gbl10_q080807.htm



SECURITIES & EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended June 30, 2007
or

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

For the transition period from ________ to

Commission File No. 1-106

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

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

(914) 921-5100
Registrant’s telephone number, including area code

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes   x   No   ¨

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, 2007
Class A Common Stock, .001 par value
 
7,489,369
Class B Common Stock, .001 par value
 
20,645,816





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 2007
-    Six months ended June 30, 2006 and 2007
   
 
Condensed Consolidated Statements of Financial Condition:
 
-    December 31, 2006 (Audited)
 
-    June 30, 2006
 
-    June 30, 2007
   
 
Condensed Consolidated Statements of Stockholders’ Equity and Comprehensive Income:
 
-    Three months ended June 30, 2006 and 2007
-    Six months ended June 30, 2006 and 2007
 
 
Condensed Consolidated Statements of Cash Flows:
 
-    Three months ended June 30, 2006 and 2007
-    Six months ended June 30, 2006 and 2007
   
   
 
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,
 
   
2007
   
2006 (a)
   
2007
   
2006 (a)
 
                         
Revenues
                       
Investment advisory and incentive fees
  $
57,654
    $
53,586
    $
114,214
    $
103,984
 
Commission revenue
   
4,036
     
2,829
     
8,056
     
6,380
 
Distribution fees and other income
   
6,587
     
5,244
     
12,613
     
10,579
 
Total revenues
   
68,277
     
61,659
     
134,883
     
120,943
 
Expenses
                               
Compensation and related costs
   
29,905
     
25,436
     
58,279
     
50,212
 
Management fee
   
3,449
     
1,818
     
6,850
     
5,235
 
Distribution costs
   
10,161
     
5,329
     
16,047
     
10,544
 
Other operating expenses
   
7,594
     
7,713
     
16,028
     
15,104
 
Reserve for settlement
   
-
     
11,900
     
-
     
11,900
 
Total expenses
   
51,109
     
52,196
     
97,204
     
92,995
 
                                 
Operating income
   
17,168
     
9,463
     
37,679
     
27,948
 
Other income (expense)
                               
Net gain from investments
   
11,193
     
4,244
     
16,763
     
27,369
 
Interest and dividend income
   
6,166
     
6,111
     
14,168
     
12,484
 
Interest expense
    (3,329 )     (3,394 )     (6,709 )     (7,269 )
Total other income, net
   
14,030
     
6,961
     
24,222
     
32,584
 
Income before income taxes and minority interest
   
31,198
     
16,424
     
61,901
     
60,532
 
Income tax provision
   
12,856
     
7,360
     
24,063
     
23,901
 
Minority interest
   
345
     
119
     
677
     
8,727
 
Net income
  $
17,997
    $
8,945
    $
37,161
    $
27,904
 
                                 
Net income per share:
                               
Basic
  $
0.64
    $
0.31
    $
1.32
    $
0.97
 
                                 
Diluted
  $
0.63
    $
0.31
    $
1.30
    $
0.96
 
                                 
Weighted average shares outstanding:
                               
Basic
   
28,160
     
28,507
     
28,194
     
28,842
 
                                 
Diluted
   
29,147
     
29,496
     
29,172
     
29,838
 
                                 
                                 
Dividends declared:
  $
0.03
    $
0.03
    $
0.06
    $
0.06
 

(a) As restated to reflect the reversal of certain previously-accrued expenses for investment partnership compensation as described in Note A 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 share data)

                   
   
December 31,
   
June 30,
   
June 30,
 
   
2006 (a)
   
2006 (a)
   
2007
 
ASSETS
       
(Unaudited)
   
(Unaudited)
 
                   
Cash and cash equivalents, including restricted cash of $2,079, $730 and $443.
  $
138,113
    $
116,852
    $
104,726
 
Investments in securities, including restricted securities of $52,116, $52,141 and $52,117.
   
507,595
     
466,056
     
550,273
 
Investments in partnerships and affiliates
   
81,884
     
83,752
     
69,869
 
Receivable from brokers
   
53,682
     
41,326
     
43,187
 
Investment advisory fees receivable
   
31,093
     
15,874
     
18,439
 
Other assets
   
24,866
     
16,426
     
19,577
 
                         
Total assets
  $
837,231
    $
740,286
    $
806,071
 
                         
LIABILITIES AND STOCKHOLDERS' EQUITY
                       
                         
Payable to brokers
  $
36,346
    $
9,228
    $
30,973
 
Income taxes payable, including deferred taxes of $363, $4,323, and $10,012.
   
13,922
     
2,556
     
14,951
 
Compensation payable
   
30,174
     
34,366
     
46,075
 
Capital lease obligation
   
2,781
     
2,891
     
2,659
 
Securities sold, not yet purchased
   
8,244
     
7,621
     
21,021
 
Accrued expenses and other liabilities
   
41,052
     
29,150
     
35,597
 
                         
Total operating liabilities
   
132,519
     
85,812
     
151,276
 
                         
5.5% Senior notes (due May 15, 2013)
   
100,000
     
100,000
     
100,000
 
6% Convertible note, $50 million outstanding (due August 14, 2011) (b)
   
49,504
     
50,000
     
49,561
 
5.22% Senior notes (due February 17, 2007)
   
82,308
     
82,308
     
-
 
                         
     Total liabilities
   
364,331
     
318,120
     
300,837
 
                         
Minority interest
   
21,324
     
19,724
     
14,441
 
                         
Stockholders’ equity
                       
Class A Common Stock, $0.001 par value; 100,000,000
                       
    shares authorized; 12,055,872, 12,010,812 and 12,172,423
                       
    issued, respectively; 7,487,018, 7,509,058 and 7,489,369 outstanding, respectively
   
12
     
10
     
12
 
Class B Common Stock, $0.001 par value; 100,000,000
                       
    shares authorized; 24,000,000 shares issued, 20,754,217, 20,781,027 and 20,645,816 shares outstanding, respectively
   
21
     
23
     
21
 
Additional paid-in capital
   
229,699
     
228,573
     
230,010
 
Retained earnings
   
397,893
     
355,565
     
432,542
 
Accumulated comprehensive gain
   
10,427
     
2,423
     
19,791
 
Treasury stock, at cost (4,501,754, 4,012,354 and 4,683,054
                       
    shares, respectively)
    (186,476 )     (184,152 )     (191,583 )
Total stockholders' equity
   
451,576
     
402,442
     
490,793
 
                         
Total liabilities and stockholders' equity
  $
837,231
    $
740,286
    $
806,071
 

(a)  As restated to reflect the reversal of certain previously-accrued expenses for investment partnership compensation as described in Note A of this report on Form 10-Q.
(b)  At June 30, 2007 and December 31, 2006, the $50 million note conversion price was $53 per share. At June 30, 2006, the convertible note was 5% with a conversion price of $52 per share.
 
