-----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, Uhw/udkveA9BR4g+gMSB/kj9gFSLR8oZmCCcmDIn79fygTMjavq88kexDUFrMq5F PNUPvz3ImvoPxRx9OaProQ== 0001157523-06-008166.txt : 20060808 0001157523-06-008166.hdr.sgml : 20060808 20060808161707 ACCESSION NUMBER: 0001157523-06-008166 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20060630 FILED AS OF DATE: 20060808 DATE AS OF CHANGE: 20060808 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: 061013368 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 a5204892.txt GAMCO INVESTORS, INC. 10-Q 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 June 30, 2006 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File No. 1-106 GAMCO INVESTORS, INC. - -------------------------------------------------------------------------------- (Exact name of Registrant as specified in its charter) New York 13-4007862 - -------------------------------------------------------------------------------- (State of other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) One Corporate Center, Rye, NY 10580-1422 - -------------------------------------------------------------------------------- (Address of principle executive offices) (Zip Code) (914) 921-3700 - -------------------------------------------------------------------------------- Registrant's telephone number, including area code Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer Accelerated filer X Non-accelerated filer ----- ----- ----- 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 July 31, 2006 ----- ---------------------------- Class A Common Stock, .001 par value 7,473,758 Class B Common Stock, .001 par value 20,781,027 1 INDEX ----- GAMCO INVESTORS, INC. AND SUBSIDIARIES PART I. FINANCIAL INFORMATION - ------- --------------------- Item 1. Financial Statements (Unaudited) Condensed Consolidated Statements of Income: - Three months ended June 30, 2006 and 2005 - Six months ended June 30, 2006 and 2005 Condensed Consolidated Statements of Financial Condition: - December 31, 2005 (Audited) - June 30, 2006 - June 30, 2005 Condensed Consolidated Statements of Stockholders' Equity and Comprehensive Income: - Three months ended June 30, 2006 and 2005 - Six months ended June 30, 2006 and 2005 Condensed Consolidated Statements of Cash Flows: - Three months ended June 30, 2006 and 2005 - Six months ended June 30, 2006 and 2005 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 4. Submission of Matters to a Vote of Security Holders Item 6. Exhibits SIGNATURES 2
GAMCO INVESTORS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME UNAUDITED (In thousands, except per share data) Three Months Ended Six Months Ended June 30, June 30, --------------------------- --------------------------- 2006 2005 (A) 2006 2005 (A) ------------- ------------- ------------- ------------- Revenues Investment advisory and incentive fees $ 54,724 $ 52,088 $ 106,413 $ 106,019 Commission revenue 2,722 2,574 6,173 5,039 Distribution fees and other income 5,351 4,908 10,786 10,043 ------------- ------------- ------------- ------------- Total revenues 62,797 59,570 123,372 121,101 Expenses Compensation and related costs 26,724 27,246 54,233 53,401 Management fee 1,804 2,306 5,282 4,561 Distribution costs 5,329 4,535 10,544 10,748 Other operating expenses 7,713 6,000 15,104 12,754 Reserve for settlement 11,900 - 11,900 - ------------- ------------- ------------- ------------- Total expenses 53,470 40,087 97,063 81,464 Operating income 9,327 19,483 26,309 39,637 Other income (expense) Net gain from investments 4,244 387 27,369 982 Interest and dividend income 6,111 4,157 12,484 7,629 Interest expense (3,394) (3,275) (7,269) (7,204) ------------- ------------- ------------- ------------- Total other income, net 6,961 1,269 32,584 1,407 ------------- ------------- ------------- ------------- Income before income taxes and minority interest 16,288 20,752 58,893 41,044 Income tax provision 7,308 7,782 23,285 15,391 Minority interest 108 107 7,458 108 ------------- ------------- ------------- ------------- Net income $ 8,872 $ 12,863 $ 28,150 $ 25,545 ============= ============= ============= ============= Net income per share: Basic $ 0.31 $ 0.43 $ 0.98 $ 0.86 ============= ============= ============= ============= Diluted $ 0.31 $ 0.42 $ 0.97 $ 0.85 ============= ============= ============= ============= Weighted average shares outstanding: Basic 28,507 30,079 28,842 29,821 ============= ============= ============= ============= Diluted 29,496 31,211 29,838 31,447 ============= ============= ============= ============= Dividends declared: $ 0.03 $ 0.02 $ 0.06 $ 0.04 ============= ============= ============= ============= (A) As restated for the Change in Accounting Method for recognizing management fee revenues on closed-end preferred shares (See Note A in item 1 of this report on Form 10-Q).
See accompanying notes. 3
GAMCO INVESTORS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (In thousands, except per share data) December 31, June 30, June 30, 2005 2006 2005 (A) -------------------------------------------------- ASSETS (Unaudited) Cash and cash equivalents, including restricted cash of $2,503, $730 and $1,508. $ 170,659 $ 116,852 $ 191,413 Investments in securities, including restricted securities of $52,219, $52,141 and $52,270. 401,216 447,464 366,664 Investments in partnerships and affiliates 91,971 89,380 85,716 Receivable from brokers 8,545 39,490 24,274 Investment advisory fees receivable 22,260 24,574 16,310 Other assets 26,443 12,121 27,625 -------------- -------------- -------------- Total assets $ 721,094 $ 729,881 $ 712,002 ============== ============== ============== LIABILITIES AND STOCKHOLDERS' EQUITY Payable to brokers $ 4 $ 2,037 $ 1 Income taxes payable, including deferred taxes of $1,699, $4,323, and $296. 10,132 2,473 2,994 Compensation payable 27,889 39,249 31,791 Capital lease obligation 2,992 2,891 3,084 Securities sold, not yet purchased - - 3,357 Accrued expenses and other liabilities 17,489 28,895 15,506 -------------- -------------- -------------- Total operating liabilities 58,506 75,545 56,733 -------------- -------------- -------------- 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 50,000 50,000 5.22% Senior notes (due February 17, 2007) 82,308 82,308 82,308 -------------- -------------- -------------- Total liabilities 290,814 307,853 289,041 Minority interest 6,151 19,712 5,735 Stockholders' equity Class A Common Stock, $0.001 par value; 100,000,000 shares authorized; 9,648,339, 12,010,812 and 9,621,064 issued, respectively; 6,414,517, 7,509,058 and 6,820,642 outstanding, respectively 10 10 10 Class B Common Stock, $0.001 par value; 100,000,000 shares authorized; 23,128,500, 23,128,500 and 23,128,500 issued, respectively; 23,128,500, 20,781,027 and 23,128,500 outstanding, respectively 23 23 23 Additional paid-in capital 226,353 228,573 235,104 Retained earnings 329,090 355,439 292,729 Accumulated comprehensive gain 526 2,423 1,864 Treasury stock, at cost (3,233,822, 4,501,754 and 2,800,422 shares, respectively) (131,873) (184,152) (112,504) -------------- -------------- -------------- Total stockholders' equity 424,129 402,316 417,226 -------------- -------------- -------------- Total liabilities and stockholders' equity $ 721,094 $ 729,881 $ 712,002 ============== ============== ============== (A) As restated for the Change in Accounting Method for recognizing management fee revenues on closed-end preferred shares (See Note A in item 1 of this report on Form 10-Q).
See accompanying notes. 4
GAMCO INVESTORS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME UNAUDITED (In thousands) Three Months Ended Six Months Ended June 30, June 30, ------------------------ ------------------------ 2006 2005 (A) 2006 2005 (A) ---------- ---------- ---------- ---------- Stockholders' equity -- beginning of period $ 410,991 $ 417,445 $ 424,129 $ 334,878 Comprehensive income: Net income 8,872 12,863 28,150 25,545 Foreign currency translation adjustments (128) (16) (53) 34 Net unrealized (loss) gain on securities available for sale (588) 741 1,867 1,883 ---------- ---------- ---------- ---------- Comprehensive income 8,156 13,588 29,964 27,462 Dividends declared (851) (599) (1,718) (1,334) Stock option expense 14 2,275 20 2,760 Proceeds from settlement of purchase contracts - - - 70,567 Excess tax benefit for exercised stock options 1,782 - 1,782 - Exercise of stock options including tax benefit 137 304 418 740 Capitalized costs - (15) - (15) Purchase of treasury stock (17,913) (15,772) (52,279) (17,832) ---------- ---------- ---------- ---------- Stockholders' equity -- end of period $ 402,316 $ 417,226 $ 402,316 $ 417,226 ========== ========== ========== ========== (A) As restated for the Change in Accounting Method for recognizing management fee revenues on closed-end preferred shares (See Note A in item 1 of this report on Form 10-Q).
See accompanying notes. 5
GAMCO INVESTORS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS UNAUDITED (In thousands) Three Months Ended Six Months Ended June 30, June 30, --------------------------------------------------- 2006 2005 (A) 2006 2005 (A) ------------ ------------ ------------ ------------ Operating activities Net income $ 8,872 $ 12,863 $ 28,150 $ 25,545 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Equity in gains from partnerships and affiliates (1,021) (538) (4,946) (2,696) Depreciation and amortization 220 237 444 471 Stock-based compensation expense 14 2,275 20 2,760 Tax benefit from exercise of stock options 21 52 87 154 Foreign currency loss 30 (9) 30 202 Other-than-temporary loss on available for sale securities 56 122 56 3,301 Impairment of goodwill - - - 1,127 Minority interest in net income of consolidated subsidiaries 75 107 362 108 Realized gains on sales of available for sale securities, net - - (442) - Realized gains on sales of investments in securities, net (2,704) (534) (9,152) (1,767) Change in unrealized value of investments in securities, net (2,493) (1,128) (2,589) (3,562) Excess tax benefit adjustment 1,782 - 1,782 - (Increase) decrease in operating assets: Purchases of investments in securities (203,842) (147,495) (450,832) (535,101) Proceeds from sales of investments in securities 166,816 70,231 451,032 473,392 Receivables from affiliates 2,277 (497) 5,439 580 Investments in partnerships and affiliates (7,833) (4,126) (10,059) (10,683) Distributions from partnerships and affiliates 7,075 4,248 7,923 17,002 Investment advisory fees receivable 655 6,189 6,304 10,257 Receivable from brokers 37,151 (656) (27,005) (18,736) Other assets 842 532 (31) (1,731) Increase (decrease) in operating liabilities: Payable to brokers 190 - 186 (301) Income taxes payable (12,110) (5,511) (8,851) (6,657) Compensation payable 2,645 (2,156) 11,029 3,809 Accrued expenses and other liabilities 10,307 (3,500) 10,417 (2,279) Effects of consolidation of investment partnerships and offshore funds consolidated under FIN 46R and EITF 04-5: Realized gains on sales of investments in securities and securities sold short, net (163) - (12,001) - Change in unrealized value of investments in securities and securities sold short, net (2,942) - (4,782) - Purchases of investments in securities and securities sold short (9,218) - (648,099) - Proceeds from sales of investments in securities and securities sold short 9,517 - 628,428 - Investment advisory fees receivable 10,897 - 98 - Increase in receivable from brokers (9,757) - (9,757) - Decrease in other assets (21) - 387 - Increase in payable to brokers 1,847 - 7,630 - Decrease in accrued expenses and other liabilities (1,892) - (12,992) - Income related to investment partnerships and offshore funds consolidated under FIN 46R and EITF 04-5, net 207 - 14,637 - Total adjustments (1,369) (82,157) (55,247) (70,350) ------------ ------------ ------------ ------------ Net cash provided by (used in) operating activities 7,500 (69,294) (27,097) (44,805) ------------ ------------ ------------ ------------
6
GAMCO INVESTORS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS UNAUDITED (In thousands) Three Months Ended Six Months Ended June 30, June 30, ------------------------------------------------------ 2006 2005 2006 2005 ------------ ------------ ------------ ------------ Investing activities Purchases of available for sale securities (247) (1,016) (3,253) (4,960) Proceeds from sales of available for sale securities - - 1,486 - ------------ ------------ ------------ ------------ Net cash used in investing activities (247) (1,016) (1,767) (4,960) ------------ ------------ ------------ ------------ Financing activities Dividend paid to minority stockholders of subsidiary - (544) - (544) Contributions related to investment partnerships and offshore funds consolidated under FIN 46R and EITF 04-5, net 1,537 - 27,236 - Proceeds from exercise of stock options 116 253 332 586 Repurchase of 5% convertible note - (50,000) - (50,000) Dividends paid (851) (599) (1,718) (18,636) Proceeds from settlement of purchase contracts - (1) - 70,567 Capitalized costs - (15) - (15) Purchase of treasury stock (17,913) (15,772) (52,279) (17,832) ------------ ------------ ------------ ------------ Net cash used in financing activities (17,111) (66,678) (26,429) (15,874) ------------ ------------ ------------ ------------ Net decrease in cash and cash equivalents (9,858) (136,988) (55,293) (65,639) Net increase in cash from partnerships and offshore funds consolidated under FIN 46R and EITF 04-5 - - 1,550 - Effect of exchange rates on cash and cash equivalents (132) (27) (64) (44) Cash and cash equivalents at beginning of period 126,842 328,428 170,659 257,096 ------------ ------------ ------------ ------------ Cash and cash equivalents at end of period $116,852 $191,413 $116,852 $191,413 ============ ============ ============ ============ (A) As restated for the Change in Accounting Method for recognizing management fee revenues on closed-end preferred shares (See Note A in item 1 of this report on Form 10-Q).
