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EX-32.2 - EXHIBIT 32.2, DATED NOVEMBER 6, 2018 - GAMCO INVESTORS, INC. ET ALex32_2093018.htm
EX-32.1 - EXHIBIT 32.1, DATED NOVEMBER 6, 2018 - GAMCO INVESTORS, INC. ET ALex32_1093018.htm
EX-31.3 - EXHIBIT 31.3, DATED NOVEMBER 6, 2018 - GAMCO INVESTORS, INC. ET ALex31_3093018.htm
EX-31.2 - EXHIBIT 31.2, DATED NOVEMBER 6, 2018 - GAMCO INVESTORS, INC. ET ALex31_2093018.htm
EX-31.1 - EXHIBIT 31.1, DATED NOVEMBER 6, 2018 - GAMCO INVESTORS, INC. ET ALex31_1093018.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, 2018
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, 2018
Class A Common Stock, .001 par value
  (Including 434,150 restricted stock awards)
10,040,776
Class B Common Stock, .001 par value
 
19,024,404


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, 2018 and 2017
 
- Nine months ended September 30, 2018 and 2017
   
 
Condensed Consolidated Statements of Comprehensive Income:
 
- Three months ended September 30, 2018 and 2017
 
- Nine months ended September 30, 2018 and 2017
   
 
Condensed Consolidated Statements of Financial Condition:
 
- September 30, 2018
 
- December 31, 2017
 
- September 30, 2017
   
 
Condensed Consolidated Statements of Equity:
 
- Nine months ended September 30, 2018 and 2017
   
 
Condensed Consolidated Statements of Cash Flows:
 
- Nine months ended September 30, 2018 and 2017
   
 
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 5.
Other Information
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,
 
   
2018
   
2017
   
2018
   
2017
 
Revenues
                       
Investment advisory and incentive fees
 
$
75,934
   
$
77,328
   
$
230,616
   
$
228,942
 
Distribution fees and other income
   
9,854
     
11,013
     
29,862
     
32,916
 
Total revenues
   
85,788
     
88,341
     
260,478
     
261,858
 
Expenses
                               
Compensation
   
17,562
     
42,919
     
72,464
     
97,634
 
Management fee
   
1,449
     
4,935
     
7,565
     
9,455
 
Distribution costs
   
9,819
     
11,665
     
29,875
     
33,373
 
Other operating expenses
   
5,258
     
5,429
     
16,245
     
15,900
 
Total expenses
   
34,088
     
64,948
     
126,149
     
156,362
 
                                 
Operating income
   
51,700
     
23,393
     
134,329
     
105,496
 
Other income (expense)
                               
Net gain (loss) from investments
   
(4,328
)
   
2,841
     
(8,090
)
   
2,867
 
Interest and dividend income
   
531
     
745
     
1,549
     
1,765
 
Interest expense
   
(759
)
   
(2,688
)
   
(2,881
)
   
(8,269
)
Shareholder-designated contribution
 
$
(708
)
   
(3,857
)
   
(884
   
(3,857
)
Total other expense, net
   
(5,264
)
   
(2,959
)
   
(10,306
)
   
(7,494
)
Income before income taxes
   
46,436
     
20,434
     
124,023
     
98,002
 
Income tax provision
   
11,420
     
3,834
     
30,164
     
33,688
 
Net income attributable to GAMCO Investors, Inc.'s shareholders
 
$
35,016
   
$
16,600
   
$
93,859
   
$
64,314
 
                                 
Net income attributable to GAMCO Investors, Inc.'s shareholders
                               
per share:
                               
Basic
 
$
1.22
   
$
0.57
   
$
3.26
   
$
2.22
 
                                 
Diluted
 
$
1.22
   
$
0.55
   
$
3.26
   
$
2.14
 
                                 
Weighted average shares outstanding:
                               
Basic
   
28,677
     
28,926
     
28,789
     
28,930
 
                                 
Diluted
   
28,739
     
31,173
     
28,824
     
31,144
 
                                 
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,
 
 
2018
 
2017
 
2018
 
2017
 
                 
Net income
 
$
35,016
   
$
16,600
   
$
93,859
   
$
64,314
 
Other comprehensive gain/(loss), net of tax:
                               
Foreign currency translation
   
(13
)
   
28
     
16
     
75
 
Net unrealized gain on securities available for sale (a)
   
-
     
2,321
     
-
     
1,019
 
Other comprehensive gain/(loss)
   
(13
)
   
2,349
     
16
     
1,094
 
                                 
Comprehensive income attributable to GAMCO Investors, Inc.
 
$
35,003
   
$
18,949
   
$
93,875
   
$
65,408
 

(a) Net of income tax expense of $0, $1,363, $0 and $599, respectively.
Effective January 1, 2018, upon the adoption of ASU 2016-01, the Company no longer recognizes
unrealized gains or losses on equity securities through other comprehensive gain/(loss).  See Note C.

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,
 
   
2018
   
2017
   
2017
 
ASSETS
                 
Cash and cash equivalents, including restricted cash of $0, $0 and $95, respectively
 
$
34,334
   
$
17,821
   
$
61,097
 
Investments in securties, including restricted investments in securities
                       
  of $0, $0 and $59,954, respectively
   
29,704
     
36,790
     
101,425
 
Receivable from brokers
   
2,654
     
1,578
     
1,342
 
Investment advisory fees receivable
   
25,010
     
38,712
     
25,549
 
Receivable from affiliates
   
4,531
     
5,635
     
4,784
 
Deferred tax asset and income tax receivable
   
11,532
     
15,615
     
24,941
 
Other assets
   
10,692
     
12,135
     
11,888
 
Total assets
 
$
118,457
   
$
128,286
   
$
231,026
 
                         
LIABILITIES AND EQUITY
                       
Payable to brokers
 
$
-
   
$
14,926
   
$
13,311
 
Income taxes payable and deferred tax liabilities
   
3,555
     
3,128
     
3,215
 
Capital lease obligation
   
4,834
     
4,943
     
4,976
 
Compensation payable
   
70,385
     
82,907
     
82,896
 
Payable to affiliates
   
140
     
855
     
2,981
 
Accrued expenses and other liabilities
   
27,571
     
28,656
     
24,134
 
Sub-total
   
106,485
     
135,415
     
131,513
 
                         
4.5% Convertible note (net of issuance costs of $0, $0 and $138, respectively)
                       
