-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Vz1j1udPZcDHb1vKyEEvx5n2x1uZFNcVgLXBqah84xEWdfs4JDiRfhpFBUh9SqII Xi61eevnYFg0WPXKhGDeKg== 0001157523-05-009929.txt : 20051109 0001157523-05-009929.hdr.sgml : 20051109 20051109170220 ACCESSION NUMBER: 0001157523-05-009929 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20050930 FILED AS OF DATE: 20051109 DATE AS OF CHANGE: 20051109 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GAMCO INVESTORS, INC. ET AL CENTRAL INDEX KEY: 0001060349 STANDARD INDUSTRIAL CLASSIFICATION: SECURITY BROKERS, DEALERS & FLOTATION COMPANIES [6211] IRS NUMBER: 134007862 STATE OF INCORPORATION: NY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-14761 FILM NUMBER: 051190851 BUSINESS ADDRESS: STREET 1: ONE CORPORATE CENTER STREET 2: 401 THEODORE FREMD AVENUE CITY: RYE STATE: NY ZIP: 10580 BUSINESS PHONE: 9149213700 MAIL ADDRESS: STREET 1: ONE CORPORATE CENTER STREET 2: 401 THEODORE FREMD AVENUE CITY: RYE STATE: NY ZIP: 10580 FORMER COMPANY: FORMER CONFORMED NAME: GABELLI ASSET MANAGEMENT INC DATE OF NAME CHANGE: 19990112 FORMER COMPANY: FORMER CONFORMED NAME: ALPHA G INC DATE OF NAME CHANGE: 19980423 10-Q 1 a5016179.txt GAMCO INVESTORS, INC. 10-Q 1 SECURITIES & EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q --------- (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2005 ------------------ or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OF 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ---------- ---------- Commission File No. 1-106 ----- GAMCO INVESTORS, INC. - -------------------------------------------------------------------------------- (Exact name of Registrant as specified in its charter) New York 13-4007862 - -------------------------------------------------------------------------------- (State of other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) One Corporate Center, Rye, New York 10580 - -------------------------------------------------------------------------------- (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 [X] No [_] Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes [X] No [_] Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2). Yes [_] No [X] Indicate the number of shares outstanding of each of the Registrant's classes of Common Stock, as of the latest practical date. Class Outstanding at October 31, 2005 ----- ------------------------------- Class A Common Stock, .001 par value 6,487,517 Class B Common Stock, .001 par value 23,128,500 1 INDEX ----- GAMCO INVESTORS, INC. AND SUBSIDIARIES PART I. FINANCIAL INFORMATION - ----------------------------------- Item 1. Financial Statements (Unaudited) Condensed Consolidated Statements of Income: - Three months ended September 30, 2005 and 2004 - Nine months ended September 30, 2005 and 2004 Condensed Consolidated Statements of Financial Condition: - December 31, 2004 (Audited) - September 30, 2005 - September 30, 2004 Condensed Consolidated Statements of Stockholders' Equity and Comprehensive Income: - Three months ended September 30, 2005 and 2004 - Nine months ended September 30, 2005 and 2004 Condensed Consolidated Statements of Cash Flows: - Three months ended September 30, 2005 and 2004 - Nine months ended September 30, 2005 and 2004 Notes to Condensed Consolidated Financial Statements Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Including Quantitative and Qualitative Disclosure about Market Risk) Item 4. Controls and Procedures PART II. OTHER INFORMATION - ------------------------------- Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities Item 6. Exhibits and Reports on Form 8-K SIGNATURES - ------------- 2 GAMCO INVESTORS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME UNAUDITED (In thousands, except per share data)
Three Months Ended Nine Months Ended September 30, September 30, ------------------------------------------------------ 2005 2004 2005 2004 ------- ------- -------- -------- Revenues Investment advisory and incentive fees $57,547 $49,685 $163,837 $154,928 Commission revenue 3,259 2,962 8,298 11,312 Distribution fees and other income 5,428 4,590 15,471 14,740 ------- ------- -------- -------- Total revenues 66,234 57,237 187,606 180,980 Expenses Compensation and related costs 28,189 23,380 81,697 72,335 Management fee 3,495 2,284 8,072 7,558 Distribution costs 4,931 4,537 15,679 14,193 Other operating expenses 7,021 5,085 19,775 15,232 ------- ------- -------- -------- Total expenses 43,636 35,286 125,223 109,318 Operating income 22,598 21,951 62,383 71,662 Other income (expense) Net gain (loss) from investments 6,937 (296) 7,919 1,949 Interest and dividend income 5,216 2,916 12,845 6,510 Interest expense (3,298) (4,014) (10,502) (12,095) ------- ------- -------- -------- Total other income (expense), net 8,855 (1,394) 10,262 (3,636) ------- ------- -------- -------- Income before income taxes and minority interest 31,453 20,557 72,645 68,026 Income tax provision 11,795 7,483 27,242 24,768 Minority interest 210 43 318 238 ------- ------- -------- -------- Net income $19,448 $13,031 $ 45,085 $ 43,020 ======= ======= ======== ======== Net income per share: Basic $ 0.65 $ 0.44 $ 1.51 $ 1.44 ======= ======= ======== ======== Diluted $ 0.64 $ 0.43 $ 1.48 $ 1.41 ======= ======= ======== ======== Weighted average shares outstanding: Basic 29,935 29,707 29,859 29,886 ======= ======= ======== ======== Diluted 31,079 31,820 31,323 32,011 ======= ======= ======== ======== Dividends declared: Quarterly $ 0.02 $ 0.02 $ 0.06 $ 0.04 ======= ======= ======== ======== Special $ - $ 1.00 $ - $ 1.10 ======= ======= ======== ========
See accompanying notes. 3
GAMCO INVESTORS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (In thousands) September 30 September 30 December 31, 2005 2004 2004 --------- --------- ---------- ASSETS (Unaudited) Cash and cash equivalents, including restricted cash of $2,483, $1,902 and $1,054. $ 205,050 $ 337,830 $ 257,096 Investments in securities, including restricted securities of $51,731, $101,969 and $102,111. 391,484 249,779 292,350 Investments in partnerships and affiliates 90,241 91,149 89,339 Receivable from brokers 8,692 22,620 5,539 Investment advisory fees receivable 19,005 17,894 26,567 Other assets 26,827 25,051 28,081 --------- --------- ---------- Total assets $ 741,299 $ 744,323 $ 698,972 ========= ========= ========== LIABILITIES AND STOCKHOLDERS' EQUITY Payable to brokers $ 86 $ - $ 302 Income taxes payable, including deferred taxes of $1,713, $2,016 and $938. 6,580 5,608 8,526 Compensation payable 41,388 33,871 27,645 Capital lease obligation 3,039 2,751 3,167 Securities sold, not yet purchased 337 1,084 1,088 Dividends payable - - 17,302 Accrued expenses and other liabilities 19,222 16,669 17,585 --------- --------- ---------- Total operating liabilities 70,652 59,983 75,615 5.5% Senior notes (due May 15, 2013) 100,000 100,000 100,000 5% Convertible note (conversion price, $52.00 per share; note due August 14, 2011) 50,000 100,000 100,000 5.22% Senior notes (due February 17, 2007) 82,308 - - Mandatory convertible securities (purchase contract settlement date, February 17, 2005; notes due February 17, 2007) - 82,308 82,308 --------- --------- ---------- Total liabilities 302,960 342,291 357,923 Minority interest 5,981 5,916 6,171 Stockholders' equity Class A Common Stock, $0.001 par value; 100,000,000 shares authorized; 9,640,339, 7,778,625 and 8,081,356 issued and outstanding, respectively 10 8 8 Class B Common Stock, $0.001 par value; 100,000,000 shares authorized; 23,128,500, 23,128,500 and 23,128,500 issued and outstanding, respectively 23 23 23 Additional paid-in capital 235,735 147,381 161,053 Retained earnings 311,671 296,116 268,519 Accumulated comprehensive gain / (loss) 2,171 (624) (53) Treasury stock, at cost (2,907,022, 1,349,272 and 2,372,822 shares, respectively) (117,252) (46,788) (94,672) --------- --------- ---------- Total stockholders' equity 432,358 396,116 334,878 --------- --------- ---------- Total liabilities and stockholders' equity $ 741,299 $ 744,323 $ 698,972 ========= ========= ==========
See accompanying notes. 4
GAMCO INVESTORS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME UNAUDITED (In thousands) Three Months Ended Nine Months Ended September 30, September 30, ----------------------------------------------------- 2005 2004 2005 2004 -------- -------- -------- -------- Stockholders' equity - beginning of period $417,318 $392,803 $334,878 $378,311 Comprehensive income: Net income 19,448 13,031 45,085 43,020 Translation adjustments (9) - 25 - Net unrealized gain (loss) on securities available for sale 316 1,368 2,199 (2,104) -------- -------- -------- -------- Comprehensive income 19,755 14,399 47,309 40,916 -------- -------- -------- -------- Dividends declared (599) (593) (1,933) (4,171) Stock option expense - 467 2,760 1,352 Proceeds from settlement of purchase contracts - - 70,568 - Purchase and retirement of mandatory convertible securities - 15 - 45 Capitalized costs (16) - (31) - Exercise of stock options including tax benefit 648 678 1,387 2,510 Purchase of treasury stock (4,748) (11,653) (22,580) (22,847) -------- -------- -------- -------- Stockholders' equity - end of period $432,358 $396,116 $432,358 $396,116 ======== ======== ======== ========
See accompanying notes. 5
GAMCO INVESTORS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS UNAUDITED (In thousands) Three Months Ended Nine Months Ended September 30, September 30, ----------------------------------------------------- 2005 2004 2005 2004 -------- -------- -------- -------- Operating activities Net income $ 19,448 $ 13,031 $ 45,085 $ 43,020 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Equity in losses / (gains) from partnerships and affiliates (2,540) 403 (5,236) (1,562) Depreciation and amortization 298 241 769 720 Stock-based compensation expense - 467 2,760 1,352 Tax benefit from exercise of stock options 133 191 287 570 Foreign currency (gain) / loss (6) - 196 - Other-than-temporary loss on available for sale securities - - 3,301 - Impairment of goodwill - - 1,127 - Minority interest in net income of consolidated subsidiaries 210 43 318 238 Realized gains on available for sale securities - - - (101) (Increase) decrease in operating assets: Investments in securities (23,699) 6,263 (93,007) (12,680) Investment advisory fees receivable (2,423) (1,248) 7,563 3,671 Receivables from affiliates (216) 1,070 364 5,653 Receivable from brokers 15,582 (5,795) (3,154) (21,388) Other assets 711 778 (1,020) 366 Increase (decrease) in operating liabilities: Payable to brokers 85 (1) (216) (5,692) Income taxes payable 3,342 1,365 (3,260) (5,463) Compensation payable 9,418 4,335 13,352 8,692 Accrued expenses and other liabilities 3,686 517 1,407 (2,120) Securities sold, not yet purchased (3,020) 15 (751) 419 -------- -------- -------- -------- Total adjustments 1,561 8,644 (75,200) (27,325) -------- -------- -------- -------- Net cash provided by (used in) operating activities 21,009 21,675 (30,115) 15,695 -------- -------- -------- -------- Investing activities Purchases of available for sale securities (560) (822) (5,520) (9,927) Proceeds from sales of available for sale securities - - - 600 Distributions from partnerships and affiliates 1,074 2,552 18,076 12,509 Investments in partnerships and affiliates (3,058) (727) (13,741) (38,084) -------- -------- -------- -------- Net cash (used in) provided by investing activities (2,544) 1,003 (1,185) (34,902) -------- -------- -------- -------- Financing activities Dividend paid to minority stockholders of subsidiary - - (544) (2,718) Accrual for settlement of minority interest 36 - 36 - Proceeds from exercise of stock options 515 487 1,100 1,939 Repurchase of 5% convertible note - - (50,000) - Dividends paid (599) (593) (19,235) (4,171) Purchase of mandatory convertible securities - (547) - (1,677) Proceeds from settlement of purchase contracts - - 70,568 - Capitalized costs (16) - (31) - Purchase of treasury stock (4,748) (11,653) (22,580) (22,847) -------- -------- -------- -------- Net cash used in financing activities (4,812) (12,306) (20,686) (29,474) -------- -------- -------- -------- Net increase (decrease) in cash and cash equivalents 13,653 10,372 (51,986) (48,681) Effect of exchange rates on cash and cash equivalents (16) - (60) - Cash and cash equivalents at beginning of period 191,413 327,458 257,096 386,511 -------- -------- -------- -------- Cash and cash equivalents at end of period $205,050 $337,830 $205,050 $337,830 ======== ======== ======== ========