See accompanying notes. 7 GAMCO INVESTORS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS June 30, 2006 (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 generally accepted accounting principles in the United States for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by generally accepted accounting principles in the United States for complete financial statements. In the opinion of management, the unaudited interim condensed consolidated financial statements reflect all adjustments, which are of a normal recurring nature, necessary for a fair presentation of financial position, results of operations and cash flows of GAMCO for the interim periods presented and are not necessarily indicative of a full year's results. 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, 2005, 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. Changes in Accounting Policy GAMCO has voluntarily changed its accounting method for recognizing management fee revenues on closed-end preferred shares effective January 1, 2006. GAMCO, unlike most investment advisors that use leverage, does not earn a fee on assets from the leverage until the return on assets exceeds the cost of capital. GAMCO recognized these revenues during each interim reporting period if and when the total return to common shareholders of the closed-end fund exceeded the dividend rate of the preferred shares. Under this method, management fee revenues recognized in prior interim periods during the measurement period were subject to possible reversal in subsequent periods during that measurement period. After considering the guidance provided in EITF D-96, "Accounting for Management Fees Based on a Formula", GAMCO believes that the preferable method of accounting is to recognize management fee revenues on closed-end preferred shares (which fees are only earned if the annual performance of the fund exceeds the cost to the fund of the preferred shares) at the end of the measurement period, which is currently the end of each calendar year for all closed-end funds. This method results in revenue recognition only when the measurement period has been completed and when the management fees have been earned. This eliminates the possibility of revenues that have been recognized in interim measurement periods subsequently being reversed in later periods during a fiscal year. 8 A. Basis of Presentation (continued) Under SFAS No. 154, which GAMCO adopted on January 1, 2006, this voluntary change in accounting principle requires retrospective application to each period presented as if the different accounting principle had always been used and requires an adjustment at the beginning of the first period presented for the cumulative effect of the change to the new accounting principle. Because full year results are equivalent under both the old and new accounting methods, only interim periods during a year are affected by the change. Therefore, there is no cumulative effect adjustment at the beginning of the first period presented herein. This policy change resulted in a restatement to reduce 2005 revenues of approximately $0.3 million, or $0.01 per fully diluted share, in the second quarter, $2.9 million, or approximately $0.03 per fully diluted share, in the third quarter and a corresponding increase in revenues of $3.2 million, or approximately $0.03 per fully diluted share, in the fourth quarter. This change will have no effect on total revenues or net income reported in 2005.
Quarter Ended (a) March 31, 2005 June 30, 2005 September 30, 2005 December 31, 2005 -------------------- -------------------- -------------------- -------------------- Revenue Reported $61.5 million $59.8 million $66.2 million $64.8 million Restated $61.5 million $59.6 million $63.3 million $68.0 million Change - ($0.3) million ($2.9) million $ 3.2 million EPS Reported $0.42 $0.43 $0.64 $0.61 Restated $0.42 $0.42 $0.61 $0.64 Change - ($0.01) ($0.03) $0.03
(a) Differences due to rounding Recent Accounting Developments In February 2006, the FASB issued FASB Statement No. 155, "Accounting for Certain Hybrid Financial Instruments - an amendment of FASB Statement No. 133 and 140," that amends FASB Statements No. 133 "Accounting for Derivative Instruments and Hedging Activities," and No. 140 "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." The Statement permits fair value remeasurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation; clarifies which interest-only strips and principle-only strips are not subject to the requirements of Statement 133; establishes a requirement to evaluate interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation; Clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives; amends Statement 140 to eliminate the prohibition on a qualifying special-purpose entity from holding a derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument. Statement 155 does not permit prior period restatement. The Statement is effective for all financial instruments acquired or issued after the beginning of an entity's second fiscal year that begins after September 15, 2006. The Company plans to adopt this Statement on January 1, 2007. The adoption is not expected to have a material impact on the Company's future consolidated financial statements. In March 2006, the FASB issued FASB Statement No. 156, "Accounting for Servicing of Financial Assets," which amends FASB Statements No. 140 "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." The Statement permits an entity to choose either the amortization method or fair value measurement method for each class of separately recognized servicing assets and servicing liabilities. The Statement is effective as of the beginning of an entity's second fiscal year that begins after September 15, 2006. The Company plans to adopt this Statement on January 1, 2007. The adoption is not expected to have a material impact on the Company's future consolidated financial statements. In April 2006, the FASB issued FSP FIN 46R-6 "Determining the Variability to be Considered in Applying FASB Interpretation No. 46(R)." The FSP addresses certain major implementation issues related to FIN 46R, specifically how a reporting enterprise should determine the variability to be considered in applying FIN 46R. The FSP is effective as of the beginning of the second day of the second reporting period beginning after June 15, 2006. The Company plans to adopt this Statement on January 1, 2007. The adoption is not expected to have a material impact on the Company's future consolidated financial statements. 9 In June 2006, the FASB issued Interpretation No. 48, "Accounting for Uncertainty in Income Taxes" which is an interpretation of FASB Statement No. 109, "Accounting for Income Taxes". This Interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expect to be taken in a tax return. This Interpretation is effective for fiscal years beginning after December 15, 2006. The Company plans to adopt this Statement on January 1, 2007. The adoption is not expected to have a material impact on the Company's future consolidated financial statements. 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 with maturities of three months or less at time of purchase are classified as cash and cash equivalents. A substantial portion of Investments in Securities are held for resale in anticipation of short-term market movements and therefore are classified as trading securities. Trading securities are stated at fair value, with any unrealized gains or losses, net of deferred taxes, reported in current period earnings. Available for sale ("AFS") 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 income. For the three and six month periods ended June 30, 2006, there were $0.1 million in losses on AFS securities deemed to be other than temporary which were recorded in the statement of income. For the three and six month periods ended June 30, 2005, there were $0.1 million in losses and $3.3 million in losses, respectively, on AFS securities deemed to be other than temporary which were recorded in the statement of income. The losses related to AFS securities in the six month period ended June 30, 2005 were partially 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 $2.1 million on OXPS for the first six months of 2005. For the six month period ended June 30, 2006, we recorded a gain of $0.5 million on OXPS. At June 30, 2006 and June 30, 2005, the market value of investments available for sale was $86.7 million and $80.9 million, respectively. An unrealized gain in market value, net of management fee and taxes, of $2.4 million and $1.9 million has been included in stockholders' equity for June 30, 2006 and June 30, 2005, respectively. The unrealized gain in the six month period ended June 30, 2005 included an increase of $1.9 million, net of management fee and taxes, from the write down of available for sale securities when these losses were reclassified from comprehensive loss within stockholders' equity to current period statement of income for the six months ended June 30, 2005. There were no sales of investments available for sale for the three month period ended June 30, 2006 or for the three and six month periods ended March 31, 2005 and June 30, 2005. Proceeds from sales of investments available for sale were approximately $1.5 million for the six month period ended June 30, 2006. C. Investments in Partnerships and Affiliates Beginning January 1, 2006, the provisions of FASB Interpretation No. 46R ("FIN 46R") and Emerging Issue Task Force 04-5 ("EITF 04-5") require consolidation of the majority of our investment partnerships and offshore funds managed by our subsidiaries into our consolidated financial statements. However, since we amended the agreements of certain investment partnerships and an offshore fund on March 31, 2006, FIN46R and EITF 04-5 only required us to consolidate these entities on our income statement and statement of cash flows for the first quarter 2006. We were not required to consolidate these entities on our balance sheet at March 31, 2006. In addition, these partnerships and offshore funds, for which the agreements were amended, are not required to be consolidated within our statement of income and statement of cash flows or on our balance sheet in the second quarter or future periods. However, for the six months ended June 30, 2006, the consolidation of these entities for the first quarter 2006 does affect the classification of income between operating and 10 other income. As a result, we have provided our results for the six month period through June 30, 2006 before adjusting for FIN46R and EITF 04-5 as we believe this basis is comparable to our reported results for the six months ended June 30, 2005. We consolidated four other investment partnerships and two offshore funds in which we have a direct or indirect controlling financial interest as of and for the three and six months ended June 30, 2006. These entities have been consolidated within our financial statements for the three and six month periods ended June 30, 2006 and will continue to be consolidated in future periods as long as we continue to maintain a direct or indirect controlling financial interest. In addition to minor FIN 46R and EITF 04-5 adjustments to the statement of income and statement of cash flows for the three and six month periods ended June 30, 2006 related to these entities, the consolidation of these entities also resulted in minor adjustments to our statement of financial condition at June 30, 2006. The consolidation of these entities on the statement of financial condition has increased assets by $16.0 million, liabilities by $2.8 million and minority interest by $13.2 million. Prior to consolidation of these entities, our investments in these entities were reflected within Investments in partnerships and affiliates on the statement of financial condition and accounted for under the equity method. For the three and six months ended June 30, 2006, the consolidation of these entities had no impact on net income but did result in (a) the elimination of revenues and expenses which are now intercompany transactions; (b) the recording of all the partnerships' operating expenses of these entities including those pertaining to third-party interests; (c) the recording of all other income of these entities including those pertaining to third-party interests; (d) recording of income tax expense of these entities including those pertaining to third party interests and (e) the recording of minority interest which offsets the net amount of any of the partnerships' revenues, operating expenses, other income and income taxes recorded in these respective line items which pertain to third-party interest in these entities. While this had no impact on net income, the consolidation of these entities does affect the classification of income between operating and other income. D. Earnings Per Share
The computations of basic and diluted net income per share are as follows: Three Months Ended Six Months Ended June 30, June 30, (in thousands, except per share amounts) 2006 2005* 2006 2005* ----------- ----------- ----------- ----------- Basic: Net income $ 8,872 $ 12,863 $ 28,150 $ 25,545 =========== =========== =========== =========== Average shares outstanding 28,507 30,079 28,842 29,821 =========== =========== =========== =========== Basic net income per share $ 0.31 $ 0.43 $ 0.98 $ 0.86 =========== =========== =========== =========== Diluted: Net income $ 8,872 $ 12,863 $ 28,150 $ 25,545 Add interest expense on 5% convertible note, net of management fee and taxes 351 352 703 1,055 ----------- ----------- ----------- ----------- Total $ 9,223 $ 13,215 $ 28,853 $ 26,600 =========== =========== =========== =========== Average shares outstanding 28,507 30,079 28,842 29,821 Dilutive stock options 27 171 34 186 Assumed conversion of 5% convertible note 962 961 962 1,440 ----------- ----------- ----------- ----------- Total 29,496 31,211 29,838 31,447 =========== =========== =========== =========== Diluted net income per share $ 0.31 $ 0.42 $ 0.97 $ 0.85 =========== =========== =========== =========== * As restated for the Change in Accounting Method for recognizing management fee revenues on closed-end preferred shares (See Note A in item 1 of this report on Form 10-Q).
E. Stockholders' Equity Shares outstanding on June 30, 2006 were 28,290,085, approximately 1.7% 11 lower than the March 31, 2006 outstanding shares of 28,774,485, and approximately 5.5% below the 29,949,142 shares outstanding on June 30, 2005. Fully diluted shares outstanding for the second quarter of 2006 were 29,495,759 approximately 2.3% lower than first quarter 2006 fully diluted shares of 30,185,312 and approximately 5.5% lower than our fully diluted shares of 31,211,347 for the second quarter 2005. In June 2006, the holders of 2,347,473 Class B shares exchanged their Class B shares for an equal number of Class A shares. The 2,347,473 Class A shares are currently unregistered with Securities and Exchange Commission ("SEC") and GAMCO intends to file a registration statement for the Class A shares with the SEC in the near future. 2,071,635 of these Class A shares are subject to a lockup period of two years, beginning on the date of registration of the shares with the SEC. On the first day of every month during the lockup period, one-twenty fourth (1/24th) of these 2,071,635 Class A shares are freed from the lockup restrictions and thereafter may be sold in the public markets or otherwise disposed of. As of June 30, 2006, there were 7,509,058 of Class A shares outstanding compared to 5,645,985 shares outstanding at March 31, 2006. On May 8, 2006, the Board of Directors declared a quarterly dividend of $0.03 per share that was paid on June 28, 2006 to shareholders of record on June 15, 2006. Stock Award and Incentive Plan Effective January 1, 2003, we adopted the fair value recognition provisions of SFAS No. 123 in accordance with the transition and disclosure provisions under 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, 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. For the three months ended June 30, 2006, we recognized a tax benefit from previously exercised stock options of $1.8 million. For the three months ended June 30, 2006 and 2005, we recognized stock-based compensation expense of approximately $14,000 and $2.3 million, respectively. For the six months ended June 30, 2006 and 2005, we recognized stock-based compensation expense of approximately $20,000 and $2.3 million, respectively. The total compensation costs related to non-vested awards not yet recognized is approximately $0.2 million. This will be recognized as expense in the following periods: Remainder of 2006 2007 2008 2009 2010 --------- --------- --------- --------- --------- $33,000 $67,000 $62,000 $20,000 $2,000 Proceeds from the exercise of 5,000 and 8,750 stock options were approximately $133,000 and $253,000 for the three months ended June 30, 2006 and 2005, respectively, resulting in a tax benefit to GAMCO of $21,000 and $52,000 for the three months ended June 30, 2006 and 2005, respectively. Proceeds from the exercise of 15,000 and 22,225 stock options were approximately $348,000 and $586,000 for the six months ended June 30, 2006 and 2005, respectively, resulting in a tax benefit to GAMCO of $87,000 and $154,000 for the three months ended June 30, 2006 and 2005, respectively. Stock Repurchase Program Our stock buyback program was initiated in March 1999. In the second quarter of 2006, we repurchased 489,400 shares at an average investment of $36.58. In May 2006, our Board of Directors authorized an additional 400,000 shares to be repurchased bringing the total amount of shares currently available to be repurchased under the program to approximately 714,000 shares at June 30, 2006. In the period since our buyback program was initiated, 4,602,558 class A common shares have been repurchased through June 30, 2006 at an average investment of $39.52 per share. 