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EX-31.2 - EXHIBIT 31.2, DATED NOVEMBER 7, 2017 - GAMCO INVESTORS, INC. ET ALex31_2093017.htm
EX-32.2 - EXHIBIT 32.2, DATED NOVEMBER 7, 2017 - GAMCO INVESTORS, INC. ET ALex32_2093017.htm
EX-32.1 - EXHIBIT 32.1, DATED NOVEMBER 7, 2017 - GAMCO INVESTORS, INC. ET ALex32_1093017.htm
EX-31.3 - EXHIBIT 31.3, DATED NOVEMBER 7, 2017 - GAMCO INVESTORS, INC. ET ALex31_3093017.htm
EX-31.1 - EXHIBIT 31.1, DATED NOVEMBER 7, 2017 - GAMCO INVESTORS, INC. ET ALex31_1093017.htm
SECURITIES & EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2017
or
       TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ___ to ___

Commission File No. 001-14761

GAMCO INVESTORS, INC.
(Exact name of Registrant as specified in its charter)

Delaware
 
13-4007862
(State of other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
     
One Corporate Center, Rye, NY
 
10580-1422
(Address of principle executive offices)
 
(Zip Code)

(914) 921-3700
Registrant's telephone number, including area code
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes   No 
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer
Accelerated filer
 
 
Non-accelerated filer
Smaller reporting company o Emerging growth company
   
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes    No 
 
Indicate the number of shares outstanding of each of the Registrant's classes of Common Stock, as of the latest practical date.
Class
 
Outstanding at October 31, 2017
Class A Common Stock, .001 par value
  (Including 164,050 restricted stock awards)
10,089,844
Class B Common Stock, .001 par value
 
19,062,168


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, 2017 and 2016
 
- Nine months ended September 30, 2017 and 2016
   
 
Condensed Consolidated Statements of Comprehensive Income:
 
- Three months ended September 30, 2017 and 2016
 
- Nine months ended September 30, 2017 and 2016
   
 
Condensed Consolidated Statements of Financial Condition:
 
- September 30, 2017
 
- December 31, 2016
 
- September 30, 2016
   
 
Condensed Consolidated Statements of Equity:
 
- Nine months ended September 30, 2017 and 2016
   
 
Condensed Consolidated Statements of Cash Flows:
 
- Nine months ended September 30, 2017 and 2016
   
 
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,
 
   
2017
   
2016
   
2017
   
2016
 
Revenues
                       
Investment advisory and incentive fees
 
$
77,328
   
$
75,952
   
$
228,942
   
$
219,594
 
Distribution fees and other income
   
11,013
     
11,769
     
32,916
     
33,456
 
Total revenues
   
88,341
     
87,721
     
261,858
     
253,050
 
Expenses
                               
Compensation
   
42,919
     
21,233
     
97,634
     
62,130
 
Management fee
   
4,935
     
1,163
     
9,455
     
3,376
 
Distribution costs
   
11,665
     
11,568
     
33,373
     
32,786
 
Other operating expenses
   
5,429
     
5,681
     
15,900
     
14,993
 
Total expenses
   
64,948
     
39,645
     
156,362
     
113,285
 
                                 
Operating income
   
23,393
     
48,076
     
105,496
     
139,765
 
Other income (expense)
                               
Net gain from investments
   
2,841
     
55
     
2,867
     
518
 
Interest and dividend income
   
745
     
371
     
1,765
     
1,104
 
Interest expense
   
(2,688
)
   
(3,155
)
   
(8,269
)
   
(9,729
)
Shareholder-designated contribution
   
(3,857
)
   
-
     
(3,857
)
   
-
 
Total other expense, net
   
(2,959
)
   
(2,729
)
   
(7,494
)
   
(8,107
)
Income before income taxes
   
20,434
     
45,347
     
98,002
     
131,658
 
Income tax provision
   
3,834
     
14,486
     
33,688
     
47,229
 
Net income attributable to GAMCO Investors, Inc.'s shareholders
 
$
16,600
   
$
30,861
   
$
64,314
   
$
84,429
 
                                 
Net income attributable to GAMCO Investors, Inc.'s shareholders
                               
per share:
                               
Basic
 
$
0.57
   
$
1.06
   
$
2.22
   
$
2.89
 
                                 
Diluted
 
$
0.55
   
$
1.03
   
$
2.14
   
$
2.85
 
                                 
Weighted average shares outstanding:
                               
Basic
   
28,926
     
29,185
     
28,930
     
29,222
 
                                 
Diluted
   
31,173
     
30,406
     
31,144
     
29,811
 
                                 
Dividends declared:
 
$
0.02
   
$
0.02
   
$
0.06
   
$
0.06
 

See accompanying notes.

3

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

 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2017
 
2016
 
2017
 
2016
 
                 
Net income
 
$
16,600
   
$
30,861
   
$
64,314
   
$
84,429
 
Other comprehensive gain/(loss), net of tax:
                               
Foreign currency translation
   
28
     
(28
)
   
75
     
(121
)
Net unrealized gains on securities available for sale (a)
   
2,321
     
506
     
1,019
     
323
 
Other comprehensive gain
   
2,349
     
478
     
1,094
     
202
 
                                 
Comprehensive income attributable to GAMCO Investors, Inc.
 
$
18,949
   
$
31,339
   
$
65,408
   
$
84,631
 

(a) Net of income tax expense of $1,363, $297, $599 and $190, respectively.

See accompanying notes.

4

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

   
September 30,
   
December 31,
   
September 30,
 
   
2017
   
2016
   
2016
 
ASSETS
                 
Cash and cash equivalents, including restricted cash of $95, $0 and $0, respectively
 
$
61,097
   
$
39,812
   
$
33,852
 
Investments in securities, including restricted investments in securities                         
  of $59,954, $0 and $0, respectively
   
101,425
     
37,285
     
32,889
 
Receivable from brokers
   
1,342
     
453
     
344
 
Investment advisory fees receivable
   
25,549
     
43,736
     
26,606
 
Receivable from affiliates
   
4,784
     
5,960
     
4,745
 
Income tax receivable and deferred tax asset
   
24,941
     
9,349
     
10,634
 
Other assets
   
11,888
     
12,634
     
12,198
 
Total assets
 
$
231,026
   
$
149,229
   
$
121,268
 
                         
LIABILITIES AND EQUITY
                       
Payable to brokers
 
$
13,311
   
$
66
   
$
10,203
 
Income taxes payable and deferred tax liabilities
   
3,215
     
3,815
     
164
 
Capital lease obligation
   
4,976
     
5,066
     
5,094
 
Compensation payable
   
82,896
     
42,384
     
31,469
 
Payable to affiliates
   
2,981
     
1,412
     
7,679
 
Accrued expenses and other liabilities
   
24,134
     
29,178
     
31,801
 
Sub-total
   
131,513
     
81,921
     
86,410
 
                         
4.5% Convertible note (net of issuance costs of $138, $165 and $174, respectively)
                       
  (due August 15, 2021) (Note F)
   
109,862
     
109,835
     
109,826
 
AC 4% PIK Note (due November 30, 2020) (Note F)
   
70,000
     
100,000
     
100,000
 
5.875% Senior notes (net of issuance costs of $87, $105 and $110, respectively)
                       
  (due June 1, 2021) (Note F)
   