See accompanying notes. 6 GAMCO INVESTORS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS September 30, 2005 (Unaudited) A. Basis of Presentation Unless we have indicated otherwise, or the context otherwise requires, references in this report to "GAMCO Investors, Inc.," "GAMCO," "we," "us" and "our" or similar terms are to GAMCO Investors, Inc. (formerly, Gabelli Asset Management Inc.), its predecessors and its subsidiaries. The unaudited interim Condensed Consolidated Financial Statements of GAMCO Investors, Inc. included herein have been prepared in conformity with U.S. generally accepted accounting principles 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. generally accepted accounting principles 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. In preparing the unaudited interim condensed consolidated financial statements, management is required to make estimates and assumptions that affect the amounts reported in the financial statements. Actual results could differ from those estimates. These 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, 2004, from which the accompanying Condensed Consolidated Statement of Financial Condition was derived. Certain items previously reported have been reclassified to conform to the current period's financial statement presentation. B. Investment in Securities Management determines the appropriate classification of debt and equity securities at the time of purchase and reevaluates such designation as of each balance sheet date. Investments in Treasury Bills and Notes with maturities of greater than three months at the time of purchase are classified as Investments in securities and in Cash and cash equivalents if three months or less at time of purchase. A substantial portion of investments in securities are held for resale in anticipation of short-term market movements and classified as trading securities. Available for sale investments are stated at fair value, with any unrealized gains or losses, net of deferred taxes, reported as a component of stockholders' equity except for losses deemed to be other than temporary which are recorded as realized losses in the statement of operations. For the nine month period ended September 30, 2005, there were $3.3 million in losses on available for sale securities deemed to be other than temporary which were recorded in the statement of income. There were no losses in the three month period ended September 30, 2005 or in the prior year's three month or nine month periods ended September 30, 2004. 7 B. Investment in Securities (continued) The losses related to available for sale securities in the nine month period ended September 30, 2005 were offset by gains related to our $100,000 venture capital investment in optionsXpress Holdings, Inc. (Nasdaq: OXPS) made in 2001 through our 92% owned subsidiary, Gabelli Securities, Inc. OXPS completed its initial public offering during the first quarter of 2005. We recorded a total gain of $4.8 million on OXPS for the first nine months of 2005, of which $2.7 million was recognized during the third quarter of 2005. In addition we had previously recorded a gain of $0.9 million related to this investment in the fourth quarter of 2003. During the third quarter of 2005, we sold 155,000 shares for approximately $2.8 million. We recorded a total gain on these shares of $2.3 million for the first nine months of 2005, of which $1.3 million was recorded in the third quarter. Gabelli Securities, Inc. owned approximately 160,000 shares at September 30, 2005, which are held for trading purposes. These shares have an original cost basis of $0.23 per share and were written up to $3.11 per share in December 2003 concurrent with a second round of financing prior to the IPO, and were marked to market at $19.04 per share on September 30, 2005. At September 30, 2005 and 2004, the market value of investments available for sale was $82.0 million and $73.1 million, respectively. An unrealized gain in market value, net of management fee and taxes, of $2.1 million and an unrealized loss in market value, net of management fee and taxes, of $624,000 has been included in stockholders' equity for September 30, 2005 and 2004, respectively. There were no sales of investments available for sale for the three and nine month periods ended September 30, 2005. Proceeds from sales of investments available for sale were approximately $0.6 million for the nine month period ended September 30, 2004. For the first nine months of 2004, gross gains on the sale of investments available for sale amounted to $101,000; there were no gross losses on the sale of investments available for sale. C. Earnings Per Share The computations of basic and diluted net income per share are as follows:
Three Months Ended Nine Months Ended September 30, September 30, (in thousands, except per share amounts) 2005 2004 2005 2004 ------- ------- ------- ------- Basic: Net income $19,448 $13,031 $45,085 $43,020 ======= ======= ======= ======= Average shares outstanding 29,935 29,707 29,859 29,886 ======= ======= ======= ======= Basic net income per share $ 0.65 $ 0.44 $ 1.51 $ 1.44 ======= ======= ======= ======= Diluted: Net income $19,448 $13,031 $45,085 $43,020 Add interest expense on 5% convertible note, net of management fee and taxes 352 716 1,406 2,147 ------- ------- ------- ------- Total $19,800 $13,747 $46,491 $45,167 ======= ======= ======= ======= Average shares outstanding 29,935 29,707 29,859 29,886 Dilutive stock options 182 190 185 202 Assumed conversion of 5% convertible note 962 1,923 1,279 1,923 ------- ------- ------- ------- Total 31,079 31,820 31,323 32,011 ======= ======= ======= ======= Diluted net income per share $ 0.64 $ 0.43 $ 1.48 $ 1.41 ======= ======= ======= =======
8 D. Stockholders' Equity Shares outstanding on September 30, 2005 were 29,861,817, which is approximately 3.6% higher than shares outstanding of 28,837,034 at the end of 2004 and approximately 1.0% above shares outstanding of 29,557,853 on September 30, 2004 reflecting the issuance of 1,517,483 shares of class A common stock in settlement of the purchase contracts issued pursuant to our mandatory convertible securities on February 17, 2005 and the repurchase of approximately 0.5 million shares and 1.6 million shares during the nine and twelve month periods, respectively. Fully diluted shares outstanding for the third quarter 2005 were 31,079,413 approximately 0.4% lower than second quarter 2005 fully diluted shares of 31,211,347 and approximately 2.3% lower than our fully diluted shares of 31,820,157 for the third quarter 2004. Our Board of Directors has announced that the regular quarterly dividend will be increased 50% to $0.03 per share beginning with the fourth quarter 2005. The Board of Directors also declared a quarterly dividend of $0.02 per share that was paid on September 28, 2005 to shareholders of record on September 15, 2005. During the first nine months of 2005, we have paid total dividends of $0.66 per share to all shareholders, which includes a special dividend of $0.60 per share on January 18, 2005. This follows the $1.16 per share of dividends paid in 2004 which included special dividends of $0.10 per share in the second quarter 2004 and $1.00 per share in the fourth quarter 2004. Stock Award and Incentive Plan During June 2005, we announced that our Board of Directors approved the accelerated vesting of all unvested stock options. In accordance with Statement of Financial Accounting Standards ("SFAS") 123(R), the acceleration of vesting resulted in the recognition of approximately $1.8 million of incremental compensation expense during the second quarter 2005. As a result, we did not recognize any stock-based compensation expense for the three months ended September 30, 2005. For the three months ended September 30, 2004, we recognized stock-based compensation expense of $467,000. For the nine months ended September 30, 2005 and 2004, we recognized $2,760,000 and $1,352,000, respectively, in stock-based compensation. For the fourth quarter of 2005 compensation expense will be lower by approximately $467,000 as compared to the prior year quarter as we currently estimate there will be no stock option expense in the 2005 quarter. Proceeds from the exercise of 19,275 and 22,900 stock options were $515,000 and $487,000 for the three months ended September 30, 2005 and 2004, respectively, resulting in a tax benefit to GAMCO of $133,000 and $191,000 for the three months ended September 30, 2005 and 2004, respectively. Proceeds from the exercise of 41,500 and 81,025 stock options were $1,100,000 and $1,939,000 for the nine months ended September 30, 2005 and 2004, respectively, resulting in a tax benefit to GAMCO of $287,000 and $570,000 for the nine months ended September 30, 2005 and 2004, respectively. Prior to January 1, 2003, we applied Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations in accounting for our stock option plan. Accordingly, no compensation expense was recognized where the exercise price equals or exceeds the market price of the underlying stock on the date of grant. Effective January 1, 2003, we adopted the fair value recognition provisions of SFAS No. 123 in accordance with the transition and disclosure provisions under the recently issued SFAS No. 148, "Accounting for Stock Based Compensation - Transition and Disclosure". We adopted SFAS 123 (R) on January 1, 2005. In light of our modified prospective adoption of the fair value recognition provisions of SFAS 123 (R) for all grants of employee stock options, the adoption of SFAS 123 (R) did not have a material impact on our consolidated financial statements. During June 2005, the Board of Directors authorized the accelerated vesting of all unvested stock options as of July 1, 2005. This resulted in the expensing of an additional $1.8 million in stock option expense during the second quarter of 2005. All compensation costs related to stock options granted have been recognized in our consolidated financial statements. 9 D. Stockholders' Equity (continued) If we had elected for 2001 and 2002 to account for our stock options under the fair value method of SFAS No. 123 "Accounting for Stock Based Compensation," our net income and net income per share would have been reduced to the pro forma amounts indicated below: Three Months Ended Nine Months Ended September 30, September 30, 2005 2004 2005 2004 ------- ------- ------- ------- Net income (in thousands): As reported $19,448 $13,031 $45,085 $43,020 Pro forma $19,448 $13,009 $45,085 $42,864 Net income per share - Basic As reported $ 0.65 $ 0.44 $ 1.51 $ 1.44 Pro forma $ 0.65 $ 0.44 $ 1.51 $ 1.44 Net income per share - Diluted As reported $ 0.64 $ 0.43 $ 1.48 $ 1.41 Pro forma $ 0.64 $ 0.43 $ 1.48 $ 1.41 Stock Repurchase Program In March 1999, the Board of Directors established the Stock Repurchase Program to grant us authority to repurchase shares of our Class A common stock. For the three and nine months ended September 30, 2005, we repurchased 106,600 and 534,200 shares at an average investment of $44.93 and $42.25, respectively. Since the inception of the program we have repurchased 3,307,826 shares at an average investment of $37.33 per share. During August 2005, the Board of Directors authorized an additional 500,000 shares to be repurchased. At September 30, 2005 the total shares available under the program to be repurchased was approximately 910,000. The Board of Directors had also previously approved the repurchase of up to 900,000 shares of our mandatory convertible securities. During the third quarter and first nine months of 2004, we repurchased 22,500 shares at an average investment of $24.10 per share and 68,900 shares at an average investment of $24.67 per share, respectively. A gain attributable to the debt component of the mandatory convertible securities totaling $24,000 and $34,000 has been included in other income (expense) for both the three and nine months ended September 30, 2004, respectively. The total shares repurchased were 307,700 at a total investment of $6.9 million. In February 2005 we issued approximately 1,517,000 shares of class A common stock in settlement of the 2,822,700 purchase contracts issued pursuant to our mandatory convertible securities resulting in proceeds of $70.6 million. The settlement rate of 0.5376 was determined based on the average closing price per share of class A common stock for the twenty consecutive trading days ending February 14, 2005. In June 2005, the firm filed a "shelf" registration statement on Form S-3. The shelf is currently being reviewed by the staff of the Securities and Exchange Commission. If and when declared effective, the shelf process will provide us with opportunistic flexibility to sell any combination of senior and subordinate debt securities, convertible debt securities and equity securities (including common and preferred securities) up to a total amount of $400 million. This authorization is in addition to the remaining $120 million available under our "shelf" registration filed in 2001. 10 E. Goodwill In accordance with SFAS 142 "Accounting for Goodwill and Other Intangible Assets," we assess the recoverability of goodwill and other intangible assets at least annually, or more often should events warrant. During the first quarter of 2005, assets under management for our fixed income business decreased approximately 42% from the beginning of the year, triggering under our accounting policies the need to reassess goodwill for this 80% owned subsidiary. Using a present value cash flow method, we reassessed goodwill for this entity and determined that the value of the entity no longer justified the amount of goodwill. Accordingly, we recorded a charge of $1.1 million for the impairment of goodwill that represented the entire amount of goodwill for this entity during the first quarter of 2005. There was no impairment charge recorded for the three months ended September 30, 2005. There remains $3.5 million of goodwill related to our 92% owned subsidiary, Gabelli Securities, Inc. F. Subsequent Events On October 5, 2005, the Company announced that a total of approximately 110 option holders elected to tender options to purchase an aggregate of approximately 522,000 shares of its Class A common stock. These option holders received an aggregate of approximately $9.7 million in cash (less any withholding taxes). As a result of the completion of the tender offer, there will be a reduction in fully diluted shares outstanding of approximately 130,000 shares for the fourth quarter 2005. From October 1 through October 31, 2005, we repurchased 247,300 shares of our class A common stock, under the Stock Repurchase Program, at an average investment of $44.61 per share. 