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,
 
   
2007
   
2006 (a)
   
2007
   
2006 (a)
 
Stockholders’ equity – beginning of period
  $
467,488
    $
412,828
    $
451,576
    $
424,502
 
                                 
Cumulative effect of applying the provisions of FIN 48
at January 1, 2007
   
-
     
-
      (822 )    
-
 
Comprehensive income:
                               
  Net income
   
17,997
     
8,945
     
37,161
     
27,904
 
  Foreign currency translation adjustments
   
12
      (129 )    
13
      (54 )
  Net unrealized gain on securities available for sale
   
8,666
      (589 )    
9,352
     
1,867
 
Total comprehensive income
   
26,675
     
8,227
     
46,526
     
29,717
 
                                 
Dividends declared
    (844 )     (851 )     (1,691 )     (1,718 )
Excess tax benefit for exercised stock options
   
-
     
-
     
-
     
1,782
 
Stock based compensation expense
   
24
     
14
     
45
     
20
 
Exercise of stock options including tax benefit
   
194
     
137
     
266
     
418
 
Purchase of treasury stock
    (2,744 )     (17,913 )     (5,107 )     (52,279 )
Stockholders’ equity – end of period
  $
490,793
    $
402,442
    $
490,793
    $
402,442
 
                                 


(a) As restated to reflect the reversal of certain previously-accrued expenses for investment partnership compensation as described in Note A 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,
 
   
2007
   
2006 (a)
   
2007
   
2006 (a)
 
Operating activities
                       
Net income
  $
17,997
    $
8,945
    $
37,161
    $
27,904
 
Adjustments to reconcile net income to net cash
                               
   provided by (used in) operating activities:
                               
Cumulative effect of applying the provisions of FIN 48
   
-
     
-
      (822 )    
-
 
Equity in gains from partnerships and affiliates
    (2,498 )     (474 )     (4,744 )     (3,338 )
Depreciation and amortization
   
216
     
220
     
522
     
444
 
Stock based compensation expense
   
24
     
14
     
45
     
20
 
Tax benefit from exercise of stock options
   
32
     
21
     
57
     
87
 
Foreign currency loss
   
12
     
30
     
13
     
30
 
Other-than-temporary loss on available for sale securities
   
-
     
56
     
-
     
56
 
Market value of donated securities
   
-
     
-
     
122
     
-
 
Impairment of goodwill
   
-
     
-
     
56
     
-
 
Amortization of debt discount
   
23
     
-
     
56
     
-
 
Minority interest in net income of consolidated subsidiaries
   
244
     
81
     
520
     
343
 
Realized gains on sales of available for sale securities, net
    (316 )    
-
      (473 )     (442 )
Realized gains on sales of trading investments in securities, net
    (4,406 )     (3,389 )     (10,875 )     (9,974 )
Change in unrealized value of investments in securities, net
    (5,022 )     (2,318 )     (2,498 )     (3,336 )
Excess tax benefit adjustment
   
-
     
1,782
     
-
     
1,782
 
(Increase) decrease in operating assets:
                               
   Purchases of trading investments in securities
    (417,321 )     (250,014 )     (852,789 )     (537,616 )
   Proceeds from sales of trading investments in securities
   
425,979
     
205,993
     
875,850
     
527,522
 
   Investments in partnerships and affiliates
    (978 )     (2,823 )     (4,050 )     (4,048 )
   Distributions from partnerships and affiliates
   
1,664
     
7,065
     
13,149
     
7,913
 
   Investment advisory fees receivable
   
1,917
     
696
     
12,681
     
6,126
 
   Other receivables from affiliates
   
302
     
3,423
     
5,106
     
10,092
 
   Receivable from brokers
    (20,171 )    
35,314
     
10,022
      (27,559 )
   Other assets
   
201
     
764
      (153 )     (120 )
Increase (decrease) in operating liabilities:
                               
   Payable to brokers
    (6,917 )    
3,975
      (3,957 )    
3,444
 
   Income taxes payable
   
2,160
      (12,062 )     (3,835 )     (9,009 )
   Compensation payable
   
6,066
     
1,364
     
14,289
     
6,953
 
   Accrued expenses and other liabilities
   
3,603
     
10,362
      (5,050 )    
10,578
 
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
    (330 )     (163 )     (607 )     (12,080 )
Change in unrealized value of investments in securities and securities sold short, net
    (115 )     (2,839 )     85       (4,269 )
Purchases of trading investments in securities and securities sold short
    (19,885 )     (8,882 )     (34,436 )     (650,941 )
Proceeds from sales of trading investments in securities and securities sold short
   
22,467
     
9,517
     
34,551
     
629,221
 
   Investments in partnerships and affiliates
   
-
      (336 )    
(2,000)
      (1,318 )
Distributions from partnerships and affiliates
   
325
     
-
     
825
     
380
 
Equity in earnings of partnerships and affiliates
   
25
      (103 )    
(733)
      (528 )
   Decrease in advisory fees receivable
   
19
     
98
      (26 )    
98
 
   (Increase) decrease in receivable from brokers
    (222 )    
1,042
     
473
      (11,427 )
   Decrease (increase) in other assets
    (186 )     (21 )     (244 )    
333
 
   Increase in payable to brokers
    (2,551 )    
1,847
      (1,416 )    
7,630
 
   (Decrease) increase in accrued expenses and other liabilities
   
266
      (1,892 )    
315
      (11,678 )
   Income related to investment partnerships and offshore funds consolidated under FIN 46R and EITF 04-5, net
   