24,138
     
24,120
     
24,115
 
Total liabilities
   
335,513
     
315,876
     
320,351
 
                         
Commitments and contingencies (Note I)
   
-
     
-
     
-
 
                         
Equity
                       
GAMCO Investors, Inc. stockholders' equity
                       
Preferred stock, $.001 par value;10,000,000 shares authorized;
                       
         none issued and outstanding
   
-
     
-
     
-
 
Class A Common Stock, $0.001 par value; 100,000,000 shares authorized;
                       
  15,473,725, 15,477,082 and 15,480,032 issued, respectively;10,075,944,
                       
  10,369,601 and 10,454,392 outstanding, respectively
   
14
     
14
     
14
 
Class B Common Stock, $0.001 par value; 100,000,000 shares authorized;
                       
  24,000,000 shares issued; 19,092,168, 19,093,311 and 19,093,311 shares
                       
  outstanding, respectively
   
19
     
19
     
19
 
Additional paid-in capital
   
11,084
     
3,903
     
3,135
 
Retained earnings
   
143,026
     
80,515
     
48,412
 
Accumulated other comprehensive income
   
12,365
     
11,271
     
9,317
 
Treasury stock, at cost (5,397,781, 5,107,481 and 5,025,640 shares, respectively)
   
(270,995
)
   
(262,369
)
   
(259,980
)
Total GAMCO Investors, Inc. stockholders' equity (deficit)
   
(104,487
)
   
(166,647
)
   
(199,083
)
                         
Total liabilities and equity
 
$
231,026
   
$
149,229
   
$
121,268
 

See accompanying notes.

5

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

For the Nine Months Ended September 30, 2017

   
GAMCO Investors, Inc. stockholders
 
                     
Accumulated
             
         
Additional
         
Other
             
   
Common
   
Paid-in
   
Retained
   
Comprehensive
   
Treasury
       
   
Stock
   
Capital
   
Earnings
   
Income
   
Stock
   
Total
 
Balance at December 31, 2016
 
$
33
   
$
3,903
   
$
80,515
   
$
11,271
   
$
(262,369
)
 
$
(166,647
)
Net income
   
-
     
-
     
64,314
     
-
     
-
     
64,314
 
Net unrealized gains on
                                               
securities available for sale,
                                               
net of income tax expense ($1,663)
   
-
     
-
     
-
     
2,830
     
-
     
2,830
 
Amounts reclassified from
                                               
  accumulated other
                                               
  comprehensive income,
                                               
  net of income tax benefit ($1,064)
   
-
     
-
     
-
     
(1,811
)
   
-
     
(1,811
)
Foreign currency translation
   
-
     
-
     
-
     
75
     
-
     
75
 
Dividends declared ($0.06 per
                                               
share)
   
-
     
-
     
(1,803
)
   
-
     
-
     
(1,803
)
Stock based compensation
                                               
expense
   
-
     
7,181
     
-
     
-
     
-
     
7,181
 
Purchase of treasury stock
   
-
     
-
     
-
     
-
     
(8,626
)
   
(8,626
)
Balance at September 30, 2017
 
$
33
   
$
11,084
   
$
143,026
   
$
12,365
   
$
(270,995
)
 
$
(104,487
)

See accompanying notes.

6

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

For the Nine Months Ended September 30, 2016

   
GAMCO Investors, Inc. stockholders
 
                     
Accumulated
             
         
Additional
   
Retained
   
Other
             
   
Common
   
Paid-in
   
Earnings
   
Comprehensive
   
Treasury
       
   
Stock
   
Capital
   
(Deficit)
   
Income
   
Stock
   
Total
 
Balance at December 31, 2015
 
$
33
   
$
345
   
$
(34,224
)
 
$
9,115
   
$
(251,596
)
 
$
(276,327
)
Net income
   
-
     
-
     
84,429
     
-
     
-
     
84,429
 
Net unrealized gains on
                                               
securities available for sale,
                                               
net of income tax expense ($129)
   
-
     
-
     
-
     
221
     
-
     
221
 
Amounts reclassified from
                                               
accumulated other
                                               
comprehensive income,
                                               
net of income tax expense ($61)
   
-
     
-
     
-
     
102
     
-
     
102
 
Foreign currency translation
   
-
     
-
     
-
     
(121
)
   
-
     
(121
)
Dividends declared ($0.06 per
                                               
share)
   
-
     
-
     
(1,793
)
   
-
     
-
     
(1,793
)
Stock based compensation
                                               
expense
   
-
     
3,258
     
-
     
-
     
-
     
3,258
 
Reduction of deferred tax asset
                                               
for excess of recorded RSA tax
                                               
benefit over actual tax benefit
   
-
     
(468
)
   
-
     
-
     
-
     
(468
)
Purchase of treasury stock
   
-
     
-
     
-
     
-
     
(8,384
)
   
(8,384
)
Balance at September 30, 2016
 
$
33
   
$
3,135
   
$
48,412
   
$
9,317
   
$
(259,980
)
 
$
(199,083
)


See accompanying notes.



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

   
Nine Months Ended
 
   
September 30,
 
   
2017
   
2016
 
Operating activities
           
Net income
 
$
64,314
   
$
84,429
 
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation and amortization
   
439
     
470
 
Stock based compensation expense
   
7,181
     
3,258
 
Deferred income taxes
   
(9,229
)
   
(3,930
)
Foreign currency translation loss
   
75
     
(121
)
Cost basis of donated securities
   
1,051
     
68
 
Net gains on sales of available for sale securities
   
(20
)
   
(4
)
(Increase) decrease in assets:
               
Investments in trading securities
   
(59,943
)
   
223
 
Receivable from affiliates
   
1,179
     
290
 
Receivable from brokers
   
(889
)
   
747
 
Investment advisory fees receivable
   
18,188
     
4,442
 
Income taxes receivable and deferred tax assets
   
(15,592
)
   
(3,847
)
Other assets
   
325
     
534
 
Increase (decrease) in liabilities:
               
Payable to affiliates
   
1,569
     
(8
)
Payable to brokers
   
13,245
     
10,190
 
Income taxes payable and deferred tax liabilities
   
8,029
     
(1,384
)
Compensation payable
   
40,506
     
7,051
 
Accrued expenses and other liabilities
   
(5,199
)
   
2,804
 
Total adjustments
   
915
     
20,783
 
Net cash provided by operating activities
 
$
65,229
   
$
105,212
 


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

   
Nine Months Ended
 
   
September 30,
 
   
2017
   
2016
 
Investing activities
           
Purchases of available for sale securities
 
$
(3,932
)
 
$
(223
)
Proceeds from sales of available for sale securities
   
321
     
408
 
Net cash (used in) provided by investing activities
   
(3,611
)
   
185
 
                 
Financing activities
               
Issuance of 4.5% Convertible note
   
-
     
109,826
 
Dividends paid
   
(1,737
)
   
(1,752
)
Purchase of treasury stock
   
(8,626
)
   
(8,384
)
Repayment of AC 4% PIK Note
   
(30,000
)
   
(150,000
)
Repayment of loan from GGCP
   
-
     
(35,000
)
Amortization of debt issuance costs
   
45
     
18
 
Net cash used in financing activities
   
(40,318
)
   
(85,292
)
Effect of exchange rates on cash and cash equivalents
   
(15
)
   
28
 
Net increase in cash and cash equivalents
   
21,285
     
20,133
 
Cash and cash equivalents at beginning of period
   
39,812
     
13,719
 
Cash and cash equivalents at end of period
 
$
61,097
   
$
33,852
 
Supplemental disclosures of cash flow information:
               
Cash paid for interest
 
$
6,621
   
$
4,561
 
Cash paid for taxes
 
$
52,628
   
$
55,216
 

Non-cash activity:
-
For the nine months ended September 30, 2017 and September 30, 2016, the Company accrued dividends on restricted stock awards of $66 and $41, respectively.
-
For the nine months ended September 30, 2016, the Company recorded $468 as a reduction to its deferred tax asset and additional paid-in capital for the excess of the recorded restricted stock award tax benefit over the actual tax benefit.