  (due August 15, 2021) (Note G)
   
-
     
-
     
109,862
 
AC 4% PIK Note (due November 30, 2020) (Note G)
   
-
     
50,000
     
70,000
 
AC 1.6% Note Payable (due February 28, 2018) (Note G)
   
-
     
15,000
     
-
 
5.875% Senior notes (net of issuance costs of $63, $81 and $87, respectively)
                       
  (due June 1, 2021) (Note G)
   
24,162
     
24,144
     
24,138
 
Total liabilities
   
130,647
     
224,559
     
335,513
 
                         
Commitments and contingencies (Note J)
   
-
     
-
     
-
 
                         
Equity
                       
GAMCO Investors, Inc. stockholders' equity
                       
Preferred stock, $.001 par value;10,000,000 shares authorized;
                       
         none issued and outstanding
   
-
     
-
     
-
 
Class A Common Stock, $0.001 par value; 100,000,000 shares authorized;
                       
  15,976,239, 15,541,489 and 15,473,725 issued, respectively;10,041,376,
                       
  9,949,482 and 10,075,944 outstanding, respectively
   
14
     
14
     
14
 
Class B Common Stock, $0.001 par value; 100,000,000 shares authorized;
                       
  24,000,000 shares issued; 19,024,404, 19,024,404 and 19,092,168 shares
                       
  outstanding, respectively
   
19
     
19
     
19
 
Additional paid-in capital
   
13,614
     
12,572
     
11,084
 
Retained earnings
   
260,171
     
155,939
     
143,026
 
Accumulated other comprehensive income
   
(218
)
   
11,876
     
12,365
 
Treasury stock, at cost (5,934,863, 5,592,007 and 5,397,781 shares, respectively)
   
(285,790
)
   
(276,693
)
   
(270,995
)
Total GAMCO Investors, Inc. stockholders' equity (deficit)
   
(12,190
)
   
(96,273
)
   
(104,487
)
                         
Total liabilities and equity
 
$
118,457
   
$
128,286
   
$
231,026
 

See accompanying notes.

5

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

For the Nine Months Ended September 30, 2018

   
GAMCO Investors, Inc. stockholders
 
                     
Accumulated
             
         
Additional
         
Other
             
   
Common
   
Paid-in
   
Retained
   
Comprehensive
   
Treasury
       
   
Stock
   
Capital
   
Earnings
   
Income
   
Stock
   
Total
 
Balance at December 31, 2017
 
$
33
   
$
12,572
   
$
155,939
   
$
11,876
   
$
(276,693
)
 
$
(96,273
)
Net income
   
-
     
-
     
93,859
     
-
     
-
     
93,859
 
Reclassification pursuant to
                                               
adoption of ASU 2016-01,
                                               
net of tax ($7,095)
   
-
     
-
     
12,110
     
(12,110
)
   
-
     
-
 
Foreign currency translation
   
-
     
-
     
-
     
16
     
-
     
16
 
Dividends declared ($0.06 per
                                               
share)
   
-
     
-
     
(1,737
)
   
-
     
-
     
(1,737
)
Stock based compensation
                                               
expense
   
-
     
1,042
     
-
     
-
     
-
     
1,042
 
Purchase of treasury stock
   
-
     
-
     
-
     
-
     
(9,097
)
   
(9,097
)
Balance at September 30, 2018
 
$
33
   
$
13,614
   
$
260,171
   
$
(218
)
 
$
(285,790
)
 
$
(12,190
)

See accompanying notes.

6

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 benefit ($1,663)
   
-
     
-
     
-
     
2,830
     
-
     
2,830
 
Amounts reclassified from
                                               
accumulated other
                                               
comprehensive income,
                                               
net of income tax expense ($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.


7

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

   
Nine Months Ended
 
   
September 30,
 
   
2018
   
2017
 
Operating activities
           
Net income
 
$
93,859
   
$
64,314
 
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation and amortization
   
425
     
439
 
Stock based compensation expense
   
1,042
     
7,181
 
Deferred income taxes
   
1,660
     
(9,229
)
Foreign currency translation loss
   
16
     
75
 
Cost basis of donated securities
   
304
     
1,051
 
Net gains on sales of available for sale securities
   
-
     
(20
)
(Increase) decrease in assets:
               
Investments in securities (trading securities for 2017)
   
6,783
     
(59,943
)
Receivable from affiliates
   
1,196
     
1,179
 
Receivable from brokers
   
(1,076
)
   
(889
)
Investment advisory fees receivable
   
13,702
     
18,188
 
Income taxes receivable and deferred tax assets
   
4,083
     
(15,592
)
Other assets
   
1,008
     
325
 
Increase (decrease) in liabilities:
               
Payable to affiliates
   
(715
)
   
1,569
 
Payable to brokers
   
(811
)
   
13,245
 
Income taxes payable and deferred tax liabilities
   
(1,232
)
   
8,029
 
Compensation payable
   
(12,520
)
   
40,506
 
Accrued expenses and other liabilities
   
(601
)
   
(5,199
)
Total adjustments
   
13,264
     
915
 
Net cash provided by operating activities
 
$
107,123
   
$
65,229
 

8

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

   
Nine Months Ended
 
   
September 30,
 
   
2018
   
2017
 
Investing activities
           
Purchases of available for sale securities
 
$
-
   
$
(3,932
)
Proceeds from sales of available for sale securities
   
-
     
321
 
Net cash used in investing activities
   
-
     
(3,611
)
                 
Financing activities
               
Dividends paid
   
(2,328
)
   
(1,737
)
Purchase of treasury stock
   
(9,097
)
   
(8,626
)
Repayment of AC 4% PIK Note
   
(50,000
)
   
(30,000
)
Repayment of AC 1.6% Note
   
(15,000
)
   
-
 
Margin loan borrowings
   
11,000
     
-
 
Margin loan payments
   
(25,115
)
   
-
 
Amortization of debt issuance costs
   
18
     
45
 
Net cash used in financing activities
   
(90,522
)
   
(40,318
)
Effect of exchange rates on cash and cash equivalents
   
(88
)
   
(15
)
Net increase in cash and cash equivalents
   
16,513
     
21,285
 
Cash and cash equivalents at beginning of period
   
17,821
     
39,812
 
Cash and cash equivalents at end of period
 
$
34,334
   
$
61,097
 
Supplemental disclosures of cash flow information:
               
Cash paid for interest
 
$
2,695
   
$
6,621
 
Cash paid for taxes
 
$
24,571
   
$
52,628
 

Non-cash activity:
-
For the nine months ended September 30, 2018 and September 30, 2017, the Company accrued dividends on restricted stock awards of $12 and $66, respectively.