506
     
207
     
996
     
14,637
 
Total adjustments
    (14,867 )     (1,445 )    
41,025
      (59,994 )
Net cash provided by (used in) operating activities
   
3,130
     
7,500
     
78,186
      (32,090 )

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,
 
   
2007
   
2006 (a)
   
2007
   
2006 (a)
 
                         
Investing activities
                       
Purchases of available for sale securities
    (223 )     (247 )     (25,254 )     (3,253 )
Proceeds from sales of available for sale securities
   
1,353
     
-
     
2,292
     
1,486
 
Net cash provided by (used in) investing activities
   
1,130
      (247 )     (22,962 )     (1,767 )
                                 
Financing activities
                               
Contributions related to investment partnerships and offshore funds
    consolidated under FIN 46R and EITF 04-5, net
    (5 )    
1,537
     
511
     
29,727
 
Retirement of 5.22% senior notes
   
-
     
-
      (82,308 )    
-
 
Proceeds from exercise of stock options
   
162
     
116
     
209
     
332
 
Dividends paid
    (844 )     (851 )     (1,691 )     (1,718 )
Subsidiary stock repurchased from minority shareholders
   
-
     
-
      (241 )    
-
 
Purchase of treasury stock
    (2,744 )     (17,913 )     (5,107 )     (52,279 )
Net cash used in financing activities
    (3,431 )     (17,111 )     (88,627 )     (23,938 )
Net increase (decrease) in cash and cash equivalents
   
829
      (9,858 )     (33,403 )     (57,795 )
Effect of exchange rates on cash and cash equivalents
   
15
      (132 )    
16
      (64 )
Net increase in cash from partnerships and offshore funds consolidated under FIN 46R and EITF 04-5
   
-
     
-
     
-
     
1,550
 
Cash and cash equivalents at beginning of period
   
103,882
     
126,842
     
138,113
     
173,161
 
Cash and cash equivalents at end of period
  $
104,726
    $
116,852
    $
104,726
    $
116,852
 


(a)  As restated to reflect the reversal of certain previously-accrued expenses for investment partnership compensation as described in Note A of this report on Form 10-Q.


See accompanying notes.


7



GAMCO INVESTORS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2007
(Unaudited)

A.  Basis of Presentation

Unless we have indicated otherwise, or the context otherwise requires, references in this report to “GAMCO Investors, Inc.,” “GAMCO,” “the Company,” “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 and non-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.

The condensed consolidated financial statements include the accounts of GAMCO and its subsidiaries.  All material intercompany accounts and transactions are eliminated.

These financial statements should be read in conjunction with our audited consolidated financial statements included in our Annual Report on Form 10-K/A for the year ended December 31, 2006, 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 changed its accounting policy to reflect the adoption of FASB-issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”), which is an interpretation of FASB Statement No. 109, “Accounting for Income Taxes” (“FAS 109”). This interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This interpretation is effective for fiscal years beginning after December 15, 2006. The Company adopted this interpretation on January 1, 2007.   In accordance with the method of adoption prescribed in the Interpretation, FIN 48 has been applied prospectively as of the date of adoption, and periods prior to adoption have not been retroactively restated or reclassified.  See Note F for further details.

Restatement

On August 9, 2007, GAMCO filed a Form 10-K/A restating 2006 results to reflect the reversal of certain previously accrued expenses for investment partnership compensation.

Quarterly financial information for the year ended December 31, 2006, as restated, is presented below.
 
   
2006
 
(in thousands, except per share data)
 
1st
   
2nd
   
3rd
   
4th
   
Full Year
 
Revenues                                            
  $
59,284
    $
61,659
    $
57,994
    $
82,526
    $
261,463
 
Operating income                                            
   
18,485
     
9,463
     
18,498
     
29,901
     
76,347
 
Net income                                            
   
18,960
     
8,944
     
17,043
     
26,980
     
71,927
 
Net income per share:
                                       
   Basic                                            
   
0.65
     
0.31
     
0.60
     
0.96
     
2.52
 
   Diluted                                            
   
0.64
     
0.31
     
0.60
     
0.94
     
2.49
 

Quarterly financial information for the year ended December 31, 2006, as originally reported, is presented below.

   
2006
 
(in thousands, except per share data)
 
1st
   
2nd
   
3rd
   
4th
   
Full Year
 
Revenues                                            
  $
59,284
    $
61,659
    $
57,994
    $
82,526
    $
261,463
 
Operating income                                            
   
18,034
     
8,936
     
18,220
     
26,971
     
72,161
 
Net income                                            
   
18,700
     
8,641
     
16,884
     
25,293
     
69,518
 
Net income per share:
                                       
   Basic                                            
   
0.64
     
0.30
     
0.60
     
0.90
     
2.44
 
   Diluted                                            
   
0.63
     
0.30
     
0.59
     
0.88
     
2.40
 

B.  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,” (“Statement 155”) that amends FASB Statements No. 133 “Accounting for Derivative Instruments and Hedging Activities,” (“Statement 133”) and No. 140 “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities a replacement of FASB Statement 125” (“Statement 140”).  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 principal-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 first fiscal year that begins after September 15, 2006.  The Company adopted this statement on January 1, 2007.  The impact of adopting this statement has been immaterial to the Company’s 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)” (“FSP”).  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 first day of the first reporting period beginning after September 15, 2006. The Company adopted this Statement on January 1, 2007.  The impact of adopting this statement has been immaterial to the Company’s consolidated financial statements.

In September 2006, the FASB issued FASB Statement No. 157, “Fair Value Measurements” (“Statement 157”). The statement provides guidance for using fair value to measure assets and liabilities. The statement provides guidance to companies about the extent of which to measure assets and liabilities at fair value, the information used to measure fair value, and the effect of fair value measurements on earnings. The statement applies whenever other standards require (or permit) assets or liabilities to be measured at fair value. The statement does not expand the use of fair value in any new circumstances. The statement is effective for financial statements issued for fiscal years beginning after November 15, 2007 and for interim periods within those fiscal years. The Company plans to adopt this statement on January 1, 2008. The impact of adopting Statement 157 is expected to be immaterial to the Company’s consolidated financial statements.