11 ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (INCLUDING QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK) Overview GAMCO Investors, Inc. (formerly, Gabelli Asset Management Inc.) (NYSE: GBL) is a widely recognized provider of investment advisory services to mutual funds, institutional and high net worth investors, and investment partnerships. Through Gabelli & Company, Inc., we provide institutional research services to institutional clients and investment partnerships. We generally manage assets on a discretionary basis and invest in a variety of U.S. and international securities through various investment styles. Our revenues are based primarily on the firm's levels of assets under management and fees associated with our various investment products, rather than our own corporate assets. Since 1977, we have been identified with and enhanced the "value" style approach to investing. Our investment objective is to earn a superior risk-adjusted return for our clients over the long-term through our proprietary fundamental research. In addition to our value products, we offer our clients a broad array of investment strategies that include growth, international and convertible products. We also offer non-market correlated, and fixed income strategies. By earning returns for our clients, we will be earning returns for all our constituents. As part of our re-branding initiative to accelerate growth, our corporate name change to GAMCO Investors, Inc. became effective August 29, 2005. Since the firm was founded in 1977, GAMCO has been the name of our asset management business, representing our institutional and high net worth effort. We believe changing our corporate name to GAMCO helps us achieve our vision for assets entrusted to us, that is, to earn a superior return for our clients by providing various value-added (alpha) products. GAMCO is a more inclusive parent company name, and more appropriately represents the various investment strategies and asset management brands contributing to the continued growth of our company. The Gabelli brand will continue to represent our absolute return, research driven Value style that focuses on our unique Private Market Value with a Catalyst (TM) investment approach. Our class A common stock will continue to trade on the New York Stock Exchange under the ticker symbol "GBL". As part of this initiative, we will ask the directors of our mutual funds at the next board meeting to approve the name change of the Growth, the Global Series, the Mathers and the International Growth funds (amongst others) to GAMCO from Gabelli. The funds that reflect the Private Market Value with a Catalyst approach will continue under the Gabelli brand. Our revenues are highly correlated to the level of assets under management, which are directly influenced by the level and changes of the overall equity markets. Assets under management can also fluctuate through acquisitions, the creation of new products, the addition of new accounts or the loss of existing accounts. Since various equity products have different fees, changes in our business mix may also affect revenues. At times, the performance of our equity products may differ markedly from popular market indices, and this can also impact our revenues. It is our belief that general stock market trends will have the greatest impact on our level of assets under management and hence, revenues. This becomes increasingly likely as the base of assets grows. We conduct our investment advisory business principally through: GAMCO Asset Management Inc. (Separate Accounts), Gabelli Funds, LLC (Mutual Funds) and Gabelli Securities, Inc. (Investment Partnerships). We also act as an underwriter, are a distributor of our open-end mutual funds and provide institutional research through Gabelli & Company, Inc., our broker-dealer 12 As of September 30, 2005, we had $27.6 billion of assets under management (AUM), approximately 96.5% of which were in equity products. Our equity open-end mutual funds and closed-end funds had a record $12.8 billion in AUM at quarter end, 2.6% above the $12.5 billion on June 30, 2005 and 13.8% ahead of the $11.3 billion on September 30, 2004. In the institutional and high net worth segment of our business, GAMCO Asset Management Inc. had AUM of $13.1 billion in separately managed equity accounts on September 30, 2005, down 0.5% from the $13.2 billion on June 30, 2005 and down 0.4% from the $13.2 billion on September 30, 2004. Assets in our investment partnerships were $745 million, down 10.3% from second quarter-end 2005 assets of $831 million and 20.2% below the $934 million on September 30, 2004. Fixed income assets, primarily money market mutual funds, totaled $954 million on September 30, 2005, down 14.9% from second quarter-end 2005 assets of $1.1 billion and 48.9% lower than assets of $1.9 billion on September 30, 2004. 13 Assets Under Management The company reported assets under management as follows:
Table I: Assets Under Management (in millions) ------------------------------------- September 30 ------------ % 2004 2005 Inc. (Dec.) ---- ---- ----------- Mutual Funds: Equities Open End $ 7,534 $ 7,959 5.6% Closed-End 3,727 4,851 30.2 Fixed Income 1,524 796 (47.8) ------- ------ Total Mutual Funds 12,785 13,606 6.4 ------- ------ Institutional & High Net Worth Separate Accounts: Equities 13,185 13,129 (0.4) Fixed Income 344 158 (54.1) ------- ------ Total Institutional & High Net Worth Separate Accounts 13,529 13,287 (1.8) ------- ------ Investment Partnerships 934 745 (20.2) ------- ------ Total Assets Under Management $27,248 $27,638 1.4 ======= ======
Table II: Fund Flows - 3rd Quarter 2005 (in millions) ------------------------------------------- Market June 30, Net Appreciation / September 30, 2005 Cash Flows (Depreciation) 2005 -------------- ----------- --------------- -------------- Mutual Funds: Equities $12,482 ($ 212) $540 $12,810 Fixed Income 852 (62) 6 796 ------- ----- ---- ------- Total Mutual Funds 13,334 (274) 546 13,606 ------- ----- ---- ------- Institutional & HNW Separate Accounts Equities 13,189 (340) 280 13,129 Fixed Income 269 (113) 2 158 ------- ----- ---- ------- Total Institutional & HNW Separate Accounts 13,458 (453) 282 13,287 ------- ----- ---- ------- Investment Partnerships 831 (103) 17 745 ------- ----- ---- ------- Total Assets Under Management $27,623 ($ 830) $845 $27,638 ======= ===== ==== =======
Table III: Assets Under Management (in millions) ------------------------------------- %Increase/(decrease) 9/04 12/04 3/05 6/05 9/05 6/05 9/04 ---- ----- ---- ---- ---- ---- ---- Mutual Funds Open end $ 7,534 $ 8,029 $ 7,808 $ 7,798 $ 7,959 2.1% 5.6% Closed-end 3,727 4,342 4,602 4,684 4,851 3.6 30.2 Fixed income 1,524 1,499 1,154 852 796 (6.6) (47.8) ------- ------- ------- ------- ------- Total Mutual Funds 12,785 13,870 13,564 13,334 13,606 2.0 6.4 ------- ------- ------- ------- ------- Institutional & HNW Separate Accounts: Equities 13,185 13,587 13,364 13,189 13,129 (0.5) (0.4) Fixed Income 344 388 266 269 158 (41.3) (54.1) ------- ------- ------- ------- ------- Total Institutional & HNW Separate Accounts 13,529 13,975 13,630 13,458 13,287 (1.3) (1.8) ------- ------- ------- ------- ------- Investment Partnerships 934 814 854 831 745 (10.3) (20.2) ------- ------- ------- ------- ------- Total Assets Under Management $27,248 $28,659 $28,048 $27,623 $27,638 0.1 1.4 ======= ======= ======= ======= =======
14 Recent regulatory developments On September 3, 2003, the New York Attorney General's office ("NYAG") announced that it had found evidence of widespread improper trading involving mutual fund shares. These transactions included the "late trading" of mutual fund shares after the 4:00 p.m. pricing cutoff and "time zone arbitrage" of mutual fund shares designed to exploit pricing inefficiencies. Since the NYAG's announcement, the NASD, the SEC, the NYAG and officials of other states have been conducting inquiries into and bringing enforcement actions related to trading abuses in mutual fund shares. We have received information requests and subpoenas from the SEC and the NYAG in connection with their inquiries. We are complying with these requests for documents and testimony and have been conducting an internal review of our mutual fund practices and procedures in a variety of areas with the guidance of outside counsel. A special committee of all of our independent directors was also formed to review various issues involving mutual fund share transactions and was assisted by independent counsel. As part of our review, hundreds of documents were examined and approximately fifteen individuals were interviewed. We have found no evidence that any employee participated in or facilitated any "late trading". We also have found no evidence of any improper trading in our mutual funds by our investment professionals or senior executives. As we previously reported, we did find that in August of 2002, we banned an account, which had been engaging in frequent trading in our Global Growth Fund (the prospectus of which did not impose limits on frequent trading) and which had made a small investment in one of our hedge funds, from further transactions with our firm. Certain other investors had been banned prior to that. Since our internal review and requests from regulators for documents and testimony are ongoing, we can make no assurances that additional information will not become available or that we will not become subject to disciplinary action. In response to industry-wide inquiries and enforcement actions, a number of regulatory and legislative initiatives were introduced. The SEC has proposed and adopted a number of rules under the Investment Company Act and the Investment Advisers Act and is currently studying potential major revisions of other rules. The SEC adopted rules requiring written compliance programs for registered investment advisers and registered investment companies and additional disclosures regarding portfolio management and advisory contract renewals. In addition, several bills were introduced in the prior Congress that, if adopted, would have amended the Investment Company Act. These proposals, if reintroduced and enacted, or if adopted by the SEC, could have a substantial impact on the regulation and operation of our registered and unregistered funds. For example, certain of these proposals would, among other things, limit or eliminate Rule 12b-1 distribution fees, limit or prohibit third party soft dollar arrangements and restrict the management of hedge funds and mutual funds by the same portfolio manager. In the coming months, the investment management industry is likely to continue facing a high level of regulatory scrutiny and become subject to additional rules designed to increase disclosure, tighten controls and reduce potential conflicts of interest. In addition, the SEC has substantially increased its use of focused inquiries in which it requests information from a number of fund complexes regarding particular practices or provisions of the securities laws. We participate in some of these inquiries in the normal course of our business. Changes in laws, regulations and administrative practices by regulatory authorities, and the associated compliance costs, have increased our cost structure and could in the future have a material impact. In September 2005, we were informed by the staff of the Securities and Exchange Commission that they may recommend to the Commission that one of our advisory subsidiaries be held accountable for the actions of two of the seven closed-end funds managed by the subsidiary relating to Section 19(a) and Rule 19a-1 of the Investment Company Act of 1940. These provisions require registered investment companies to provide written statements to shareholders when a dividend is made from a source other than net investment income. While the funds sent annual statements containing the required information and 1099 statements as required by the IRS, the funds did not send written statements to shareholders with each distribution in 2002 and 2003. The staff indicated that they may recommend to the Commission that administrative remedies be sought, including a monetary penalty. The closed-end funds changed their notification procedures and GAMCO believes that all of the funds are now in compliance. 