See accompanying notes.

9

GAMCO INVESTORS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2018
(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, 2017.

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 to receive 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 (a) assessing collectability, (b) presenting sales taxes, (c) measuring noncash consideration, and (d) certain transition matters.  The Company adopted this guidance on January 1, 2018 and adopted the modified retrospective approach.  The Company’s implementation analysis has been completed, and we have identified similar performance obligations under this guidance as compared with deliverables and separate units of account previously identified under Topic 605.  As a result, the timing of the recognition of our revenue remains the same as under Topic 605, and therefore the adoption does not have any effect on the timing of the recognition of revenue.  See Note B. Revenue Recognition for the disclosures required by ASU 2014-09.

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 are 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.  The Company adopted this guidance on January 1, 2018 and reclassified $12.1 million out of Accumulated Other Comprehensive Income and into Retained Earnings.  Effective January 1, 2018, changes in the fair value of the Company’s investments in equity securities are reported through earnings in the net gain (loss) from investments line in the condensed consolidated statements of income 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 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.  The Company adopted this guidance on January 1, 2018 without a 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 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.  The Company adopted this guidance on January 1, 2018 without a material impact to the consolidated financial statements.

On August 17, 2018, the SEC issued a final rule that amends certain of its disclosure requirements.  The final rule amends numerous SEC rules, items, and forms covering a diverse group of topics.  Noteworthy changes in the final rule, which eliminate certain disclosure requirements but add or modify a few others, include requiring an analysis of changes in stockholders’ equity for the current and comparative interim periods.  The rule also eliminates the requirement to disclose the historical and pro forma ratio of earnings to fixed charges and the related exhibit and deletes the provisions in SEC Regulation S-X that require the presentation of dividends per share on the face of the income statement for interim periods, moving the required disclosure to the analysis of changes in stockholders’ equity.  This new guidance will be effective for the first 10Q for the quarter that begins after November 5, 2018.  The Company is currently evaluating the potential effect of this new guidance on its consolidated financial statements and related disclosures.
 
B.  Revenue Recognition

The revenue streams in the discussion below and in the table on page 13 include those that are within the scope of ASU 2014-09.  Those revenues deemed out of scope and excluded are: investment gains and losses generated from the Company’s proprietary trading activities, dividend income, and interest income.  In all cases for all revenue streams discussed below, the revenue generated is from a single transaction price, and there is no need to allocate the amounts across more than a single revenue stream.  The customer for all revenues derived from open-end and closed-end funds described in detail below has been determined to be the fund itself and not the ultimate underlying investor in the fund.  The Company has identified similar performance obligations under ASU 2014-09 as compared with ASC Topic 605.  As a result, the timing of the recognition of our revenue remains the same under this new guidance as it was under ASC Topic 605.

11

Significant Judgments that affect the amounts and timing of revenue recognition:

The Company’s analysis of the timing of revenue recognition for each revenue stream is based upon an analysis of current contract terms.  Performance obligations could, however, change from time to time if and when existing contracts are modified or new contracts are entered into.  These changes could potentially affect the timing of satisfaction of performance obligations, the determination of the transaction price, and the allocation of the price to performance obligations.  In the case of the revenue streams discussed below, the performance obligation is satisfied either at a point in time or over time.  For performance correlated and conditional revenues, the performance obligation (advising a client portfolio) is satisfied over time, while recognition of revenues effectively occurs at the end of the measurement period as defined within the contract, as such amounts are subject to reduction to zero on the date where the measurement period ends even if the performance benchmarks were exceeded during the intervening period.  The judgments outlined below, where the determination as to these factors is discussed in detail, are continually reviewed and monitored by the Company when new contracts or contract modifications occur.  Transaction price is in all instances formulaic and not subject to significant (or any) judgment at the current time.  The allowance for doubtful accounts is subject to judgment.  There were no impairment losses (allowance for doubtful accounts) on any receivables from any revenue stream at the end of the three and nine months ended September 30, 2018.
 
Advisory Fee Revenues

Advisory fees for open-end funds, closed-end funds, sub-advisory accounts, SICAVs, and Exchange Traded Managed Funds (“ETMFs”) are earned based on predetermined percentages of the average net assets of the individual funds and are recognized as revenues as the related services are performed.  Fees for open-end funds, one non-U.S. closed-end fund, sub-advisory accounts,  SICAVs, and ETMFs are computed on a daily basis on average net assets under management (“AUM”).  Fees for U.S. closed-end funds are computed on average weekly net AUM, and fees for one non-U.S. closed-end fund is computed on a daily basis based on market value.  These fees are received in cash after the end of each monthly period within 30 days.  The revenue recognition occurs daily as the performance obligation (advising the fund) is met continuously.  There is a risk of non-payment, and therefore an impairment loss on these receivables is possible at each reporting date.  There were no such impairment losses for the current period.

Advisory fees for Institutional & Private Wealth Management accounts are earned based on predetermined percentages of the average AUM and are generally computed quarterly based on account values at the end of the preceding quarter.  The revenue recognition occurs daily as the performance obligation (advising the client portfolio) is met continuously.  These fees are received in cash, typically within 60 days of the client being billed.  There is a risk of non-payment, and therefore an impairment loss on these receivables is possible at each reporting date.  There were no such impairment losses for the current period.