See accompanying notes.

9

GAMCO INVESTORS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017
(Unaudited)

A.  Significant Accounting Policies

Basis of Presentation

Unless we have indicated otherwise, or the context otherwise requires, references in this report to “GAMCO Investors, Inc.,” “GAMCO,” “the Company,” “GBL,” “we,” “us” and “our” or similar terms are to GAMCO Investors, Inc., its predecessors and its subsidiaries.
 
The unaudited interim condensed consolidated financial statements of GAMCO included herein have been prepared in conformity with generally accepted accounting principles (“GAAP”) in the United States for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by U.S. GAAP in the United States for complete financial statements.  In the opinion of management, the unaudited interim condensed consolidated financial statements reflect all adjustments, which are of a normal recurring nature, necessary for a fair presentation of financial position, results of operations and cash flows of GAMCO for the interim periods presented and are not necessarily indicative of a full year’s results.
 
The interim condensed consolidated financial statements include the accounts of GAMCO and its subsidiaries.  Intercompany accounts and transactions are eliminated.
 
These interim 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, 2016.

Use of Estimates

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

Recent Accounting Developments

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, "Revenue from Contracts with Customers," which supersedes the revenue recognition requirements in the Accounting Standards Codification ("Codification") Topic 605, Revenue Recognition, and most industry-specific guidance throughout the industry topics of the Codification.  The core principle of the new ASU No. 2014-09 is for companies to recognize revenue from the transfer of goods or services to customers in amounts that reflect the consideration to which the company expects to be entitled in exchange for those goods or services.  The new standard provides a five-step approach to be applied to all contracts with customers and also requires expanded disclosures about revenue recognition.  In March 2016, the FASB issued revised guidance which clarifies the guidance related to (a) determining the appropriate unit of account under the revenue standard’s principal versus agent guidance and (b) applying the indicators of whether an entity is a principal or an agent in accordance with the revenue standard’s control principle. In April 2016, the FASB issued an amendment to provide more detailed guidance including additional implementation guidance and examples related to a) identifying performance obligations and b) licenses of intellectual property. In May 2016, the FASB amended the standard to clarify the guidance on assessing collectability, presenting sales taxes, measuring noncash consideration, and certain transition matters. This new guidance will be effective for the Company's first quarter of 2018 and requires either a full retrospective or a modified retrospective approach to adoption. The Company’s implementation analysis is nearing completion, and the Company does not expect the adoption of the guidance to have a significant effect on the timing of the recognition of revenue.  The Company has also been reviewing and preparing for the enhanced disclosure requirements of the standard, which will have an effect on the disclosures in the consolidated financial statements and accompanying notes.  The overall effect upon adoption may change based on further analysis and implementation efforts. Finally, the Company has not yet determined which transition method it will use.

In January 2016, the FASB issued ASU 2016-01, which amends the guidance in U.S. GAAP on the classification and measurement of financial instruments. Although the ASU retains many current requirements, it significantly revises an entity’s accounting related to (1) the classification and measurement of investments in equity securities and (2) the presentation of certain fair value changes for financial liabilities measured at fair value. The ASU also amends certain disclosure requirements associated with the fair value of financial instruments. In addition, the FASB clarified guidance related to the valuation allowance assessment when recognizing deferred tax assets resulting from unrealized losses on available-for-sale debt securities. To adopt the amendments, entities will be required to make a cumulative-effect adjustment to beginning retained earnings as of the beginning of the fiscal year in which the guidance is effective. This new guidance will be effective for the Company’s first quarter of 2018. Upon adoption of this guidance, changes in the fair value of the Company’s available-for-sale investments will be reported through earnings rather than through other comprehensive income.



10

In February 2016, the FASB issued ASU 2016-02, which amends the guidance in U.S. GAAP for the accounting for leases.  ASU 2016-02 requires a lessee to recognize assets and liabilities arising from most operating leases in the condensed consolidated statement of financial position. It requires these operating leases to be recorded on the balance sheet as right of use assets and offsetting lease liability obligations.  This new guidance will be effective for the Company’s first quarter of 2019. The Company is currently evaluating this guidance and the impact it will have on its consolidated financial statements and related disclosures.

In March 2016, the FASB issued ASU 2016-09, which simplifies several aspects of the accounting for employee share-based payment transactions for both public and nonpublic entities, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. For public companies, the ASU is effective for annual reporting periods beginning after December 15, 2016, including interim periods within those annual reporting periods.  The Company adopted this guidance on January 1, 2017 without a material impact to the consolidated financial statements.  Please see Note D.

In August 2016, the FASB issued ASU 2016-15, which adds and clarifies guidance on the classification of certain cash receipts and payments in the consolidated statements of cash flows.  This guidance is intended to unify the currently diverse presentations and classifications, which address eight classification issues related to the statement of cash flows, including debt prepayment or debt extinguishment costs, settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies, distributions received from equity method investees, beneficial interests in securitization transactions, and separately identifiable cash flows and application of the predominance principle. This new guidance will be effective for the Company’s first quarter of 2018 and requires a retrospective approach to adoption. The Company is currently evaluating the potential effect of this new guidance on its condensed consolidated financial statements and the related disclosures.

In November 2016, the FASB issued ASU 2016-18, which amends ASC 230 to clarify guidance on the classification and presentation of restricted cash in the statement of cash flows.  Key requirements are that an entity should include in its cash and cash equivalent balances in the statement of cash flow those amounts that are deemed to be restricted cash and restricted cash equivalents and that a reconciliation between the statement of financial position and the statement of cash flows must be disclosed when the statement of financial position includes more than one line item for cash, cash equivalents, restricted cash, and restricted cash equivalents.  The ASU also mandates that changes in restricted cash and restricted cash equivalents that result from transfers between cash, cash equivalents, restricted cash, and restricted cash equivalents should not be presented as cash flow activities in the statement of cash flows and that an entity with a material amount of restricted cash and restricted cash equivalents must disclose information about the nature of the restrictions.  This new guidance was to be effective for the Company’s first quarter of 2018, but the Company has elected to early adopt in the third quarter of 2017.  There was no material impact to the consolidated financial statements.

In January 2017, the FASB issued ASU 2017-04 to simplify the process used to test for goodwill impairment.  A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. This new guidance will be effective for the Company’s first quarter of 2020. The Company is currently evaluating the potential effect of this new guidance on its condensed consolidated financial statements and related disclosures.