15 The following discussion should be read in conjunction with the Condensed Consolidated Financial Statements and the notes thereto included in Item 1 to this report. RESULTS OF OPERATIONS Three Months Ended September 30, 2005 Compared To Three Months Ended September 30, 2004 Consolidated Results - Three Months Ended September 30th: (Unaudited; in thousands, except per share data) 2005 2004 ------- ------- Revenues $66,234 $ 57,237 Expenses 43,636 35,286 ------- ------- Operating income 22,598 21,951 Investment income, net 12,153 2,620 Interest expense (3,298) (4,014) ------- ------- Total other income (expense), net 8,855 (1,394) ------- ------- Income before taxes and minority interest 31,453 20,557 Income tax provision 11,795 7,483 Minority interest 210 43 ------- ------- Net income $19,448 $ 13,031 ======= ======= Net income per share: Basic $ 0.65 $ 0.44 ======= ======= Diluted $ 0.64 $ 0.43 ======= ======= Reconciliation of Net income to Adjusted EBITDA: Net income $19,448 $ 13,031 Interest Expense 3,298 4,014 Income tax provision and minority interest 12,005 7,526 Depreciation and amortization 298 241 ------- ------- Adjusted EBITDA(a) $35,049 $ 24,812 ------- ------- (a) Adjusted EBITDA is defined as earnings before interest, taxes, depreciation and amortization, and minority interest. Adjusted EBITDA is a Non-GAAP measure and should not be considered as an alternative to any measure of performance as promulgated under accounting principles generally accepted in the United States nor should it be considered as an indicator of our overall financial performance. We use Adjusted EBITDA as a supplemental measure of performance as we believe it gives investors a more complete understanding of our operating results before the impact of investing and financing activities as a tool for determining the private market value of an enterprise. Total revenues were $66.2 million in the third quarter of 2005 up $9.0 million or 15.7% from total revenues of $57.2 million reported in the third quarter of 2004. Operating income improved $0.6 million to $22.6 million up 2.9% from the $21.9 million reported in last year's third quarter. Net income for the quarter was $19.4 million or $0.64 per fully diluted share versus $13.0 million or $0.43 per fully diluted share in the prior year's quarter. The 2005 quarter was boosted by a $10.2 million swing in net investment income. In the short-run, our results remain sensitive to changes in the equity market. 16 Investment advisory and incentive fees, which comprised 86.9% of total revenues, were $57.5 million in the third quarter of 2005 up $7.8 million or 15.8% from the $49.7 million reported in the prior year's quarter. The higher revenues during the quarter were primarily driven by our closed-end funds as revenues jumped 67.3% to $12.8 million in the third quarter 2005 up from $7.6 million in the prior year's quarter. This increase was principally due to management fees of $2.9 million recorded for preferred shares in the third quarter 2005 covering the first nine of months of 2005 versus a reversal of $200,000 in revenue from preferred shares in the prior year's quarter. In addition, we recorded approximately $0.9 million of revenues from the inclusion of The Gabelli Global Gold, Natural Resources & Income Trust (AMEX: GGN), our new closed-end fund, which started on March 29, 2005. Unlike most money management firms, we do not earn a management fee on closed-end preferred shares (approximately $875 million in total assets) unless the total return to common shareholders of the closed-end fund at year-end exceeds the dividend rate of the preferred shares. As a result, management fees accrued for preferred shares are affected by current weak market conditions and may be subject to reversal in the fourth quarter of 2005. Incentive fees from investment partnerships increased by $2.9 million in the third quarter 2005 from the prior year as the 2004 quarter included a clawback in incentive fees that reduced revenues. For the third quarter 2005, our revenues of $20.4 million from open-end mutual funds were 3.9% higher than the $19.6 million recorded in the 2004 quarter. Revenues from our institutional and high net worth separate accounts business, which are generally billed based on asset levels at the beginning of a quarter, declined by 2.3% to $19.9 million in the third quarter 2005, down from $20.4 million in the 2004 quarter. Commission revenues from our institutional research affiliate, Gabelli & Company, Inc., were $3.3 million in the third quarter of 2005, up 10.0% from $3.0 million in the same period a year earlier. Revenues from the distribution of mutual funds and other income were $5.4 million in the third quarter of 2005 versus $4.6 million in the third quarter of 2004. This increase was the result of increases in both underwriting revenue and distribution revenue. As previously discussed, several bills were introduced in the prior Congress that, if adopted, would, among other things, pose a risk to our future distribution fee revenue as Rule 12b-1 distribution fees may be limited or eliminated. Total expenses, excluding management fee, were $40.1 million in the third quarter of 2005, a 21.6% increase from total expenses of $33.0 million reported in the third quarter of 2004. Compensation and related costs, which are largely variable, were $28.2 million or 20.6% higher than the $23.4 million recorded in the same period a year earlier. This increase was primarily due to higher revenues versus the prior's year's quarter and accruals for variable compensation costs related to management fees on closed-end preferred shares and investment partnership incentive fees in the 2005 quarter. Revenues related to investment partnership incentive fees have higher variable compensation costs, as a percent of revenue, as compared to our other investment advisory fees. Distribution costs were $4.9 million, an increase of 8.7% from $4.5 million in the prior year's period. Other operating expenses were higher by $1.9 million, a 38.1% increase to $7.0 million in the third quarter of 2005 from the prior year third quarter of $5.1 million. This increase included legal and accounting costs related to regulatory and corporate governance dynamics, including Sarbanes-Oxley compliance, and the incremental costs incurred due to the elimination of soft dollar usage, which took effect in the fourth quarter of 2004, for our mutual fund business. Management fee expense, which is totally variable and based on pretax income, was $3.5 million in the third quarter of 2005 versus $2.3 million in the third quarter of 2004. Other income, net of interest expense, was $8.9 million in the third quarter of 2005, a positive swing of $10.2 million from the $1.4 million loss reported in the third quarter of 2004. The net return from our corporate investment portfolio improved to $12.2 million in the 2005 third quarter from $2.6 million in the prior year's quarter as we benefited from the strength of the equity markets in the third quarter of 2005 as well as an increase in interest rates from the prior year. We recorded a total gain of $2.7 million on our investment in OXPS during the third quarter of 2005 and $5.2 million in interest and dividend income, $2.3 million or 78.9% higher than the $2.9 million reported in previous year's quarter. 17 Interest expense fell to $3.3 million in the third quarter of 2005 from $4.0 million in the comparable prior year quarter. This decrease is a result of the April 1, 2005 repurchase of $50 million of the $100 million 5% convertible note and the remarketing of the senior notes in November 2004, which reduced the interest rate from 6.0% to 5.22%. The estimated effective tax rate for the third quarter of 2005 increased to 37.5% from 36.4% for the third quarter of 2004 as we adjusted the tax rate to reflect our estimate of the current year end tax liability. Nine Months Ended September 30, 2005 Compared To Nine Months Ended September 30, 2004 Consolidated Results - Nine Months Ended September 30th: (Unaudited; in thousands, except per share data) 2005 2004 -------- -------- Revenues $187,606 $ 180,980 Expenses 125,223 109,318 -------- -------- Operating income 62,383 71,662 Investment income, net 20,764 8,459 Interest expense (10,502) (12,095) -------- -------- Total other income (expense), net 10,262 (3,636) -------- -------- Income before taxes and minority interest 72,645 68,026 Income tax provision 27,242 24,768 Minority interest 318 238 -------- -------- Net income $ 45,085 $ 43,020 ======== ======== Net income per share: Basic $ 1.51 $ 1.44 ======== ======== Diluted $ 1.48 $ 1.41 ======== ======== Reconciliation of Net income to Adjusted EBITDA: Net income $ 45,085 $ 43,020 Interest Expense 10,502 12,095 Income tax provision and minority interest 27,560 25,006 Impairment of goodwill 1,127 - Depreciation and amortization 769 720 -------- -------- Adjusted EBITDA(a) $ 85,043 $ 80,841 -------- -------- (b) Adjusted EBITDA is defined as earnings before interest, taxes, depreciation and amortization, and minority interest. Adjusted EBITDA is a Non-GAAP measure and should not be considered as an alternative to any measure of performance as promulgated under accounting principles generally accepted in the United States nor should it be considered as an indicator of our overall financial performance. We use Adjusted EBITDA as a supplemental measure of performance as we believe it gives investors a more complete understanding of our operating results before the impact of investing and financing activities as a tool for determining the private market value of an enterprise. Total revenues were $187.6 million in the first nine months of 2005 an increase of $6.6 million or 3.7% from total revenues of $181.0 million reported in the first nine months of 2004. Operating income declined $9.3 million to $62.4 million down 12.9% from the $71.7 million reported in last year's first nine months. Net income for the nine months was $45.1 million or $1.48 per fully diluted share versus $43.0 million or $1.41 per fully diluted share in the prior year's nine months. One-time charges of $1.5 million related to the launch of our new closed-end fund, The Gabelli Global Gold, Natural Resources & Income Trust (AMEX: GGN), and $1.1 million for the impairment of goodwill at our 80% owned fixed income subsidiary as well as $1.8 million in incremental costs relating to the accelerated vesting of stock options contributed to the decline in operating income. 18 Investment advisory and incentive fees, which comprised 87.3% of total revenues, were $163.8 million in the first nine months of 2005 up $8.9 million or 5.8% from the $154.9 million reported in the first nine months of 2004. The higher revenues during the year were primarily driven by our closed-end funds as revenues increased 29.9% to $30.7 million in the first nine months of 2005 up from $23.6 million in the prior year's period. The increase in revenues from closed-end funds for the first nine months of 2005 resulted principally from an increase in management fees accrued on preferred shares, revenues from GGN, and the inclusion of The Gabelli Global Utility and Income Trust (AMEX: GLU), which launched at the end of May 2004, for the entire 2005 period. Advisory fees from investment partnerships increased 66.1% in the first nine months of 2005 versus the prior year's first nine months due principally to an increase in performance fees as the third quarter of 2004 included a clawback in incentive fees that decreased revenues. For the first nine months of 2005, our revenues of $60.0 million from open-end mutual funds were 2.2% lower than the $61.3 million recorded in the 2004 period. Our fees from GAMCO separate accounts, which are generally billed based on asset levels at the beginning of a quarter, decreased $1.1 million or 1.8% in the 2005 period as compared to the first nine months of 2004. Commission revenues from our institutional research affiliate, Gabelli & Company, Inc., were $8.3 million in the first nine months of 2005, down 26.6% from $11.3 million in the same period a year earlier. Revenues from distribution of mutual funds and other income were $15.5 million in the first nine months of 2005 versus $14.7 million in the first nine months of 2004. This increase was the result of increases in both underwriting revenue and distribution revenue. As previously discussed, several bills were introduced in the prior Congress that, if adopted, would, among other things, pose a risk to our future distribution fee revenue as Rule 12b-1 distribution fees may be limited or eliminated. Total expenses, excluding management fee, were $117.2 million in the first nine months of 2005, a 15.1% increase from total expenses of $101.8 million reported in the first nine months of 2004. The increase in expenses included one-time charges of $4.4 million recorded during the first nine months of 2005. Compensation and related costs, which are largely variable, increased $9.4 million to $81.7 million, 12.9% higher than the same period a year earlier. This increase was primarily due to higher revenues versus the prior's year's period, higher variable compensation costs for our separate accounts business, and accruals for variable compensation costs related to management fees on closed-end preferred shares and investment partnership incentive fees in the 2005 period. Revenues related to investment partnership incentive fees have higher variable compensation costs, as a percent of revenue, as compared to our other investment advisory fees. In addition, a one-time charge of $1.8 million relating to the accelerated vesting of stock options and higher fixed compensation costs contributed to the increase. Distribution costs were $15.7 million, an increase of 10.5% from $14.2 million in the prior year's period. This increase was largely the result of one-time launch costs of $1.5 million for GGN, our new closed-end fund. These launch costs included a $1.2 million structuring fee paid to one of the lead underwriters for GGN's initial public offering. Other operating expenses were higher by $4.5 million, a 29.8% increase to $19.8 million in the first nine months of 2005 from the prior year first nine months of $15.2 million. This increase included legal and accounting costs related to regulatory and corporate governance dynamics, including Sarbanes-Oxley compliance, and the incremental costs incurred due to the elimination of soft dollar usage, which took effect in the fourth quarter of 2004, for our mutual fund business. In addition, we recorded a $1.1 million charge for the impairment of goodwill related to our 80% owned fixed income subsidiary. Management fee expense, which is totally variable and based on pretax income, was $8.1 million in the first nine months of 2005 versus $7.6 million in the first nine months of 2004. 