Performance Correlated and Conditional Revenues

Investment advisory fees earned on a portion of the closed-end funds' preferred shares are earned at year-end if the total return to common shareholders of the closed-end fund for the calendar year exceeds the dividend rate of the preferred shares.  These fees are recognized at the end of the measurement period which coincides with the calendar year.  The fee would also be earned and the contract period ended at any interim point in time that the preferred shares are redeemed.  These fees are received in cash after the end of the measurement period within 30 days.

Certain closed-end funds have performance fees that are earned at the end of the fund’s fiscal year to the extent the total return of each fund exceeds a benchmark return.  The fee would also be earned and the contract period ended at any interim point in time that the fund was to repurchase shares.  These fees are received in cash after the end of the measurement period within 30 days.

We also receive incentive fees from certain institutional clients which are based upon exceeding a specific benchmark index.  These fees are recognized at the end of the stipulated contract period, which is generally annually, for the respective account.  The fee would also be earned and the contract period ended at any interim point in time that the client terminated its relationship with us.  These fees are received in cash after the end of the measurement period typically within 60 days.

One fund within the SICAV structure charges a performance fee.  That fee is recognized at the end of the measurement period which coincides with the calendar year or upon redemption.  The fee would also be earned and the contract period ended at any interim point in time that the client terminated its relationship with us.  That fee is received in cash after the end of the measurement period within 30 days.

We also receive conditional fees from certain institutional clients which are based upon exceeding a defined return for these accounts.  These fees are recognized at the end of the stipulated contract period, which is generally annually, for the respective account.  The fee would also be earned and the contract period ended at any interim point in time that the client terminated its relationship with us.  These fees are received in cash after the end of the measurement period typically within 60 days.

12

In all cases of the performance correlated and conditional revenue, because of the variable nature of the consideration, revenue recognition is delayed until it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved (for example, the measurement period has concluded and the hurdle has been exceeded).  There is a risk of non-payment, and therefore an impairment loss on these receivables is possible at each reporting date.  There were no such impairment losses for the current period.
 
Distribution Fees and Other Income

Distribution fees and other income primarily includes distribution fee revenue earned in accordance with Rule 12b-1 of the Company Act, as amended, along with sales charges and underwriting fees associated with the sale of the mutual funds.  Distribution plan fees are computed based on average daily net assets of each fund and are accrued for during the period in which they are earned.  These fees are received in cash after the end of each monthly period within 30 days.  In evaluating the appropriate timing of the recognition of these fees, we applied the guidance on up-front fees to determine whether such fees are related to the transfer of a promised service (a distinct performance obligation).  Our conclusion is that the service being provided by G.distributors to the customer in exchange for the fee is for the initial distribution of the funds and is completed at the time of the sale.  As such, there is no portion of this revenue that needs to be deferred because the performance obligation is complete, and revenue recognition coincides with the completion.  The Company reached the same conclusion with regard to sales charges and underwriting fees associated with the sale of the mutual funds - neither of which is material in the aggregate to the Company's revenue streams.  There is a risk of non-payment, and therefore an impairment loss on these receivables is possible at each reporting date.  There were no such impairment losses for the current period.

Revenue Disaggregated

The following table presents our revenue disaggregated by account type:

   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
   
2018
   
2017
   
2018
   
2017
 
Advisory Fees:
                       
Open-end Funds
 
$
31,481
   
$
32,738
   
$
94,326
   
$
97,390
 
Closed-end Funds
   
17,337
     
16,242
     
51,389
     
47,404
 
Sub-advisory accounts
   
1,189
     
1,024
     
3,430
     
2,321
 
Institutional & Private Wealth Management
   
24,276
     
26,049
     
75,391
     
78,603
 
SICAVs
   
1,471
     
1,265
     
4,223
     
3,200
 
Performance-based
   
180
     
10
     
207
     
24
 
Conditional
   
-
     
-
     
1,650
     
-
 
Distribution and other income
   
9,854
     
11,013
     
29,862
     
32,916
 
Total revenues
 
$
85,788
   
$
88,341
   
$
260,478
   
$
261,858
 

C.  Investment in Securities

Effective with the Company’s adoption of ASU 2016-01 on January 1, 2018, the Company carries all investments in equity securities at fair value through net income (“FVTNI”) which approximates market value.  The Company has no securities that qualify for the equity method or for consolidation of the investee for which the Company has elected the practicality exception to fair value measurement.

13

Investments in securities at September 30, 2018, December 31, 2017 and September 30, 2017 consisted of the following:

   
September 30, 2018
   
December 31, 2017
   
September 30, 2017
 
         
Estimated
         
Estimated
         
Estimated
 
   
Cost
   
Market Value
   
Cost
   
Market Value
   
Cost
   
Market Value
 
   
(In thousands)
 
Securities carried at FVTNI (trading securities for comparative periods):
                         
US Government Obligations
 
$
-
   
$
-
   
$
-
   
$
-
   
$
59,905
   
$
59,954
 
Common stocks
   
18,154
     
28,666
     
26
     
34
     
24
     
31
 
Mutual Funds
   
44
     
44
     
11
     
11
     
11
     
11
 
Closed-end funds
   
951
     
994
     
-
     
-
     
-
     
-
 
Total securities carried at FVTNI
   
19,149
     
29,704
     
37
     
45
     
59,940
     
59,996
 
                                                 
Available for sale securities:
                                               
Common stocks
   
-
     
-
     
17,441
     
36,637
     
21,319
     
41,315
 
Closed-end funds
   
-
     
-
     
99
     
108
     
99
     
114
 
Total available for sale securities
   
-
     
-
     
17,540
     
36,745
     
21,418
     
41,429
 
                                                 
Total investments in securities
 
$
19,149
   
$
29,704
   
$
17,577
   
$
36,790
   
$
81,358
   
$
101,425
 

There were no securities sold, not yet purchased at September 30, 2018, December 31, 2017 and September 30, 2017.

