SECURITIES & EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

(Mark One)

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

For the quarterly period ended September 30, 2018

or

For the transition period from ___ to ___

Commission File No. 001-14761

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes   No 

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  No

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

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

Indicate the number of shares outstanding of each of the Registrant’s classes of Common Stock, as of the latest practical date.

GAMCO INVESTORS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

UNAUDITED

(Dollars in thousands, except per share data)

See accompanying notes.

GAMCO INVESTORS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

UNAUDITED

(Dollars in thousands, except per share data)

(a) Net of income tax expense of $0, $1,363, $0 and $599, respectively.

Effective January 1, 2018, upon the adoption of ASU 2016-01, the Company no longer recognizes

unrealized gains or losses on equity securities through other comprehensive gain/(loss).  See Note C.

See accompanying notes.

GAMCO INVESTORS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

UNAUDITED

(Dollars in thousands, except per share data)

See accompanying notes.

GAMCO INVESTORS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY

UNAUDITED

(In thousands)

For the Nine Months Ended September 30, 2018

See accompanying notes.

GAMCO INVESTORS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY

UNAUDITED

(In thousands)

For the Nine Months Ended September 30, 2017

See accompanying notes.

GAMCO INVESTORS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

UNAUDITED

(In thousands)

GAMCO INVESTORS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

UNAUDITED (continued)

(In thousands)

Non-cash activity:

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

See accompanying notes.

GAMCO INVESTORS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2018

(Unaudited)

A.  Significant Accounting Policies

Basis of Presentation

Unless we have indicated otherwise, or the context otherwise requires, references in this report to “GAMCO Investors, Inc.,” “GAMCO,” “the Company,” “GBL,” “we,” “us” and “our” or similar terms are to GAMCO Investors, Inc., its predecessors and its subsidiaries.

 

The unaudited interim condensed consolidated financial statements of GAMCO included herein have been prepared in conformity with generally accepted accounting principles (“GAAP”) in the United States for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by U.S. GAAP in the United States for complete financial statements.  In the opinion of management, the unaudited interim condensed consolidated financial statements reflect all adjustments, which are of a normal recurring nature, necessary for a fair presentation of financial position, results of operations and cash flows of GAMCO for the interim periods presented and are not necessarily indicative of a full year’s results.

 

The interim condensed consolidated financial statements include the accounts of GAMCO and its subsidiaries.  Intercompany accounts and transactions are eliminated.

 

These interim condensed consolidated financial statements should be read in conjunction with our audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2017.

Use of Estimates

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

Recent Accounting Developments

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, "Revenue from Contracts with Customers," which supersedes the revenue recognition requirements in the Accounting Standards Codification ("Codification") Topic 605, Revenue Recognition, and most industry-specific guidance throughout the industry topics of the Codification.  The core principle of the new ASU No. 2014-09 is for companies to recognize revenue from the transfer of goods or services to customers in amounts that reflect the consideration to which the company expects to be entitled to receive in exchange for those goods or services.  The new standard provides a five-step approach to be applied to all contracts with customers and also requires expanded disclosures about revenue recognition.  In March 2016, the FASB issued revised guidance which clarifies the guidance related to (a) determining the appropriate unit of account under the revenue standard’s principal versus agent guidance and (b) applying the indicators of whether an entity is a principal or an agent in accordance with the revenue standard’s control principle. In April 2016, the FASB issued an amendment to provide more detailed guidance including additional implementation guidance and examples related to (a) identifying performance obligations and (b) licenses of intellectual property.  In May 2016, the FASB amended the standard to clarify the guidance on (a) assessing collectability, (b) presenting sales taxes, (c) measuring noncash consideration, and (d) certain transition matters.  The Company adopted this guidance on January 1, 2018 and adopted the modified retrospective approach.  The Company’s implementation analysis has been completed, and we have identified similar performance obligations under this guidance as compared with deliverables and separate units of account previously identified under Topic 605.  As a result, the timing of the recognition of our revenue remains the same as under Topic 605, and therefore the adoption does not have any effect on the timing of the recognition of revenue.  See Note B. Revenue Recognition for the disclosures required by ASU 2014-09.

In January 2016, the FASB issued ASU 2016-01, which amends the guidance in U.S. GAAP on the classification and measurement of financial instruments. Although the ASU retains many current requirements, it significantly revises an entity’s accounting related to (1) the classification and measurement of investments in equity securities and (2) the presentation of certain fair value changes for financial liabilities measured at fair value. The ASU also amends certain disclosure requirements associated with the fair value of financial instruments. In addition, the FASB clarified guidance related to the valuation allowance assessment when recognizing deferred tax assets resulting from unrealized losses on available-for-sale debt securities. To adopt the amendments, entities are required to make a cumulative-effect adjustment to beginning retained earnings as of the beginning of the fiscal year in which the guidance is effective.  The Company adopted this guidance on January 1, 2018 and reclassified $12.1 million out of Accumulated Other Comprehensive Income and into Retained Earnings.  Effective January 1, 2018, changes in the fair value of the Company’s investments in equity securities are reported through earnings in the net gain (loss) from investments line in the condensed consolidated statements of income rather than through other comprehensive income.