12 F. Debt In May 2006, the SEC declared effective the Company's $400 million "shelf" registration statement on Form S-3. This provides us 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 $520 million, which includes the remaining $120 million available under our shelf registration filed in 2001. In June 2006, GAMCO and Cascade Investments L.L.C. ("Cascade") agreed to amend the terms of the $50 million convertible note maturing in August 2011. The rate on the note will increase from 5% to 6% while the conversion price will be raised to $53 per share from $52 per share, in each case effective September 15, 2006. In addition, the exercise date of Cascade's put option was extended to May 15, 2007, the expiration date of the related letter of credit was extended to May 22, 2007 and a call option was included giving GAMCO the right to redeem the note at 101% of its principle amount together with all accrued but unpaid interest thereon upon at least 30 days prior written notice, subject to certain provisions. G. 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. There was no impairment charge recorded for the three month or six month periods ended June 30, 2006. 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 the recoverability of 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 during the first quarter of 2005 for the impairment of goodwill that represented the entire amount of goodwill for this entity. At June 30, 2006, there remains $3.5 million, included in other assets, of goodwill related to our 92% owned subsidiary, Gabelli Securities, Inc. H. Other Matters Since September 2003, GAMCO and certain of its subsidiaries have been cooperating with inquiries from the N.Y. Attorney General's office and the SEC by providing documents and testimony regarding certain mutual fund share trading practices. In June 2006, we began discussions with the SEC for a potential resolution of their inquiry. As a result of these discussions, GAMCO recorded a reserve against earnings of approximately $12 million. Since these discussions are ongoing, we cannot determine at this time whether they will ultimately result in a settlement of this matter, whether our reserves will be sufficient to cover any payments by GAMCO related to such a settlement, or whether and to what extent insurance may cover such payments. In November 2002, the Financial Accounting Standards Board ("FASB") issued Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness to Others" ("FIN 45"), which provides accounting and disclosure requirements for certain guarantees. The disclosure requirements are effective for financial statements of interim or annual periods ending after December 15, 2002. The Interpretation's initial recognition and initial measurement provisions are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. We indemnify our clearing brokers for losses they may sustain from the customer accounts introduced by our broker-dealer subsidiaries. In accordance with NYSE rules, customer balances are typically collateralized by customer securities or supported by other recourse provisions. In addition, we further limit margin balances to a maximum of 25% versus 50% permitted under Regulation T of the Federal Reserve Board and exchange regulations. At June 30, 2006 and June 30, 2005, the total amount of customer balances subject to indemnification (i.e. margin debits) was immaterial. The Company also has entered into arrangements with various other third parties which provide for indemnification against losses, costs, claims and liabilities arising from the performance of their obligations under our agreement, except for gross negligence or bad faith. The Company has had no claims or payments pursuant to these or prior agreements, and we believe the likelihood of a claim being made is remote. Utilizing the methodology in FIN 45, our estimate of the value of such agreements is de 13 minimis, and therefore an accrual has not been made in the financial statements. I. Subsequent Events From July 1 through July 31, 2006, we repurchased 45,800 shares of our class A common stock, under the Stock Repurchase Program, at an average investment of $34.31 per share. 14 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, the directors of our mutual funds approved in November 2005 the name change of the Growth, the Global Series, the Mathers and the International Growth funds (among others) to GAMCO from Gabelli, which became effective in December 2005. 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 subsidiary. 15 Assets Under Management (AUM) were $26.8 billion as of June 30, 2006, 3.1% lower than March 31, 2006 and June 30, 2005 AUM of $27.6 billion. Equity assets under management were $25.9 billion on June 30, 2006, down 3.4% from March 31, 2006 equity assets of $26.8 billion, and down 2.4% from $26.5 billion on June 30, 2005. Our equity open-end funds and closed-end funds stood at $13.1 billion in AUM on June 30, 2006, 4.6% higher than the $12.5 billion on June 30, 2005, but 3.0% below the $13.5 billion level on March 31, 2006. Our institutional and high net worth business had AUM of $12.3 billion in separately managed equity accounts on June 30, 2006, 2.9% lower than the $12.6 billion on March 31, 2006, and 7.0% under the $13.2 billion on June 30, 2005. AUM in our investment partnerships were $536 million versus $681 million on March 31, 2006 and $831 million on June 30, 2005. Fixed income AUM, primarily money market mutual funds, totaled $918 million on June 30, 2006, up 6% from the March 31, 2006 assets of $866 million, and 18% lower than fixed income AUM of $1.1 billion on June 30, 2005, principally due to the closing of the Treasurer's Fund in the fourth quarter of 2005. 16 Assets Under Management The company reported assets under management as follows:
Table I: Assets Under Management (in millions) ------------------------------------- June 30 ----------------------- % 2005 2006 Inc. (Dec.) --------- --------- ----------- Mutual Funds: Equities Open end $ 7,798 $ 7,796 (0.0)% Closed-end 4,684 5,258 12.3 Fixed Income 852 863 1.3 --------- --------- Total Mutual Funds 13,334 13,917 4.4 --------- --------- Institutional & High Net Worth Separate Accounts: Equities 13,189 12,270 (7.0) Fixed Income 269 55 (79.6) --------- --------- Total Institutional & High Net Worth Separate Accounts 13,458 12,325 (8.4) --------- --------- Investment Partnerships 831 536 (35.5) --------- --------- Total Assets Under Management $ 27,623 $ 26,778 (3.1) ========= ========= Equities $ 26,502 $ 25,860 (2.4) Fixed Income 1,121 918 (18.1) --------- --------- Total Assets Under Management $ 27,623 $ 26,778 (3.1) ========= =========
Table II: Fund Flows - 2nd Quarter 2006 (in millions) Market March 31, Net Appreciation / June 30, 2006 Cash Flows (Depreciation) 2006 ---------------- ---------------- ---------------- ---------------- Mutual Funds: Equities $ 13,460 ($411) $ 5 $ 13,054 Fixed Income 807 43 13 863 ---------------- ---------------- ---------------- ---------------- Total Mutual Funds 14,267 (368) 18 13,917 ---------------- ---------------- ---------------- ---------------- Institutional & HNW Separate Accounts Equities 12,639 (376) 7 12,270 Fixed Income 59 (5) 1 55 ---------------- ---------------- ---------------- ---------------- Total Institutional & HNW Separate Accounts 12,698 (381) 8 12,325 ---------------- ---------------- ---------------- ---------------- Investment Partnerships 681 (155) 10 536 ---------------- ---------------- ---------------- ---------------- Total Assets Under Management $ 27,646 ($904) $36 $ 26,778 ================ ================ ================ ================
Assets Under Management (in millions) -------------------------------------------------------------------------------- Table III: % Increase/(decrease) 6/05 9/05 12/05 3/06 6/06 3/06 6/05 --------- --------- --------- --------- --------- ------- ------- Mutual Funds Open end $7,798 $7,959 $7,888 $8,176 $7,796 (4.6)% (0.0)% Closed-end 4,684 4,851 5,075 5,284 5,258 (0.5) 12.3 Fixed income 852 796 735 807 863 6.9 1.3 --------- --------- --------- --------- --------- Total Mutual Funds 13,334 13,606 13,698 14,267 13,917 (2.5) 4.4 --------- --------- --------- --------- --------- Institutional & HNW Separate Accounts: Equities 13,189 13,129 12,382 12,639 12,270 (2.9) (7.0) Fixed Income 269 158 84 59 55 (6.8) (79.6) --------- --------- --------- --------- --------- Total Institutional & HNW Separate Accounts 13,458 13,287 12,466 12,698 12,325 (2.9) (8.4) --------- --------- --------- --------- --------- Investment Partnerships 831 745 634 681 536 (21.3) (35.5) --------- --------- --------- --------- --------- Total Assets Under Management $ 27,623 $ 27,638 $ 26,798 $ 27,646 $ 26,778 (3.1) (3.1) ========= ========= ========= ========= =========
17 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. We also found that certain discussions took place in 2002 and 2003 between GAMCO's staff and personnel of an investment advisor regarding possible frequent trading in certain Gabelli domestic equity funds. In June 2006, we began discussions with the SEC for a potential resolution of their inquiry. As a result of these discussions, GAMCO recorded a reserve against earnings of approximately $12 million. Since these discussions are ongoing, we cannot determine at this time whether they will ultimately result in a settlement of this matter, whether our reserves will be sufficient to cover any payments by GAMCO related to such a settlement, or whether and to what extent insurance may cover such payments. 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 we believe that all of the funds are now in compliance. 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 a 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 18 regulatory authorities, and the associated compliance costs, have increased our cost structure and could in the future have a material impact. 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 June 30, 2006 Compared To Three Months Ended June 30, 2005 Consolidated Results -- Three Months Ended June 30: (Unaudited; in thousands, except per share data) ------------------------------------------------ 2006 2005 (a) 2005 (b) --------- --------- --------- Revenues Investment advisory and incentive fees $ 54,724 $ 52,088 $ 52,359 Commission revenue 2,722 2,574 2,574 Distribution fees and other income 5,351 4,908 4,908 --------- --------- --------- Total revenues 62,797 59,570 59,841 Expenses Compensation and related costs 26,724 27,246 27,353 Management fee 1,804 2,306 2,322 Distribution costs 5,329 4,535 4,535 Reserve for settlement 11,900 - - Other operating expenses 7,713 6,000 6,000 --------- --------- --------- Total expenses 53,470 40,087 40,210 --------- --------- --------- Operating income 9,327 19,483 19,631 Other income (expense) Net gain from investments 4,244 387 387 Interest and dividend income 6,111 4,157 4,157 Interest expense (3,394) (3,275) (3,275) --------- --------- --------- Total other income (expense), net 6,961 1,269 1,269 --------- --------- --------- Income before taxes and minority interest 16,288 20,752 20,900 Income tax provision 7,308 7,782 7,838 Minority interest 108 107 107 --------- --------- --------- Net income $ 8,872 $ 12,863 $ 12,955 ========= ========= ========= Net income per share: Basic $ 0.31 $ 0.43 $ 0.43 ========= ========= ========= Diluted $ 0.31 $ 0.42 $ 0.43 ========= ========= ========= Reconciliation of Net income to Adjusted EBITDA: Net income $ 8,872 $ 12,863 $ 12,955 Interest Expense 3,394 3,275 3,275 Income tax provision and minority interest 7,416 7,889 7,945 Depreciation and amortization 220 237 237 --------- --------- --------- Adjusted EBITDA(c) $ 19,902 $ 24,264 $ 24,412 --------- --------- --------- (a) As restated for the Change in Accounting Method for recognizing management fee revenues on closed-end preferred shares (See Note A in item 1 of this report on Form 10-Q). (b) As originally reported during the quarter ended June 30, 2005. (c) 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. 19 Total revenues were $62.8 million in the second quarter of 2006 up $3.2 million or 5.4% from total revenues of $59.6 million reported in the second quarter of 2005 For the second quarter of 2006, investment advisory fees were $54.7 million, an increase of 5.1% from the $52.1 million generated in the second quarter of 2005. Our closed-end funds revenues increased 17.0% to $10.8 million for the second quarter 2006, up from $9.2 million in the prior year's period. The increase was due to increased AUM within our closed-end funds from $4.7 billion as of second quarter 2005 to $5.3 billion as of second quarter 2006. Open-end mutual funds revenues rose 3.4% to $20.2 million from $19.5 million in the 2005 period. Institutional and high net worth separate accounts revenues increased 2.2% to $20.7 million, up from the $20.3 million reported in 2005. The 2006 period includes the recognition of $2.4 million in performance based fulcrum fees not in the year ago quarter. Investment Partnership revenues were $3.1 million, level with the prior year's period. Commission revenues from our institutional research affiliate, Gabelli & Company, Inc., were $2.7 million in the second quarter 2006, up 5.7% from the prior year's comparable period, attributable to increased trading volume offset by lower commissions per trade. Mutual fund distribution fees and other income were $5.4 million for the second quarter 2006, 9.0% higher than the $4.9 million reported in the 2005 period. The increase is due to higher distribution fees of $5.1 million for second quarter 2006 versus $4.7 million for second quarter 2005, principally as a result of higher average assets under management. Operating margin, before management fee, decreased to 17.7% for the second quarter 2006 from 36.6% in the prior year's quarter primarily due to a reserve against earnings taken in the second quarter 2006 as further described below. Excluding the reserve, the operating margin for the second quarter 2006 was 36.7%. Expenses not directly tied to revenues were $25.2 million, an increase from the $12.9 million recorded in the second quarter of 2005. The increase was primarily due to a reserve against earnings of approximately $12 million in the second quarter 2006 relating to the potential resolution of a regulatory inquiry. Excluding the reserve, expenses not directly tied to revenues were approximately $13 million. Since September 2003, GAMCO and certain of its subsidiaries have been cooperating with inquiries from the N.Y. Attorney General's office and the SEC by providing documents and testimony regarding certain mutual fund share trading practices. In June 2006, we began discussions with the SEC for a potential resolution of their inquiry. As a result of these discussions, GAMCO recorded the reserve. Since these discussions are ongoing, we cannot determine at this time whether they will ultimately result in a settlement of this matter, whether our reserves will be sufficient to cover any payments by GAMCO related to such a settlement, or whether and to what extent insurance may cover such payments. Total other income, net of interest expense, rose to $7.0 million for the second quarter 2006 from $1.3 million in the 2005 period. The majority of this increase was attributable to higher net gains from investments as well as higher interest income due to higher interest rates as compared to the prior year period. In 2005, we recorded gains from our investment in optionsXpress (Nasdaq: OXPS) of: $0.03 per fully diluted share in the first quarter, $0.00 per fully diluted share in the second quarter, $0.05 per fully diluted share in the third quarter, and $0.01 per fully diluted share in the fourth quarter. For 2006, we recorded $0.01 per fully diluted share in the first quarter and six months ended June 30, 2006. For the second quarter 2006, interest expense was $3.4 million versus $3.3 million in the prior year's period. Management fee was $1.8 million for the three months ended June 30, 2006, versus $2.3 million for the comparable 2005 period. The decrease is due to lower operating income before management fee, income taxes, and minority interest of $18.1 million for second quarter 2006 as compared to $23.1 million for second quarter 2005. The effective tax rate for the quarter ended June 30, 2006, excluding the reserve, remained at 37.5%, the same as the prior year period. 20 Six Months Ended June 30, 2006 Compared To Six Months Ended June 30, 2005 To provide a better understanding of core results and trends, GAMCO has provided our results before adjusting for FASB Interpretation No. 46R ("FIN 46R") and Emerging Issue Task Force 04-5 ("EITF 04-5"). These results are not presented in accordance with generally accepted accounting principles ("GAAP") in the United States. A reconciliation of these non-GAAP financial measures to results presented in accordance with GAAP is presented herein. See Note A in item 1C, "Investments in Partnerships and Affiliates", of this report on Form 10-Q for a discussion of FIN 46 and EITF 04-5.
