )     (5,402 )
Net cash used in financing activities
    (71,404 )     (12,259 )
Effect of exchange rates on cash and cash equivalents
    (2 )     83  
Net (decrease) increase in cash and cash equivalents
    (106,307 )     69,941  
Cash and cash equivalents at beginning of period
    338,270       331,174  
Cash and cash equivalents at end of period
  $ 231,963     $ 401,115  
Supplemental disclosures of cash flow information:
               
Cash paid for interest
  $ 9,775     $ 9,859  
Cash paid for taxes
  $ 28,004     $ 17,356  
Non-cash activity:
               
- On March 20, 2009, GAMCO Investors, Inc. distributed its shares of Teton Advisors, Inc. ($300) to its shareholders
 
  which resulted in the deconsolidation of Teton, and decreases of approximately $911 of cash and cash equivalents,
 
  $199 of net liabilities and $412 of noncontrolling interests.
               
- For 2010 and 2009 the Company accrued RSA dividends of $405 and $31, respectively.                 
                 
See accompanying notes.
               
 
 
8

 
 
GAMCO INVESTORS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2010
(Unaudited)
A.  Significant Accounting Policies

Basis of Presentation
 
Unless we have indicated otherwise, or the context otherwise requires, references in this report to “GAMCO Investors, Inc.,” “GAMCO,” “the Company,” “GBL,” “we,” “us” and “our” or similar terms are to GAMCO Investors, Inc., its predecessors and its subsidiaries.
 
The unaudited interim condensed consolidated financial statements of GAMCO included herein have been prepared in conformity with generally accepted accounting principles in the United States for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by generally accepted accounting principles in the United States for complete financial statements.  In the opinion of management, the unaudited interim condensed consolidated financial statements reflect all adjustments, which are of a normal recurring nature, necessary for a fair presentation of financial position, results of operations and cash flows of GAMCO for the interim periods presented and are not necessarily indicative of a full year’s results.
 
The condensed consolidated financial statements include the accounts of GAMCO and its subsidiaries.  Intercompany accounts and transactions are eliminated.
 
These condensed consolidated financial statements should be read in conjunction with our audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2009 from which the accompanying condensed consolidated financial statements were derived.

On March 20, 2009, the Company completed its spin-off of its ownership of Teton Advisors, Inc. (“Teton”) to its shareholders.  The condensed consolidated financial statements include the results of Teton up to March 20, 2009.
 
During the third quarter of 2010, the Company presented a separate column for redeemable noncontrolling interests and the amount of comprehensive income attributable to noncontrolling interests and comprehensive income attributable to GAMCO in its condensed consolidated statement of equity and comprehensive income.  The condensed consolidated statement of equity and comprehensive income for the interim period ended September 30, 2009 has also included such information.

Certain items previously reported have been reclassified to conform to the current period’s condensed consolidated financial statements presentation.
 
Use of Estimates
 
The preparation of the condensed consolidated financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes.  Actual results could differ from those estimates.
 
 
9

 
 
Recent Accounting Developments
 
In June 2009, the Financial Accounting Standards Board (“FASB”) issued guidance to improve the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial statements about a transfer of financial assets; the effects of a transfer on its financial position, financial performance, and cash flows; and a transferor’s continuing involvement, if any, in transferred financial assets.  This guidance is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2009 and shall be applied prospectively.  Early adoption is prohibited.  The Company adopted this guidance on January 1, 2010 with no impact to the condensed consolidated financial statements.

In June 2009, the FASB issued amended guidance on the accounting for variable interest entities (“VIEs”).  The amendments will significantly affect the overall consolidation analysis, changing the approach taken by companies in identifying which entities are VIEs and in determining which party is the primary beneficiary.  The guidance requires continuous assessment of the reporting entity’s involvement with such VIEs.  The revised guidance also enhances the disclosure requirements for a reporting entity’s involvement with VIEs, irrespective of whether they qualify for deferral, as discussed below.  The guidance is effective as of the beginning of the first fiscal year that begins after November 15, 2009 and early adoption is prohibited.  In February 2010, the FASB issued further guidance which provided a limited scope deferral for a reporting entity’s interest in an entity that meets all of the following conditions: (a) the entity has all the attributes of an investment company as defined under AICPA Audit and Accounting Guide, Investment Companies, or does not have all the attributes of an investment company but is an entity for which it is acceptable based on industry practice to apply measurement principles that are consistent with the AICPA Audit and Accounting Guide, Investment Companies, (b) the reporting entity does not have explicit or implicit obligations to fund any losses of the entity that could potentially be significant to the entity, and (c) the entity is not a securitization entity, asset-backed financing entity or an entity that was formerly considered a qualifying special-purpose entity.  The reporting entity is required to perform a consolidation analysis for entities that qualify for the deferral in accordance with previously issued guidance on VIEs.  The Company adopted this guidance on January 1, 2010 and has evaluated the deferral guidelines and determined that all significant entities that the Company is involved with that this guidance would potentially have impacted, qualify for the deferral, and therefore the guidance issued did not have a material impact on the condensed consolidated financial statements.