19 Other income, net of interest expense, was $10.3 million in the first nine months of 2005, higher by $13.9 million from the $3.6 million loss reported in the first nine months of 2004. We have benefited from a rise in short-term interest rates as interest and dividend income for the first nine months of 2005 was $12.8 million, $6.3 million or 97.3% higher than the $6.5 million reported in previous year's period. In addition, we recorded a total gain of $4.8 million on our investment in OXPS during the first nine months of 2005. The 2005 period also included the $3.3 million write down to fair value of certain securities held as available for sale as discussed above in Item 1. In accordance with SFAS No. 115, the available for sale securities were written down to fair value from their cost basis for declines which were considered to be other than temporary based on interpretive guidance provided by the SEC's Staff Accounting Bulletin No. 59. Of this amount, $3.1 million was previously recorded as comprehensive loss and resulted in a $1.8 million reduction, net of management fee and taxes, of stockholders' equity at the end of 2004. Interest expense decreased to $10.5 million in the first nine months of 2005 from $12.1 million in the comparable prior year period. This decrease is a result of the April 1, 2005 repurchase of $50 million of the $100 million 5% convertible note and the remarketing of the senior notes in November 2004, which reduced the interest rate from 6.0% to 5.22%. The estimated effective tax rate for the first nine months of 2005 increased to 37.5% from 36.4% for the first nine months of 2004 as we adjusted the tax rate to reflect our estimate of the current year end tax liability. 20 LIQUIDITY AND CAPITAL RESOURCES Our assets are primarily liquid, consisting mainly of cash, short term investments, securities held for investment purposes and investments in partnerships and affiliates in which we are a general partner, limited partner or investment manager. Investments in partnerships and affiliates are generally illiquid, however the underlying investments in such entities are generally liquid and the valuations of the investment partnerships and affiliates reflect this underlying liquidity. Summary cash flow data is as follows: Nine Months Ended September 30, ------------------------------- 2005 2004 -------- -------- Cash flows provided by (used in): (in thousands) Operating activities $(30,115) $ 15,695 Investing activities (1,185) (34,902) Financing activities (20,686) (29,474) -------- -------- Decrease (51,986) (48,681) Effect of exchange rates on cash and cash equivalents (60) - Cash and cash equivalents at beginning of period 257,096 386,511 -------- -------- Cash and cash equivalents at end of period $205,050 $337,830 ======== ======== Cash requirements and liquidity needs have historically been met through cash generated by operating activities and through our borrowing capacity. We have received investment grade ratings from both Moody's Investors Services and Standard & Poor's Rating Services. These investment grade ratings expand our ability to attract both public and private capital. In February, our Board of Directors authorized a plan to file a "shelf" registration statement on Form S-3, which was filed on June 13th. If and when declared effective, the shelf process will provide us opportunistic flexibility to sell any combination of senior and subordinate debt securities, convertible debt securities and equity securities (including common and preferred securities) up to a total amount of $400 million. This authorization is in addition to the remaining $120 million available under our "shelf" registration filed in 2001. At September 30, 2005, we had total cash and cash equivalents of $205.1 million, a decrease of $52.0 million from December 31, 2004. Gabelli has established a collateral account, consisting of cash and cash equivalents and investments in securities totaling $54.2 million, to secure a letter of credit issued in favor of the holder of the $50 million 5% convertible note. On April 1, 2005 the letter of credit was reduced to $51.3 million and extended to September 22, 2006, which coincides with the date of a put option the note holder may exercise. Additionally, the principal of the convertible note was reduced to $50 million and limitations on the issuance of additional debt were removed. Cash and cash equivalents and investments in securities held in the collateral account are restricted from other uses until the date of expiration. Total debt at September 30, 2005 was $232.3 million, consisting of the $50 million 5% convertible note, $100 million of 5.5% non-callable senior notes due May 15, 2013 and $82.3 million in 5.22% senior notes due February 17, 2007, issued pursuant to our mandatory convertible securities. On February 17, 2005, we issued approximately 1,517,000 shares of class A common stock in settlement of the 2,822,700 purchase contracts issued pursuant to our mandatory convertible securities resulting in proceeds of $70.6 million. The settlement rate of 0.5376 was determined based on the average closing price per share of class A common stock for the twenty consecutive trading days ending February 14, 2005. Cash used in operating activities was $30.1 million in the first nine months of 2005 principally resulting from a $93.0 million increase in investments in securities, a $3.2 million increase in receivable from brokers and a $3.3 million decrease in income taxes payable partially offset by $45.1 million in net income, a $7.6 million decrease in investment advisory fees receivable and a $13.4 million increase in compensation payable. Cash provided by operating activities was $15.7 million in the first nine months of 2004 principally from a $8.7 million increase in compensation payable and $43.0 million in net income partially offset by a $12.7 million increase in investments in securities and a $21.4 million increase in receivable from brokers. 21 Cash used in investing activities, related to investments in and distributions from partnerships and affiliates and purchases and sales of available for sale securities, was $1.2 million in the first nine months of 2005. Cash used in investing activities, related to investments in and distributions from partnerships and affiliates and purchases and sales of available for sale securities, was $34.9 million in the first nine months of 2004. Cash used in financing activities in the first nine months of 2005 was $20.7 million. The decrease in cash principally resulted from the repurchase of $50 million of our $100 million 5% convertible note on April 1, 2005, $41.8 million in dividends paid and the repurchase of our class A common stock under the Stock Repurchase Program. This was partially offset by $70.6 million in proceeds from the issuance of 1.5 million shares of class A common stock in settlement of the purchase contracts issued pursuant to our mandatory convertible securities and $1.1 million received from the exercise of non-qualified stock options that further generated cash tax savings of $0.3 million. Cash used in financing activities in the first nine months of 2004 was $29.5 million. The decrease in cash principally resulted from the repurchase of our Class A common stock and mandatory convertible securities under the respective Stock Repurchase Programs of $24.5 million, dividend payments of $4.2 million and the $50 per share dividend paid by our 92% owned subsidiary, Gabelli Securities, Inc., to its shareholders resulting in a payment to minority shareholders of $2.7 million and partially offset by the $1.9 million received from the exercise of non-qualified stock options that further generated cash tax savings of $0.6 million. Based upon our current level of operations and anticipated growth, we expect that our current cash balances plus cash flows from operating activities and our borrowing capacity will be sufficient to finance our working capital needs for the foreseeable future. We have no material commitments for capital expenditures. Gabelli & Company, Inc., a subsidiary of Gabelli, is registered with the Securities and Exchange Commission as a broker-dealer and is a member of the National Association of Securities Dealers. As such, it is subject to the minimum net capital requirements promulgated by the Commission. Gabelli & Company's net capital has historically exceeded these minimum requirements. Gabelli & Company computes its net capital under the alternative method permitted by the Commission, which requires minimum net capital of $250,000. At September 30, 2005, Gabelli & Company had net capital, as defined, of approximately $14.6 million, exceeding the regulatory requirement by approximately $14.3 million. Regulatory net capital requirements increase when Gabelli & Company is involved in underwriting activities. 22 Market Risk Our primary market risk exposure is to changes in equity prices and interest rates. Since over 95% of our AUM are equities, our financial results are subject to equity-market risk as revenues from our money management services are sensitive to stock market dynamics. In addition, returns from our proprietary investment portfolio are exposed to interest rate and equity market risk. We are subject to potential losses from certain market risks as a result of absolute and relative price movements in financial instruments due to changes in interest rates, equity prices and other factors. Our exposure to market risk is directly related to our role as financial intermediary, advisor and general partner for assets under management in our mutual funds, institutional and separate accounts business, investment partnerships and our proprietary investment activities. With respect to our proprietary investment activities included in investments in securities of $391.5 million at September 30, 2005 were investments in Treasury Bills and Notes of $233.0 million, in mutual funds, largely invested in equity products, of $102.5 million, a selection of common and preferred stocks totaling $55.7 million and other investments of approximately $0.3 million. Investments in mutual funds generally lower market risk through the diversification of financial instruments within their portfolio. In addition, we may alter our investment holdings from time to time in response to changes in market risks and other factors considered appropriate by management. Of the approximately $55.7 million invested in common and preferred stocks at September 30, 2005, $20.2 million is related to our investment in Westwood Holdings Group Inc. and $16.1 million is invested in risk arbitrage opportunities in connection with mergers, consolidations, acquisitions, tender offers or other similar transactions. Investments in partnerships and affiliates totaled $90.2 million at September 30, 2005, the majority of which consisted of investment partnerships and offshore funds which invest in risk arbitrage opportunities. These transactions generally involve announced deals with agreed upon terms and conditions, including pricing, which typically involve less market risk than common stocks held in a trading portfolio. The principal risk associated with risk arbitrage transactions is the inability of the companies involved to complete the transaction. GAMCO's exposure to interest rate risk results, principally, from its investment of excess cash in U.S. Government obligations. These investments are primarily short term in nature and the carrying value of these investments generally approximates market value. Our revenues are largely driven by the market value of our assets under management and are therefore exposed to fluctuations in market prices. Investment advisory fees for mutual funds are based on average daily asset values. Management fees earned on institutional and high net worth separate accounts, for any given quarter, are generally determined based on asset values on the last day of the preceding quarter. Any significant increases or decreases in market value of institutional and high net worth separate accounts assets managed which occur on the last day of the quarter will generally result in a relative increase or decrease in revenues for the following quarter. Recent Accounting Developments We adopted SFAS 123 (R) on January 1, 2005. In light of our modified prospective adoption of the fair value recognition provisions of SFAS 123 (R) for all grants of employee stock options, the adoption of SFAS 123 (R) did not have a material impact on our consolidated financial statements. 23 In January 2003 the Financial Accounting Standards Board ("FASB") issued Interpretation No. 46, "Consolidation of Variable Interest Entities" which was subsequently revised in December 2003 by FASB Interpretation No. 46(R) ("FIN46R"). FIN46R provides new criteria for determining whether or not consolidation accounting is required for off-balance sheet activities conducted through certain types of entities. This interpretation focuses on financial interests in entities (i.e., variable interests) that indicate control despite the absence of clear control through voting interest. It concludes that a company's exposure (variable interest) to the economic risks and rewards from the entity's assets and activities are the best evidence of control. The interpretation requires that these variable interest entities (VIEs) be subject to consolidation if the company holding the variable interest is subject to a majority of the expected losses or will receive a majority of the expected residual returns of the VIE (the "primary beneficiary"). As the primary beneficiary it would be required to include the variable interest entity's assets, liabilities and results of operations in its own financial statements. In June 2005, the FASB ratified the consensus EITF 04-5, "Determining Whether a General Partner, or the General Partners as a Group, Controls a Limited Partnership or Similar Entity When the Limited Partners Have Certain Rights", which provides guidance in determining whether a general partner controls a limited partnership. The provisions of EITF 04-5 are not applicable to limited partnerships or similar entities accounted for as VIEs pursuant to FIN46R. We have further reviewed the provisions of FIN46R and EITF 04-5 and have determined that we will be required to consolidate the majority of our investment partnerships and offshore funds managed by our subsidiaries beginning on January 1, 2006. If consolidation of these investment partnerships and offshore funds were required as of September 30, 2005, the effect on our consolidated financial statements would have been as follows: Consolidated Statement of Financial Condition September 30, 2005