Consolidated Results -- Six Months Ended June 30: (Unaudited; in thousands, except per share data) ------------------------------------------------ 2005 Adjustments Restated (a) 2006 (b) (c) 2006 (d) ------------ ------------ ------------ ------------ Revenues Investment advisory and incentive fees $106,019 $109,429 ($ 3,016) $106,413 Commission revenue 5,039 6,173 - 6,173 Distribution fees and other income 10,043 10,786 - 10,786 ------------ ------------ ------------ ------------ Total revenues 121,101 126,388 (3,016) 123,372 Expenses Compensation and related costs 53,401 54,233 - 54,233 Management fee 4,561 5,282 - 5,282 Distribution costs 10,748 10,544 - 10,544 Reserve for settlement - 11,900 - 11,900 Other operating expenses 12,754 14,915 189 15,104 ------------ ------------ ------------ ------------ Total expenses 81,464 96,874 189 97,063 ------------ ------------ ------------ ------------ Operating income 39,637 29,514 (3,205) 26,309 Other income (expense) Net gain from investments 982 13,597 13,772 27,369 Interest and dividend income 7,629 11,159 1,325 12,484 Interest expense (7,204) (6,678) (591) (7,269) ------------ ------------ ------------ ------------ Total other income (expense), net 1,407 18,078 14,506 32,584 ------------ ------------ ------------ ------------ Income before taxes and minority interest 41,044 47,592 11,301 58,893 Income tax provision 15,391 19,047 4,238 23,285 Minority interest 108 395 7,063 7,458 ------------ ------------ ------------ ------------ Net income $ 25,545 $ 28,150 $ - $ 28,150 ============ ============ ============ ============ Net income per share: Basic $ 0.86 $ 0.98 $ - $ 0.98 ============ ============ ============ ============ Diluted $ 0.85 $ 0.97 $ - $ 0.97 ============ ============ ============ ============ Reconciliation of Net income to Adjusted EBITDA: Net income $ 25,545 $ 28,150 $ - $ 28,150 Interest Expense 7,204 6,678 591 7,269 Income tax provision and minority interest 15,499 19,442 11,301 30,743 Depreciation and amortization 471 444 - 444 ------------ ------------ ------------ ------------ Adjusted EBITDA(e) $ 48,719 $ 54,714 $ 11,892 $ 66,606 ------------ ------------ ------------ ------------
(a) GAAP, as restated for change in accounting method. (b) Under a comparable reporting methodology as in 2005 -- Non-GAAP in 2006. (c) Represents the effects of consolidation of those entities in which GBL holds a direct or indirect controlling interest and the consolidation of entities under FIN 46R and EITF 04-5 for the first quarter of 2006. (d) GAAP basis. (e) 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. 21 Total revenues were $123.4 million for the six months ended June 30, 2006 up $2.3 million or 1.9% from total revenues of $121.1 million reported in the prior year's period For the six months ended June 30, 2006, investment advisory fees were $106.4 million, an increase of $0.4 million from the $106.0 million generated for the six months ended June 30, 2005. Further details on our six month ended June 30, 2006 investment advisory revenues included the following: Revenues from our closed-end fund increased 19.2% to $21.0 million for the six months ended June 30, 2006, up from $17.6 million in the prior year's period. The increase was due to increased average AUM within our closed-end funds from $4.5 billion for the first six months of 2005 to $5.3 billion for the first half of 2006, largely due to the launch of Gabelli Global Gold, Natural Resources & Income Trust (GGN) as of March 29, 2005. Open-end mutual funds revenues were $40.3 million, up 1.7% from the $39.6 million in the 2005 period. Institutional and high net worth separate accounts revenues decreased 5.4% to $40.1 million from the $42.4 million reported in 2005. Investment Partnership revenues were $8.1 million, an increase of 27.1%, as higher incentive fees were slightly offset by lower management fee revenues. Commission revenues from our institutional research affiliate, Gabelli & Company, Inc., were $6.2 million for the six months ended June 30, 2006, up 22.5% from the prior year's comparable period amount of $5.0 million. Mutual fund distribution fees and other income were $10.8 million for the six months ended June 30, 2006, 7.4% higher than the $10.0 million reported in the 2005 period. The increase is due to higher distribution fees of $10.2 million for six months ended June 30, 2006 versus $9.4 million for prior year period, principally as a result of higher average assets under management. Operating margin, before management fee, decreased to 25.6% for the six months ended June 30, 2006 from 36.5% in the prior year's period primarily due to a reserve against earnings taken in the second quarter 2006 as previously described. Excluding the reserve, the operating margin for the six month period ended June 30, 2006 was 35.3%. Expenses not directly tied to revenues were $37.4 million, an increase of 42.6% from the $26.3 million recorded in the period ended June 30, 2005. The increase was primarily due to a reserve against earnings of approximately $12 million in the second quarter 2006 relating to the potential resolution of a regulatory inquiry. Excluding the reserve, expenses not directly tied to revenues were $26 million. Total other income, net of interest expense, rose to $32.6 million for the six months ended June 30, 2006 from $1.4 million in the 2005 period. Approximately $14.5 million of the increase represents the effects of consolidation of entities in which GAMCO holds a direct or indirect controlling interest under FIN46R and EITF 04-5 during 2006 for the first quarter of 2006. In addition, there were higher net gains of $13.6 million from investments as well as higher interest income of $4.9 million due to higher interest rates, as compared to the prior year period. In 2005, we recorded gains from our investment in optionsXpress (Nasdaq: OXPS) of: $0.03 per fully diluted share in the first quarter, $0.00 per fully diluted share in the second quarter, $0.05 per fully diluted share in the third quarter, and $0.01 per fully diluted share in the fourth quarter. For 2006, we recorded $0.01 per fully diluted share in the first quarter and six months ended June 30, 2006. Minority interest had an increase of $7.1 million as a result of the consolidation of entities in which GAMCO holds a direct or indirect controlling interest under FIN46R and EITF 04-5 during 2006. For the six months ended June 30, 2006, interest expense increased $0.1 million to $7.3 million. Management fee was $5.3 million for the six months ended June 30, 2006, versus $4.6 million for the comparable 2005 period. The increase is due to higher operating income before management fee, income taxes, and minority interest of $64.2 million for the six months ended June 30, 2006, as compared to $45.6 million for the comparable 2005 period. The effective tax rate for the six months ended June 30, 2006, excluding the reserve, remained at 37.5%, the same as the prior year period. 22 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: Six Months Ended June 30, ------------------------- 2005 2006 ----------- ----------- (in thousands) Cash flows used in: Operating activities $ (44,805) $ (27,097) Investing activities (4,960) (1,767) Financing activities (15,874) (26,429) ----------- ----------- Decrease (65,639) (55,293) Net increase in cash from investment partnerships and offshore funds consolidated under FIN 46R and EITF 04-5 - 1,550 Effect of exchange rates on cash and cash equivalents (44) (64) Cash and cash equivalents at beginning of period 257,096 170,659 ----------- ----------- Cash and cash equivalents at end of period $ 191,413 $ 116,852 =========== =========== 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 2005, our Board of Directors authorized a plan to file a "shelf" registration statement on Form S-3, which was filed on June 13, 2005. Our shelf registration, which was declared effective on May 8, 2006, provides us opportunistic flexibility to sell any combination of senior and subordinate debt securities, convertible debt securities, equity securities (including common and preferred stock), and other securities up to a total amount of $400 million. This authorization is in addition to the remaining $120 million available under our "shelf" registration filed in 2001. At June 30, 2006, we had total cash and cash equivalents of $116.9 million, a decrease of $53.8 million from December 31, 2005. This decrease is primarily due to an increase in the purchase of securities during the six month period ended June 30, 2006. Gabelli has established a collateral account, consisting of cash and cash equivalents and investments in securities totaling $52.8 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. Additionally, the principal of the convertible note was reduced to $50 million and limitations on the issuance of additional debt were removed. The expiration date of the related letter of credit was extended to May 22, 2007. Cash and cash equivalents and investments in securities held in the collateral account are restricted from other uses until the date of expiration and cash and cash equivalents and investments in securities held by investment partnerships and offshore funds consolidated under FIN 46R and EITF 04-5 are also restricted from use for general operating purposes. Total debt at June 30, 2006 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. Cash used in operating activities was $27.1 million in the first six months of 2006 principally resulting from $450.8 million in purchases of investments in securities, a $27.0 million increase in receivable from brokers, $10.1 million in purchases of investments in partnerships and affiliates and $39.5 million from the net effects of the FIN 46R and EITF 04-5 consolidation. This was partially offset by $28.2 million in net income, proceeds from sales of investments in securities of $451.0 million, $7.9 million in distributions from 23 investments in partnerships and affiliates and an increase in compensation payable of $11.0 million. Excluding the net effects of the consolidation of investment partnerships and offshore funds, our cash provided by operating activities was $9.4 million. Cash used in investing activities, related to purchases and sales of available for sale securities, was $1.8 million in the first six months of 2006. Cash used in financing activities in the first six months of 2006 was $26.4 million. The decrease in cash principally resulted from the repurchase of our class A common stock under the Stock Repurchase Program of $52.3 million partially offset by a $30.3 million in contributions by partners into our investment partnerships. Excluding the net effects of the consolidation of investment partnerships and offshore funds, our net cash used in financing activities was $0.8 million. Cash used in operating activities was $44.8 million in the first six months of 2005 principally resulting from $535.1 million in purchases of investments in securities, a $18.7 million increase in receivable from brokers and a $6.7 million decrease in income taxes payable partially offset by $473.4 million in proceeds from sales of investments in securities, $25.5 million in net income, a $10.3 million decrease in investment advisory fees receivable and a $3.8 million increase in compensation payable. Cash used in investing activities, related to investments in and purchases and sales of available for sale securities, was $5.0 million in the first six months of 2005. Cash used in financing activities in the first six months of 2005 was $15.9 million. The decrease in cash principally resulted from the repurchase of $50 million of our $100 million 5% convertible note on April 1, 2005, $18.6 million in dividends paid and $17.8 million from 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 $0.6 million received from the exercise of non-qualified stock options that further generated cash tax savings of $0.2 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 the greater of $250,000 or 2% of the aggregate debt items in the reserve formula for those broker-dealers subject to Rule 15c3-3. The requirement was $250,000 at June 30, 2006. At June 30, 2006, Gabelli & Company had net capital, as defined, of approximately $15.7 million, exceeding the regulatory requirement by approximately $15.5 million. Regulatory net capital requirements increase when Gabelli & Company is involved in underwriting activities. 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. 24 With respect to our proprietary investment activities, included in investments in securities of $447.5 million at June 30, 2006 were investments in Treasury Bills and Notes of $253.8 million, in mutual funds, largely invested in equity products, of $109.1 million, a selection of common and preferred stocks totaling $65.7 million and other investments of approximately $18.9 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 $65.7 million invested in common and preferred stocks at June 30, 2006, $22.1 million is related to our investment in Westwood Holdings Group Inc. and $1.2 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 $89.4 million at June 30, 2006, 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. Since over 95% of our AUM are invested in equities, the primary risk factor affecting our revenues and financial results is the general market level of stock prices and interest rates. Our financial results are also subject to the gain or loss of clients. In addition, returns from our proprietary investment portfolio are also exposed to interest rate and equity market risk. Should negative market conditions that impact our AUM or proprietary investment portfolio occur, we could report lower operating results in the second half of 2006 than would otherwise be the case. We also note that second half 2006 earnings will be measured against the backdrop of strong financial results in the second half of 2005. Recent Accounting Developments In February 2006, the FASB issued FASB Statement No. 155, "Accounting for Certain Hybrid Financial Instruments - an amendment of FASB Statement No. 133 and 140," that amends FASB Statements No. 133 "Accounting for Derivative Instruments and Hedging Activities," and No. 140 "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." The Statement permits fair value remeasurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation; clarifies which interest-only strips and principle-only strips are not subject to the requirements of Statement 133; establishes a requirement to evaluate interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation; Clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives; amends Statement 140 to eliminate the prohibition on a qualifying special-purpose entity from holding a derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument. Statement 155 does not permit prior period restatement. The Statement is effective for all financial instruments acquired or issued after the beginning of an entity's second fiscal year that begins after September 15, 2006. The Company plans to adopt this Statement on January 1, 2007. The adoption is not expected to have a material impact on the Company's future consolidated financial statements. In March 2006, the FASB issued FASB Statement No. 156, "Accounting for Servicing of Financial Assets," which amends FASB Statements No. 140 "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." The Statement permits an entity to choose either the amortization method or fair value measurement method for each class of separately recognized servicing assets and servicing liabilities. The Statement is effective as of the beginning of an entity's second fiscal year that begins after September 15, 2006. The Company plans to adopt this Statement on January 1, 2007. The adoption is not expected to have a material impact on the Company's future consolidated financial statements. In April 2006, the FASB issued FSP FIN 46R-6 "Determining the Variability to be Considered in Applying FASB Interpretation No. 46(R)." The FSP addresses 25 certain major implementation issues related to FIN 46R, specifically how a reporting enterprise should determine the variability to be considered in applying FIN 46R. The FSP is effective as of the beginning of the second day of the second reporting period beginning after June 15, 2006. The Company plans to adopt this Statement on January 1, 2007. The adoption is not expected to have a material impact on the Company's future consolidated financial statements. In June 2006, the FASB issued Interpretation No. 48, "Accounting for Uncertainty in Income Taxes" which is an interpretation of FASB Statement No. 109, "Accounting for Income Taxes". This Interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expect to be taken in a tax return. This Interpretation is effective for fiscal years beginning after December 15, 2006. The Company plans to adopt this Statement on January 1, 2007. The adoption is not expected to have a material impact on the Company's future consolidated financial statements. 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 Interim 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. 26 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 June 30, 2006:
(c) Total Number of (d) Maximum (a) Total (b) Average Shares Repurchased as Number of Shares Number of Price Paid Per Part of Publicly That May Yet Be Shares Share, net of Announced Plans or Purchased Under the Period Repurchased Commissions Programs Plans or Programs - ------------------------------------------------------------------------------------------------------ 4/01/06 - 4/30/06 - - - 804,261 5/01/06 - 5/31/06 413,400 $37.04 413,400 790,861 6/01/06 - 6/30/06 76,000 $34.11 76,000 714,861 ---------- ---------- Totals 489,400 489,400 ========== ==========
In May 2006, the board of directors approved an increase of 400,000 shares of GBL available to be repurchased under our stock repurchase program. Our stock repurchase programs are not subject to expiration dates. Item 4. Submission of Matters to a Vote of Security Holders The Annual Meeting of Stockholders of GAMCO Investors, Inc. was held in Greenwich, Connecticut on May 8, 2006. At that meeting, the stockholders considered and acted upon the following matter: THE ELECTION OF DIRECTORS. The stockholders elected the following individuals to serve as directors until the 2007 annual meeting of stockholders and until their respective successors are duly elected and qualified. All of the nominees were elected with the following votes cast: Nominees For Withheld -------- --- --------- Edwin L. Artzt 232,832,610 1,385,513 Richard L. Bready 234,149,101 69,022 John C. Ferrara 234,142,210 75,913 John D. Gabelli 232,536,392 1,681,731 Mario J. Gabelli 232,552,342 1,665,781 Karl Otto Pohl 232,599,849 1,618,274 Robert S. Prather, Jr. 234,047,756 170,367 Vincent S. Tese 234,046,830 171,293 27 Item 6. (a) Exhibits 4.1 Fourth Amendment to the Note Purchase Agreement dated as of June 30, 2006. (Incorporated by reference to Exhibit 99.1 of the Company's Report on Form 8-K dated June 30, 2006.) 4.2 $50 Million Convertible Promissory Note. (Incorporated by reference to Exhibit 99.2 of the Company's Report on Form 8-K dated June 30, 2006.) 10.1 Exchange and Standstill Agreement dated May 31, 2006. 10.2 Registration Rights Agreement dated May 31, 2006. 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 Interim 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 Interim Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 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) August 7, 2006 /s/ John C. Ferrara - ---------------- ---------------------------------- Date John C. Ferrara Interim Chief Financial Officer 28 EX-10.1 2 a5204892ex101.txt GAMCO INVESTORS, INC. EX. 10.1 EXCHANGE AND STANDSTILL AGREEMENT WHEREAS, Mario J. Gabelli ("Gabelli"), Frederick J. Mancheski ("Mancheski"), David M. Perlmutter ("Perlmutter"), and GGCP, Inc., a New York corporation ("GGCP"), are parties to that certain Settlement and Stock Purchase Agreement dated May 31, 2006 (the "Settlement and Purchase Agreement"); and WHEREAS, in accordance with the terms and conditions of the Settlement and Purchase Agreement, the parties thereto are executing and delivering, or are causing to be executed and delivered, among other things, the Additional Settlement Documents and the Stipulation of Settlement (as those terms are defined in the Settlement and Purchase Agreement), among others; and WHEREAS, as a result of the transactions contemplated by the Settlement and Purchase Agreement, Mancheski will receive 2,071,635 shares of the Class B Common Stock, $.001 par value (the "Class B Common Stock"), of GAMCO Investors, Inc., a New York corporation (the "Company"), and he has requested that the Company exchange those shares for the same number of shares of Class A Common Stock, $.001 par value (the "Class A Common Stock" and together with the Class B Common Stock, the "Common Stock"), of the Company; and WHEREAS, the Company has agreed to the proposed exchange and the registration of the newly issued shares provided that Mancheski agrees to certain limitations on his Class A Common Stock; NOW, THEREFORE, this Exchange and Standstill Agreement (the "Agreement") is made this 31st day of May, 2006, by and between Mancheski and the Company. I. REPRESENTATIONS AND WARRANTIES 1. Representations and Warranties of Mancheski. Mancheski represents and warrants to the Company as follows: a. He is competent and has all requisite power and authority to execute and deliver this Agreement and to consummate the transactions contemplated hereby. b. This Agreement has been duly and validly executed and delivered by Mancheski and, assuming due and valid execution and delivery by the Company, constitutes a legal, valid and binding agreement of Mancheski, enforceable against him in accordance with its terms, subject as to enforceability to applicable bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and similar laws affecting creditors' rights and remedies generally and to general principles of equity (regardless of whether enforcement is sought in a proceeding at law or in equity). The performance of the terms of this Agreement does not conflict with, constitute a violation of, or require any notice or consent under, any certificate or articles of incorporation, limited partnership agreement, trust agreement, bylaws or any other agreement or instrument to which Mancheski is a party or by which he is bound, and does not require any consent, approval or notice under any provision of any judgment, order, decree, statute, law, rule or regulation applicable to Mancheski or Mancheski's shares of Common Stock, except as may be required by federal and state securities laws. c. There are no other persons who, by reason of their personal, business, professional or other arrangement, relationship or affiliation with Mancheski, whether written or oral and whether existing as of the date hereof or in the future, have agreed, explicitly or implicitly, to take any action on behalf of or in lieu of Mancheski that would otherwise be prohibited by this Agreement. d. As of the date hereof, Mancheski expects to become the beneficial owner 2,071,635 shares of Class B Common Stock (the "Class B Shares"), free and clear of all liens and encumbrances, pursuant to the Settlement and Purchase Agreement and no other person will have any beneficial ownership interest in the Class B Shares, and no affiliate or associate of Mancheski will have any rights, options or agreements to acquire or vote any other shares of Common Stock or other securities of the Company. e. Any shares acquired hereunder by Mancheski are being acquired solely for investment purposes and may not be resold or transferred except as permitted hereunder and in accordance with applicable securities laws. 2. Representations and Warrants of the Company. The Company represents and warrants to Mancheski as follows: a. The Company has been duly organized and is validly existing and in good standing, under the laws of the State of StateplaceNew York, and has the requisite corporate power and authority to execute and deliver this Agreement and to consummate the transactions contemplated hereby. b. This Agreement has been duly and validly executed and delivered by the Company and, assuming due and valid execution and delivery by Mancheski, constitutes a legal, valid and binding agreement of the Company, enforceable against the Company in accordance with its terms, subject as to enforceability to applicable bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and similar laws affecting creditors' rights and remedies generally and to general principles of equity (regardless of whether enforcement is sought in a proceeding at law or in equity). The performance of the terms of this Agreement does not conflict with, constitute a violation of, or require any notice or consent under, the certificate of incorporation or bylaws of the Company or any agreement or instrument to which the Company is a party or by which the Company is bound, and does not require any consent, approval or notice under any provision of any judgment, order, decree, statute, law, rule or regulation applicable to the Company, except as may be required by federal and state securities laws. 2 II. THE SHARE EXCHANGE 1. The Exchange. Mancheski hereby agrees to exchange his Class B Shares solely for 2,071,635 shares of Class A Common Stock (the "Mancheski Shares"). The Company hereby agrees that no later than 30 days after the Closing Date (as defined in the Settlement and Purchase Agreement), it will issue to Mancheski, in exchange for the Class B Shares, solely the Mancheski Shares and deliver one or more certificates as reasonably requested by Mancheski representing the Mancheski Shares. III. STANDSTILL AND VOTING AGREEMENT 1. Standstill Provisions. Mancheski agrees that the "Standstill Period" shall commence on the date of this Agreement and shall terminate on the tenth anniversary hereof. a. Mancheski agrees that, during the Standstill Period, without the prior written consent of the Board, he shall not, directly or indirectly: (i) acquire, announce an intention to acquire, offer or propose to acquire, or agree to acquire, directly or indirectly, by purchase or otherwise, beneficial ownership of (A) any Common Stock or direct or indirect rights or options to acquire (through purchase, exchange, conversion or otherwise) any Common Stock, excepting solely Common Stock or other Voting Securities (I) received as a result of a stock dividend, stock distribution or stock split, (II) issued by the Company to Mancheski in connection with any reorganization or recapitalization of the Company or (III) issued by the Company in connection with any rights offering; (ii) solicit proxies (or written consents) or assist or participate in any other way, directly or indirectly, in any solicitation of proxies (or written consents), or otherwise become a "participant" in a "solicitation," as such terms are defined in Instruction 3 of Item 4 of Schedule 14A and Rule 14a-1 of Regulation 14A, respectively, under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), in opposition to the recommendation or proposal of the Board, or recommend or request or induce or attempt to induce any other person to take any such actions, or seek to advise, encourage or influence any other person with respect to the voting of (or the execution of a written consent in respect of) the Common Stock or other Voting Securities, or execute any written consent in lieu of a meeting of the holders of the Common Stock or other Voting Securities or grant a proxy with respect to the voting of the Common Stock or other Voting Securities to any person other than to the Board or persons appointed as proxies by the Board or Gabelli or his designee pursuant to Section III.2 hereof; 3 (iii) initiate, propose or submit one or more stockholder proposals or induce or attempt to induce any other person to initiate any stockholder proposal; (iv) seek to call or to request the call of, a special meeting of the Company's stockholders, or make a request for a list of the Company's stockholders; (v) form, join or in any way participate in a "group" (within the meaning of Section 13(d)(3) of the Exchange Act) for the purpose of acquiring, holding, voting or disposing of any securities of the Company; (vi) vote for any nominee or nominees for election to the Board, other than those nominated or supported by the Board, or consent to become a nominee for election as a member of the Board unless nominated by the Board; (vii) seek, alone or in concert with others, to place a representative or other affiliate or nominee on the Board or seek the removal of any member of the Board or a change in the size or composition of the Board; (viii) deposit any Common Stock or other Voting Securities in a voting trust or enter into any other arrangement or agreement with respect to the voting thereof except pursuant to Section III.2 hereof; (ix) acquire or agree, offer, seek or propose to acquire, or cause to be acquired, ownership (including beneficial ownership) of any of the assets or business of the Company or any rights or options to acquire any such assets or business from any person; (x) seek, propose, or make any statement with respect to, or solicit, negotiate with, or provide any information to any person with respect to, a merger, consolidation, acquisition of control or other business combination, tender or exchange offer, purchase, sale or transfer of assets or securities, dissolution, liquidation, reorganization, recapitalization, dividend, share repurchase or similar transaction involving the Company, its subsidiaries or its business, whether or not any such transaction involves a change of control of the Company; (xi) take any action, alone or in concert with any other person, advise, finance, assist or participate in or encourage any person to take any action which is prohibited to be taken by Mancheski or any of his affiliates or associates pursuant to this Agreement, or make any investment in or enter into any arrangement with, any other person that engages, or offers or proposes to engage in any of the foregoing; (xii) disclose publicly, or privately in a manner that could reasonably be expected to become public, any intention, plan or arrangement inconsistent with the foregoing; 4 (xiii) make any request or demand to inspect the records of the Company or to obtain a shareholders list for the Company or encourage any shareholder or other persons to do so; (xiv) commence, encourage, or support any derivative action in the name of the Company or any class action against the Company or any of its officers or directors; or (xv) take any action challenging the validity or enforceability of any provisions of this Section III. 2. Voting. a. Mancheski agrees that, until the expiration of the Standstill Period, provided that he is a record or beneficial owner of any Common Stock or other Voting Securities of the Company, he will be present, in person or represented by proxy, at all stockholder meetings of the Company so that all Common Stock or other Voting Securities beneficially owned by him and his affiliates and associates may be counted for the purpose of determining the presence of a quorum at such meetings. b. Mancheski agrees that, until the expiration of the Standstill Period, provided that he is a record or beneficial owner of any Common Stock or other Voting Securities of the Company, he will vote or cause to be voted, or consent or cause a consent to be given with respect to, all shares of Common Stock or other Voting Securities beneficially owned by him and his affiliates and associates as follows: (i) with respect to the election of directors at any meeting of stockholders or any adjournments or postponements thereof, in favor of the nominees for directors recommended by the Board or its nominating committee and (ii) with respect to any other matter requiring a shareholder vote, in accordance with the recommendation of the Board; provided that in lieu of voting his shares in the foregoing manner, Mancheski may deliver a proxy to Gabelli or his designee to vote at the next scheduled meeting of shareholders of the Company or any adjournment thereof. c. Mancheski further agrees to take all action reasonably necessary to carry out the intention of this Section III.2, including without limitation, delivering to the Company upon its request executed proxies naming the proxies appointed by the Board to vote all shares of Common Stock or other Voting Securities beneficially owned by Mancheski and/or his affiliates as of the record dates of the Annual Meeting or any other meeting of the Company's stockholders, as applicable. The Company shall deliver a copy of such request to each of Mancheski and his counsel at their respective addresses set forth in Section VI.4 no later than 30 days before the meeting, and if executed proxies are not received by the date that is 10 days before any such meeting, without further action on the part of the parties hereto, Mancheski shall be deemed to have appointed Gabelli or his designee as Mancheski's proxy and attorney in-fact with respect to all matters brought before such meeting to be voted in accordance with this Agreement. 5 IV. TRANSFER LIMITATIONS 1. Transfer Limitations. From the date of this Agreement through the first day of the Lockup Period, without the Company's prior written consent, Mancheski shall not, directly or indirectly, sell, pledge, encumber, transfer, or otherwise dispose of, or agree to sell, pledge, encumber, transfer or otherwise dispose of, any interest in his shares of Common Stock, including Mancheski Shares, or any other Common Stock or other Voting Securities (a "Disposition"); provided that Mancheski may effect a Disposition to any of the persons listed below who executes and delivers a joinder agreement in the form annexed hereto as Exhibit A: a. to any corporation, partnership or other entity wholly-owned by Mancheski; b. to any trust the sole beneficiaries of which are family members, or any charitable trust or charitable foundation established by Mancheski; c. to any not for profit entity; d. as gifts or as bequests; or e. to the Company. In addition, Mancheski may pledge all or part of the Mancheski Shares as security for a loan from a bank or other financial institution that has entered into an Agreement with the Company containing terms and conditions substantially equivalent to those in this Agreement. 2. The Lockup Period. The Lockup Period shall commence on the date that all of Mancheski Shares become registered with the Securities and Exchange Commission (the "SEC") for sale in the public markets and shall end on the second anniversary of that date. 3. The Lockup. During the Lockup Period, Mancheski shall not make any Disposition of Mancheski Shares except that: (i) on the first day of the Lockup Period, one-twenty fourth (1/24th) of Mancheski Shares, including any shares transferred pursuant to Section 1 above, shall be freed from the foregoing restriction and may thereafter be sold in the public markets; (ii) on the same day of each month thereafter, the same amount of Mancheski Shares shall also be freed from the foregoing restrictions; and (iii) at all times during the Lockup Period, Mancheski shall be permitted to make the same transfers as set forth in Section 1 above. If during the Lockup Period (i) the Company suspends effectiveness of the Registration Statement (as defined in the Registration Rights Agreement), pursuant to Section 5(a) of the Registration Rights Agreement and (ii) Mancheski is ineligible under Rule 144 to sell the maximum number of Shares permitted by this provision, then Mancheski may, once the Registration Statement has again become effective, immediately sell in the public markets the number of Mancheski Shares equal to the number of Mancheski Shares that he would have been permitted to sell pursuant to this Section 3 during the period of the suspension. All Shares held by Mancheski or his transferee shall remain subject to all other provisions of this Agreement, unless sold in the public markets in accordance with this Agreement. 6 4. Not Applicable to Existing Shares. The restrictions set forth in this Article IV shall not apply to the 19,815 shares of Class A Common Stock owned by Mancheski as of dateMonth4Day17Year2006April 17, 2006. V. ADDITIONAL AGREEMENTS 1. Press Releases; Public Statements. Commencing with the date hereof, neither the Company nor Mancheski nor any of their respective affiliates or representatives shall issue any other press release or other publicly available document with respect to the subject matter of this Agreement, the Settlement and Purchase Agreement, the Additional Settlement Documents and the Stipulation of Settlement. The Company shall make all filings with the SEC appropriate in connection with the execution of this Agreement, including a Current Report on Form 8-K. Mancheski shall not during the Standstill Period issue any press release, grant any interviews with the press or any other person or otherwise make any public statements concerning the Company, except to the extent required by statute or regulation, unless the Company shall have agreed in form and substance to the contents thereof prior to such issuance. 2. Mutual Releases. In consideration of the provisions of this Agreement: a. Mancheski, for himself and on behalf of his heirs, representatives, and assigns (collectively, "Releasor"), hereby remises, covenants not to sue, forever discharges, and absolutely and irrevocably releases, the Company, and each of its past and present affiliates, subsidiaries, representatives, employees, attorneys, directors, officers, and assigns (collectively, the "Releasees"), from any and all claims whatsoever of every kind and nature, including without limitation, any and all claims, rights, demands, suits, causes of action, losses, damages, fees, costs, obligations, amounts, liabilities and expenses, known or unknown, suspected or unsuspected, fixed or contingent, direct or indirect that Releasor has, had, or may have had against Releasees, from the beginning of time to the Date of this Agreement. NOTHING IN THIS RELEASE SHALL RELEASE THE RELEASEES FROM THEIR OBLIGATIONS PURSUANT TO THIS AGREEMENT, THE ADDITIONAL SETTLEMENT DOCUMENTS OR THE STIPULATION OF SETTLEMENT. IN THE EVENT OF THE TERMINATION OF THE SETTLEMENT AND PURCHASE AGREEMENT IN ACCORDANCE WITH ITS TERMS, THIS RELEASE SHALL FORTHWITH BECOME VOID AND SHALL BE OF NO EFFECT WHATSOEVER. 7 b. The Company, for itself and on behalf of each of its past and present affiliates, subsidiaries, representatives, employees, directors, officers, and assigns (collectively, "Releasor"), hereby remises, covenants not to sue, forever discharges, and absolutely and irrevocably releases Mancheski and his heirs, representatives, and assigns (collectively, the "Releasees"), from any and all claims whatsoever of every kind and nature, including without limitation, any and all claims, rights, demands, suits, causes of action, losses, damages, fees, costs, obligations, amounts, liabilities and expenses, known or unknown, suspected or unsuspected, fixed or contingent, direct or indirect that Releasor has, had, or may have had against Releasees, from the beginning of time to the Date of this Agreement. NOTHING IN THIS RELEASE SHALL RELEASE THE RELEASEES FROM THEIR OBLIGATIONS PURSUANT TO THIS AGREEMENT, THE ADDITIONAL SETTLEMENT DOCUMENTS OR THE STIPULATION OF SETTLEMENT. IN THE EVENT OF THE TERMINATION OF THE SETTLEMENT AND PURCHASE AGREEMENT IN ACCORDANCE WITH ITS TERMS, THIS RELEASE SHALL FORTHWITH BECOME VOID AND SHALL BE OF NO EFFECT WHATSOEVER. 3. Negative Remarks. a. During the Standstill Period, Mancheski shall not, and shall cause his agents or representatives not to, directly or indirectly, in any capacity or manner, make, express, transmit, speak, write, verbalize or otherwise communicate in any way (or cause, further, assist, solicit, encourage, support or participate in any of the foregoing), any remark, comment, message, information, declaration, communication or other statement of any kind, whether oral, in writing, electronically transferred or otherwise, that might reasonably be construed to be derogatory or critical of, or negative toward, Gabelli, the Company or any of its directors, officers, Affiliates, subsidiaries, employees, agents or representatives in their capacities thereof (collectively, the "GBL Parties"), or to malign, harm, disparage, defame or damage the reputation or good name of Gabelli, the Company, its business or those of any of the GBL Parties, and/or that reveals, discloses, incorporates, is based upon, discusses, includes or otherwise involves any Confidential Information (as hereinafter defined). b. During the Standstill Period, the Company shall not, and shall cause its agents or representatives not to, directly or indirectly, in any capacity or manner, make, express, transmit, speak, write, verbalize or otherwise communicate in any way (or cause, further, assist, solicit, encourage, support or participate in any of the foregoing), any remark, comment, message, information, declaration, communication or other statement of any kind, whether oral, in writing, electronically transferred or otherwise, that might reasonably be construed to be derogatory or critical of, or negative toward, Mancheski, or any of Mancheski's Affiliates, employees, agents or representatives in their capacities thereof (collectively the "Mancheski Parties"), or to malign, harm, disparage, defame or damage the reputation or good name of any of the Mancheski Parties. 8 c. The provisions of this Section 3 shall not apply to the individual parties' confidential communications with their spouses, to any of the parties' confidential communications with their legal and financial advisors, or to any "permitted communications" pursuant to Section V.7 of this Agreement. d. In the event of a breach of Section V.1 or this Section V.3 by any party, or any of its Affiliates, officers, directors, employees, agents or representatives, which breach is determined to be material by the Court, the Court may award such relief as it determines appropriate, including relieving the other parties from any further obligation to comply with Sections V.1 and/or V.3 of this Agreement and holding the breaching party or parties in contempt of Court, and may assess any and all contempt remedies deemed appropriate by the Court. Nothing in this Section V.3(d) is intended or may be construed to limit or circumscribe any other or different remedies that may also be available to the parties for breach of the specified sections or any other provisions of this Agreement. 4. Treatment of Discovery Documents and Information. Nothing in this Agreement shall in any way affect that certain Stipulation and Order of Confidentiality entered on or about October 1, 2004 in the Action (as hereinafter defined), which Stipulation and Order shall remain in full force and effect in accordance with its terms. 5. Specific Performance. The Company and Mancheski acknowledge and agree that in the event of any breach of this Agreement, the non-breaching party would be irreparably harmed and could not be made whole by monetary damages. It is accordingly agreed that the Company and Mancheski, in addition to any other remedy to which they may be entitled at law or in equity, shall be entitled to an injunction or injunctions to prevent breaches of this Agreement and/or to compel specific performance of this Agreement in any action. 6. Schedule 13D/13G. Subject to compliance with the terms of this Agreement, within ten days after the Closing Date (as that term is defined in the Settlement and Purchase Agreement), Mancheski and his affiliates and associates shall file with the SEC a statement on Schedule 13D or 13G, as applicable, a copy of which shall be delivered to the Company at least two business days prior to the filing thereof with the SEC. 7. Permitted Communications. Notwithstanding any of the provisions of this Agreement to the contrary, no provision of this Agreement shall prohibit any party from (a) filing any documents required by the SEC or applicable state securities laws or making any other disclosure required by federal or state securities laws, provided that the content of any document so filed does not violate any of the other terms and conditions of this Agreement unless such content constitutes disclosure required by any securities laws or rules or regulations promulgated from time to time by the SEC, (b) making any filing or disclosure permitted by Section 4.5(b) of the Settlement and Purchase Agreement, (c) responding and testifying as permitted by Section 4.5(c) of the Settlement and Purchase Agreement, (d) enforcing any rights of such party under this Agreement, (e) communicating with actual and potential clients or their representatives about the settlement in a manner consistent with the press release previously issued by GGCP and any public disclosure permitted hereunder, (f) in the case of the Company, issuing any press releases for the purpose of disclosing material information under federal or state securities laws, or (g) in the case of Mancheski, providing this Agreement, the Registration Rights Agreement, and the Settlement and Purchase Agreement to any actual or proposed transferee, provided that any such actual or proposed transferee agrees in writing to maintain the confidentiality of such documents. In the event Mancheski or the Company receives any subpoena or other judicially enforceable written request from any court or government agency of competent jurisdiction concerning Mancheski's interests in the Company, he and the Company shall follow the procedures set forth in the final three sentences of Section 4.5 of the Settlement and Purchase Agreement. 9 8. Compliance by Affiliates and Associates. To the extent Mancheski is bound by any covenant or agreement contained in this Agreement, he shall cause each of his affiliates, associates and assignees to abide by such covenant or agreement as if such affiliate or associate were itself Mancheski and a signatory to this Agreement. 9. Waiver of Conflict of Interest. Mancheski hereby waives any conflict of interest with respect to the hiring by the Company of Morvillo, Abramowitz, Grand, Iason & Silberberg, P.C. or Collier, Halpern, Newberg, Nolletti & Bock, LLP with respect to matters unrelated to the transactions contemplated by this Agreement and unrelated to the action (the "Action") pending in Supreme Court of the State of New York, Westchester County, captioned Frederick J. Mancheski and David M. Perlmutter v. Gabelli Group Capital Partners, Inc. (Index No. 03-18762). 10. Termination. In the event of termination of the Settlement and Purchase Agreement, this Agreement shall immediately terminate and became void as set forth in Section 7.2 of the Settlement and Purchase Agreement. VI. MISCELLANEOUS 1. Entire Agreement. This Agreement, the Registration Rights Agreement and the Stipulation of Settlement constitute the entire understanding of the parties with respect to the subject matter hereof and supersede all previous negotiations, representations, discussions or agreements by the parties hereto concerning the subject matter hereof. 2. Headings. Descriptive headings are for convenience only and shall not control or affect the meaning or construction of any provision of this Agreement. 3. Counterparts. For the convenience of the parties, any number of counterparts of this Agreement may be executed and delivered (including by facsimile transmission) by the parties, and each such executed counterpart (including any counterparts executed and delivered by facsimile transmission) shall be an original instrument. 10 4. Notices. All notices and other communications required or permitted under this Agreement shall be deemed to have been duly given and made when received if in writing and if served either by personal delivery to the party for whom intended (which shall include delivery by Federal Express or similar nationally recognized service) or five business days after being deposited, postage prepaid, certified or registered mail, return receipt requested, in the United States mail bearing the address shown in this Agreement for, or such other address as may be designated in writing hereafter by, such party: if to the Company to: GAMCO Investors, Inc. One Corporate Center Rye, New York 10580 Attention: James E. McKee with a copy, which shall not constitute notice, to: Richard T. Prins Skadden, Arps, Slate, Meagher & Flom L.L.P. 4 Times Square New York, New York 10036 and if to Mancheski as follows: Frederick J. Mancheski 1060 Vegas Valley Drive Las Vegas, Nevada 89109 with a copy, which shall not constitute notice, to: Collier, Halpern, Newberg, Nolletti & Bock, LLP One North Lexington Avenue White Plains, NY 10601 Attention: Philip M. Halpern Any party may change the address to which notices or other communications hereunder are to be delivered by giving the other party notice in the manner herein set forth. 5. Successors and Assigns. This Agreement shall bind the heirs, successors and permitted assigns of the parties, and inure to the benefit of any heir, successor or permitted assign of any of the parties. 6. Governing Law. This Agreement shall be governed by and constructed and enforced in accordance with the internal laws of the State of StateplaceNew York, without giving effect to the conflict of the laws principles thereof. All disputes relating to this agreement shall be brought exclusively before the Supreme Court of New York, PlaceNameplaceWestchester PlaceTypeCounty, for assignment to the Honorable Linda S. Jamieson and all parties and their assigns consent to the personal jurisdiction of that Court and waive trial by jury. 11 7. Certain Terms. As used herein, the following terms shall have the meanings ascribed to them: a. "affiliate" and "associate" shall have the meanings set forth in Rule 12b-2 under the Exchange Act; b. "beneficial owner," "beneficially own," and "beneficial ownership" shall be determined as set forth under Rule 13d-3 under the Exchange Act; provided that a person shall be deemed to be the beneficial owner of all shares of Common Stock or other Voting Securities which such person has the right to acquire pursuant to the exercise of any rights in connection with any securities or any agreement, regardless of when such rights may be exercised and whether they are conditional; c. "Board" shall mean the Board of Directors of the Company; d. "business day" shall mean any day other than any Saturday, Sunday, or day on which commercial banks in CityplaceNew York, StateNew York are authorized or required to be closed; e. "person" shall mean any individual, corporation, association, partnership, joint venture, trust, estate, limited liability company, limited liability partnership or other entity or organization, including a government or political subdivision or any agency or instrumentality thereof; and f. "Voting Securities" shall mean securities of the Company having the power to vote generally for the election of directors of the Company and any securities convertible into, or exercisable or exchangeable for, such securities, and shall include, without limitation, the Common Stock. 8. Survival of Representations. All representations and warranties made by Mancheski and the Company in this Agreement or pursuant hereto shall survive the execution and delivery hereof. 9. Amendments; Waiver. Any provision of this Agreement may be amended or waived if, but only if, such amendment or waiver is in writing and is signed, in the case of an amendment, by each party to this Agreement, or in the case of a waiver, by the party against whom the waiver is to be effective. No failure or delay by any party in exercising any right, power or privilege hereunder shall operate as a waiver thereof nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The rights and remedies herein provided shall be cumulative. 10. Interpretation. Each of the undersigned parties hereby acknowledges that such parties fully negotiated the terms of this Agreement, that each such party had an equal opportunity to influence the drafting of the language contained in this Agreement, that each party has had an opportunity to review the contents of this Agreement with counsel of its choice, and that there shall be no presumption against any such party on the ground that such party was responsible for preparing this Agreement or any part hereof. Whenever the words "include" or "including" are used in this Agreement, they shall be deemed to be followed by the words "without limitation." The words "hereof," "herein" and words of similar import when used in this Agreement shall refer to this Agreement as a whole and not to any particular provision of this Agreement. 12 11. Severability. The provisions of this Agreement shall be deemed severable and the invalidity or unenforceability of any provision shall not affect the validity or enforceability of the other provisions hereof. If any provision of this Agreement, or the application thereof to any person or any circumstance, is invalid or unenforceable, (a) a suitable and equitable provision shall be substituted therefor in order to carry out, so far as may be valid and enforceable, the intent and purpose of such invalid or unenforceable provision and (b) the remainder of this Agreement and the application of such provision to other persons or circumstances shall not be affected by such invalidity or unenforceability, nor shall not be affected by such invalidity or unenforceability, nor shall such invalidity or unenforceability affect the validity or enforceability of such provision, or the application thereof, in any other jurisdiction. 