8

In September 2006, the SEC released Staff Accounting Bulletin No. 108, "Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements" (the “SAB”). The SAB addresses diversity in how companies consider and resolve the quantitative effect of financial statement misstatements. The SAB is effective as of the beginning of the first day of the first reporting period beginning after November 15, 2006.  The Company adopted this SAB on January 1, 2007.  The impact of adopting this SAB has been immaterial to the Company’s consolidated financial statements.

In February 2007, the FASB issued FAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities – Including an Amendment of FASB Statement No. 115,” (“Statement 159”), which provides companies with an option to report selected financial assets and liabilities at fair value. The standard’s objective is to reduce both the complexity in accounting for financial instruments and the volatility in earnings caused by measuring related assets and liabilities differently. Statement 159 also establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities.  This statement is effective as of the beginning of an entity’s first fiscal year beginning after November 15, 2007. Early adoption is permitted as of the beginning of the previous fiscal year provided that the entity makes that choice in the first 120 days of that fiscal year and also elects to apply the provisions of Statement 157.  The Company plans to adopt this statement on January 1, 2008.  The impact of adopting Statement 159 is expected to be immaterial to the Company’s consolidated financial statements.
 
The American Institute of Certified Public Accountants has finalized Statement of Position (“SOP”) 07-01, Clarification of the Scope of the Audit and Accounting Guide Investment Companies and Accounting by Parent Companies and Equity Method Investors for Investments in Investment Companies. SOP 07-01 provides criteria for determining whether an entity is within the scope of the Guide. The statement is effective for financial statements issued for fiscal years beginning after December 15, 2007. The Company plans to adopt this statement on January 1, 2008. The Company is currently evaluating the potential impact of adopting SOP 07-01 on its consolidated financial statements.
 
In May 2007, the FASB issued FSP No. FIN 46(R)-7, “Application of FASB Interpretation No. 46(R) to Investment Companies”. This FSP amends Interpretation FIN 46(R) to provide an exception to the scope of FIN 46(R) for companies within the scope of the revised Audit and Accounting Guide Investment Companies. The Company is currently evaluating the potential impact of adopting FIN 46(r)-7 on its consolidated financial statements.
 
C.  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 condensed consolidated statement of financial condition 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. Investments in securities are accounted for as either “trading securities” or “available for sale” (“AFS”) and are stated at quoted market values. Securities that are not readily marketable are stated at their estimated fair values as determined by our management. The resulting unrealized gains and losses for trading securities are included in net gain from investments, and the unrealized gains and losses for available for sale securities, net of management fees and tax, are reported as a separate 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 months ended June 30, 2007, there was no impairment of AFS securities.  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. Securities sold, not yet purchased are financial instruments purchased under agreements to resell and financial instruments sold under agreements to repurchase.  These financial instruments are stated at fair value and are subject to market risks resulting from changes in price and volatility. At June 30, 2007 and 2006, the market value of securities sold, not yet purchased was $21.0 million and $7.6 million, respectively.

The Company accounts for derivative financial instruments in accordance with Statement of Financial Accounting Standards (“FAS”) No. 133 (“Statement No. 133”), Accounting for Derivative Instruments and Hedging Activities, as amended. Statement No. 133 requires that an entity recognize all derivatives, as defined, as either assets or liabilities measured at fair value. The Company uses swaps and treasury futures to manage its exposure to market and credit risks from changes in certain equity prices, interest rates, and volatility and does not hold or issue swaps and treasury futures for speculative or trading purposes. These swaps and treasury futures are not designated as hedges, and changes in fair values of these derivatives are recognized in earnings as gains (losses) on derivative contracts. The fair value of swaps and treasury futures are included in investments in securities in the statements of financial condition, and gains and losses from the swaps are included in the Statements of Income at June 30, 2007 and 2006, the market value of derivatives was $26.9 million and $13.0 million, respectively.

At June 30, 2007 and 2006, the market value of investments available for sale was $140.4 million and $86.7 million, respectively.  Unrealized gains in market value, net of management fee and taxes, of $19.8 million and $2.4 million have been included in stockholders’ equity as at June 30, 2007 and 2006, respectively.

Proceeds from sales of investments available for sale were approximately $1.4 million for the three-month period ended June 30, 2007.  There were no sales of investments available for sale during the three months ended June 30, 2006. Proceeds from sales of investments available for sale were approximately $2.3 million and $1.5 million for the six-month periods ended June 30, 2007 and 2006, respectively.  For the three months ended June 30, 2007, gross gains on the sale of investments available for sale amounted to $316,000; there were no gross losses on the sale of investments available for sale. For the first six months of 2007 and 2006, gross gains on the sale of investments available for sale amounted to $473,000 and $442,000, respectively; there were no gross losses on the sale of investments available for sale.

D. Investments in Partnerships and Affiliates

Beginning January 1, 2006, the provisions of FIN 46R and EITF 04-5 required 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, FIN 46R and EITF 04-5 only required us to consolidate these entities on our condensed consolidated statement of income and condensed consolidated statement of cash flows for the first quarter 2006.   We were not required to consolidate these entities on our condensed consolidated statement of financial condition at March 31, 2006.  In addition, these partnerships and offshore funds, for which the agreements were amended, were not required to be consolidated within our condensed consolidated statement of income and condensed consolidated statement of cash flows or on our condensed consolidated statement of financial condition for any period subsequent to the first quarter 2006 and will continue to not be required as long as GAMCO does not maintain direct or indirect control over the investment partnerships and offshore funds, which remains the case at and for the three and six months ended June 30, 2007.  For the six months ended June 30, 2006, the consolidation of these entities had no effect on net income but did affect the classification of income between operating and other income.

From January 1, 2006 to December 31, 2006, we have also consolidated five other investment partnerships and two offshore funds in which we have a direct or indirect controlling financial interest, and we will continue to consolidate these in future periods as long as we continue to maintain a direct or indirect controlling financial interest. From January 1, 2007 to June 30, 2007, we consolidated these same five investment partnerships and one of these offshore funds in which we continue to have a direct or indirect controlling financial interest.

For the three and six months ended June 30, 2007 and 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 did affect the classification of income between operating and other income.  Cash and cash equivalents and investments in securities held by investment partnerships and offshore funds, which at June 30, 2007, June 30, 2006 and December 31, 2006 were $6.1 million, $11.9 million and $15.7 million, respectively, consolidated under FIN 46R and EITF 04-5 are also restricted from use for general operating purposes.