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

In August 2016, the FASB issued ASU 2016-15, which adds and clarifies guidance on the classification of certain cash receipts and payments in the consolidated statements of cash flows.  This guidance is intended to unify the currently diverse presentations and classifications, which address eight classification issues related to the statement of cash flows, including debt prepayment or debt extinguishment costs, settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies, distributions received from equity method investees, beneficial interests in securitization transactions, and separately identifiable cash flows and application of the predominance principle.  The Company adopted this guidance on January 1, 2018 without a material impact to the consolidated financial statements.

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

On May 10, 2017, the FASB issued ASU 2017-09, which amends the scope of modification accounting for share-based payment arrangements.  The ASU provides guidance on the types of changes to the terms or conditions of share-based payment awards to which an entity would be required to apply modification accounting under ASC 718.  Specifically, an entity would not apply modification accounting if the fair value, vesting conditions, and classification of the awards are the same immediately before and after the modification.  For all entities, the ASU is effective for annual reporting periods, including interim periods within those annual reporting periods, beginning after December 15, 2017.  The Company adopted this guidance on January 1, 2018 without a material impact to the consolidated financial statements.

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

 

B.  Revenue Recognition

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

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

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

 

Advisory Fee Revenues

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

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

Performance Correlated and Conditional Revenues

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

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

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

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

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

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

 

Distribution Fees and Other Income

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

Revenue Disaggregated

The following table presents our revenue disaggregated by account type:

C.  Investment in Securities

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

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

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

Investments in United States Treasury Bills and Notes with maturities of greater than three months at the time of purchase are classified as investments in securities, and those with maturities of three months or less at the time of purchase are classified as cash equivalents.  The portion of investments in securities held for resale in anticipation of short-term market movements were classified as trading securities for the periods ended December 31, 2017 and September 30, 2017.  Securities carried at FVTNI for the September 30, 2018 period-end and trading securities in the periods ending December 31, 2017 and September 30, 2017 are stated at fair value, with any unrealized gains or losses reported in current period earnings.  Available for sale (“AFS”) investments for the periods ended December 31, 2017 and September 30, 2017 are stated at fair value, with any unrealized gains or losses, net of taxes, reported as a component of equity except for losses deemed to be other than temporary (“OTT”) which were recorded as realized losses in the condensed consolidated statements of income.

Effective January 1, 2018, the Company adopted ASU 2016-01, which eliminated available for sale accounting and resulted in the reclassification of $12.1 million, net of tax, out of accumulated comprehensive income and into retained earnings in the condensed consolidated statement of financial condition.  As a result, for the three and nine months ended September 30, 2018, changes in the fair value of the Company’s entire investment portfolio are now recorded in the net gain (loss) from investments line in the condensed consolidated statements of income rather than through other comprehensive income.

The following table identifies all reclassifications out of accumulated other comprehensive income (“AOCI”) into income for the three and nine months ended September 30, 2017 (in thousands).  (No disclosure is needed for the three and nine months ended September 30, 2018 due to the adoption of ASU 2016-01.)

 

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

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

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

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

 

D. Fair Value

The following tables present information about the Company’s assets and liabilities by major categories measured at fair value on a recurring basis as of September 30, 2018, December 31, 2017 and September 30, 2017 and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value:

Assets and Liabilities Measured at Fair Value on a Recurring Basis as of September 30, 2018 (in thousands)

Assets and Liabilities Measured at Fair Value on a Recurring Basis as of December 31, 2017 (in thousands)

Assets and Liabilities Measured at Fair Value on a Recurring Basis as of September 30, 2017 (in thousands)

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

E. Income Taxes

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

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

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

 

F. Earnings Per Share

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

G. Debt

Debt consists of the following:

4.5% Convertible Note

On August 15, 2016, the Company issued and sold a 5-year, $110 million convertible note (“Convertible Note”).  The note bore interest at a rate of 4.5% per annum and was convertible into shares of the Company’s Class A Common stock (“Class A Stock”) at an initial conversion price of $55.00 per share.  The Convertible Note was initially convertible into two million shares of the Company’s Class A Stock, subject to adjustment pursuant to the terms of the Convertible Note.  The Company was required to repurchase the Convertible Note at the request of the holder on specified dates or after certain circumstances involving a Fundamental Change (as defined in the Convertible Note).  The Company recorded $174,000 of costs in connection with the issuance of the Convertible Note.  On November 20, 2017, the Company and the Convertible Note holder agreed to amend the Convertible Note to allow for an early redemption if the Company paid the Convertible Note holder 103% of the unpaid principal plus all accrued but unpaid interest on the redemption date.  On November 21, 2017, the Company redeemed the Convertible Note for $114.6 million.  The payment was equal to 103% of the unpaid principal amount of the note plus accrued interest.  As a result, the Company recorded a loss on extinguishment of debt of $3.3 million and expensed the remaining $135,000 of issuance costs.