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 were classified as trading securities for the periods ended December 31, 2017 and September 30, 2017.  Securities carried at FVTNI for the September 30, 2018 period-end and trading securities in the periods ending December 31, 2017 and September 30, 2017 are stated at fair value, with any unrealized gains or losses reported in current period earnings.  Available for sale (“AFS”) investments for the periods ended December 31, 2017 and September 30, 2017 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 were recorded as realized losses in the condensed consolidated statements of income.

Effective January 1, 2018, the Company adopted ASU 2016-01, which eliminated available for sale accounting and resulted in the reclassification of $12.1 million, net of tax, out of accumulated comprehensive income and into retained earnings in the condensed consolidated statement of financial condition.  As a result, for the three and nine months ended September 30, 2018, changes in the fair value of the Company’s entire investment portfolio are now recorded in the net gain (loss) from investments line in the condensed consolidated statements of income rather than through other comprehensive 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 (in thousands).  (No disclosure is needed for the three and nine months ended September 30, 2018 due to the adoption of ASU 2016-01.)
 
Amount
 
Affected Line Items
 
Reason for
Reclassified
 
in the Statements
 
Reclassification
from AOCI
 
Of Income
 
from AOCI
Three months ended
 
Nine months ended
     
   
September 30, 2017
 
September 30, 2017
     
   
                      
 
$
20
   
$
20
 
Net gain from investments
 
Realized gain on sale of AFS securities
   
2,821
     
2,855
 
Other operating expenses/net gain from investments
 
Realized gain on donation of AFS securities
 
$
2,841
   
$
2,875
 
Income before income taxes
   
   
(1,051
)
   
(1,064
)
Income tax provision
   
 
$
1,790
   
$
1,811
 
Net income
   


14

The following is a summary of the cost, gross unrealized gains, gross unrealized losses and fair value of available for sale investments as of December 31, 2017 and September 30, 2017.  (No disclosures are required as of September 30, 2018 due to the adoption of ASU 2016-01.)

 
December 31, 2017
 
     
Gross
 
Gross
 
Estimated
 
     
Unrealized
 
Unrealized
 
Market
 
 
Cost
 
Gains
 
Losses
 
Value
 
 
(In thousands)
 
Common stocks
$
 
 
17,441
   
$
19,196
   
$
-
   
$
36,637
 
Closed-end funds
     
99
     
9
     
-
     
108
 
Total available for sale securities
$
 
 
17,540
   
$
19,205
   
$
-
   
$
36,745
 
                                   
 
September 30, 2017
 
         
Gross
 
Gross
 
Estimated
 
         
Unrealized
 
Unrealized
 
Market
 
 
Cost
 
Gains
 
Losses
 
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
 

A net unrealized gain, net of taxes, for the three and nine months ended September 30, 2017 of $2.3 million and $1.0 million, respectively, has been included in other comprehensive income, a component of equity, at September 30, 2017.  During the three and nine 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 realized losses on the sale of investments available for sale for the three and nine months ended September 30, 2017.  The Company determines the cost of a security sold by using specific identification.  Accumulated other comprehensive income in the condensed consolidated statements of equity is primarily comprised of unrealized gains/losses, net of taxes, for AFS securities.

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

For the three and nine months ended September 30, 2017, there were no losses on available for sale securities that were deemed to be other than temporary.
 
D. 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, 2018, December 31, 2017 and September 30, 2017 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, 2018 (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)
   
2018
 
Cash equivalents
 
$
34,020
   
$
-
   
$
-
   
$
34,020
 
Investments in securities:
                               
Common stocks
   
28,666
     
-
     
-
     
28,666
 
Mutual Funds
   
44
     
-
     
-
     
44
 
Closed-end Funds
   
994
     
-
     
-
     
994
 
Total investments in securities
   
29,704
     
-
     
-
     
29,704
 
Total assets at fair value
 
$
63,724
   
$
-
   
$
-
   
$
63,724
 

15

Assets and Liabilities Measured at Fair Value on a Recurring Basis as of December 31, 2017 (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)
   
2017
 
Cash equivalents
 
$
17,475
   
$
-
   
$
-
   
$
17,475
 
Investments in securities:
                               
AFS - Common stocks
   
36,637
     
-
     
-
     
36,637
 
AFS - Closed-end Funds
   
108
     
-
     
-
     
108
 
Trading - Common stocks
   
34
     
-
     
-
     
34
 
Trading - Mutual funds
   
11
     
-
     
-
     
11
 
Total investments in securities
   
36,790
     
-
     
-
     
36,790
 
Total assets at fair value
 
$
54,265
   
$
-
   
$
-
   
$
54,265
 


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
 

During the quarters ended September 30, 2018 and 2017, there were no transfers between any Level 1 and Level 2 holdings, or between Level 1 and Level 3 holdings.

E. Income Taxes

The effective tax rate (“ETR”) for the three months ended September 30, 2018 and September 30, 2017 was 24.6% and 18.8%, respectively. The ETR for the nine months ended September 30, 2018 and September 30, 2017 was 24.3% and 34.4%, respectively.

The third quarter 2017 ETR benefited from the reversal of certain tax accruals totaling $3.6 million due to a change in accounting estimate.  Absent this reversal the ETR was 36.2%.

The decline in the nine month ETR is almost exclusively due to the lower Federal tax rate under the Tax Cuts and Jobs Act which lowered our Federal tax rate from 35% to 21%, effective January 1, 2018.
 