E. Debt

In February 2007, the Company retired the $82.3 million in 5.22% Senior Notes due February 17, 2007 plus accrued interest from its cash and cash equivalents and investments. This debt was originally issued in connection with GBL's sale of mandatory convertible securities in February 2002 and was remarketed in November 2004.

On April 18, 2007, the Company and Cascade Investment L.L.C. (“Cascade”) amended the terms of the $50 million convertible note maturing in August 2011, to extend the exercise date for Cascade’s put option from May 15, 2007 to December 17, 2007 and to extend the expiration date of the related letter of credit to December 24, 2007.
 
9

F. Income Taxes and Adoption of FIN 48
 
      The effective tax rate for the three months ended June 30, 2007 was 41.2% as compared to the prior year quarter’s effective rate of 44.8%.  For the six months ended June 30, 2007, the effective tax rate was 38.9% as compared to 39.5% in the prior year’s comparable period.
 
In June 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”), which is an interpretation of FAS 109. This interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The Company adopted this interpretation on January 1, 2007.
 
In May 2007, the FASB issued FSP FIN 48-1, “Definition of Settlement in FASB Interpretation No. 48”, amending FSP FIN 48 to clarify that a tax position could be effectively settled upon examination by a taxing authority. For the second quarter 2007, we have updated our schedule of uncertain tax positions and the impact of taxes, interest, and penalties has been reflected within our income tax provision and disclosed within our footnotes to the financial statements.

As of January 1, 2007, the Company had a gross unrecognized tax benefit of approximately $2.6 million, of which recognition of $2.5 million would impact the Company’s effective tax rate.  As of June 30, 2007, the total amount of gross unrecognized tax benefits was approximately $3.7 million, of which recognition of $2.5 million would impact the Company’s effective tax rate. As of January 1, 2007, the Company had a cumulative effect of adopting FIN 48 of $0.8 million, and an adjustment was recorded to retained earnings upon such adoption.

The Company’s historical accounting policy with respect to penalties and interest related to tax uncertainties has been to classify these amounts as income taxes, and the Company continued this classification upon the adoption of FIN 48.  As of January 1, 2007, the total amount of accrued penalties and interest related to uncertain tax positions recognized in the condensed consolidated statement of financial condition was approximately $1.4 million. 

The Internal Revenue Service (“IRS”) is currently auditing the 2003 and 2004 federal income tax returns. It is reasonably possible that the Company will conclude the audits within the next 12-month period. It is estimated that the Company’s FIN 48 liability could decrease by approximately $0.9 million upon the conclusion of these audits.  The 2005 and 2006 federal income tax returns remain subject to potential future audit by the IRS.

The Company is currently being audited in one state jurisdiction for its income tax returns filed between 1999 and 2003.  It is reasonably possible that the Company will conclude the audits of 1999 and 2000 within the next 12-month period, and it is estimated that the Company’s FIN 48 liability could decrease by approximately $0.7 million upon the conclusion of these audits.  The state income tax returns for all years after 2002 are subject to potential future audit by tax authorities in the Company’s major state tax jurisdictions.

Income tax expense is based on pre-tax financial accounting income, including adjustments made for the recognition or derecognition related to uncertain tax positions.  The recognition or derecognition of income tax expense related to uncertain tax positions is determined under the guidance as prescribed by FIN 48.  Deferred tax assets and liabilities are recognized for the future tax attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.  Deferred tax assets and liabilities are measured using enacted tax rates expected to be recovered or concluded.  The effect on deferred tax assets and liabilities of a change in tax rates is recognized in earnings in the period that includes the enactment date.

G. Earnings Per Share

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

(in thousands, except per share amounts)
 
Three Months Ended
June 30, 2007
   
Three Months Ended
June 30, 2006 (a)
   
Six Months Ended
June 30, 2007
   
Six Months Ended
June 30, 2006 (a)
 
Basic:
                       
Net income
  $
17,997
    $
8,945
    $
37,161
    $
27,904
 
Average shares outstanding
   
28,160
     
28,507
     
28,194
     
28,842
 
Basic net income per share
  $
0.64
    $
0.31
    $
1.32
    $
0.97
 
                                 
Diluted:
                               
Net income
  $
17,997
    $
8,945
    $
37,161
    $
27,904
 
Add interest expense on convertible note, net of management fee and taxes
   
429
     
351
     
857
     
703
 
Total
  $
18,426
    $
9,296
    $
38,018
    $
28,607
 
                                 
Average shares outstanding
   
28,160
     
28,507
     
28,194
     
28,842
 
Dilutive stock options
   
44
     
27
     
35
     
34
 
Assumed conversion of convertible note
   
943
     
962
     
943
     
962
 
Total
   
29,147
     
29,496
     
29,172
     
29,838
 
Diluted net income per share
  $
0.63
    $ 0.31 (b)   $
1.30
    $
0.96
 

 
(a)  
As restated to reflect the reversal of certain previously-accrued expenses for investment partnership compensation as described in Note A of this report on Form 10-Q.
(b)  
Diluted net income per share is anti-dilutive and has therefore been reported at basic net income per share.
 
10

H. Stockholders’ Equity

Shares outstanding on June 30, 2007 were 28.1 million, slightly below March 31, 2007 shares of 28.2 million and approximately 0.5% lower than 28.3 million shares outstanding on June 30, 2006.  Fully diluted shares outstanding for the second quarter of 2007 were 29.1 million, 0.1 million below the first quarter 2007 fully diluted shares outstanding and 1.2% below our fully diluted shares of 29.5 million for the second quarter 2006.

In addition to the regular dividend of $0.03 per share which was declared on May 9, 2007 and paid on June 28, 2007, and subsequent to the end of our quarter, the Board of Directors declared a special cash dividend of $1.00 per share payable on July 30, 2007 to holders of record on July 23, 2007.

Stock Award and Incentive Plan

Effective January 1, 2003, we adopted the fair value recognition provisions of FAS No. 123 in accordance with the transition and disclosure provisions under the recently issued FAS No. 148, “Accounting for Stock Based Compensation – Transition and Disclosure.”