12. No Third Party Beneficiaries. This Agreement shall be binding upon and, except as provided below, inure solely to the benefit of each party hereto and their successors, assigns and transferees, and nothing in this Agreement, express or implied, is intended to confer upon any other person (other than the Company Releasees and Mancheski Releasees as provided in Section V.2) any rights or remedies of any nature whatsoever under or by reason of this Agreement, provided that all parties recognize that, for good and valid consideration, Gabelli and GGCP are third party beneficiaries of this Agreement and either may enforce any of the terms of this Agreement in the event of a breach by Mancheski. 13. Attorneys' Fees. In the event of any dispute or controversy arising out of this Agreement or in connection with the interpretation of any term or condition of this Agreement, the enforcement of this Agreement, damages for breach of any provision hereof, or in the situation where any provision of this Agreement is validly asserted as a defense, the prevailing party shall be entitled to recover costs of suit, including reasonable attorneys' fees actually incurred, from the other party in addition to any other available remedy. 13 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the date first referred to above. GAMCO INVESTORS, INC. By: ------------------------------------- Name: Title: ---------------------------------------- FREDERICK J. MANCHESKI 14 EXHIBIT A JOINDER AGREEMENT JOINDER AGREEMENT dated ________, 200__ by and between GAMCO Investors, Inc., a StateplaceNew York corporation (the "Company"), and ________________ ("Shareholder"). W I T N E S S E T H WHEREAS, pursuant to that certain Exchange and Standstill Agreement dated May 31, 2006 (the "Standstill Agreement") by and between the Company and Frederick J. Mancheski ("Mancheski"), it is a condition to the transfer of shares of capital stock of the Company (the "Shares") to Shareholder that Shareholder become a party to (i) the Standstill Agreement, and (ii) that certain Registration Rights Agreement dated May 31, 2006 (the "Registration Rights Agreement") by and among the Company, Mancheski and David M. Perlmutter. NOW, THEREFORE, in consideration of the premises and of the mutual covenants and agreements of the parties herein contained, the parties hereby agree as follows: Section 1. Joinder. Effective immediately (i) Shareholder is joined as a party to the Standstill Agreement and is subject to, and shall have all of the rights, liabilities and obligations under the following provisions of the Standstill Agreement to the same extent as Mancheski: Article III; Article IV; Article V, Sections 1, 2(a) and (c), 3 to 7 inclusive and 10 only; and Article VI; and (ii) Shareholder is joined as a party to the Registration Rights Agreement and is subject to and shall have all of the rights, liabilities and obligations thereunder to the same extent as Mancheski. Shareholder shall not transfer the Shares except pursuant to Article IV, Sections 2 and 3. Section 2. Governing Law. This Joinder Agreement shall be governed by, and construed in accordance with, the laws of the State of New York, except that body of law relating to choice of laws. Section 3. Successors and Assigns. This Joinder Agreement shall be binding upon the parties hereto and their respective successors and assigns (which become such by operation of law), legal representatives and heirs. Section 4. Modification. Neither this Joinder Agreement nor any provision hereof may be modified, changed, discharged or terminated except by the written agreement of each of the parties hereto. Section 5. Severability. In the event that any one or more of the provisions contained in this Joinder Agreement shall, for any reason, be held to be valid, illegal or unenforceable, such invalidity, illegality or unenforceability shall not affect any other provisions of this Joinder Agreement. Section 6. Injunctive Relief. The parties hereto acknowledge and agree that a remedy at law for any breach or threatened breach of the provisions of this Joinder Agreement would be inadequate and, therefore, agree that each party hereto shall be entitled to injunctive relief in addition to any other available rights and remedies in case of any such breach or threatened breach; provided, however, that nothing contained herein shall be construed as prohibiting any party hereto from pursuing any other rights and remedies available for any such breach or threatened breach. 15 Section 7. Counterparts. This Joinder Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original, but all of which taken together shall constitute one and the same instrument. Section 8. Entire Agreement. This Joinder Agreement, the Standstill Agreement and the Registration Rights Agreement supersede all previous agreements among the parties hereto with respect to the subject matter hereof. Section 9. Notices. Any notice, demand or request required or permitted to be given under the provisions of this Joinder Agreement (i) shall be in writing; (ii) shall be delivered personally, including by means of telecopy (confirmed by a subsequent delivery by courier or mail) or courier, or mailed by registered or certified mail, postage prepaid and return receipt requested; (iii) shall be deemed given on the date of personal delivery or on the date that is five days after the date set forth on the return receipt; and (iv) shall be delivered or mailed as follows or to such other address as any party may from time to time direct: if to the Company to: GAMCO Investors, Inc. One Corporate Center Rye, New York 10580 Attention: James E. McKee with a copy, which shall not constitute notice, to: Richard T. Prins Skadden, Arps, Slate, Meagher & Flom L.L.P. 4 Times Square New York, New York 10036 and if to Shareholder as follows: [name] [address] or at such other address provided by such party in a notice pursuant to the provisions of this Section 9. 16 IN WITNESS WHEREOF, the parties hereto have executed this Joinder Agreement as of the day and year first above written. GAMCO Investors, Inc. By: ------------------------------------- Name: Title: ---------------------------------------- [Shareholder] [Shareholder's Address] 17 EX-10.2 3 a5204892ex102.txt GAMCO INVESTORS, INC. EX. 10.2 REGISTRATION RIGHTS AGREEMENT This REGISTRATION RIGHTS AGREEMENT (this "Agreement") is made and entered into this 31st day of May, 2006, by and between GAMCO Investors, Inc., a StateplaceNew York corporation ("GBL"), and Frederick J. Mancheski and David M. Perlmutter (individually, a "Seller" and collectively, the "Sellers"). RECITALS Mario J. Gabelli ("Gabelli"), GGCP, Inc. ("GGCP") and Sellers are parties to that certain Settlement and Stock Purchase Agreement dated May 31, 2006 (the "Purchase Agreement") pursuant to which Gabelli is acquiring Sellers' ownership interest in GGCP for consideration that includes an aggregate of 2,141,149 shares (the "Class B Shares") of GBL's Class B Common Stock, $.001 par value. GBL and Mancheski, and GBL and Perlmutter, are parties to those certain Exchange and Standstill Agreements, dated May 31, 2006 (the "Exchange and Standstill Agreements"), pursuant to which the Class B Shares are to be exchanged for an aggregate of 2,141,149 shares (the "Class A Shares") of GBL's Class A Common Stock, $.001 par value (the "Class A Common Stock"). GBL, Mancheski, Perlmutter, Gabelli and GGCP are parties to that certain Stipulation and Order of Settlement, dated May 31, 2006 (the "Stipulation of Settlement"). NOW, THEREFORE, in consideration of the premises and the covenants, agreements, representations and warranties set forth herein, and for other good and valuable consideration, the parties agree as follows: 1. Definitions. As used in this Agreement: (a) "Advice" shall mean advice contained in a writing. (b) "Board" shall mean the Board of Directors of GBL. (c) "Commission" shall mean the Securities and Exchange Commission or any other federal agency at the time administering the Securities Act. (d) "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended, or any similar federal statute enacted hereafter, and the rules and regulations of the Commission thereunder, all as the same shall be in effect from time to time. (e) The term "Prospectus" means a prospectus forming a part of the Registration Statement. (f) The terms "register," "registered" and "registration" refer to a registration effected by preparing and filing a registration statement in compliance with the Securities Act and the declaration or ordering of effectiveness of such registration statement by the Commission. (g) "Registrable Securities" shall mean the Class A Shares received by the Sellers in the exchange referred to in the recitals, as well as any securities issued as a dividend or other distribution with respect to, or in exchange or in replacement of, such Class A Shares. (h) "Rule 144" shall mean Rule 144 promulgated under the Securities Act or any similar rule enacted hereafter, as the same shall be in effect from time to time. (i) "Securities Act" shall mean the Securities Act of 1933, as amended, or any similar federal statute enacted hereafter, and the rules and regulations promulgated thereunder, all as the same shall be in effect from time to time. (j) "Transferee" shall have the meaning provided in Section 19 hereof. 2. Registration on Form S-3. GBL, at its sole cost and expense, shall prepare and file with the Commission, within 30 days after the date hereof, a registration statement on Form S-3 pursuant to Rule 415 under the Securities Act, or, in the event that Form S-3 is unavailable to GBL, a registration statement on such other form (in either event, the "Registration Statement"), covering the resale of the Registrable Securities owned by each Seller and/or by each Transferee (as hereinafter defined) of a Seller, and shall use its best efforts: (i) to cause the Registration Statement to become effective as promptly thereafter as possible; and (ii) to maintain the effectiveness of the Registration Statement until the earlier of (i) three years after the effective date of the Registration Statement (plus any extensions of such effectiveness required by Section 5 hereof), or (ii) until each Seller (which term shall not include Transferees) has sold any remaining Registrable Securities (the "Registration Period"), 3. Registration Procedures. In connection with the registration of any Registrable Securities, GBL shall, as expeditiously as possible: (a) Prepare and file with the Commission such pre-effective and post-effective amendments and supplements to the Registration Statement and the prospectus used in connection with the Registration Statement, and/or file such reports under the Exchange Act, as may be necessary to cause the Registration Statement to become effective, to keep the Registration Statement continuously effective during the Registration Period and not misleading, and as may otherwise be required or applicable under, and to comply with the provisions of, the Securities Act with respect to the disposition of all Registrable Securities covered by the Registration Statement during the Registration Period. (b) Furnish to the Sellers such number of copies of the Prospectus, and each amendment or supplement thereto, in conformity with the requirements of the Securities Act, and such other documents as the Sellers may reasonably request in order to facilitate the disposition of Registrable Securities owned by them. 2 (c) Promptly notify the Sellers: (i) when a Prospectus or any Prospectus supplement or post-effective amendment is proposed to be filed and, with respect to any post-effective amendment, when the same has become effective, (ii) of any request by the Commission or any other federal or state governmental authority for amendments or supplements to a Registration Statement or a Prospectus or for additional information, (iii) of the issuance by the Commission of any stop order suspending the effectiveness of a Registration Statement or the initiation of any proceedings for that purpose, (iv) of the receipt by GBL of any notification with respect to the suspension of the qualification or exemption from qualification of any of the Registrable Securities for sale in any jurisdiction, or the initiation or threatening of any proceeding for such purpose, and (v) of the occurrence of any event or circumstance that makes any statement made in the Registration Statement or Prospectus or any document incorporated or deemed to be incorporated therein by reference untrue in any material respect or that requires the making of any changes in the Registration Statement, Prospectus or documents so that, in the case of the Registration Statement and any amendment or supplement thereto, it will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading, and that in the case of the Prospectus, it will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. (d) Make every reasonable effort to avoid the issuance of, or, if issued, obtain the withdrawal of, any order suspending the effectiveness of a Registration Statement, or the lifting of any suspension of the qualification (or exemption from qualification) of any of the Registrable Securities for sale in any jurisdiction, at the earliest practicable moment. (e) If requested by the Sellers with respect to not less than 50% of the Registrable Securities, (i) promptly incorporate in a Prospectus supplement or post-effective amendment such information as such holders reasonably request be included therein regarding such holders or the plan of distribution of the Registrable Securities and (ii) make all required filings of the Prospectus supplement or such post-effective amendment as soon as practicable after GBL has received notification of such matters to be incorporated in such Prospectus supplement or post-effective amendment; provided, however, that GBL shall not be required to take any action pursuant to this Section 3(e) that would, in the opinion of counsel to GBL, violate applicable law. (f) Upon the occurrence of any event contemplated by Section 3(c), as promptly as practicable, prepare and deliver to the Sellers any required supplement or amendment, including a post-effective amendment, to the Registration Statement or a supplement to the Prospectus or any document incorporated or deemed to be incorporated therein by reference, and file any other required document, including such reports as may be required to be filed under the Exchange Act, so that, as thereafter delivered, the Prospectus will not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. (g) Use its best efforts to cause all Registrable Securities the resale of which is registered under cover of the Registration Statement to be listed on the New York Stock Exchange or such other securities exchange or automated quotation system, if any, as is then the principal securities exchange or automated quotation system on which the GBL Class A Common Stock is then listed. 3 (h) Use its best efforts to cause all Registrable Securities registered by the Registration Statement to be registered or qualified under the securities or "blue sky" laws of Nevada, Connecticut, New York and such other states as the Sellers shall reasonably request; provided, however, that GBL shall not be required to qualify generally to do business in any jurisdiction where it is not then so qualified or to take any action that would subject it to general service of process in any such jurisdiction where it is not then so subject or to subject itself to any material tax in any such jurisdiction where it is not then so subject. (i) Cooperate with the Sellers to facilitate the timely preparation and delivery of certificates representing the Registrable Securities to be sold pursuant to the Registration Statement free of any restrictive legends and in such denominations and registered in such names as the Sellers may reasonably request a reasonable period of time prior to sales of the Registrable Securities pursuant to the Registration Statement. (j) Deliver to the Sellers, promptly upon the issuance thereof by the Commission, written evidence of the registration of the Registrable Securities. 4. Obligation to Furnish Information. It shall be a condition precedent to the obligations of GBL to take any action pursuant to this Agreement with respect to the Registrable Shares of a Seller that such Seller or any transferee of such Seller shall have furnished to GBL such information regarding it, the Registrable Securities held by it, and the intended method of disposition of such Registrable Securities as GBL shall reasonably request and as shall be required in connection with the action to be taken by GBL, and shall advise GBL promptly in the event of any material change in the information previously provided. 