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F. Earnings Per Share

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

   
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
(in thousands, except per share amounts)
 
2018
   
2017
   
2018
   
2017
 
Basic:
                       
Net income attributable to GAMCO Investors, Inc.'s shareholders
 
$
35,016
   
$
16,600
   
$
93,859
   
$
64,314
 
Weighted average shares outstanding
   
28,677
     
28,926
     
28,789
     
28,930
 
                                 
Basic net income per share attributable to GAMCO
                               
Investors, Inc.'s shareholders
 
$
1.22
   
$
0.57
   
$
3.26
   
$
2.22
 
                                 
Diluted:
                               
Net income attributable to GAMCO Investors, Inc.'s shareholders
 
$
35,016
   
$
16,600
   
$
93,859
   
$
64,314
 
Add interest on convertible note, net of management fee and taxes
   
-
     
696
     
-
     
2,192
 
Total income attributable to GAMCO Investors, Inc.'s shareholders
 
$
35,016
   
$
17,296
   
$
93,859
   
$
66,506
 
                                 
Weighted average share outstanding
   
28,677
     
28,926
     
28,789
     
28,930
 
Restricted stock awards
   
62
     
247
     
35
     
214
 
Assumed conversion of convertible note
   
-
     
2,000
     
-
     
2,000
 
Total
   
28,739
     
31,173
     
28,824
     
31,144
 
                                 
Diluted net income per share attributable to GAMCO
                               
Investors, Inc.'s shareholders
 
$
1.22
   
$
0.55
   
$
3.26
   
$
2.14
 

G. Debt

Debt consists of the following:

 
September 30, 2018
 
December 31, 2017
 
September 30, 2017
 
 
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
 
AC 4% PIK Note
   
-
     
-
     
50,000
     
50,572
     
70,000
     
71,755
 
AC 1.6% Note
   
-
     
-
     
15,000
     
14,972
     
-
     
-
 
5.875% Senior notes
   
24,162
     
23,217
     
24,144
     
24,543
     
24,138
     
24,748
 
Total
 
$
24,162
   
$
23,217
   
$
89,144
   
$
90,087
   
$
204,000
   
$
208,077
 

4.5% Convertible Note

On August 15, 2016, the Company issued and sold a 5-year, $110 million convertible note (“Convertible Note”).  The note bore interest at a rate of 4.5% per annum and was 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 was 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 was 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.  On November 20, 2017, the Company and the Convertible Note holder agreed to amend the Convertible Note to allow for an early redemption if the Company paid the Convertible Note holder 103% of the unpaid principal plus all accrued but unpaid interest on the redemption date.  On November 21, 2017, the Company redeemed the Convertible Note for $114.6 million.  The payment was equal to 103% of the unpaid principal amount of the note plus accrued interest.  As a result, the Company recorded a loss on extinguishment of debt of $3.3 million and expensed the remaining $135,000 of issuance costs.

GGCP, Inc. (“GGCP”), which owns approximately 63 % of the equity interest of the Company, initially 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 (the “Escrow Agreement”).  In connection with the Initial Deposit made by GGCP, the Company had agreed that GGCP had a right to demand payment in an amount equal to any funds withdrawn from the escrow account by the Convertible Note holder.  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.  On November 21, 2017, the Company paid GGCP $53 million for the remaining 47% of the assets in the escrow account that it did not previously own.


17

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, 2018, the Company prepaid $20 million and $50 million, respectively, of principal of the AC 4% PIK Note against the principal amount due on November 30, 2020.  The AC 4% PIK Note was fully repaid on August 28, 2018.  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.

AC 1.6% Note

On December 26, 2017, to finance tax payments and for working capital purposes, the Company borrowed $15 million from AC in exchange for a note that bore interest at 1.6% per annum.  On February 28, 2018, the date of maturity, the Company repaid the entire principal and accrued interest.

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, 2018, December 31, 2017 and September 30, 2017, the debt was recorded at its face value, net of issuance costs, of $24.2 million, $24.1 million and $24.1 million, respectively.

The Company’s debt, which is a Level 2 valuation, is carried at amortized cost on the condensed consolidated statements of financial position.  The Company has not elected the fair value option for its debt, and, therefore, the provisions of ASU 2016-01 (adopted by the Company on January 1, 2018) related to instrument-specific credit risk are not applicable.
 
H. Stockholders Equity
 
Shares outstanding were 29.1 million, 29.0 million and 29.2 million on September 30, 2018, December 31, 2017 and September 30, 2017, respectively.

18

Dividends

 
Record  
Payment
     
 
Date  
Date
 
Amount
 
 
           
Three months ended March 31, 2018
March 13, 2018
 
March 27, 2018
 
$
0.02
 
Three months ended June 30, 2018
June 18, 2018
 
July 2, 2018
   
0.02
 
Three months ended September 30, 2018
September 10, 2018
 
September 25, 2018
   
0.02
 
Nine months ended September 30, 2018
   
   
 
$
0.06
 
               
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
 

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 one Plan approved by the shareholders, which is 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 Plan 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 Plan by a committee of the Board of Directors responsible for administering the Plan (“Compensation Committee”). Under the Plan, 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 December 31, 2017 and September 30, 2017, there were 19,400 RSA shares and 164,050 RSA shares outstanding, respectively, that were previously issued at an average weighted grant price of $65.67 and $66.84, respectively. These RSA grants occurred prior to the spin-off of Associated Capital (“AC”).  All of these RSAs vested prior to March 31, 2018.  On April 4, 2018, 270,500 RSAs were issued at a grant price of $24.77.  On August 7, 2018, 162,450 RSAs were issued at a grant price of $25.16.  On September 17, 2018, 5,000 RSAs were issued at a grant price of $25.74.  As of September 30, 2018, there were 434,750 of these RSA shares outstanding with a weighted average grant price of $24.93.  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 January 5, 2018, the Compensation Committee of GBL accelerated the vesting relating to the remaining 19,400 RSAs outstanding.  As a result, GBL recorded an incremental $0.2 million of stock-based compensation expense during the first nine months of 2018.

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 nine months ended September 30, 2018, the Company reduced previously recorded tax benefits relating to RSA expense by $0.1 million on RSAs that vested.  There were no RSAs that vested for the three months ended September 30, 2018.

19

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 for the nine months ended September 30, 2017.  This amount related to GBL teammates who held AC RSAs.

For the three months ended September 30, 2018 and September 30, 2017, we recognized stock-based compensation expense of $0.5 million and $2.1 million, respectively.  For the nine months ended September 30, 2018 and September 30, 2017, we recognized stock-based compensation expense of $1.0 million and $7.2 million, respectively.  The 2017 nine month amounts include the $3.7 million related to the AC RSAs’ accelerated vesting mentioned above.