On May 10, 2017, the FASB issued ASU 2017-09, which amends the scope of modification accounting for share-based payment arrangements.  The ASU provides guidance on the types of changes to the terms or conditions of share-based payment awards to which an entity would be required to apply modification accounting under ASC 718.  Specifically, an entity would not apply modification accounting if the fair value, vesting conditions, and classification of the awards are the same immediately before and after the modification.  For all entities, the ASU is effective for annual reporting periods, including interim periods within those annual reporting periods, beginning after December 15, 2017.  Early adoption is permitted, including adoption in any interim period.  This ASU, which we did not early adopt, would not have impacted the accounting for the acceleration of vesting of restricted stock awards during the nine months ended September 30, 2017.


11


B.  Investment in Securities

Investments in securities at September 30, 2017, December 31, 2016 and September 30, 2016 consisted of the following:

   
September 30, 2017
   
December 31, 2016
   
September 30, 2016
 
   
Cost
   
Fair Value
   
Cost
   
Fair Value
   
Cost
   
Fair Value
 
   
(In thousands)
 
Trading securities:
                                   
US Government Obligations
 
$
59,905
   
$
59,954
   
$
-
   
$
-
   
$
-
   
$
-
 
Common stocks
   
24
     
31
     
51
     
54
     
16
     
16
 
Mutual Funds
   
11
     
11
     
-
     
-
     
-
     
-
 
Total trading securities
   
59,940
     
59,996
     
51
     
54
     
16
     
16
 
                                                 
Available for sale securities:
                                               
Common stocks
   
21,319
     
41,315
     
18,739
     
37,131
     
17,649
     
32,873
 
Closed-end funds
   
99
     
114
     
99
     
100
     
-
     
-
 
Total available for sale securities
   
21,418
     
41,429
     
18,838
     
37,231
     
17,649
     
32,873
 
                                                 
Total investments in securities
 
$
81,358
   
$
101,425
   
$
18,889
   
$
37,285
   
$
17,665
   
$
32,889
 

There were no securities sold, not yet purchased at September 30, 2017, December 31, 2016 and September 30, 2016.

$59.9 million of U.S. Government Obligations are held in an escrow account for the benefit of the Convertible Note holder.

Management determines the appropriate classification of debt and equity securities at the time of purchase and reevaluates such designation as of the date of each condensed consolidated statement of financial condition.  Investments in United States Treasury Bills and Notes with maturities of greater than three months at the time of purchase are classified as investments in securities, and those with maturities of three months or less at the time of purchase are classified as cash equivalents.  The portion of investments in securities held for resale in anticipation of short-term market movements are classified as trading securities.  Trading securities are stated at fair value, with any unrealized gains or losses reported in current period earnings.  Available for sale (“AFS”) investments are stated at fair value, with any unrealized gains or losses, net of taxes, reported as a component of equity except for losses deemed to be other than temporary (“OTT”) which are recorded as realized losses in the condensed consolidated statements of income.

The following table identifies all reclassifications out of accumulated other comprehensive income (“AOCI”) into income for the three and nine months ended September 30, 2017 and 2016 (in thousands):
 
Amount
 
Affected Line Items
 
Reason for
Reclassified
 
in the Statements
 
Reclassification
from AOCI
 
Of Income
 
from AOCI
Three Months Ended September 30,
        
2017
 
2016
        
 
$
20
   
$
-
 
Net gain from investments
 
Realized gain on sale of AFS securities
   
2,821
     
7
 
Other operating expenses/net gains from investments
 
Realized gain on donations of AFS securities
   
2,841
     
7
 
Income before income taxes
   
   
(1,051
)
   
(3
)
Income tax provision
   
 
$
1,790
   
$
4
 
Net income
   

Amount
 
Affected Line Items
 
Reason for
Reclassified
 
in the Statements
 
Reclassification
from AOCI
 
Of Income
 
from AOCI
Nine Months Ended September 30,
        
2017
 
2016
        
 
$
20
   
$
4
 
Net gain from investments
 
Realized gain on sale of AFS securities
   
2,855
     
159
 
Other operating expenses/net gains from investments
 
Realized gain on donations of AFS securities
   
2,875
     
163
 
Income before income taxes
   
   
(1,064
)
   
(61
)
Income tax provision
   
 
$
1,811
   
$
102
 
Net income
   


12

The following is a summary of the cost, gross unrealized gains, gross unrealized losses and fair value of available for sale investments as of September 30, 2017, December 31, 2016 and September 30, 2016:

 
September 30, 2017
 
     
Gross
 
Gross
     
     
Unrealized
 
Unrealized
     
 
Cost
 
Gains
 
Losses
 
Fair Value
 
 
(In thousands)
 
Common stocks
 
$
21,319
   
$
19,996
   
$
-
   
$
41,315
 
Closed-end funds
   
99
     
15
     
-
     
114
 
Total available for sale securities
 
$
21,418
   
$
20,011
   
$
-
   
$
41,429
 

 
December 31, 2016
 
     
Gross
 
Gross
     
     
Unrealized
 
Unrealized
     
 
Cost
 
Gains
 
Losses
 
Fair Value
 
 
(In thousands)
 
Common stocks
 
$
18,739
   
$
18,392
   
$
-
   
$
37,131
 
Closed-end funds
   
99
     
1
     
-
     
100
 
Total available for sale securities
 
$
18,838
   
$
18,393
   
$
-
   
$
37,231
 

 
September 30, 2016
 
     
Gross
 
Gross
     
     
Unrealized
 
Unrealized
     
 
Cost
 
Gains
 
Losses
 
Fair Value
 
 
(In thousands)
 
Common stocks
 
$
17,649
   
$
15,224
   
$
-
   
$
32,873
 
Total available for sale securities
 
$
17,649
   
$
15,224
   
$
-
   
$
32,873
 

A net unrealized gain, net of taxes, for the three months ended September 30, 2017 and 2016 of $2.3 million and $0.5 million, respectively, has been included in other comprehensive income, a component of equity, at September 30, 2017 and 2016.  During the three months ended September 30, 2017, proceeds from the sales of investments available for sale were approximately $321,000 and gross gains on the sale of investments available for sale amounted to $20,000 and were reclassified from other comprehensive income into net gain from investments in the condensed consolidated statements of income.  There were no sales of investments available for sale for the three months ended September 30, 2016. There were no realized losses on the sale of investments available for sale for the three months ended September 30, 2017 or September 30, 2016.  A net unrealized gain, net of taxes, for the nine months ended September 30, 2017 and 2016 of $1.0 million and $0.3 million, respectively, has been included in other comprehensive income, a component of equity, at September 30, 2017 and 2016, respectively.  During the nine months ended September 30, 2017 and 2016, proceeds from the sales of investments available for sale were approximately $321,000 and $408,000, respectively, and gross gains on the sale of investments available for sale amounted to $20,000 and $4,000, respectively, and were reclassified from other comprehensive income into net gain from investments in the condensed consolidated statements of income.  There were no realized losses on the sale of investments available for sale for the nine months ended September 30, 2017 or September 30, 2016.  The basis on which the cost of a security sold is determined using specific identification.  Accumulated other comprehensive income on the condensed consolidated statements of equity is primarily comprised of unrealized gains/losses, net of taxes, for AFS securities.

The Company has an established accounting policy and methodology to determine other-than-temporary impairment on available for sale securities.  Under this policy, available for sale securities are evaluated for other than temporary impairments and any impairment charges are recorded in net gain/(loss) from investments on the condensed consolidated statements of income.  Management reviews all available for sale securities whose cost exceeds their market value to determine if the impairment is other than temporary.  Management uses qualitative factors such as diversification of the investment, the amount of time that the investment has been impaired, the intent to sell and the severity of the decline in determining whether the impairment is other than temporary.  

There were no investments classified as available for sale that were in an unrealized loss position at September 30, 2017, December 31, 2016 or September 30, 2016.

For the three and nine months ended September 30, 2017 and 2016, there were no losses on available for sale securities that were deemed to be other than temporary.


13

C. Fair Value

The following tables present information about the Company’s assets and liabilities by major categories measured at fair value on a recurring basis as of September 30, 2017, December 31, 2016 and September 30, 2016 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, 2017 (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)
   
2017
 
Cash equivalents
 
$
60,702
   
$
-
   
$
-
   
$
60,702
 
Investments in securities:
                               
AFS - Common stocks
   
41,315
     
-
     
-
     
41,315
 
AFS - Closed-end Funds
   
114
     
-
     
-
     
114
 
US Government Obligations
   
59,954
     
-
     
-
     
59,954
 
Trading - Common stocks
   
31
     
-
     
-
     
31
 
Trading - Mutual Funds
   
11
     
-
     
-
     
11
 
Total investments in securities
   
101,425
     
-
     
-
     
101,425
 
Total assets at fair value
 
$
162,127
   
$
-
   
$
-
   
$
162,127
 

Assets and Liabilities Measured at Fair Value on a Recurring Basis as of December 31, 2016 (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)
   
2016
 
Cash equivalents
 
$
39,638
   
$
-
   
$
-
   
$
39,638
 
Investments in securities:
                               
AFS - Common stocks
   
37,131
     
-
     
-
     
37,131
 
AFS - Closed-end Funds
   
100
     
-
     
-
     
100
 
Trading - Common stocks
   
54
     
-
     
-
     
54
 
Total investments in securities
   
37,285
     
-
     
-
     
37,285
 
Total assets at fair value
 
$
76,923
   
$
-
   
$
-
   
$
76,923
 

Assets and Liabilities Measured at Fair Value on a Recurring Basis as of September 30, 2016 (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)
   
2016
 
Cash equivalents
 
$
33,576
   
$
-
   
$
-
   
$
33,576
 
Investments in securities:
                               
AFS - Common stocks
   
32,873
     
-
     
-
     
32,873
 
Trading - Common stocks
   
16
     
-
     
-
     
16
 
Total investments in securities
   
32,889
     
-
     
-
     
32,889
 
Total assets at fair value
 
$
66,465
   
$
-
   
$
-
   
$
66,465
 

During the quarters ended September 30, 2017 and 2016, there were no transfers between any Level 1 and Level 2 holdings, or between Level 1 and Level 3 holdings.

D. Income Taxes

The effective tax rate (“ETR”) for the three months ended September 30, 2017 and September 30, 2016 was 18.8% and 31.9%, respectively. The ETR for the nine months ended September 30, 2017 and September 30, 2016 was 34.4% and 35.9%, respectively. The current year quarter’s ETR benefited from the reversal of certain tax accruals totaling $3.6 million due to a change in accounting estimate as well as a $1.0 million tax benefit related to the charitable contribution while the prior year quarter benefited from a reversal of $2.6 million in tax accruals due to the conclusion of a state audit.


14

ASU 2016-09, which was issued in March 2016 and became effective for interim and annual reporting periods beginning after December 15, 2016, simplifies several aspects of accounting for employee share-based payment transactions. Upon adoption of ASU 2016-09 on January 1, 2017, our accounting for excess tax benefits has changed and adopted prospectively, resulting in recognition of excess tax benefits or tax deficiencies against income tax expenses rather than additional paid-in capital.  During the three and nine months ended September 30, 2017, the ETR was higher by 3.6% and 1.0%, respectively, as a result of a reduction to previously recorded stock compensation tax benefits.

E. Earnings Per Share

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

   
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
(in thousands, except per share amounts)
 
2017
   
2016
   
2017
   
2016
 
Basic:
                       
Net income attributable to GAMCO Investors, Inc.'s
                       
shareholders
 
$
16,600
   
$
30,861
   
$
64,314
   
$
84,429
 
Weighted average shares outstanding
   
28,926
     
29,185
     
28,930
     
29,222
 
                                 
Basic net income per share attributable to GAMCO
                               
Investors, Inc.'s shareholders
 
$
0.57
   
$
1.06
   
$
2.22
   
$
2.89
 
                                 
Diluted:
                               
Net income attributable to GAMCO Investors, Inc.'s shareholders
 
$
16,600
   
$
30,861
   
$
64,314
   
$
84,429
 
Add interest on convertible note, net of management fee and taxes
   
696
     
387
     
2,192
     
387
 
Total income attributable to GAMCO Investors, Inc.'s shareholders
 
$
17,296
   
$
31,248
   
$
66,506
   
$
84,816
 
                                 
Weighted average share outstanding
   
28,926
     
29,185
     
28,930
     
29,222
 
Restricted stock awards
   
247
     
221
     
214
     
253
 
Assumed conversion of convertible note
   
2,000
     
1,000
     
2,000
     
336
 
Total
   
31,173
     
30,406
     
31,144
     
29,811
 
                                 
Diluted net income per share attributable to GAMCO
                               
Investors, Inc.'s shareholders
 
$
0.55
   
$
1.03
   
$
2.14
   
$
2.85
 

F. Debt

Debt consists of the following:

 
September 30, 2017
 
December 31, 2016
 
September 30, 2016
 
 
Carrying
 
Fair Value
 
Carrying
 
Fair Value
 
Carrying
 
Fair Value
 
 
Value
 
Level 2
 
Value
 
Level 2
 
Value
 
Level 2
 
(In thousands)
                       
4.5 % Convertible note
 
$
109,862
     
111,574
   
$
109,835
   
$
111,525
   
$
109,826
   
$
112,172
 
AC 4% PIK Note
   
70,000
     
71,755
     
100,000
     
100,930
     
100,000
     
101,347
 
5.875% Senior notes
   
24,138
     
24,748
     
24,120
     
24,558
     
24,115
     
25,073
 
Total
 
$
204,000
   
$
208,077
   
$
233,955
   
$
237,013
   
$
233,941
   
$
238,592
 

4.5% Convertible Note

On August 15, 2016, the Company issued and sold a 5-year, $110 million convertible note (“Convertible Note”).  The note bears interest at a rate of 4.5% per annum and is convertible into shares of the Company’s Class A Common stock (“Class A Stock”) at an initial conversion price of $55.00 per share.  The Convertible Note is initially convertible into two million shares of the Company’s Class A Stock, subject to adjustment pursuant to the terms of the Convertible Note.  The Company is required to repurchase the Convertible Note at the request of the holder on specified dates or after certain circumstances involving a Fundamental Change (as defined in the Convertible Note).  The Company recorded $174,000 of costs in connection with the issuance of the Convertible Note.  GGCP, Inc. (“GGCP”), which owns approximately 63 % of the equity interest of the Company, has deposited cash equal to the principal amount of the Note and six months interest (“Initial Deposit”) into an escrow account established pursuant to an escrow agreement by and among GGCP, the Company, the Convertible Note holder and the escrow agent.  In connection with the Initial Deposit made by GGCP, the Company has agreed that GGCP has a right to demand payment in an amount equal to any funds withdrawn from the escrow account by the Convertible Note holder.


15

A portion of the proceeds from the sale of the Convertible Note are now held in an escrow account established pursuant to an escrow agreement dated August 15, 2016 by and among the Company, GGCP and its related parties, Cascade and JP Morgan Chase Bank, National Association, as escrow agent (the “Escrow Agreement”).  On September 30, 2017, in connection with an amendment to the Escrow Agreement and in exchange for approximately 53% of the assets in the escrow account, the Company paid GGCP $60 million. The $60 million is disclosed as restricted cash and restricted investment in securities of $0.1 million and $59.9 million, respectively, on the statement of financial condition. The Escrow Agreement provides for the release to the Company of a pro rata portion of the escrowed funds upon repayment of the Convertible Note or conversion of the Convertible Note, based upon the principal amount of the Convertible Note that is converted into Class A Stock.  Under the Convertible Note, Cascade has the right to claim the escrowed funds upon a payment default by the Company.  It is the Company’s current plan to redeem the Convertible Note no later than February 15, 2019.

AC 4% PIK Note

In connection with the spin-off of AC on November 30, 2015, the Company issued a $250 million promissory note (the “AC 4% PIK Note”) payable to AC.  The AC 4% PIK Note bears interest at 4.0% per annum.  The original principal amount has a maturity date of November 30, 2020.  Interest on the AC 4% PIK Note will accrue from the date of the last interest payment, or if no interest has been paid, from the effective date of the AC 4% PIK Note.  At the election of the Company, payment of interest on the AC 4% PIK Note may be paid in kind (in whole or in part) on the then-outstanding principal amount (a “PIK Amount”) in lieu of cash.  All PIK Amounts added to the outstanding principal amount of the AC 4% PIK Note will mature on the fifth anniversary from the date the PIK Amount was added to the outstanding principal of the AC 4% PIK Note.  In no event may any interest be paid in kind subsequent to November 30, 2019.  The Company may prepay the AC 4% PIK Note (in whole or in part) prior to maturity without penalty.

During the three and nine months ended September 30, 2017, the Company prepaid $10 million and $30 million, respectively, of principal of the AC 4% PIK Note against the principal amount due on November 30, 2018.  Of the $70 million principal amount outstanding after this payment, $20 million is due on November 30, 2019, and $50 million is due on November 30, 2020. During the three and nine months ended September 30, 2016, the Company prepaid $150 million of principal of the AC 4% PIK Note.  Subsequent to quarter end, the Company paid an additional $20 million of principal, thereby reducing the amount outstanding to $50 million, all of which is due on November 30, 2020.

5.875% Senior Notes

On May 31, 2011, the Company issued 10-year, $100 million senior notes (“Senior Notes”).  The Senior Notes mature on June 1, 2021 and bear interest at 5.875% per annum, payable semi-annually on June 1 and December 1 of each year and commenced on December 1, 2011.  Upon the occurrence of a change of control triggering event, as defined in the indenture, the Company would be required to offer to repurchase the Senior Notes at 101% of their principal amount.

At September 30, 2017, December 31, 2016 and September 30, 2016, the debt was recorded at its face value, net of issuance costs, of $24.1 million, $24.1 million and $24.1 million, respectively.

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

G. Stockholders Equity
 
Shares outstanding were 29.2 million, 29.5 million and 29.5 million on September 30, 2017, December 31, 2016 and September 30, 2016, respectively.


16

Dividends

 
  Record  
Payment
     
 
  Date  
Date
 
Amount
 
               
Three months ended March 31, 2017
 
March 14, 2017
 
March 28, 2017
 
$
0.02
 
Three months ended June 30, 2017
 
June 27, 2017
 
July 11, 2017
   
0.02
 
Three months ended September 30, 2017
 
September 12, 2017
 
September 26, 2017
   
0.02
 
Nine months ended September 30, 2017
          
$
0.06
 

 
 
Record
 
Payment
     
 
  Date  
Date
 
Amount
 
               
Three months ended March 31, 2016
 
March 15, 2016
 
March 29, 2016
 
$
0.02
 
Three months ended June 30, 2016
 
June 14, 2016
 
June 28, 2016
   
0.02
 
Three months ended September 30, 2016
 
September 13, 2016
 
September 27, 2016
   
0.02
 
Nine months ended September 30, 2016
          
$
0.06
 

Voting Rights

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

Stock Award and Incentive Plan
 
The Company maintains two Plans approved by the shareholders, which are designed to provide incentives which will attract and retain individuals key to the success of GBL through direct or indirect ownership of our common stock. Benefits under the Plans may be granted in any one or a combination of stock options, stock appreciation rights, restricted stock, restricted stock units, stock awards, dividend equivalents and other stock or cash based awards. A maximum of 7.5 million shares of Class A Stock have been reserved for issuance under the Plans by a committee of the Board of Directors responsible for administering the Plans (“Compensation Committee”). Under the Plans, the committee may grant RSAs and either incentive or nonqualified stock options with a term not to exceed ten years from the grant date and at an exercise price that the committee may determine.

As of September 30, 2017, December 31, 2016 and September 30, 2016, there were 164,050 RSA shares, 424,340 RSA shares and 427,290 RSA shares outstanding, respectively, that were previously issued at an average weighted grant price of $66.84, $65.74 and $65.72, respectively. These RSA grants occurred prior to the spin-off of Associated Capital (“AC”). On November 30, 2015, pursuant to the spin-off, all RSA grant holders received shares of AC’s Class A common stock as a result of their ownership of their GAMCO unvested RSAs (one share of AC for each share of GBL). All grants of the RSA shares were recommended by the Company's Chairman, who did not receive a RSA, and approved by the Compensation Committee. This expense, net of estimated forfeitures, is recognized over the vesting period for these awards which is either (1) 30% over three years from the date of grant and 70% over five years from the date of grant or (2) 30% over three years from the date of grant and 10% each year over years four through ten from the date of grant.  During the vesting period, dividends to RSA holders are held for them until the RSA vesting dates and are forfeited if the grantee is no longer employed by the Company on the vesting dates.  Dividends declared on these RSAs, less estimated forfeitures, are charged to retained earnings (deficit) on the declaration date.

On June 1, 2017, the Compensation Committee of AC accelerated the vesting of all 420,240 AC RSAs outstanding effective June 15, 2017.  As a result, GBL recorded an incremental $3.7 million of stock-based compensation expense for the nine months ended September 30, 2017.  This amount related to GBL teammates who held AC RSAs.  There will be no further expense related to these AC RSAs recorded by GBL after the second quarter ended June 30, 2017.

On August 7, 2017, the Compensation Committee of GBL accelerated the vesting relating to 201,120 of GBL RSAs outstanding effective August 31, 2017.  As a result, GBL recorded an incremental $1.8 million of stock-based compensation expense for the three and nine months ended September 30, 2017.  There continue to be 164,050 GBL RSAs outstanding that were not vested as part of this acceleration which will result in recognition of expense as these RSAs continue to vest.  See table below for impact by quarter.

ASU 2016-09, which was issued in March 2016 and became effective for interim and annual reporting periods beginning after December 15, 2016, simplifies several aspects of accounting for employee share-based payment transactions.  Upon adoption of ASU 2016-09 on January 1, 2017, the Company elected not to change its accounting policy on forfeitures and continue to estimate forfeitures rather than accounting for forfeitures as they occur, an alternative allowed under ASU 2016-09.  The Company’s accounting treatment for excess tax benefits or tax deficiencies also changed with the adoption of ASU 2016-09 on January 1, 2017. Excess tax benefits or tax deficiencies are now required to be recorded within the income tax expense line in the consolidated statement of income rather than to additional paid-in capital within the condensed consolidated statement of financial condition.  During the three and nine months ended September 30, 2017, the Company reduced previously recorded tax benefits relating to RSA expense by $0.7 million and $1.0 million, respectively, on RSAs that vested.


17

For the three months ended September 30, 2017 and September 30, 2016, we recognized stock-based compensation expense of $2.1 million and $1.2 million, respectively.  For the nine months ended September 30, 2017 and September 30, 2016, we recognized stock-based compensation expense of $7.2 million and $3.3 million, respectively.  The three month amount for 2017 includes the $1.8 million related to the GBL RSA accelerated vesting mentioned above.  The nine month amount for 2017 includes the $1.8 million related to the GBL RSAs’ accelerated vesting and the $3.7 million related to the AC RSAs’ accelerated vesting both mentioned above.  All stock-based compensation expense in future periods for grants currently outstanding will relate to GBL RSAs only.

Actual and projected stock-based compensation expense for RSA shares for the years ended December 31, 2016 through December 31, 2024 is as follows (in thousands):

     
2016
   
2017
   
2018
   
2019
   
2020
   
2021
   
2022
   
2023
   
2024
 
 
Q1
   
$
1,037
   
$
699
   
$
144
   
$
113
   
$
72
   
$
49
   
$
32
   
$
17
   
$
4
 
 
Q2
     
1,036
     
4,381
     
141
     
113
     
68
     
49
     
32
     
17
     
4
 
 
Q3
     
1,186
     
2,103
     
126
     
101
     
57
     
39
     
24
     
10
     
2
 
 
Q4
     
691
     
157
     
113
     
90
     
49
     
32
     
17
     
4
     
-
 
Full Year
   
$
3,950
   
$
7,340
   
$
524
   
$
417
   
$
246
   
$
169
   
$
105
   
$
48
   
$
10
 

The total compensation cost related to non-vested RSAs not yet recognized is approximately $1.7 million as of September 30, 2017.

Stock Repurchase Program
 
In March 1999, GAMCO's Board of Directors established the Stock Repurchase Program to grant management the authority to repurchase shares of our Class A Common Stock.  On May 3, 2017, our Board of Directors authorized an incremental 500,000 shares to be added to the current buyback authorization. On August 3, 2017, our Board of Directors authorized an incremental 425,352 shares to be added to the current buy back authorization. For the three months ended September 30, 2017 and September 30, 2016, the Company repurchased 131,480 shares and 223,811 shares, respectively, at an average price per share of $29.42 and $31.50, respectively.  For the nine months ended September 30, 2017 and September 30, 2016, the Company repurchased 290,300 shares and 266,846 shares, respectively, at an average price per share of $29.71 and $31.41, respectively.  From the inception of the program through September 30, 2017, 10,191,640 shares have been repurchased at an average price of $43.90 per share.  At September 30, 2017, the total shares available under the program to be repurchased in the future were 868,520.

Shelf Registration
On May 4, 2015, the Securities and Exchange Commission (“SEC”) declared effective the “shelf” registration statement filed by the Company. The “shelf” provides the Company with the flexibility of issuing any combination of senior and subordinated debt securities, convertible securities and common and preferred securities up to a total amount of $500 million and replaced the existing shelf registration which expired in May 2015.  As of September 30, 2017, $500 million is available on the shelf.

H. Related Party Transactions

In connection with the issuance of the Convertible Note in August 2016, GGCP deposited cash of approximately $112.5 million, equal to the principal amount of the Convertible Note and six months interest, into an escrow account established pursuant to an escrow agreement by and among GGCP, the Company, the Convertible Note holder and the escrow agent.  The Company paid the annual costs of setting up the escrow account in the amount of $55,000 and will continue to pay them as long as the escrow account is open.  The Company did not pay any fees to GGCP in connection with the funding of the escrow account.  On September 30, 2017, in connection with an amendment to the Escrow Agreement and in exchange for approximately 53% of the assets in the escrow account, the Company paid GGCP $60 million.  See Note F. Debt for additional details.


18

I. Identifiable Intangible Assets

As a result of becoming the advisor to the Gabelli Enterprise Mergers and Acquisitions Fund and the associated consideration paid, the Company maintains an identifiable intangible asset of $1.9 million within other assets on the condensed consolidated statements of financial condition at September 30, 2017, December 31, 2016 and September 30, 2016. The investment advisory agreement is subject to annual renewal by the fund's Board of Directors, which the Company expects to be renewed, and the Company does not expect to incur additional expense as a result, which is consistent with other investment advisory agreements entered into by the Company.  The advisory contract is next up for renewal in February 2018. On November 1, 2015, as a result of becoming the advisor to the Bancroft Fund Ltd. and the Ellsworth Growth and Income Fund Ltd. and the associated consideration paid, the Company maintains an identifiable intangible asset of $1.6 million within other assets on the condensed consolidated statement of financial condition at September 30, 2017, December 31, 2016 and September 30, 2016.  The advisory contracts for the Bancroft Fund Ltd. and the Ellsworth Growth and Income Fund Ltd. are both next up for renewal in August 2018. The Company assesses the recoverability of this intangible asset at least annually, or more often should events warrant. There were no indicators of impairment for the three months ended September 30, 2017 or September 30, 2016, and as such there was no impairment analysis performed or charge recorded.

J. Commitments and Contingencies

From time to time, the Company may be named in legal actions and proceedings. These actions may seek substantial or indeterminate compensatory as well as punitive damages or injunctive relief. The Company is also subject to governmental or regulatory examinations or investigations. The examinations or investigations could result in adverse judgments, settlements, fines, injunctions, restitutions or other relief. For any such matters, the condensed consolidated financial statements include the necessary provisions for losses that the Company believes are probable and estimable. Furthermore, the Company evaluates whether there exist losses which may be reasonably possible and will, if material, make the necessary disclosures.  However, management believes such amounts, both those that are probable and those that are reasonably possible, are not material to the Company’s financial condition, operations or cash flows at September 30, 2017.

K. Subsequent Events

On September 30, 2017, GAMCO entered into a third deferred compensation agreement with Mr. Gabelli for the period of October 1, 2017 to December 31, 2017.  Mr. Gabelli’s variable cash compensation for that period will vest on April 1, 2019.  For GAAP accounting purposes, the compensation earned from October 1, 2017 to December 31, 2017 will be expensed ratably from October 1, 2017 to March 31, 2019.

On October 3, 2017, the Company paid an additional $20 million of principal relating to the AC 4% PIK Note, thereby reducing the amount outstanding to $50 million, all of which is due on November 30, 2020.