Effects of (Pro Forma) Reported consolidation Post consolidation Assets $ 741,299 $ 405,196 $ 1,146,495 Liabilities 302,960 74,899 377,859 Minority Interest 5,981 330,298 336,279 Stockholders' Equity $ 432,358 $ - $ 432,358 Consolidated Income Statement For the nine months ended September 30, 2005 Effects of (Pro Forma) Reported consolidation Post consolidation Revenues $ 187,606 ($ 5,046) $ 182,560 Expenses 125,223 220 125,443 Other Income, net 10,262 21,466 31,728 Minority Interest 318 16,200 16,518 Net Income $ 45,085 $ - $ 45,085
We also serve as the Investment Manager of five offshore funds and one investment partnership that are classified as VIEs. The offshore funds seek to earn absolute returns for investors and are primarily focused within our event-driven long/short equity and sector-focused strategies. Our involvement with one of these offshore funds began in 1994 but the majority were launched between 1999 and 2002. The investment partnership, which was started in 2005, is a fund of hedge funds which is currently invested in four other investment partnerships managed by GAMCO. 24 The total net assets of the five offshore funds and one investment partnership classified as VIEs were approximately $39.5 million on September 30, 2005. However, we are not the primary beneficiary or a holder of a significant variable interest in these VIEs. Our maximum exposure to loss as result of our involvement with the offshore funds classified as VIEs is limited to our investment while we are contingently liable for all of the liabilities of the investment partnership that is classified as a VIE. On September 30, 2005, we did not have any investments in these VIEs. Item 4. Controls and Procedures Management, including the Chief Executive Officer and the Chief Financial Officer has conducted an evaluation of the effectiveness of disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based on the evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the disclosure controls and procedures are effective in ensuring that all material information required to be filed in this quarterly report has been made known to them in a timely fashion. There have been no significant changes in internal controls, or in factors that could significantly affect internal controls, subsequent to the date the Chief Executive Officer and the Chief Financial Officer completed their evaluation. Forward-Looking Information Our disclosure and analysis in this report contain some forward-looking statements. Forward-looking statements give our current expectations or forecasts of future events. You can identify these statements because they do not relate strictly to historical or current facts. They use words such as "anticipate," "estimate," "expect," "project," "intend," "plan," "believe," and other words and terms of similar meaning. They also appear in any discussion of future operating or financial performance. In particular, these include statements relating to future actions, future performance of our products, expenses, the outcome of any legal proceedings, and financial results. Although we believe that we are basing our expectations and beliefs on reasonable assumptions within the bounds of what we currently know about our business and operations, there can be no assurance that our actual results will not differ materially from what we expect or believe. Some of the factors that could cause our actual results to differ from our expectations or beliefs include, without limitation: the adverse effect from a decline in the securities markets; a decline in the performance of our products; a general downturn in the economy; changes in government policy or regulation; changes in our ability to attract or retain key employees; and unforeseen costs and other effects related to legal proceedings or investigations of governmental and self-regulatory organizations. We also direct your attention to any more specific discussions of risk contained in our Form 10-K and other public filings. We are providing these statements as permitted by the Private Litigation Reform Act of 1995. We do not undertake to update publicly any forward-looking statements if we subsequently learn that we are unlikely to achieve our expectations or if we receive any additional information relating to the subject matters of our forward-looking statements. 25 Part II: Other Information Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities The following table provides information with respect to the shares of common stock we repurchased during the three months ended September 30, 2005:
(c) Total Number of Shares (b) Average Repurchased as (d) Maximum Number (a) Total Price Paid Part of of Shares That May Number of Per Share, Publicly Yet Be Purchased Shares net of Announced Plans Under the Plans or Period Repurchased Commissions or Programs Programs - -------------------------------------------------------------------------------------------------- GBL 7/01/05 - 7/31/05 - $- - 516,193 8/01/05 - 8/31/05 12,600 $42.82 12,600 1,003,593 9/01/05 - 9/30/05 94,000 $45.22 94,000 909,593 ------------ ---------------- Totals 106,600 106,600 ============ ================
In August 2005 we announced an increase of 500,000 shares of GBL available to be repurchased under our stock repurchase program. Our stock repurchase programs are not subject to expiration dates. Item 6. (a) Exhibits 3.0 Restated Certificate of Incorporation of GAMCO Investors, Inc. 31.1 Certification by Chief Executive Officer Pursuant to Rule 13a-14 (a) and 15d-14 (a) as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.2 Certification by Chief Financial Officer Pursuant to Rule 13a-14 (a) and 15d-14 (a) as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (b) Reports on Form 8-K. The Company filed the following Current Reports on Form 8-K during the three months ended September 30, 2005. 1. Current Report on Form 8-K dated July 21, 2005 containing the press release disclosing the Company's operating results for the second quarter ended June 30, 2005. 2. Current Report on Form 8-K dated September 23, 2005 containing the press release disclosing the Company's initial update on the SEC's industry wide review of Closed-End Fund distribution notices. 26 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. GAMCO INVESTORS, INC. ------------------------- (Registrant) November 9, 2005 /s/ Michael R. Anastasio - ---------------- ---------------------------------- Date Michael R. Anastasio Chief Financial Officer 27 EX-3.0 2 a5016179ex3-0.txt EXHIBIT 3.0 Exhibit 3.0 RESTATED CERTIFICATE OF INCORPORATION OF GAMCO INVESTORS, INC. 1. The name of the corporation is GAMCO Investors, Inc. (hereinafter sometimes called the "Corporation"). 2. The purposes for which it is formed are to engage in any lawful act or activity for which corporations may be organized under the Business Corporation Law of the State of New York ("BCL") provided that the Corporation is not formed to engage in any act or activity which requires the consent or approval of any state official, department, board, agency or other body, without such consent or approval first being obtained. It is hereby expressly provided that the foregoing shall not be held to limit or restrict in any manner the powers of this Corporation; and that this Corporation may do all and every thing necessary, suitable and appropriate for the exercise of any of its general powers. 3. The office of the Corporation in the State of New York shall be located in the County of Westchester. 4. The aggregate number of shares of common stock which the Corporation shall have authority to issue is 200,000,000 shares, each share having a par value of $.001 per share, of which 100,000,000 shares shall be designated as "Class A Common Stock" (the "Class A Common Stock") and 100,000,000 shares shall be designated as "Class B Common Stock" (the "Class B Common Stock"). The holders of the Class A and Class B Common Stock shall have no preemptive rights to subscribe for any shares of any class of stock of the Corporation whether now or hereafter authorized. The powers, preferences and rights, and the qualifications, limitations and restrictions of each class of the common stock are as follows: (a) Voting. (1) At each annual or special meeting of shareholders, in the case of any written consent of shareholders in lieu of a meeting and for all other purposes, each holder of record of shares of Class A Common Stock on the relevant record date shall be entitled to one (1) vote for each share of Class A Common Stock standing in such person's name on the stock transfer records of the Corporation, and each holder of record of Class B Common Stock on the relevant record date shall be entitled to ten (10) votes for each share of Class B Common Stock standing in such person's name on the stock transfer records of the Corporation. Except as otherwise required by law and subject to the rights of holders of any series of Preferred Stock of the Corporation that may be issued from time to time, the holders of shares of Class A Common Stock and of shares of Class B 1 Common Stock shall vote as a single class on all matters with respect to which a vote of the shareholders of the Corporation is required under applicable law, the Certificate of Incorporation, or the By-Laws of the Corporation, or on which a vote of shareholders is otherwise duly called for by the Corporation, including, but not limited to, the election of directors, matters concerning the sale, lease or exchange of all or substantially all of the property and assets of the Corporation, mergers or consolidations with another entity or entities, dissolution of the Corporation and amendments to the Certificate of Incorporation of the Corporation. Except as provided in this Article 4 or by applicable law, whenever applicable law, the Certificate of Incorporation of the Corporation or the By-Laws of the Corporation provide for the necessity of an affirmative vote of the shareholders entitled to cast at least a "majority (or any other greater percentage) of the votes which all shareholders are entitled to cast thereon," or a "majority (or any other greater percentage) of the Voting Stock," or language of similar effect, any and all such language shall mean that the holders of shares of Class A Common Stock and the holders of shares of Class B Common Stock shall vote as one class and that such majority (or any other greater percentage) consists of a majority (or such other greater percentage) of the total number of votes entitled to be cast in accordance with the provisions of this Article 4. (2) Neither the holders of shares of Class A Common Stock nor the holders of shares of Class B Common Stock shall have cumulative voting rights. (b) Dividends; Stock Splits. Subject to the rights of the holders of shares of any series of Preferred Stock, and subject to any other provisions of the Certificate of Incorporation of the Corporation, holders of shares of Class A Common Stock and shares of Class B Common Stock shall be entitled to receive such dividends and other distributions in cash, stock or property of the Corporation as may be declared thereon by the Board of Directors of the Corporation (the "Board of Directors") from time to time out of assets or funds of the Corporation legally available therefor. If at any time a dividend or other distribution in cash or other property (other than dividends or other distributions payable in shares of