Actual and projected stock-based compensation expense for RSA shares for the years ended December 31, 2017 through December 31, 2023 is as follows (in thousands):

     
2017
   
2018
   
2019
   
2020
   
2021
   
2022
   
2023
 
 
Q1
   
$
699
   
$
187
   
$
572
   
$
572
   
$
572
   
$
329
   
$
329
 
 
Q2
     
4,381
     
351
     
572
     
572
     
423
     
329
     
128
 
 
Q3
     
2,103
     
496
     
572
     
572
     
361
     
329
     
43
 
 
Q4
     
1,488
     
572
     
572
     
572
     
329
     
329
     
-
 
Full Year
   
$
8,671
   
$
1,606
   
$
2,288
   
$
2,288
   
$
1,685
   
$
1,316
   
$
500
 

The total compensation costs related to non-vested RSAs not yet recognized is approximately $8.6 million as of September 30, 2018.

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.  For the three and nine months ended September 30, 2018, the Company repurchased 86,333 shares and 342,856 shares, respectively, at an average price per share of $25.99 and $26.52, respectively.  From the inception of the program through the November 30, 2015 spin-off of AC, 9,539,253 shares were repurchased.  From the spin-off date through September 30, 2018, 1,189,469 shares have been repurchased at an average price of $29.10 per share.  At September 30, 2018, the total shares available under the program to be repurchased in the future were 941,949.
 
Shelf Registration

On April 23, 2018, 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.   As of September 30, 2018, $500 million is available on the shelf.
 
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 in the condensed consolidated statements of financial condition at September 30, 2018, December 31, 2017 and September 30, 2017. 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 2019. 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 in the condensed consolidated statement of financial condition at September 30, 2018, December 31, 2017 and September 30, 2017.  The advisory contracts for the Bancroft Fund Ltd. and the Ellsworth Growth and Income Fund Ltd. are next up for renewal in August 2019. 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, 2018 or September 30, 2017, and as such there was no impairment analysis performed or charge recorded.
 
20

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 exists 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, 2018.

K. Related Party Transactions

On February 23, 2018, the Chief Executive Officer of the Company elected to waive all of his compensation that he would have otherwise been entitled to for the period of March 1, 2018 through December 31, 2018.  For the three and nine months ended September 30, 2018, the waiver reduced compensation by $14.4 million and $33.5 million, respectively, and management fee by $3.3 million and $8.0 million, respectively.  No projection can be reasonably provided as to the amount of compensation foregone by the waiver for October 1, 2018 through December 31, 2018 as the entirety of the CEO’s compensation is variably based.

L. Subsequent Events

On October 29, 2018, AC completed an exchange offer with respect to its Class A shares.  Tendering shareholders received 1.9 GAMCO Class A shares for each AC Class A share that they tendered, together with cash in lieu of any fractional share.  There were approximately 370,000 AC Class A shares tendered and accepted by AC.  AC delivered approximately 710,000 GAMCO Class A shares that they held to the tendering shareholders.  After the exchange, AC and its subsidiaries own 3.2 million shares of our Class A Stock, representing approximately 2% of the combined voting power and 10% of the outstanding shares of our common stock.

On November 6, 2018, the Board of Directors declared its regular quarterly dividend of $0.02 per share to all of its shareholders, payable on January 15, 2019 to shareholders of record on January 2, 2019.

On November 6, 2018, the Board of Directors authorized an additional $0.20 per share charitable contribution under our existing Shareholder Designated Charitable Contribution program.  Registered holders of record as of December 31, 2018 will be eligible to participate.  Since the inception of the program, GAMCO has donated $22 million to over 150 different charities on behalf of its shareholders.

21

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, Exchange Traded Managed Funds (“ETMFs”), and institutional and private wealth management investors principally in the United States.  Through G.distributors, LLC (“G.distributors”), we provide distribution for open-end funds and ETMFs.  We generally manage assets on a fully discretionary basis and invest in a variety of U.S. and international securities through various investment styles including value, growth, non-market correlated, and convertible securities.  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 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 an impact on our level of assets under management and hence, on revenues.

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

Assets under management (“AUM”) were $40.6 billion as of September 30, 2018, a decline of $0.1 billion, or 0.2%, from the June 30, 2018 AUM of $40.7 billion and a decrease of $2.5 billion, or 5.7% from the September 30, 2017 AUM of $43.1 billion.  The third quarter 2018 activity consisted of net cash outflows of $1.1 billion and recurring distributions, net of reinvestments, from open-end and closed-end funds of $147 million mostly offset by $1.2 billion of market appreciation.  Average total AUM was $41.0 billion in the 2018 quarter versus $42.3 billion in the prior year period, a decrease of 3.1%.

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 two closed-end funds.  As of September 30, 2018, assets under management with incentive based fees were $2.2 billion, $0.8 billion less than the $3.0 billion on September 30, 2017.
22

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

Table I: Fund Flows - 3rd Quarter 2018

                     
Fund
       
         
Market
         
distributions,
       
   
June 30,
   
appreciation/
   
Net cash
   
net of
   
September 30,
 
   
2018
   
(depreciation)
   
flows
   
reinvestments
   
2018
 
Equities:
                             
Open-end Funds
 
$
12,906
   
$
480
   
$
(566
)
 
$
(21
)
 
$
12,799
 
Closed-end Funds
   
7,778
     
252
     
(9
)
   
(126
)
   
7,895
 
Institutional & PWM - direct
   
11,982
     
418
     
(460
)
   
-
     
11,940
 
Institutional & PWM - sub-advisory
   
5,459
     
55
     
(80
)
   
-
     
5,434
 
SICAV
   
559
     
1
     
(12
)
   
-
     
548
 
Total Equities
   
38,684
     
1,206
     
(1,127
)
   
(147
)
   
38,616
 
Fixed Income:
                                       
100% U.S. Treasury Fund
   
1,961
     
10
     
33
     
-
     
2,004
 
Institutional & PWM
   
26
     
-
     
-
     
-
     
26
 
Total Fixed Income
   
1,987
     
10
     
33
     
-
     
2,030
 
Total Assets Under Management
 
$
40,671
   
$
1,216
   
$
(1,094
)
 