We adopted FAS 123 (R) on January 1, 2005.  In light of our modified prospective adoption of the fair value recognition provisions of FAS 123 (R) for all grants of employee stock options, the adoption of FAS 123 (R) did not have a material impact on our consolidated financial statements.  For the three months ended June 30, 2007 and 2006, we recognized stock-based compensation expense of $24,000 and $14,000, respectively.  For the six months ended June 30, 2007 and 2006, we recognized stock-based compensation expense of $45,000 and $20,000, respectively.   The total compensation costs related to non-vested awards not yet recognized are approximately $193,000.  These will be recognized as expense in the following periods:
 
Remainder of
2007
   
2008
   
2009
   
2010
 
$
47,000
    $
89,000
    $
47,000
    $
10,000
 

      Proceeds from the exercise of 5,400 and 5,000 stock options were $162,000 and $133,000 for the three months ended June 30, 2007 and 2006, respectively. The excersize of the options resulted in a tax benefit to GAMCO of $32,000 and $21,000 for the three months ended June 30, 2007 and 2006, respectively. Proceeds from the exercise of 8,150 and 15,000 stock options were $209,000 and $348,000 for the six months ended June 30, 2007 and 2006, respectively, resulting in a tax benefit to GAMCO of $57,000 and $87,000 for the six months ended June 30, 2007 and 2006, respectively.

 Stock Repurchase Program

In March 1999, the Board of Directors established the Stock Repurchase Program to grant us authority to repurchase shares of our Class A common stock.  For the three months ended June 30, 2007 and 2006, we repurchased 55,600 shares at an average investment of $49.35.  Since the inception of the program we have repurchased 4,783,858 class A common shares at an average investment of $39.58 per share.  The total amount of shares currently available for repurchase under the current authorization is approximately 934,000 shares at June 30, 2007.
 
I. Goodwill

In accordance with FAS 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, using a present value cash flow method.  There was no impairment charge recorded for the three months ended June 30, 2007 and 2006, respectively.  For the six months ended June 30, 2007, there was an impairment charge of $56,000 recorded as a result of the voluntary deregistration of an inactive broker dealer subsidiary. There was no impairment charge recorded for the six months ended June 30, 2006. At June 30, 2007 and 2006, there remains $3.5 million of goodwill related to our 92%-owned subsidiary, Gabelli Securities, Inc.

J.  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.  As a result of discussions with the SEC for a potential resolution of their inquiry, GAMCO recorded a reserve against earnings of approximately $15 million in 2006.  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.

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, 2007 and 2006, 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 of the third parties or the Company against losses, costs, claims and liabilities arising from the performance of obligations under the agreements, except for generally 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 the FASB issued Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others”, our estimate of the value of such agreements is de minimis, and therefore an accrual has not been made in the financial statements.

K. Subsequent Events

On July 10, 2007, our Board of Directors declared a special cash dividend of $1.00 per share payable on July 30, 2007 to holders of record on July 23, 2007.
 
On July 10, 2007, the Company appointed Kieran Caterina and Diane M. LaPointe Acting Co-Chief Financial Officers.

On August 7, 2007, our Board of Directors declared a quarterly dividend of $0.03 per share to be paid on September 14, 2007 to shareholders of record on September 28, 2007.

From July 1 through August 9, 2007, we repurchased 27,600 shares of our class A common stock, under the Stock Repurchase Program, at an average investment of $49.09 per share.
 
11



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

Overview

GAMCO Investors, Inc. (NYSE: GBL), well known for its Private Market Value (PMV) with a CatalystTM investment approach, is a widely-recognized provider of investment advisory services to mutual funds, institutional and high net worth investors, and investment partnerships, principally in the United States.  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.

Since 1977, we have been identified with and have 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 portfolios, we offer our clients a broad array of investment strategies that includes global, growth, international and convertible products.  We also offer a series of investment partnership (performance fee-based) vehicles that provide a series of long-short investment opportunities in market and sector specific opportunities, including offerings of non-market correlated investments in merger arbitrage, as well as fixed income strategies.

Our revenues are highly correlated to the level of assets under management and fees associated with our various investment products, rather than our own corporate assets.  Assets under management, which are directly influenced by the level and changes of the overall equity markets, can also fluctuate through acquisitions, the creation of new products, the addition of new accounts or the loss of existing accounts.  Since various equity products have different fees, changes in our business mix may also affect revenues.  At times, the performance of our equity products may differ markedly from popular market indices, and this can also impact our revenues.  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.

Assets Under Management (AUM) were a record $30.6 billion as of June 30, 2007, 4.3% higher than March 31, 2007 AUM of $29.4 billion and 14.4% greater than June 30, 2006 AUM of $26.8 billion.  Equity assets under management were a record $29.9 billion on June 30, 2007, 4.2% more than March 31, 2007 equity assets of $28.7 billion and 15.7% above the $25.9 billion on June 30, 2006. Our closed-end equity funds reached a record AUM of $6.4 billion on June 30, 2007, up 3.6% from $6.2 billion on March 31, 2007 and 21.9% higher than the $5.3 billion on June 30, 2006. Our open-end equity fund AUM were $9.5 billion on June 30, 2007, a 7.6% gain from $8.9 billion on March 31, 2007 and 22.2% from $7.8 billion at June 30, 2006. Our institutional and high net worth business had $13.5 billion in separately managed accounts on June 30, 2007.  While up only a nominal 2.1% from $13.2 billion on March 31st, we do note that – as previously disclosed – on June 22nd we were displaced as a sub-advisor to a mutual fund entity that was sold.  We managed $551 million as of March 31, 2007 for this account. Our Investment Partnerships AUM were $486 million on June 30, 2007 versus $477 million on March 31, 2007 and $536 million on June 30, 2006. We receive incentive and fulcrum fees for our investment partnership assets, certain institutional client assets, preferred issues of our closed-end funds and our new closed-end fund launched in January 2007, the Gabelli Global Deal Fund.  As of June 30, 2007, assets generating performance-based fees were $3.6 billion, an increase of 3.8% versus the $3.5 billion on March 31, 2007 and 19.5% increase over the $3.0 billion on June 30, 2006. Fixed income AUM, primarily money market mutual funds, totaled $705 million on June 30, 2007 compared to AUM of $640 million on March 31, 2007 and AUM of $918 million on June 30, 2006.