In January 2010, the FASB issued guidance to improve disclosures about fair value measurements.  The guidance affects all entities that are required to make disclosures about recurring and nonrecurring fair value measurements.  The guidance requires new disclosures regarding transfers in and out of Level 1 and 2 fair value measurements and activity related to Level 3 fair value measurements.  In addition, the guidance clarifies existing fair value disclosure requirements related to the level of disaggregation of assets and liabilities and the valuation techniques and inputs used.  This update is effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements.  Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years.  The Company has adopted the guidance that was effective for interim and annual periods beginning after December 15, 2009 on January 1, 2010 which resulted in enhanced footnote disclosure.  The Company's adoption of the guidance which will be effective for interim and annual periods beginning after December 15, 2010 will result in enhanced footnote disclosure upon adoption on January 1, 2011.

In July 2010, the FASB issued guidance to improve disclosures about an entity’s allowance for credit losses and the credit quality of its financing receivables.  The guidance affects all entities.  The guidance requires the entity to disclose the nature of credit risk inherent in the entity’s portfolio of financing receivables, how that risk is analyzed and assessed in arriving at the allowance for credit losses and the changes and reasons for those changes in the allowance for credit losses.  This update is effective for interim and annual reporting periods ending on or after December 15, 2010, except for the disclosures about activity that occurs during a reporting period which is effective for interim and annual reporting periods beginning on or after December 15, 2010.  The application of this guidance is not expected to be material to the condensed consolidated financial statements.
 
 
10

 
 
 B.  Investment in Securities

Investments in securities at September 30, 2010, December 31, 2009 and September 30, 2009 consisted of the following:
 
   
September 30, 2010
   
December 31, 2009
   
September 30, 2009
 
   
Cost
   
Fair Value
   
Cost
   
Fair Value
   
Cost
   
Fair Value
 
   
(In thousands)
                         
Trading securities:
                                   
  Government obligations
  $ 1,388     $ 1,363     $ -     $ -     $ -     $ -  
  Common stocks
    122,720       128,386       53,985       58,834       74,618       79,680  
  Mutual funds
    1,194       1,365       1,194       1,295       1,215       1,254  
  Convertible bonds
    762       938       -       -       -       -  
  Preferred stocks
    1,783       1,834       -       15       10       18  
  Other investments
    785       582       819       585       355       151  
Total trading securities
    128,632       134,468       55,998       60,729       76,198       81,103  
                                                 
Available for sale securities:
                                               
  Common stocks
    16,918       31,594       17,100       34,294       17,100       32,746  
  Mutual funds
    44,717       62,148       48,607       62,380       47,565       58,722  
Total available for sale securities
    61,635       93,742       65,707       96,674       64,665       91,468  
                                                 
Total investments in securities
  $ 190,267     $ 228,210     $ 121,705     $ 157,403     $ 140,863     $ 172,571  
 
Securities sold, not yet purchased at September 30, 2010, December 31, 2009 and September 30, 2009 consisted of the following:
 
   
September 30, 2010
   
December 31, 2009
   
September 30, 2009
 
   
Cost
   
Fair Value
   
Cost
   
Fair Value
   
Cost
   
Fair Value
 
Trading securities:   
(In thousands)
                         
  Common stocks
  $ 18,026     $ 18,387     $ 9,505     $ 9,569     $ 9,037     $ 9,738  
  Other
    56       59       -       -       -       -  
Total securities sold, not yet purchased
  $ 18,082     $ 18,446     $ 9,505     $ 9,569     $ 9,037     $ 9,738  
 
Management determines the appropriate classification of debt and equity securities at the time of purchase and reevaluates such designation as of each balance sheet date.  Investments in United States Treasury Bills and Notes with maturities of greater than three months at the time of purchase are classified as investments in securities and those with maturities of three months or less at time of purchase are classified as cash equivalents.  A substantial portion of investments in securities are held for resale in anticipation of short-term market movements and therefore are classified as trading securities.  Trading securities are stated at fair value, with any unrealized gains or losses, reported in current period earnings.  Available for sale (“AFS”) investments are stated at fair value, with any unrealized gains or losses, net of taxes, reported as a component of equity except for losses deemed to be other than temporary which are recorded as unrealized losses in the condensed consolidated statements of income.  There were no impairment of AFS securities for the three or nine month periods ended September 30, 2010 and 2009.
 
The Company recognizes all derivatives as either assets or liabilities measured at fair value and are included in either investments in securities or securities sold, not yet purchased on the condensed consolidated statements of financial condition.  From time to time, the Company will enter into hedging transactions to manage its exposure to foreign currencies and equity prices related to its proprietary investments.  For the three months ended September 30, 2010, the Company had derivative transactions in equity derivatives which resulted in net losses of $36,000.  There was no derivative activity for the three months ended September 30, 2009.  For the nine months ended September 30, 2010 and 2009, the Company had derivative transactions in equity derivatives which resulted in net losses of $154,000 and $27,000, respectively.  At September 30, 2010 and December 31, 2009 we held derivative contracts on 265,000 equity shares and 122,000 equity shares, respectively, and the fair value was $285,000 and $246,000, respectively, and are included as investments in securities in the condensed consolidated statements of financial condition.  There were no derivatives held at September 30, 2009.  These transactions are not designated as hedges for accounting purposes, and changes in fair values of these derivatives are included in net gain from investments in the condensed consolidated statements of income. 
 
 
11

 

At September 30, 2010, December 31, 2009 and September 30, 2009, the fair value of common stock investments available for sale was $31.6 million, $34.3 million and $32.7 million, respectively.  The total unrealized gains for common stock investments available for sale securities with unrealized gains was $14.7 million, $17.2 million and $15.6 million at September 30, 2010, December 31, 2009 and September 30, 2009, respectively.  There were no unrealized losses for common stock investments available for sale at September 30, 2010, December 31, 2009 or September 30, 2009.  At September 30, 2010, December 31, 2009 and September 30, 2009, the fair value of mutual fund investments available for sale with unrealized gains was $62.1 million, $60.4 million and $58.5 million, respectively.  At September 30, 2010, there were no unrealized losses for mutual fund investments available for sale.  At December 31, 2009 and September 30, 2009, the fair value of mutual fund investments available for sale with unrealized losses was $2.0 million and $172,000, respectively.  The total unrealized gains for mutual fund investments available for sale securities with unrealized gains at September 30, 2010, December 31, 2009 and September 30, 2009 was $17.4 million, $13.8 million and $11.2 million, respectively, while the total unrealized losses for available for sale securities with unrealized losses was $0, $2,000 and $2,000, respectively.

Unrealized changes to fair value, net of taxes, for the three months ended September 30, 2010 and 2009 of $3.3 million and $1.0 million in gains, respectively, and for the nine months ended September 30, 2010 and 2009 of $0.2 million and $9.9 million in gains, respectively, have been included in other comprehensive income, a component of equity, at September 30, 2010 and September 30, 2009, respectively.  Return of capital on available for sale securities for the nine months ended September 30, 2010 and 2009 were $1.9 million and $2.7 million, respectively.  There were no sales of investments available for sale for the three months ended September 30, 2010.  Proceeds from sales of investments available for sale were approximately $0.8 million for the three month period ended September 30, 2009.  For the three months ended September 30, 2009, gross gains on the sale of investments available for sale amounted to $175,000; there were no gross losses on the sale of investments available for sale.  Proceeds from sales of investments available for sale were approximately $2.0 million and $4.3 million for the nine month periods ended September 30, 2010 and 2009, respectively.  For the nine months ended September 30, 2010 and 2009, gross gains on the sale of investments available for sale amounted to $13,000 and $2.1 million, respectively; there were no gross losses on the sale of investments available for sale.  The basis on which the cost of a security sold is determined is specific identification.

Investments classified as available for sale that are in an unrealized loss position for which other-than-temporary impairment has not been recognized consisted of the following:
 
   
September 30, 2010
         
December 31, 2009
         
September 30, 2009
       
         
Unrealized
             
Unrealized
             
Unrealized
     
   
Cost
   
Losses
   
Fair Value
 
Cost
   
Losses
   
Fair Value
 
Cost
   
Losses
   
Fair Value
 
(in thousands)
                                                     
Mutual Funds
  $ -     $ -     $ -     $ 2,002     $ (2 )   $ 2,000     $ 174     $ (2 )   $ 172  
 
At September 30, 2010, there were no available for sale holdings in loss positions.

At December 31, 2009, there were five holdings in loss positions which were not deemed to be other-than-temporarily impaired due to the length of time that they had been in a loss position and because they passed scrutiny in our evaluation of issuer-specific and industry-specific considerations.  In these specific instances, the investments at December 31, 2009 were mutual funds with diversified holdings across multiple companies and in most cases across multiple industries.  One holding was impaired for one month, one holding was impaired for nine consecutive months and three holdings were impaired for fourteen consecutive months.  The fair value of these holdings at December 31, 2009 was $2.0 million.

At September 30, 2009, there were five holdings in loss positions which were not deemed to be other-than-temporarily impaired due to the length of time that they had been in a loss position and because they passed scrutiny in our evaluation of issuer-specific and industry-specific considerations.  In these specific instances, the investments at September 30, 2009 were mutual funds with diversified holdings across multiple companies and in most cases across multiple industries.  One holding was impaired for six consecutive months and four holdings were impaired for eleven consecutive months.  The fair value of these holdings at September 30, 2009 was $172,000.
 
 
12

 

C. Investments in Partnerships
 
The Company is general partner or co-general partner of various sponsored limited partnerships and the investment manager of various sponsored offshore funds whose underlying assets consist primarily of marketable securities (the “affiliated entities”).  We also have investments in unaffiliated partnerships, offshore funds and other entities.  Certain of the affiliated entities are consolidated, generally because a majority of the equity is owned by the Company.  Other investment partnerships for which we serve as the general partner but have only a minority ownership interest are not consolidated because the limited partners have substantive rights to replace the Company as general partner.  Our balance sheet caption “investments in partnerships” includes those investments, in both affiliated and unaffiliated entities, which the Company accounts for under the equity method of accounting and certain investments in consolidated feeder funds that the Company accounts for at fair value, as described below.  The Company reflects the equity in earnings of these equity method investees and the change in fair value of the consolidated feeder funds under the caption net gain from investments on the condensed consolidated statements of income.

We also have sponsored a number of investment vehicles where we are the investment manager in which we do not have an equity investment.  These vehicles are considered VIEs and we are not the primary beneficiary because we do not absorb a majority of the entities’ expected losses or expected returns.  The Company has not provided any financial or other support to these entities.  The total assets of these entities at September 30, 2010, December 31, 2009 and September 30, 2009 were $11.8 million, $10.4 million and $9.9 million, respectively.  Our maximum exposure to loss as a result of our involvement with the VIEs is limited to the deferred carried interest that we have in one of the VIEs.  On September 30, 2010, December 31, 2009 and September 30, 2009, we had a deferred carried interest in one of the VIE offshore funds of approximately $307,000, $285,000 and $273,000, respectively, and was included in investments in partnerships on the condensed consolidated statements of financial condition.  Additionally, as the general partner or investment manager to these VIEs the Company earns fees in relation to these roles, which given a decline in AUM for the VIEs would result in lower fee revenues earned by the Company which would be reflected in the condensed consolidated statement of income, condensed consolidated statement of financial condition and condensed consolidated statement of cash flows.

At September 30, 2010, December 31, 2009 and September 30, 2009, and for the nine months ended September 30, 2010, the Company consolidated two limited partnerships and one offshore fund (the “consolidated feeder funds”), and for the nine months ended September 30, 2009, the Company consolidated three limited partnerships and one offshore fund, that owned 100% of their offshore master funds.  The Company retained the specialized accounting of the consolidated feeder funds in the Company’s consolidated financial statements.  Included in the investment in partnerships on the Company’s consolidated statement of financial condition as of September 30, 2010, December 31, 2009 and September 30, 2009, is $26.8 million $25.1 million, and $24.7 million, respectively, which represents the consolidated feeder fund’s proportionate investment in the master funds carried at fair value. 