common stock or other voting securities or options or warrants to purchase shares of common stock or other voting securities or securities convertible into or exchangeable for shares of common stock or other voting securities) is paid on the shares of Class A Common Stock or shares of Class B Common Stock, a like dividend or other distribution in cash or other property shall also be paid on shares of Class B Common Stock or shares of Class A Common Stock, as the case may be, in an equal amount per share. If at any time a dividend or other distribution payable in shares of common stock or 2 options or warrants to purchase shares of common stock or securities convertible into or exchangeable for shares of common stock is paid on shares of Class A Common Stock or Class B Common Stock, a like dividend or other distribution shall also be paid on shares of Class B Common Stock or Class A Common Stock, as the case may be, in an equal amount per share; provided that, for this purpose, if shares of Class A Common Stock or other voting securities, or options or warrants to purchase shares of Class A Common Stock or other voting securities or securities convertible into or exchangeable for shares of Class A Common Stock or other voting securities, are paid on shares of Class A Common Stock and shares of Class B Common Stock or voting securities identical to the other securities paid on the shares of Class A Common Stock (except that the voting securities paid on the Class B Common Stock may have up to ten (10) times the number of votes per share as the other voting securities to be received by the holders of the Class A Common Stock) or options or warrants to purchase shares of Class B Common Stock or such other voting securities or securities convertible into or exchangeable for shares of Class B Common Stock or such other voting securities, are paid on shares of Class B Common Stock, in an equal amount per share of Class A Common Stock and Class B Common Stock, such dividend or other distribution shall be deemed to be a like dividend or other distribution. In the case of any split, subdivision, combination or reclassification of shares of Class A Common Stock or Class B Common Stock, the shares of Class B Common Stock or Class A Common Stock, as the case may be, shall also be split, subdivided, combined or reclassified so that the number of shares of Class A Common Stock and Class B Common Stock outstanding immediately following such split, subdivision, combination or reclassification shall bear the same relationship to each other as did the number of shares of Class A Common Stock and Class B Common Stock outstanding immediately prior to such split, subdivision, combination or reclassification. (c) Liquidation, Dissolution, etc. In the event of any liquidation, dissolution or winding up (either voluntary or involuntary) of the Corporation, the holders of shares of Class A Common Stock and the holders of shares of Class B Common Stock shall be entitled to receive the assets and funds of the Corporation available for distribution, after payments to creditors and to the holders of any Preferred Stock of the Corporation that may at the time be outstanding, in proportion to the number of shares held by them, respectively, without regard to class. 3 (d) Mergers, etc. In the event of any corporate merger, consolidation, purchase or acquisition of property or stock, or other reorganization in which any consideration is to be received by the holders of shares of Class A Common Stock or the holders of shares of Class B Common Stock, the holders of shares of Class A Common Stock and the holders of shares of Class B Common Stock shall receive the same consideration on a per share basis; provided that, if such consideration shall consist in any part of voting securities (or of options or warrants to purchase, or of securities convertible into or exchangeable for, voting securities), the holders of shares of Class B Common Stock may receive, on a per share basis, voting securities with up to ten (10) times the number of votes per share as those voting securities to be received by the holders of shares of Class A Common Stock (or options or warrants to purchase, or securities convertible into or exchangeable for, voting securities with up to ten (10) times the number of votes per share as the voting securities issuable upon exercise of the options or warrants to be received by the holders of the shares of Class A Common Stock, or into which the convertible or exchangeable securities to be received by the holders of the shares of Class A Common Stock may be converted or exchanged). (e) Power to Sell and Purchase Shares. Subject to applicable law, the Corporation shall have the power to issue and sell all or any part of any shares of any class of stock herein or hereafter authorized to such persons, and for such consideration, as the Board of Directors shall from time to time, in its discretion, determine, whether or not greater consideration could be received upon the issue or sale of the same number of shares of another class, and as otherwise permitted by law. Subject to the requirements of applicable law, the Corporation shall have the power to purchase any shares of any class of stock herein or hereafter authorized from such persons, and for such consideration, as the Board of Directors shall from time to time, in its discretion, determine, whether or not less consideration could be paid upon the purchase of the same number of shares of another class, and as otherwise permitted by law. (f) Rights Otherwise Identical. Except as otherwise expressly set in this Article 4, the rights of the holders of Class A Common Stock and the rights of the holders of Class B Common Stock shall be in all respects identical. 5. The aggregate number of shares of preferred stock which the Corporation shall have authority to issue is 10,000,000 shares, each share having a par value of $.001 per share (the "Preferred Stock"). The holders of the Preferred Stock shall have no preemptive rights to subscribe for any shares of any class of stock of the Corporation whether now or hereafter authorized. The Board of Directors is authorized to establish and designate series of the Preferred Stock, to issue shares of the Preferred Stock in series and to fix the number of shares in a series, the rights, preferences and limitations of each series and the variations in the relative rights, preferences and limitations as between series. The Board of Directors may determine for each series: (a) the number of shares constituting that series and the distinctive designation of that series; (b) the dividend rate on the shares of that series, whether dividends shall be cumulative, and, if so, from which date or dates, and the relative rights of priority, if any, of payments of dividends on shares of that series; 4 (c) whether that series shall have voting rights, in addition to the voting rights provided by law, and, if so, the terms of such voting rights; (d) whether that series shall have conversion or exchange privileges or be subject to conversion or exchange obligations, and, if so, the terms and conditions of such conversion or exchange, including provision for adjustment of the conversion or exchange rate in such events as the Board of Directors shall determine; (e) whether or not the shares of that series shall be redeemable, and, if so, the terms and conditions of such redemption, including the manner of selecting shares for redemption if less than all shares are to be redeemed, the date or dates upon or after which they shall be redeemable, and the amount per share payable in case of redemption, which amount may vary under different conditions and at different redemption dates; (f) whether that series shall have a sinking fund for the redemption or purchase of shares of that series, and, if so, the terms and amount of such sinking fund; (g) the right of the shares of that series to the benefit of conditions and restrictions upon the creation of indebtedness of the Corporation or any subsidiary, upon the issue of any additional shares (including additional shares of such series or any other series) and upon the payment of dividends or the making of other distributions on, and the purchase, redemption or other acquisition by the Corporation or any subsidiary of any outstanding shares of the Corporation; (h) the rights of the shares of that series in the event of voluntary or involuntary liquidation, dissolution or winding up of the Corporation, and the relative rights of priority, if any, of payment of shares of that series; (i) any restrictions on transfers of shares of that series; and (j) any other relative, participating, optional or other special rights, qualifications, limitations or restrictions of that series. 6. The Secretary of State of the State of New York is hereby designated as the agent of the Corporation upon whom any process may in any action or proceeding against it be served. The post office address to which the Secretary of State shall mail a copy of any process in any action or proceeding against the Corporation which may be served upon it is: One Corporate Center, Rye, New York 10580; Attention: General Counsel. 7. The following provisions are inserted for the management of the business and the conduct of the affairs of the Corporation, and for further definition, limitation and regulation of the powers of the Corporation and of its Board of Directors and shareholders: 5 (a) The business and affairs of the Corporation shall be managed by or under the direction of the Board of Directors. (b) The Board of Directors shall have concurrent power with the shareholders to make, alter, amend, change, add to or repeal the By-Laws of the Corporation. (c) The number of directors of the Corporation shall be as from time to time fixed by, or in the manner provided in, the By-Laws of the Corporation. Election of directors need not be by written ballot unless the By-Laws so provide. (d) In addition to the powers and authority hereinbefore or by statute expressly conferred upon them, the Board of Directors are hereby empowered to exercise all such powers and do all such acts and things as may be exercised or done by the Corporation, subject, nevertheless, to the provisions of the BCL, this Certificate of Incorporation, and any By-Laws adopted by the shareholders; provided, however, that no By-Laws hereafter adopted by the shareholders shall invalidate any prior act of the Board of Directors which would have been valid if such By-Laws had not been adopted. (e) Prior to the Trigger Date (as defined in paragraph (g) of this Article 7), any member of the Board of Directors may be removed, with or without cause, at any time prior to the expiration of his term by a majority vote of the outstanding shares. (f) Subject to any rights of holders of Preferred Stock or any other series or class of stock, and unless the Board of Directors otherwise determines, any vacancies will be filled only by the affirmative vote of a majority of the remaining directors, even if less than a quorum. (g) Subject to the rights of holders of Preferred Stock to elect directors under specified circumstances, effective as of the date on which Mario J. Gabelli (hereinafter, "Mr. Gabelli") "beneficially" owns (within the meaning of Section 13(d) of the of the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder, as in effect on the effective date of this Restated Certificate of Incorporation) less than a majority of the voting power of the Voting Stock (as defined below) (the "Trigger Date"), a director may be removed only for cause and only upon the affirmative vote of holders of at least 80% of the voting power of all the then outstanding shares of capital stock entitled to vote generally in the election of directors ("Voting Stock"), voting together as a single class. Before the Trigger Date, directors may be removed, without cause, with the affirmative vote of the holders of at least a majority of the voting power of the then outstanding Voting Stock, voting together as a single class. 6 8. The personal liability of the Board of Directors of the Corporation is hereby eliminated to the fullest extent permitted by the provisions of paragraph (b) of Section 402 of the BCL, as the same may be amended and supplemented. 