12


The company reported Assets Under Management as follows:
 
Assets Under Management (millions)
 
Table I:
Mutual Funds:
 
June 30, 2006
   
June 30, 2007
   
% Inc. (Dec.)
 
Open-end
  $
7,796
    $
9,529
      22.2 %
Closed-end
   
5,258
     
6,412
     
21.9
 
Fixed Income
   
863
     
684
      (20.7 )
Total Mutual Funds
   
13,917
     
16,625
     
19.5
 
Institutional & Separate Accounts:
                       
Equities: direct
   
9,520
     
11,116
     
16.8
 
“        sub-advisory
   
2,750
     
2,383
      (13.3 )
Fixed Income
   
55
     
21
      (61.8 )
Total Institutional & Separate Accounts
   
12,325
     
13,520
     
9.7
 
Investment Partnerships
   
536
     
486
      (9.3 )
Total Assets Under Management
  $
26,778
    $
30,631
     
14.4
 
                         
Equities
  $
25,860
    $
29,926
     
15.7
 
Fixed Income
   
918
     
705
      (23.2 )
Total Assets Under Management
  $
26,778
    $
30,631
     
14.4
 

Table II:
   
Assets Under Management (millions)
 
                                 
% Increase/(decrease)
 
Mutual Funds
   
6/06
     
9/06
     
12/06
     
3/07
     
6/07
     
3/07
     
6/06
 
Open-end
  $
7,796
    $
7,854
    $
8,389
    $
8,858
    $
9,529
      7.6 %     22.2 %
Closed-end
   
5,258
     
5,327
     
5,806
     
6,188
     
6,412
     
3.6
     
21.9
 
Fixed income
   
863
     
683
     
744
     
591
     
684
     
15.7
      (20.7 )
Total Mutual Funds
   
13,917
     
13,864
     
14,939
     
15,637
     
16,625
     
6.3
     
19.5
 
Institutional & Separate Accounts:
                                                       
Equities: direct
   
9,520
     
9,470
     
10,282
     
10,587
     
11,116
     
5.0
     
16.8
 
“        sub-advisory
   
2,750
     
2,725
     
2,340
     
2,608
     
2,383
      (8.6 )     (13.3 )
Fixed Income
   
55
     
54
     
50
     
49
     
21
      (57.1 )     (61.8 )
Total Institutional & Separate Accounts
   
12,325
     
12,249
     
12,672
     
13,244
     
13,520
     
2.1
     
9.7
 
Investment Partnerships
   
536
     
488
     
491
     
477
     
486
     
1.9
      (9.3 )
Total Assets Under Management
  $
26,778
    $
26,601
    $
28,102
    $
29,358
    $
30,631
     
4.3
     
14.4
 

Table III:
Fund Flows – 2nd Quarter 2007 (millions)
   
 
 
 
 
March 31,
2007
Net
Cash Flows
Market
Appreciation / (Depreciation)
June 30,
2007

Mutual Funds:
                       
Equities
  $
15,046
    $
149
    $
746
    $
15,941
 
Fixed Income
   
591
     
80
     
13
     
684
 
Total Mutual Funds
   
15,637
     
229
     
759
     
16,625
 
Institutional & Separate Accounts
                               
Equities: direct
   
10,587
      (161 )    
690
     
11,116
 
“        sub-advisory
   
2,608
      (415 )    
190
     
2,383
 
Fixed Income
   
49
      (29 )    
1
     
21
 
Total Institutional & Separate Accounts
   
13,244
      (605 )    
881
     
13,520
 
                                 
Investment Partnerships
   
477
      (3 )    
12
     
486
 
Total Assets Under Management
  $
29,358
    $ (379 )   $
1,652
    $
30,631
 
 
 
13


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 and have been complying with these requests for documents and testimony. We implemented additional compliance policies and procedures in response to recent industry initiatives and an internal review of our mutual fund practices and procedures in a variety of areas.  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 staff for a potential resolution of their inquiry.  In February 2007, one of our advisory subsidiaries made an offer of settlement to the SEC staff for communication to the Commission for its consideration to resolve this matter. This offer of settlement is subject to final agreement regarding the specific language of the SEC’s administrative order and other settlement documents. As a result of these developments, we recorded a reserve of approximately $15.0 million in 2006. 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 SEC that they may recommend to the Commission that one of our advisory subsidiaries be held accountable for the actions of two of the eight 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 Form 1099-Div 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.

     The investment management industry is likely to continue facing a high level of regulatory scrutiny and become subject to additional rules designed to increase disclosure, tighten controls and reduce potential conflicts of interest.  In addition, the SEC has substantially increased its use of focused inquiries in which it requests information from a number of fund complexes regarding particular practices or provisions of the securities laws.  We participate in some of these inquiries in the normal course of our business.  Changes in laws, regulations and administrative practices by regulatory authorities, and the associated compliance costs, have increased our cost structure and could in the future have a material impact.

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.
 
14

RESULTS OF OPERATIONS
 
Three Months Ended June 30, 2007 Compared To Three Months Ended June 30, 2006

Condensed Consolidated Results – Three Months Ended June 30:
(Unaudited; in thousands, except per share data)
             
   
2007
   
2006 (a)
 
             
Revenues
           
  Investment advisory and incentive fees
  $
57,654
    $
53,586
 
  Commission revenue
   
4,036
     
2,829
 
  Distribution fees and other income
   
6,587
     
5,244
 
     Total revenues
   
68,277
     
61,659
 
Expenses
               
  Compensation and related costs
   
29,905
     
25,436
 
  Management fee
   
3,449
     
1,818
 
  Distribution costs
   
10,161
     
5,329
 
  Other operating expenses
   
7,594
     
7,713
 
  Reserve for settlement
   
-
     
11,900
 
     Total expenses
   
51,109
     
52,196
 
Operating income
   
17,168
     
9,463
 
Other income (expense)
               
Net gain from investments
   
11,193
     
4,244
 
Interest and dividend income
   
6,166
     
6,111
 
Interest expense
    (3,329 )     (3,394 )
Total other income (expense), net
   
14,030
     
6,961
 
Income before taxes and minority interest
   
31,198
     
16,424
 
Income tax provision
   
12,856
     
7,360
 
Minority interest
   
345
     
119
 
Net income
  $
17,997
    $
8,945
 
                 
Net income per share:
               
   Basic
  $
0.64
    $
0.31
 
   Diluted
  $
0.63
    $
0.31
 
                 
Reconciliation of Net income to Adjusted EBITDA:
               
                 
Net income
  $
17,997
    $
8,945
 
Interest Expense
   
3,329
     
3,394
 
Income tax provision and minority interest
   
13,201
     
7,479
 
Depreciation and amortization
   
216
     
220
 
Adjusted EBITDA(b)
  $
34,743
    $
20,038
 
 
 
(a) As restated to reflect the reversal of certain previously-accrued expenses for investment partnership compensation as described in note A in item 1 of this report on Form 10-Q.
 