5. Delay or Suspension of Registration Statement. (a) If there is material non-public information regarding GBL that the Board reasonably determines not to be in GBL's best interest to disclose and that GBL is not otherwise required to disclose, GBL may (x) postpone or suspend filing of the Registration Statement for a period not to exceed 90 consecutive days or (y) postpone or suspend effectiveness of a Registration Statement for a period not to exceed 90 consecutive days; provided that GBL may not postpone or suspend effectiveness of a registration statement under this Section 5(a) for more than 120 days in the aggregate during any consecutive 12-month period; and provided, further, that no such postponement or suspension shall be permitted for consecutive 90 day periods arising out of the same set of facts, circumstances or transactions except that, notwithstanding the foregoing, GBL may suspend the Registration Statement for longer periods as to a Seller if such Seller is eligible to sell his Shares under Rule 144 in the full amounts permitted by the Exchange and Standstill Agreement between such Seller and GBL. (b) Upon receipt of any notice from GBL to the Sellers of the happening of any event of the kind described in Section 5(a), each Seller shall forthwith discontinue disposition of Registrable Securities under the Registration Statement until such Seller's receipt of copies of a supplemented or amended Prospectus contemplated by Section 3(f), or until it has received an Advice from GBL that the use of the Prospectus may be resumed, and has received copies of any additional or supplemental filings that are incorporated by reference in the Prospectus. If so directed by GBL, each Seller shall deliver to GBL (at the expense of GBL) all copies, other than permanent file copies then in each Seller's possession, of the Prospectus current at the time of receipt of such notice. In the event GBL shall give any such notice, the Registration Period shall be extended by the number of days during the period from and including the date of the giving of such notice pursuant to Section 3(c) or 5(a) to and including the date when the Sellers shall have received the copy of the supplemented or amended prospectus contemplated by Section 3(f) or the Advice; provided, that in no event shall the Registration Period be extended beyond the time when it would otherwise terminate pursuant to Section 2 hereof. 4 6. Expenses of Registration. All expenses incurred in connection with the registration pursuant to Section 2 (excluding any underwriters' discounts and commissions and fees and disbursements of counsel for the Sellers), including, without limitation all registration and qualification fees, and fees and disbursements of counsel for GBL, shall be borne by GBL. 7. Indemnification. (a) To the full extent permitted by law, GBL shall, and hereby does indemnify and hold harmless each Seller, each director, officer, partner, agent for each Seller (including the Sellers' Agent), any underwriter (as defined in the Securities Act), and each person, if any, who controls each Seller, or underwriter within the meaning of the Securities Act, against any losses, claims, damages or liabilities, joint or several, to which they may become subject under the Securities Act, the Exchange Act, and applicable state law insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based on any untrue or alleged untrue statement of any material fact contained in the Registration Statement, including any preliminary Prospectus or final Prospectus or any amendments or supplements thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein in light of the circumstance under which it was made or necessary to make the statements therein not misleading, or arise out of any violation by GBL of any rule or regulation promulgated under the Securities Act applicable to GBL and relating to action or inaction required of GBL in connection with any such registration; and shall reimburse each such person for any legal or other expenses reasonably incurred by him in connection with investigating or defending any such loss, claim, damage, liability or action. The indemnity agreement contained in this Section 7 shall not apply to amounts paid in settlement of any such loss, claim, damage, liability, or action if such settlement is effected without the consent of GBL (which consent shall not be unreasonably withheld) nor shall GBL be liable to a Seller, underwriter or controlling person for any such loss, claim, damage, liability or action to the extent that it arises out of or is based upon an untrue statement or an alleged untrue statement or omission or alleged omission made in connection with the Registration Statement, preliminary Prospectus, final Prospectus, or amendments or supplements thereto, in reliance upon and in conformity with information furnished by such Seller in writing for use in connection with such registration by or on behalf of such Seller, underwriter or controlling person. 5 (b) To the full extent permitted by law, each Seller shall indemnify and hold harmless GBL, each of its directors, each of its officers who have signed the registration statement, each person, if any, who controls GBL within the meaning of the Securities Act, and any underwriter for GBL (within the meaning of the Securities Act), against any losses, claims, damages or liabilities, joint or several, to which GBL or any such director, officer, controlling person or underwriter may become subject, under the Securities Act and applicable state securities laws, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in the Registration Statement, including any preliminary Prospectus or final Prospectus or any amendments or supplements thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances, in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was made in the Registration Statement, preliminary or final Prospectus, or amendments or supplements thereto, in reliance upon and in conformity with information furnished in writing by such Seller for use in connection with such registration. The indemnity agreement contained in this Section 7 shall not apply to amounts paid in settlement of any such loss, claim, damage, liability, or action if such settlement is effected without the consent of such Seller (which consent shall not be unreasonably withheld). (c) In no event shall the liability of any Seller under Section 7(b) be greater than the lesser of (a) its pro rata portion of any liability based on the total liability of all Sellers similarly situated, or (b) the dollar amount of the net proceeds received by such Seller upon the sale of the Registrable Securities giving rise to such indemnification obligation. (d) Promptly after receipt by an indemnified party under this Section 7 of notice of the commencement of any action or actual knowledge of a claim that would, if asserted, give rise to a claim for indemnity hereunder, such indemnified party shall, if a claim in respect thereof is to be made against any indemnifying party under this Section 7, notify the indemnifying party in writing of the commencement thereof or knowledge thereof and the indemnifying party shall have the right to participate in, and, to the extent the indemnifying party so desires, jointly with any other indemnifying party similarly noticed, to assume the defense thereof with qualified counsel. The failure to notify an indemnifying party promptly of the commencement of any such action or of the knowledge of any such claim, if materially prejudicial to his ability to defend such action, shall relieve such indemnifying party of any liability to the indemnified party under this Section 7, but the omission so to notify the indemnifying party shall not relieve him of any liability that he may have to any indemnified party otherwise than under this Section. (e) If the indemnification provided for in this Section 7 is for any reason, other than pursuant to the terms thereof, held to be unavailable to an indemnified party in respect of any losses, claims, damages or liabilities (or actions in respect thereof) referred to therein, then each indemnifying party shall, in lieu of indemnifying such indemnified party, contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages or liabilities (or actions in respect thereof) in such proportion as is appropriate to reflect the relative fault of GBL and each Seller in connection with the statements or omission that resulted in such losses, claims, damages, liabilities (or actions in respect thereof), as well as any other relevant equitable considerations. The relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact relates to information supplied by GBL or a Seller and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. GBL and each Seller agree that it would not be just and equitable if contribution pursuant to this Section 7(e) were determined by pro rata allocation or by any other method of allocation that does not take account of the equitable considerations referred to above in this Section 7(e). The amount paid or payable by an indemnified party as a result of the losses, claims, damages or liabilities (or actions in respect thereof) referred to above in this Section 7(e) shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim, but shall be subject, in the case of a Seller, to the limitation of Section 7(c) above. No person guilty of fraudulent misrepresentation within the meaning of Section 11(d) of the Securities Act shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. No party shall be liable for contribution with respect to any loss, claim, damage, liability, or action if such settlement is effected without the prior written consent of such party, which consent shall not be reasonably withheld. 6 8. Termination. This Agreement shall terminate upon either (i) the expiration of the Registration Period, provided that the rights and obligations of the parties pursuant to Section 7 shall survive such termination or (ii) the termination of the Purchase Agreement, in which event this Agreement shall immediately become void as set forth in Section 7.2 of the Purchase Agreement. 9. Rule 144. During the Registration Period, GBL shall use its best efforts to file the reports required to be filed by it under the Exchange Act in a timely manner and, if at any time GBL is not required to file such reports, it shall, upon the request of any Seller, use its best efforts to make publicly available other information so long as is necessary to permit sales pursuant to Rule 144. GBL shall take such further action as any Seller may reasonably request, all to the extent required from time to time to enable such Seller to sell Registrable Securities without registration under the Securities Act pursuant to the exemption provided by Rule 144 under the Securities Act. Upon the request of any Seller, GBL shall deliver to the Sellers' Agent a written statement as to whether it has complied with such information requirements. 10. Remedies. In case any one or more of the covenants and/or agreements set forth in this Agreement shall have been breached by GBL or the Sellers, the Sellers or GBL (as the case may be) may proceed to protect and enforce its rights either by suit in equity and/or by action at law, including, but not limited to, an action for damages as a result of any such breach and/or an action for specific performance or injunctive relief with respect to any such covenant or agreement contained in this Agreement. 11. Notices. All notices, requests, demands or other communications provided for or permitted to be given pursuant to this Agreement shall be in writing and shall be deemed to have been duly given when delivered personally (which personal delivery shall include delivery by responsible overnight courier), or five days after being sent by registered or certified mail, return receipt requested, postage prepaid: 7 If to GBL to: GAMCO Investors, Inc. One Corporate Center Rye, New York 10580 Attention: James E. McKee with a copy to: Skadden Arps Slate Meagher & Flom LLP 4 Times Square New York, New York 10036 Attention: Richard T. Prins If to the Sellers to: Frederick J. Mancheski 1060 Vegas Valley Drive Las Vegas, Nevada 89109 and David M. Perlmutter 470 Bellwood Avenue Sleepy Hollow, New York 10951 with copies to: Collier Halpern, Newberg, Nolletti & Bock, LLP One North Lexington Avenue White Plains, NY 10601 Attention: Philip M. Halpern Morvillo, Abramowitz, Grand, Iason & Silberberg, P.C. 565 Fifth Avenue New York, New York 10017 Attention: Barbara Moses By giving to the other parties at least five days' written notice thereof, any party hereto shall have the right from time to time and at any time during the term of this Agreement to change his respective address and each party shall have the right to specify as his address any other address within the United States of America. 12. Grant of Other Registration Rights. From time to time, GBL may grant registration rights to any other holder or prospective holder of any of the capital stock of GBL. 8 13. Binding Agreement. This Agreement and each provision herein shall be binding upon and applicable to, and shall inure to the benefit of, GBL, the Sellers, their heirs, permitted assigns and legal representatives. 14. Consents and Waivers. No consent or waiver, express or implied, by any party hereto of the breach, default or violation by any other party hereto of his obligations hereunder shall be deemed or construed to be a consent or waiver to or of any other breach, default or violation of the same or any other obligations of such party hereunder. Failure on the part of any party hereto to complain of any act of any of the other parties or to declare any of the other parties hereto in default, irrespective or how long such failure continues, shall not constitute a waiver by such party of his rights hereunder. 15. Applicable Law and Consent to Jurisdiction. (a) This Agreement shall be governed by and construed in accordance with the laws of the State of New York, without giving effect to the principles of conflicts of law thereof (b) The parties hereto hereby irrevocably submit to the exclusive jurisdiction of Supreme Court of the State of New York, or the United States District Court, Southern District of New York (but only to the extent that jurisdiction is exclusively federal), in each case sitting in Westchester County, New York, over any action or proceeding arising out of or relating to this Agreement and the transactions contemplated hereby and each of the parties hereto hereby irrevocably agrees that all claims in respect to such action or proceeding shall be heard and determined in such New York state or federal court. Each of the parties hereto agrees that if any such action is filed in or transferred to the Supreme Court of the State of New York, Westchester County, they will request referral of the action to Justice Linda A. Jamieson. Each of the parties hereto hereby irrevocably waives, to the fullest extent legally possible, the defense of an inconvenient forum to the maintenance of such action or proceeding. 16. Prior Agreements; Amendments. This Agreement supersedes any prior or contemporaneous understanding or agreement among the parties hereto respecting the subject matter hereof. There are no arrangements, understandings or agreements, oral or written, among such parties relating to the subject matter of this Agreement, except those fully expressed herein and in the Exchange and Standstill Agreements and the Stipulation of Settlement. No change or modification of this Agreement shall be valid or binding upon the parties hereto unless such change or modification or waiver shall be in writing and signed by the parties hereto, and such change or modification shall be binding on all holders of Registrable Securities. 17. Headings. The headings and captions in this Agreement are included for purposes of convenience only and shall not affect the construction or interpretation of any of its provisions. 18. Counterparts. This Agreement may be executed simultaneously in any number of counterparts, each of which shall be deemed an original, but all of which when taken together shall constitute one and the same instrument. 9 19. Transfer of Rights and Obligations. This Agreement and the rights and obligations of any Seller under this Agreement may be transferred by any Seller to a spouse, ancestor or lineal descendant, to a trust for the benefit of any of the foregoing, or to any legal entity, all of the outstanding voting or equity interests with respect to which are owned or controlled by such Seller and/or such family members or family trusts (any such permitted transferee being referred to herein as a "Transferee"). As a condition precedent to any such transfer, any such Transferee must provide written notice of such assignment to GBL, which notice shall at a minimum include the name and address of such Transferee, the Registrable Securities with respect to which such transfer is to occur and the number, if any, of other shares of Class A Common Stock held by such Transferee and agree in writing to be bound by the terms of this Agreement. 20. Third Party Beneficiaries. GBL hereby acknowledges that the Transferees are express third party beneficiaries of the obligations of GBL hereunder. 21. Gender. As used in this Agreement, the neuter gender shall include the masculine and feminine genders and the masculine gender shall include the feminine and neuter genders, the singular shall include the plural and the word "person" shall include a corporation, firm, company, trust and other form of association or entity. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed and delivered on the date first above written. GAMCO INVESTORS, INC. By: -------------------------------------- Name: Title: ------------------------------------------- FREDERICK J. MANCHESKI ------------------------------------------- DAVID M. PERLMUTTER 10 EX-31.1 4 a5204892ex311.txt GAMCO INVESTORS, INC. EX 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: August 7, 2006 EX-31.2 5 a5204892ex312.txt GAMCO INVESTORS, INC. EX. 31.2 Exhibit 31.2 Certifications I, John C. Ferrara, 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/ John C. Ferrara ----------------------- John C. Ferrara Interim Chief Financial Officer Date: August 7, 2006 EX-32.1 6 a5204892ex321.txt GAMCO INVESTORS, INC. EX. 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 June 30, 2006 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: August 7, 2006 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 7 a5204892ex322.txt GAMCO INVESTORS, INC. EX. 32.2 Exhibit 32.2 Certification of Interim CFO 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 June 30, 2006 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), John C. Ferrara, as Interim 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/ John C. Ferrara - --------------------------- Name: John C. Ferrara Title: Interim Chief Financial Officer Date: August 7, 2006 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-----