9. In anticipation and recognition that (i) the Corporation will cease to be a wholly-owned subsidiary of Gabelli Funds, Inc. (to be renamed Gabelli Group Capital Partners, Inc., "GFI") but that GFI (and, therefore, Mr. Gabelli beneficially) is expected to remain a substantial shareholder of the Corporation, (ii) the Corporation, GFI and other Gabellis (as defined below) may engage in the same areas of corporate opportunities, and (iii) benefits will be derived by the Corporation through its continued contractual, corporate and business relations with GFI and other Gabellis (including possible service of officers and directors of GFI, or any other Gabelli, as officers and directors of the Corporation), the provisions of this Article 9 are set forth to regulate and define the conduct of certain affairs of the Corporation as they may involve a Gabelli (including GFI) and their officers and directors, and the powers, rights, duties and liabilities of the Corporation and its officers, directors and shareholders in connection therewith. (a) Definitions. For purposes of this Article 9: (1) the "Corporation" includes its subsidiaries and other entities in which it beneficially owns, directly or indirectly, 50% or more of the outstanding voting securities or comparable interests; (2) a "Gabelli" includes (i) Mr. Mario J. Gabelli, so long as he is an officer or director of the Corporation or beneficially owns a controlling interest in the Corporation, (ii) any member of his "immediate family" (which shall include Mr. Gabelli's spouse, parents, children and siblings) who is at the time an officer or director of the Corporation and (iii) any entity in which the persons qualifying as Gabellis pursuant to clauses (i) and (ii) above beneficially own a controlling interest of the outstanding voting securities or comparable interests; (3) "Permissible Accounts" mean (i) those investment funds and accounts currently managed by Mr. Gabelli outside the Corporation under performance fee arrangements but only to the extent, in the case of an investment fund, such fund's investors consist solely of one or more of the persons who were investors as of the date of the initial issuance of the Corporation's Class A Common Stock in the public offering contemplated by the Corporation's Registration Statement on Form S-1 (File No. 333-51023) (the "IPO Consummation Date") and the successors, heirs, donees or immediate families thereof and, in the case of an investment account, the parties to such account are solely one or more of the persons who were parties to such account as of the IPO Consummation Date and the successors, heirs, donees or immediate families thereof (collectively, "Qualifying Persons") and (ii) successor funds and accounts which serve no persons other than the Qualifying Persons referred to in clause (i), which funds and accounts operate according to an investment style similar to such other accounts or funds and which style is not used at the Corporation as of the IPO Consummation Date and which are subject to performance fee arrangements; and 7 (4) "corporate opportunities" potentially allocable to the Corporation consist of business opportunities that (i) the Corporation is financially able to undertake; (ii) are, from their nature, in the Corporation's actual line or lines of business and are of practical advantage to the Corporation; and (iii) are ones in which the Corporation has an interest or reasonable expectancy. However, "corporate opportunities" do not include transactions in which the Corporation or a Gabelli is permitted to participate pursuant to any agreement between the Corporation and such Gabelli that is in effect as of the time any equity security of the Corporation is held of record by any person other than a Gabelli or is subsequently entered into with the approval of the members of the Board of Directors and do not include passive investments. (b) Corporate Opportunities Policy. (1) Except with respect to opportunities that involve Permissible Accounts, if a Gabelli acquires knowledge of a potential transaction on a matter that is a corporate opportunity for both any Gabelli and the Corporation, such Gabelli will have a duty to communicate that opportunity to the Corporation and may not pursue that opportunity or direct it to another person unless the Corporation declines such opportunity or fails to pursue it. (2) If a director or officer of the Corporation other than a Gabelli acquires knowledge of a potential transaction or matter that may be a corporate opportunity for both the Corporation and a Gabelli, such director or officer must act in good faith in accordance with the following two-part policy. (A) A corporate opportunity offered to any person who is a director but not an officer of the Corporation and who is also a director (whether or not an officer) of an entity which is at the time a Gabelli will belong to such Gabelli or to the Corporation, as the case may be, depending on whether the opportunity is expressly offered to the person primarily in his or her capacity as an officer or director of the entity which is at the time a Gabelli or of the Corporation, respectively. Otherwise, the opportunity will belong to the Corporation to the same extent as if the opportunity came directly to the Corporation. (B) A corporate opportunity offered to any person who is an officer (whether or not a director) of the Corporation and who is also a director or an officer of an entity which is at the time a Gabelli will belong to the Corporation, unless the opportunity is expressly offered to that person primarily in his or her capacity as a director or officer of the entity which is at the time a Gabelli, in which case the opportunity will belong to such Gabelli to the same extent as if the opportunity came directly to a Gabelli. 8 A director or officer of the Corporation (other than a Gabelli) who acts in accordance with the foregoing two-part policy (i) will be deemed fully to have satisfied his or her fiduciary duties to the Corporation and its shareholders with respect to such corporate opportunity, (ii) will not be liable to the Corporation or its shareholders for any breach of fiduciary duty by reason of the fact that a Gabelli pursues or acquires such opportunity or directs such corporate opportunity to another person or entity or does not communicate information regarding such opportunity to the Corporation, (iii) will be deemed to have acted in good faith and in a manner he or she reasonably believes to be in the best interests of the Corporation, and (iv) will be deemed not to have breached his or her duty of loyalty to the Corporation or its shareholders and not to have derived an improper benefit therefrom. (3) Any corporate opportunity that belongs to a Gabelli or to the Corporation pursuant to the foregoing paragraphs shall not be pursued by the other (or directed by the other to another person or entity) unless and until such Gabelli or the Corporation, as the case may be, determines not to pursue the opportunity. If the party to whom the corporate opportunity belongs does not, however, within a reasonable period of time, begin to pursue, or thereafter continue to pursue, such opportunity diligently and in good faith, the other party may pursue such opportunity (or direct it to another person or entity). (c) Conflict of Interest Policy. (1) No contract, agreement, arrangement, or transaction between the Corporation and a Gabelli or any customer or supplier or any entity in which a director of the Corporation has a financial interest (a "Related Entity"), or one or more of the directors or officers of the Corporation, or any Related Entity, any amendment, modification, or termination thereof, or any waiver of any right thereunder, will be voidable solely because a Gabelli or such customer or supplier, any Related Entity, or any one or more of the officers or directors of the Corporation or any Related Entity are parties thereto, or solely because any such directors or officers are present at or participate in the meeting of the Board of Directors, or committee thereof, that authorizes the contract, agreement, arrangement, transaction, amendment, modification, termination, or waiver (each a "Transaction") or solely because their votes are counted for such purpose, if any of the following four requirements are met: (A) the material facts as to the relationship or interest and as to the Transaction are disclosed or known to the Board of Directors or the committee thereof that authorizes the Transaction, and the Board of Directors or such committee in good faith approves the Transaction by the affirmative vote of a majority of the disinterested directors on the Board of Directors or such committee, even if the disinterested directors are less than a quorum; (B) the material facts as to the relationship or interest and as to the Transaction are disclosed or known to the holders of Voting Stock entitled to vote thereon, and the Transaction is specifically approved by vote of the holders of a majority of the voting power of the then outstanding Voting Stock not owned by such Gabelli or such Related Entity, voting together as a single class; 9 (C) the Transaction is effected pursuant to guidelines that are in good faith approved by a majority of the disinterested directors on the Board of Directors or the applicable committee thereof or by vote of the holders of a majority of the then outstanding Voting Stock not owned by such Gabelli or such Related Entity, voting together as a single class; or (D) the Transaction is fair to the Corporation as of the time it is approved by the Board of Directors, a committee thereof or the shareholders of the Corporation. (2) If the requirements of (A), (B), (C) or (D) of paragraph (1) above are met, such Gabelli, the Related Entity, and the directors and officers of the Corporation, or the Related Entity (as applicable) will be deemed to have acted reasonably and in good faith (to the extent such standard is applicable to such person's conduct) and fully to have satisfied any duties of loyalty and fiduciary duties they may have to the Corporation and its shareholders with respect to such Transaction. (3) Any Transaction authorized, approved, or effected, and each of such guidelines so authorized or approved, as described in (A), (B), or (C) above, will be deemed to be entirely fair to the Corporation and its shareholders, except that, if such authorization or approval is not obtained, or such Transaction is not so effected, no presumption will arise that such Transaction or guideline is not fair to the Corporation and its shareholders. A Gabelli will not be liable to the Corporation or its shareholders for breach of any fiduciary duty that a Gabelli may have as a shareholder of the Corporation by reason of the fact that a Gabelli takes any action in connection with any transaction between such Gabelli and the Corporation. For purposes of the provisions contained in this Article 9, a "disinterested director" shall mean a director that is not a Gabelli and who does not have a financial interest in the Transaction. Interests in an entity that are not equity or ownership interests or that constitute less than 10% of the equity or ownership interests of such entity will not be considered to confer a financial interest on any person who beneficially owns such interests. Before the Trigger Date, the affirmative vote of the holders of a majority of the outstanding Voting Stock, voting together as a single class, will be required to alter, amend, or repeal any of these conflict of interest or corporate opportunity provisions contained in this Article 9 in a manner adverse to the interests of any Gabelli. After the Trigger Date, such required vote will be increased to 80% to alter, amend, repeal or replace any of the conflict of interest and corporate opportunity provisions contained herein. 10 EX-31.1 3 a5016179ex31-1.txt EXHIBIT 31.1 Exhibit 31.1 Certifications I, Mario J. Gabelli, certify that: 1. I have reviewed this report on Form 10-Q of GAMCO Investors, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial data; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. By: /s/ Mario J. Gabelli --------------------------- Mario J. Gabelli Chief Executive Officer Date: November 9, 2005 EX-31.2 4 a5016179ex31-2.txt EXHIBIT 31.2 Exhibit 31.2 Certifications I, Michael R. Anastasio, certify that: 1. I have reviewed this report on Form 10-Q of GAMCO Investors, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial data; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. By: /s/ Michael R. Anastasio ------------------------------ Michael R. Anastasio Chief Financial Officer Date: November 9, 2005 EX-32.1 5 a5016179ex32-1.txt EXHIBIT 32.1 Exhibit 32.1 Certification of CEO Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 In connection with the Quarterly Report on Form 10-Q of GAMCO Investors, Inc. (the "Company") for the quarterly period ended September 30, 2005 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), Mario J. Gabelli, as Chief Executive Officer of the Company, hereby certifies, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that, to the best of his knowledge: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Mario J. Gabelli - ---------------------------- Name: Mario J. Gabelli Title: Chief Executive Officer Date: November 9, 2005 This certification accompanies the Report pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the Sarbanes-Oxley Act of 2002, be deemed filed by the Company for purposes of ss.18 of the Securities Exchange Act of 1934, as amended. EX-32.2 6 a5016179ex32-2.txt EXHIBIT 32.2 Exhibit 32.2 Certification of CAO Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 In connection with the Quarterly Report on Form 10-Q of GAMCO Investors, Inc. (the "Company") for the quarterly period ended September 30, 2005 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), Michael R. Anastasio, as Chief Financial Officer of the Company, hereby certifies, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that, to the best of his knowledge: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Michael R. Anastasio - ------------------------------ Name: Michael R. Anastasio Title: Chief Financial Officer Date: November 9, 2005 This certification accompanies the Report pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the Sarbanes-Oxley Act of 2002, be deemed filed by the Company for purposes of ss.18 of the Securities Exchange Act of 1934, as amended. -----END PRIVACY-ENHANCED MESSAGE-----