(b) Adjusted EBITDA is defined as earnings before interest, taxes, depreciation and amortization, and minority interest.  Adjusted EBITDA is a non-GAAP measure and should not be considered as an alternative to any measure of performance as promulgated under accounting principles generally accepted in the United States nor should it be considered as an indicator of our overall financial performance.  We use Adjusted EBITDA as a supplemental measure of performance as we believe it gives investors a more complete understanding of our operating results before the impact of investing and financing activities as a tool for determining the private market value of an enterprise.

Total revenues were $68.3 million in the second quarter of 2007 up $6.6 million or 10.7% from total revenues of $61.7 million reported in the second quarter of 2006.  Operating income was $17.2 million, an increase of $7.7 million or 81.4% from the $9.5 million in the second quarter of 2006.  Total other income, net of interest expense, increased to $14.0 million for the second quarter 2007, doubling from the $7.0 million for second quarter 2006.  In the short-run, our results remain sensitive to changes in the equity market.  Net income for the quarter was $18.0 million or $0.63 per fully diluted share versus $8.9 million or $0.31 per fully diluted share in the prior year’s quarter.
 
Investment advisory and incentive fees increased to $57.7 million, an increase of $4.1 million or 7.6% compared to the revenues in 2006. Our closed-end funds revenues surged 19.2% to $12.8 million in the second quarter 2007 from $10.8 million in 2006 primarily due to higher performance and the launch of a new fund. Open-end mutual funds revenues grew 15.7% to $23.3 million from $20.1 million in second quarter 2006 primarily due to higher performance. Institutional and high net worth separate accounts revenues decreased 2.4% to $20.3 million from $20.7 million in second quarter 2006 primarily due to lower performance related fees. Investment Partnership revenues were $1.2 million, $0.7 million or 35.0% below revenues in 2006.  The decline was primarily due to lower management fees resulting from a decrease in AUM.

Commission revenues from our institutional research affiliate, Gabelli & Company, Inc., were $4.0 million in the second quarter 2007, up 42.7% from the prior year.  The increase was traced to an increase in overall trading volume and to a change in the mix of business transacted.

Revenues from the distribution of mutual funds and other income were $6.6 million for the second quarter 2007, an increase of $1.4 million, or 25.6%, from $5.2 million in second quarter 2006.

Total expenses, excluding management fee, were $47.7 million in the second quarter of 2007, a 5.4% decrease from total expenses of $50.4 million in the second quarter of 2006.  Included within second quarter 2007 total expenses are approximately $4.2 million in distribution costs associated with the termination of a closed-end fund compensation agreement. Second quarter 2006 total expenses include a previously-reported special charge of approximately $12 million.

Compensation and related costs, which are largely variable, of $29.9 million were $4.5 million or 17.6% higher than the $25.4 million recorded in the prior year period.  This increase was primarily due to higher variable compensation of $2.9 million and increased salaries of $1.4 million.

Management fee expense, which is totally variable and based on pretax income, was $3.4 million versus $1.8 million in 2006.
 
Distribution costs were $10.2 million, near double the $5.3 million in the prior year’s period. The termination of a closed-end fund compensation agreement increased the current quarter’s costs by $4.2 million.

Other operating expenses, excluding the previously mentioned special charge in the second quarter of 2006  reserve of approximately $12 million, remained relatively flat, at $7.6 million.

Total other income (which represents primarily investment income in our proprietary investments), net of interest expense, was $14.0 million for the second quarter 2007 compared to $7.0 million in 2006.
15

Interest expense remained relatively flat, decreasing approximately $0.1 million from the prior year second quarter amount of $3.4 million.
 
The effective tax rate for the three months ended June 30, 2007 was 41.2% as compared to the prior year quarter’s effective rate of 44.8%.  
 
Minority interest increased to $0.3 million in 2007 from $0.1 million in 2006.
 
In the first quarter of 2006, the provisions of FASB Interpretation No. 46R (“FIN 46R”) and Emerging Issue Task Force 04-5 (“EITF 04-5”) required the consolidation 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, FIN 46R and EITF 04-5 only required us to consolidate these entities on our consolidated condensed statement of income for the first quarter 2006.  Accordingly, to provide a better understanding of our core results and trends, GAMCO has provided the 2006 results throughout the following analysis before adjusting for FIN 46R and 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 below.
Six Months Ended June 30, 2007 Compared To Six Months Ended June 30, 2007

Condensed Consolidated Results – Six Months Ended June 30th:
(Unaudited; in thousands, except per share data)
   
2006 (a)
   
2006 (b)
   
Adjust-
ments(c)
   
2006 (d)
   
2007 (e)
Revenues
                           
Investment advisory and incentive fees
  $
106,413
    $
104,947
    $ (963 )   $
103,984
    $
114,214
 
Commission revenue
   
6,380
     
6,380
     
-
     
6,380
     
8,056
 
Distribution fees and other income
   
10,579
     
10,579
     
-
     
10,579
     
12,613
 
Total revenues
   
123,372
     
121,906
      (963 )    
120,943
     
134,883
 
Expenses
                                   
Compensation and related costs
   
54,233
     
50,212
     
-
     
50,212
     
58,279
 
Management fee
   
5,282
     
5,235
     
-
     
5,235
     
6,850
 
Distribution costs
   
10,544
     
10,544
     
-
     
10,544
     
16,047