On November 7, 2017, the Board of Directors declared its regular quarterly dividend of $0.02 per share to all of its shareholders, payable on January 10, 2018 to shareholders of record on December 27, 2017.

From October 1, 2017 to November 7, 2017, the Company repurchased 31,100 shares at $29.11 per share.

19

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

Overview
 
GAMCO, through the Gabelli brand, well known for its Private Market Value (PMV) with a CatalystTM investment approach, is a widely-recognized provider of investment advisory services to open-end funds, closed-end funds, and institutional and private wealth management investors principally in the United States.  Through G.distributors, LLC (“G.distributors”), we provide open-end fund distribution.  We generally manage assets on a fully discretionary basis and invest in a variety of U.S. and international securities through various investment styles.  Our revenues are based primarily on the Company’s levels of assets under management and fees associated with our various investment products.
 
Our revenues are highly correlated to the level of assets under management and fees associated with our various investment products, rather than our own corporate assets.  Assets under management, which are directly influenced by the level and changes of the overall equity markets, can also fluctuate through acquisitions, the creation of new products, the addition of new accounts, or the loss of existing accounts.  Since various equity products have different fees, changes in our business mix may also affect revenues.  At times, the performance of our equity products may differ markedly from popular market indices, and this can also impact our revenues.  General stock market trends will have the greatest impact on our level of assets under management and hence, on revenues.

We conduct our investment advisory business principally through the following subsidiaries: GAMCO Asset Management Inc. (Institutional and Private Wealth Management) and Gabelli Funds, LLC (Funds).  The distribution of our open-end funds is conducted through G.distributors, our broker-dealer subsidiary.

Assets under management (“AUM”) were $43.1 billion as of September 30, 2017, an increase of $1.8 billion, or 4.3%, from June 30, 2017 of $41.3 billion and an increase of $3.5 billion, or 8.9% from the September 30, 2016 AUM of $39.6 billion.  The third quarter 2017 activity consisted of net cash outflows of $213 million, $1.8 billion of market appreciation and recurring distributions, net of reinvestments, from open-end and closed-end funds of $140 million.  Average total AUM was $42.3 billion in the 2017 quarter versus $39.9 billion in the prior year period, an increase of 6.0%.

In addition to management fees, we earn incentive fees for certain institutional client assets, certain assets attributable to preferred issues of our closed-end funds and our GDL Fund (NYSE: GDL).  As of September 30, 2017, assets under management with incentive based fees were $3.0 billion, $0.2 billion higher than the $2.8 billion on June 30, 2017 and $0.6 billion higher than the $2.4 billion on September 30, 2016. 
20

The Company reported Assets Under Management as follows (in millions):

Table I: Fund Flows - 3rd Quarter 2017

                     
Fund
       
         
Market
         
distributions,
       
   
June 30,
   
appreciation/
   
Net cash
   
net of
   
September 30,
 
   
2017
   
(depreciation)
   
flows
   
reinvestments
   
2017
 
Equities:
                             
Open-end Funds
 
$
13,574
   
$
517
   
$
(305
)
 
$
(24
)
 
$
13,762
 
Closed-end Funds
   
7,359
     
249
     
176
     
(116
)
   
7,668
 
Institutional & PWM - direct
   
13,437
     
613
     
(157
)
   
-
     
13,893
 
Institutional & PWM - sub-advisory
   
5,048
     
368
     
(70
)
   
-
     
5,346
 
SICAV (a)
   
421
     
10
     
73
     
-
     
504
 
Total Equities
   
39,839
     
1,757
     
(283
)
   
(140
)
   
41,173
 
Fixed Income:
                                       
Money-Market Fund
   
1,813
     
4
     
73
     
-
     
1,890
 
Institutional & PWM
   
29
     
-
     
(3
)
   
-
     
26
 
Total Fixed Income
   
1,842
     
4
     
70
     
-
     
1,916
 
Total Assets Under Management
 
$
41,681
   
$
1,761
   
$
(213
)
 
$
(140
)
 
$
43,089
 
(a) Adjusted to include Merger Arbitrage of $371 million at June 30, 2017.

Table II: Fund Flows - Year to date September 2017

                       
Fund
       
         
Market
            
distributions,
       
   
December 31,
   
appreciation/
   
Net cash
     
net of
   
September 30,
 
   
2016
   
(depreciation)
   
flows
     
reinvestments
   
2017
 
Equities:
                               
Open-end Funds
 
$
13,462
   
$
1,354
   
$
(1,009
)
   
$
(45
)
 
$
13,762
 
Closed-end Funds
   
7,150
     
712
     
162
       
(356
)
   
7,668
 
Institutional & PWM - direct
   
13,441
     
1,523
     
(1,071
)
     
-
     
13,893
 
Institutional & PWM - sub-advisory
   
3,783
     
522
     
1,041
 
(b)
   
-
     
5,346
 
SICAV (a)
   
320
     
29
     
155
       
-
     
504
 
Total Equities
   
38,156
     
4,140
     
(722
)
     
(401
)
   
41,173
 
Fixed Income:
                                         
Money-Market Fund
   
1,767
     
9
     
114
       
-
     
1,890
 
Institutional & PWM
   
31
     
-
     
(5
)
     
-
     
26
 
Total Fixed Income
   
1,798
     
9
     
109
       
-
     
1,916
 
Total Assets Under Management
 
$
39,954
   
$
4,149
   
$
(613
)
   
$
(401
)
 
$
43,089
 
(a) Adjusted to include Merger Arbitrage of $270 million at December 31, 2016.
(b) Includes $1.2 billion from being approved as the sub-advisor on two sub-advisory entities as of February 27, 2017.
21

Table III: Assets Under Management by Quarter

                     
% Change From
 
   
September 30,
   
June 30,
   
September 30,
   
June 30,
   
September 30,
 
   
2017
   
2017
   
2016
   
2017
   
2016
 
Equities:
                             
Open-end Funds
 
$
13,762
   
$
13,574
   
$
13,799
     
1.4
%
   
(0.3
%)
Closed-end Funds
   
7,669
     
7,359
     
7,178
     
4.2
     
6.8
 
Institutional & PWM - direct
   
13,893
     
13,437
     
13,245
     
3.4
     
4.9
 
Institutional & PWM - sub-advisory
   
5,346
     
5,048
     
3,542
     
5.9
     
50.9
 
SICAV (a)
   
504
     
50
     
42
     
908.0
     
1,100.0
 
Total Equities
   
41,174
     
39,468
     
37,806
     
4.3
     
8.9
 
Fixed Income:
                                       
Money-Market Fund
   
1,890
     
1,813
     
1,738
     
4.2
     
8.7
 
Institutional & PWM
   
26
     
29
     
37
     
(10.3
)
   
(29.7
)
Total Fixed Income
   
1,916
     
1,842
     
1,775
     
4.0
     
7.9
 
Total Assets Under Management
 
$
43,090
   
$
41,310
   
$
39,581
     
4.3
%
   
8.9
%
Institutional & PWM - direct includes $280 million, $300 million and $286 million of Money Market Fund AUM at September 30, 2017, June 30, 2017 and September 30, 2016, respectively.
(a) Adjusted to include Merger Arbitrage of $371 million and $225 million at June 30, 2017 and September 30, 2016, respectively.


22