D. Fair Value

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

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

-  
Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities at the reporting date.  Level 1 assets include cash equivalents, government obligations, listed mutual funds and equities.
-  
Level 2 inputs utilize inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly.  Level 2 inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities that are not active and inputs other than quoted prices that are observable for the asset or liability, such as interest rates and yield curves that are observable at commonly-quoted intervals.  Assets that generally are included in this category may include certain limited partnership interests in hedge funds in which the valuations for substantially all of the investments within the fund are based upon Level 1 or Level 2 inputs and over the counter derivatives that have inputs to the valuations that can be generally corroborated by observable market data.
-  
Level 3 inputs are unobservable inputs for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability.  Assets included in this category generally include equities and direct private equity investments held within consolidated partnerships.
 
 
13

 

In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy.  In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level input that is significant to the fair value measurement in its entirety.  The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.  Investments are transferred into or out of any level at their beginning period values.

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

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

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

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

Investments in Partnerships – The Company’s investments include limited partner investments in consolidated feeder funds.  The Company considers the net asset value of the fund to be the best estimate of fair value.  Investments in hedge funds that are redeemable at the measurement date or within one month, are categorized in Level 2 of the fair value hierarchy.  These funds primarily invest in long and short investments in debt and equity securities that are traded in public and over-the-counter exchanges in the United States and are classified as level 1 assets or liabilities in the funds’ financial statements.  We may redeem our investments in these funds monthly with 30 days’ notice.
 
 
14

 

The following table presents information about the Company’s assets and liabilities by major categories measured at fair value on a recurring basis as of September 30, 2010, December 31, 2009 and September 30, 2009 and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value:

Assets and Liabilities Measured at Fair Value on a Recurring Basis as of September 30, 2010 (in thousands)
 
   
Quoted Prices in Active
   
Significant Other
   
Significant
   
Balance as of
 
   
Markets for Identical
   
Observable
   
Unobservable
   
September 30,
 
Assets
 
Assets (Level 1)
   
Inputs (Level 2)
   
Inputs (Level 3)
   
2010
 
Cash equivalents
  $ 293,661     $ -     $ -     $ 293,661  
Investments in partnerships
    -       26,795       -       26,795  
Investments in securities:
                               
  AFS - Common stocks
    31,594       -       -       31,594  
  AFS - Mutual funds
    62,148       -       -       62,148  
  Trading - Gov't obligations
    1,363       -       -       1,363  
  Trading - Common stocks
    128,113       90       183       128,386  
  Trading - Mutual funds
    1,365       -       -       1,365  
  Trading - Convertible bonds
    938       -       -       938  
  Trading - Preferred stocks
    1,821       -       13       1,834  
  Trading - Other
    204       285       93       582  
Total investments in securities
    227,546       375       289       228,210  
Total investments
    227,546       27,170       289       255,005  
Total assets at fair value
  $ 521,207     $ 27,170     $ 289     $ 548,666  
Liabilities
                               
  Trading - Common stocks
  $ 18,387     $ -     $ -     $ 18,387  
  Trading - Other
    59       -       -       59  
Securities sold, not yet purchased
  $ 18,446     $ -     $ -     $ 18,446  
 
Assets and Liabilities Measured at Fair Value on a Recurring Basis as of December 31, 2009 (in thousands)
 
   
Quoted Prices in Active
   
Significant Other
   
Significant
   
Balance as of
 
   
Markets for Identical
   
Observable
   
Unobservable
   
December 31,
 
Assets
 
Assets (Level 1)
   
Inputs (Level 2)
   
Inputs (Level 3)
   
2009
 
Cash equivalents
  $ 400,111     $ -     $ -     $ 400,111  
Investments in partnerships
    -       25,092       -       25,092  
Investments in securities:
                               
  AFS - Common stocks
    34,294       -       -       34,294  
  AFS - Mutual funds
    62,380       -       -       62,380  
  Trading - Common stocks
    58,521       108       205       58,834  
  Trading - Mutual funds
    1,295       -       -       1,295  
  Trading - Preferred stocks
    -       -       15       15  
  Trading - Other
    249       246       90       585  
Total investments in securities
    156,739       354       310       157,403  
Total investments
    156,739       25,446       310       182,495  
Total assets at fair value
  $ 556,850     $ 25,446     $ 310     $ 582,606  
Liabilities