GGCP, Inc. (“GGCP”), which owns approximately 63 % of the equity interest of the Company, initially deposited cash equal to the principal amount of the Note and six months interest (“Initial Deposit”) into an escrow account established pursuant to an escrow agreement by and among GGCP, the Company, the Convertible Note holder and the escrow agent (the “Escrow Agreement”).  In connection with the Initial Deposit made by GGCP, the Company had agreed that GGCP had a right to demand payment in an amount equal to any funds withdrawn from the escrow account by the Convertible Note holder.  On September 30, 2017, in connection with an amendment to the Escrow Agreement and in exchange for approximately 53% of the assets in the escrow account, the Company paid GGCP $60 million.  On November 21, 2017, the Company paid GGCP $53 million for the remaining 47% of the assets in the escrow account that it did not previously own.

AC 4% PIK Note

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

During the three and nine months ended September 30, 2018, the Company prepaid $20 million and $50 million, respectively, of principal of the AC 4% PIK Note against the principal amount due on November 30, 2020.  The AC 4% PIK Note was fully repaid on August 28, 2018.  During the three and nine months ended September 30, 2017, the Company prepaid $10 million and $30 million, respectively, of principal of the AC 4% PIK Note.

AC 1.6% Note

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

5.875% Senior notes

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

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

The Company’s debt, which is a Level 2 valuation, is carried at amortized cost on the condensed consolidated statements of financial position.  The Company has not elected the fair value option for its debt, and, therefore, the provisions of ASU 2016-01 (adopted by the Company on January 1, 2018) related to instrument-specific credit risk are not applicable.

 

H. Stockholders’ Equity

 

Shares outstanding were 29.1 million, 29.0 million and 29.2 million on September 30, 2018, December 31, 2017 and September 30, 2017, respectively.

Dividends

Voting Rights

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

Stock Award and Incentive Plan

 

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

As of December 31, 2017 and September 30, 2017, there were 19,400 RSA shares and 164,050 RSA shares outstanding, respectively, that were previously issued at an average weighted grant price of $65.67 and $66.84, respectively. These RSA grants occurred prior to the spin-off of Associated Capital (“AC”).  All of these RSAs vested prior to March 31, 2018.  On April 4, 2018, 270,500 RSAs were issued at a grant price of $24.77.  On August 7, 2018, 162,450 RSAs were issued at a grant price of $25.16.  On September 17, 2018, 5,000 RSAs were issued at a grant price of $25.74.  As of September 30, 2018, there were 434,750 of these RSA shares outstanding with a weighted average grant price of $24.93.  All grants of the RSA shares were recommended by the Company's Chairman, who did not receive a RSA, and approved by the Compensation Committee. This expense, net of estimated forfeitures, is recognized over the vesting period for these awards which is either (1) 30% over three years from the date of grant and 70% over five years from the date of grant or (2) 30% over three years from the date of grant and 10% each year over years four through ten from the date of grant.  During the vesting period, dividends to RSA holders are held for them until the RSA vesting dates and are forfeited if the grantee is no longer employed by the Company on the vesting dates.  Dividends declared on these RSAs, less estimated forfeitures, are charged to retained earnings (deficit) on the declaration date.

On January 5, 2018, the Compensation Committee of GBL accelerated the vesting relating to the remaining 19,400 RSAs outstanding.  As a result, GBL recorded an incremental $0.2 million of stock-based compensation expense during the first nine months of 2018.

ASU 2016-09, which was issued in March 2016 and became effective for interim and annual reporting periods beginning after December 15, 2016, simplifies several aspects of accounting for employee share-based payment transactions.  Upon adoption of ASU 2016-09 on January 1, 2017, the Company elected not to change its accounting policy on forfeitures and continue to estimate forfeitures rather than accounting for forfeitures as they occur, an alternative allowed under ASU 2016-09.  The Company’s accounting treatment for excess tax benefits or tax deficiencies also changed with the adoption of ASU 2016-09 on January 1, 2017. Excess tax benefits or tax deficiencies are now required to be recorded within the income tax expense line in the consolidated statement of income rather than to additional paid-in capital within the condensed consolidated statement of financial condition.  During the nine months ended September 30, 2018, the Company reduced previously recorded tax benefits relating to RSA expense by $0.1 million on RSAs that vested.  There were no RSAs that vested for the three months ended September 30, 2018.

On June 1, 2017, the Compensation Committee of AC accelerated the vesting of all 420,240 AC RSAs outstanding effective June 15, 2017.  As a result, GBL recorded an incremental $3.7 million of stock-based compensation for the nine months ended September 30, 2017.  This amount related to GBL teammates who held AC RSAs.

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

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

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

Stock Repurchase Program

 

In March 1999, GAMCO’s Board of Directors established the Stock Repurchase Program to grant management the authority to repurchase shares of our Class A Common Stock.  For the three and nine months ended September 30, 2018, the Company repurchased 86,333 shares and 342,856 shares, respectively, at an average price per share of $25.99 and $26.52, respectively.  From the inception of the program through the November 30, 2015 spin-off of AC, 9,539,253 shares were repurchased.  From the spin-off date through September 30, 2018, 1,189,469 shares have been repurchased at an average price of $29.10 per share.  At September 30, 2018, the total shares available under the program to be repurchased in the future were 941,949.

 

Shelf Registration

On April 23, 2018, the Securities and Exchange Commission (“SEC”) declared effective the “shelf” registration statement filed by the Company.  The “shelf” provides the Company with the flexibility of issuing any combination of senior and subordinated debt securities, convertible securities and common and preferred securities up to a total amount of $500 million.   As of September 30, 2018, $500 million is available on the shelf.

 

I. Identifiable Intangible Assets

As a result of becoming the advisor to the Gabelli Enterprise Mergers and Acquisitions Fund and the associated consideration paid, the Company maintains an identifiable intangible asset of $1.9 million within other assets in the condensed consolidated statements of financial condition at September 30, 2018, December 31, 2017 and September 30, 2017. The investment advisory agreement is subject to annual renewal by the fund's Board of Directors, which the Company expects to be renewed, and the Company does not expect to incur additional expense as a result, which is consistent with other investment advisory agreements entered into by the Company.  The advisory contract is next up for renewal in February 2019. As a result of becoming the advisor to the Bancroft Fund Ltd. and the Ellsworth Growth and Income Fund Ltd. and the associated consideration paid, the Company maintains an identifiable intangible asset of $1.6 million within other assets in the condensed consolidated statement of financial condition at September 30, 2018, December 31, 2017 and September 30, 2017.  The advisory contracts for the Bancroft Fund Ltd. and the Ellsworth Growth and Income Fund Ltd. are next up for renewal in August 2019. The Company assesses the recoverability of this intangible asset at least annually, or more often should events warrant. There were no indicators of impairment for the three months ended September 30, 2018 or September 30, 2017, and as such there was no impairment analysis performed or charge recorded.

 

J. Commitments and Contingencies

From time to time, the Company may be named in legal actions and proceedings. These actions may seek substantial or indeterminate compensatory as well as punitive damages or injunctive relief. The Company is also subject to governmental or regulatory examinations or investigations. The examinations or investigations could result in adverse judgments, settlements, fines, injunctions, restitutions or other relief. For any such matters, the condensed consolidated financial statements include the necessary provisions for losses that the Company believes are probable and estimable. Furthermore, the Company evaluates whether there exists losses which may be reasonably possible and will, if material, make the necessary disclosures.  However, management believes such amounts, both those that are probable and those that are reasonably possible, are not material to the Company’s financial condition, operations or cash flows at September 30, 2018.

K. Related Party Transactions

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

L. Subsequent Events

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

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

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

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

Overview

 

GAMCO, through the Gabelli brand, well known for its Private Market Value (PMV) with a Catalyst^TM investment approach, is a widely-recognized provider of investment advisory services to open-end funds, closed-end funds, Exchange Traded Managed Funds (“ETMFs”), and institutional and private wealth management investors principally in the United States.  Through G.distributors, LLC (“G.distributors”), we provide distribution for open-end funds and ETMFs.  We generally manage assets on a fully discretionary basis and invest in a variety of U.S. and international securities through various investment styles including value, growth, non-market correlated, and convertible securities.  Our revenues are based primarily on the Company’s levels of assets under management and fees associated with our various investment products.

 

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

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

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

In addition to management fees, we earn incentive fees for certain institutional client assets, certain assets attributable to preferred issues of our closed-end funds, and two closed-end funds.  As of September 30, 2018, assets under management with incentive based fees were $2.2 billion, $0.8 billion less than the $3.0 billion on September 30, 2017.

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

Table I: Fund Flows - 3rd Quarter 2018

Table II: Fund Flows - Year to date September 2018