$
(147
)
 
$
40,646
 

Table II: Fund Flows - Year to date September 2018

                     
Fund
       
         
Market
         
distributions,
       
   
December 31,
   
appreciation/
   
Net cash
   
net of
   
September 30,
 
   
2017
   
(depreciation)
   
flows
   
reinvestments
   
2018
 
Equities:
                             
Open-end Funds
 
$
13,747
   
$
503
   
$
(1,413
)
 
$
(38
)
 
$
12,799
 
Closed-end Funds
   
8,053
     
269
     
(47
)
   
(380
)
   
7,895
 
Institutional & PWM - direct
   
13,420
     
227
     
(1,707
)
   
-
     
11,940
 
Institutional & PWM - sub-advisory
   
5,432
     
122
     
(120
)
   
-
     
5,434
 
SICAV
   
510
     
(14
)
   
52
     
-
     
548
 
Total Equities
   
41,162
     
1,107
     
(3,235
)
   
(418
)
   
38,616
 
Fixed Income:
                                       
100% U.S. Treasury Fund
   
1,870
     
24
     
110
     
-
     
2,004
 
Institutional & PWM
   
31
     
1
     
(6
)
   
-
     
26
 
Total Fixed Income
   
1,901
     
25
     
104
     
-
     
2,030
 
Total Assets Under Management
 
$
43,063
   
$
1,132
   
$
(3,131
)
 
$
(418
)
 
$
40,646
 
23

Table III: Assets Under Management by Quarter

                     
% Change From
 
   
September 30,
   
December 31,
   
September 30,
   
December 31,
   
September 30,
 
   
2018
   
2017
   
2017
   
2017
   
2017
 
Equities:
                             
Open-end Funds
 
$
12,799
   
$
13,747
   
$
13,762
     
(6.9
%)
   
(7.0
%)
Closed-end Funds
   
7,895
     
8,053
     
7,668
     
(2.0
)
   
3.0
 
Institutional & PWM - direct
   
11,940
     
13,420
     
13,893
     
(11.0
)
   
(14.1
)
Institutional & PWM - sub-advisory
   
5,434
     
5,432
     
5,346
     
0.0
     
1.6
 
SICAV
   
548
     
510
     
504
     
7.5
     
8.7
 
Total Equities
   
38,616
     
41,162
     
41,173
     
(6.2
)
   
(6.2
)
Fixed Income:
                                       
100% U.S. Treasury Fund
   
2,004
     
1,870
     
1,890
     
7.2
     
6.0
 
Institutional & PWM
   
26
     
31
     
26
     
(16.1
)
   
-
 
Total Fixed Income
   
2,030
     
1,901
     
1,916
     
6.8
     
5.9
 
Total Assets Under Management
 
$
40,646
   
$
43,063
   
$
43,089
     
(5.6
%)
   
(5.7
%)
Institutional & PWM - direct includes $324 million, $261 million and $280 million of Money Market Fund AUM at September 30, 2018, December 31, 2017 and September 30, 2017, respectively.


24

DEFERRED COMPENSATION

As previously disclosed, the Company has deferred the cash compensation of the Chief Executive Officer relating to all of 2016 (“2016 DCCA”), the first half of 2017 (“First Half 2017 DCCA”), and the fourth quarter of 2017 (“Fourth Quarter 2017 DCCA”) to provide the Company with flexibility to pay down debt and enhance our ability to execute lift-outs, make acquisitions, and seed new products.  We have made substantial progress toward this objective, having reduced our debt since the November 2015 spin-off of AC, resulting in Standard & Poor’s July 2018 reaffirmation of our investment grade rating of BBB- and stable outlook.

Notwithstanding its ability to settle these agreements in stock, GAMCO currently intends to make cash payments to Mr. Gabelli on the respective vesting dates.  While the agreements did not change Mr. Gabelli’s compensation, generally accepted accounting principles (“GAAP”) reporting for his compensation did change due to the ratable vesting.

The DCCAs defer the Chief Executive Officer’s compensation expense by amortizing it over each DCCA’s respective vesting period.  The Chief Executive Officer is not entitled to receive the compensation until the end of the vesting period, so GAAP specify this treatment of the expense.  The 2016 DCCA is expensed ratably over 4 years, the First Half 2017 DCCA was expensed ratably over 18 months, and the Fourth Quarter 2017 DCCA is expensed ratably over 18 months.

Because the GAAP reporting of the DCCAs granted to the CEO tracks vesting, compensation expense and management fee expense in the year of grant is lower than compensation expense and management fee expense in future periods to the extent that future periods contain the vesting of the prior year’s DCCA compensation in addition to normal non-deferred compensation for the current year period.  In 2016, the full amount of the compensation was deferred, and expense was recorded for the 25% vesting in that year.  In the first six months of 2017, the ratable vesting continued for the 2016 compensation, and the new First Half 2017 DCCA grant resulted in compensation for the first six months of 2017 being deferred and expense being recorded for 33% vesting in that period.  The CEO’s third quarter 2017 compensation was not deferred so 100% of the CEO’s compensation for that period was recorded together with the ratable portions of the vestings of the 2016 DCCA and the First Half 2017 DCCA.  This results in a compounding effect in future periods when non-deferred current period compensation and prior period deferred compensation is ratably vested.  On May 23, 2018, the CEO waived receipt of $6 million of the First Half 2017 DCCA, and a reduction in expense was recognized in the nine months ended September 30, 2018.  On July 2, 2018, the First Half 2017 DCCA vested in accordance with the terms of the agreement and a cash payment in the amount of $28.3 million was made to the CEO.
 
Accordingly, this vesting schedule resulted in a $9.5 million decrease in compensation expense in the third quarter 2018 versus the comparable 2017 period’s amounts as well as a $0.1 million decrease in management fee expense in the third quarter 2018 as compared to the 2017 period’s amounts.

The following tables show the amortization and EPS impact of the DCCAs by quarter.  The amortization amount of future periods assumes that the stock price of GBL is unchanged from September 30, 2018.

Amortization by quarter (increase / (decrease)):
   
EPS impact by quarter: