FORM 10-K/A GAMCO Investors, Inc. - Gabelli

Expenses
Compensation: Compensation costs, which are largely variable in nature, decreased approximately $4.2 million, or 3.9%, to $102.0 million in 2006 from $106.1 million in
2005. Our variable compensation costs decreased $5.2 million to $72.1 million in 2006 from $77.3 million in 2005 and decreased, as a percent of revenues, to 27.6% in 2006
compared to 30.5% in 2005. While overall revenues increased, revenues in the Investment Partnership area decreased $2.8 million, as disclosed on page 52. As a result, the
compensation relating to the Investment Partnership area decreased from year to year because the variable compensation is driven by revenue levels. An additional component of
this decrease was the change in the compensation structure and the decision to not pay certain investment partnership compensation for 2006. On a comparable basis, GBL paid
out a lower percentage of Investment Partnership revenues in related variable compensation in 2006 than we did in 2005. Fixed compensation costs rose approximately $1.1 million
to $29.9 million in 2006 from $28.8 million in 2005 principally due to increases in salaries and bonuses, partially offset by reduced stock option expense.
Management Fee: Management fee expense is incentive-based and entirely variable compensation in the amount of 10% of the aggregate pre-tax profits which is paid to Mr.
Gabelli for acting as CEO pursuant to his Employment Agreement so long as he is an executive of GBL and devoting the substantial majority of his working time to the business. In
2006, management fee expense increased 15.5% to $13.2 million versus $11.5 million in 2005.
Distribution Costs: Distribution costs, which include marketing, promotion and distribution costs increased $4.3 million or 19.8% in 2006 from the 2005 period. This increase
relates primarily to the voluntary prepayment of distribution expenses of $4.2 million in connection with a closed-end fund, The Gabelli Dividend & Income Trust, and continuing
distribution costs increases to $1.2 million in 2006 from the 2005 period.
Other Operating Expenses: Our ongoing other operating expenses were $27.6 million in 2006 compared to $26.7 million in 2005. However, total other operating expenses
increased 65.2% in 2006 as a result of a reserve against earnings of approximately $15.0 million relating to the proposed settlement of an SEC inquiry, an increase in operating
expenses of $1.0 million due to the funding of the Graham & Dodd, Murray, Greenwald Prize for Value Investing, and other donations of approximately $0.5 million. We cannot
determine at this time whether our reserves will be sufficient to cover any payments by the Company related to such a settlement, or whether and to what extent insurance may
cover such payments.
Other Income and Expense
Our proprietary investment portfolio consists of investments in mutual funds, U.S. treasury bills, common stocks as well as other investments including limited partnerships and
offshore funds. Net gain from investments increased to $41.7 million for the year ended December 31, 2006 compared to $10.9 million in 2005. Of the increase, $17.3 million was
primarily due to improved investment results and $13.5 million of the increase was due to the consolidation of certain partnerships and offshore funds that are not expected to be
consolidated in future periods in accordance with FASB Interpretation No. 46R (“FIN 46R”) and Emerging Issue Task Force 04-5 (“EITF 04-5”) in 2006.
Interest and dividend income was $29.4 million in 2006 compared to $18.5 million in 2005.
Interest expense increased $0.4 million to $14.2 million in 2006, from $13.8 million in 2005. The increase is a result of changes to the terms of our $50 million convertible note with
Cascade Investments L.L.C. (“Cascade”). In June 2006, GBL and Cascade agreed to amend the terms of the $50 million convertible note maturing in August 2011. Effective
September 15, 2006, the rate on the note increased from 5% to 6% while the conversion price was raised to $53 per share from $52 per share. In addition, the exercise date of
Cascade’s put option was extended to May 15, 2007, the expiration date of the related letter of credit was extended to May 22, 2007 and a call option was included giving GBL
the right to redeem the note at 101% of its principle amount together with all accrued but unpaid interest thereon upon at least 30 days prior written notice, subject to certain
provisions.
Income Taxes
The effective tax rate for 2006 was 38.2% compared to 37.5% in the prior year. Excluding the tax effects of the reserve against earnings as described above, the effective tax rate
was 37.1%.
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