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

We were not required to consolidate these entities on our consolidated statements of financial condition at March 31, 2006. In addition, these partnerships and offshore funds, for
which the agreements were amended, are not required to be consolidated within our consolidated statement of income and consolidated statement of cash flows or on our
consolidated statements of financial condition in the second quarter or future periods as long as GBL continued to not maintain direct or indirect control over the investment
partnerships and offshore funds. The equity method of accounting is applied for the investment partnerships and offshore funds that are not consolidated under the provisions of
FIN 46R and EITF 04-5. For the year ended December 31, 2006, the consolidation of these entities for the first quarter 2006 had no effect on net income but does affect the
classification of income between operating and other income.
Six entities, five investment partnerships and one offshore fund, are consolidated as a result of applying the guidance in EITF 04-5 and one entity, an offshore fund, is consolidated
as a result of applying the guidance in FIN 46R.
We also serve as the investment manager or co-investment manager for several offshore funds and the general partner for one partnership, which are classified as VIEs. These
offshore funds seek to earn absolute returns for investors and are primarily focused within our event-driven long/short equity and sector-focused strategies. The partnership seeks
to generate absolute returns by investing in, and optimizing, a portfolio of several investment partnerships managed and advised by us. Our involvement with one of these offshore
funds began in 1994 but the majority of the offshore funds were launched between 1999 and 2002. The partnership began in 2005.
The total net assets of the six offshore funds and one partnership, which are classified as VIEs, were approximately $56.5 million on December 31, 2006, and the total net assets of
the five offshore funds and one partnership on December 31, 2005 were approximately $40.0 million. On December 31, 2006, we were not the primary beneficiary or a holder of
a significant variable interest in six of the seven VIEs therefore these are not consolidated in our consolidated financial statements. In the other instance, an unconsolidated related
party held an interest in an offshore fund which, when combined with the Company’s cash flows from the incentive fee allocation and the management fee as co-investment manager
results in the Company being considered the primary beneficiary of such entity. This offshore fund is a global event-driven long/short equity fund with total assets of $10,078,000
and $9,246,000 and total liabilities of $979,000 and $872,000 at December 31, 2005 and 2006, respectively. This fund was not consolidated as of and for the year ended
December 31, 2005 but has been consolidated as of and for the year ended December 31, 2006. As co-investment manager of this fund, we earned approximately $73,000,
$100,000 and $62,000 in management and incentive fees in 2004, 2005 and 2006, respectively.
Our maximum exposure to loss as a result of our involvement with the six offshore funds classified as VIEs is limited to our investment in the respective VIEs which was only the
case for one of these funds. On December 31, 2005 and 2006, we had an investment in this offshore fund of approximately $187,000 and $196,000, respectively. Our maximum
exposure to loss as a result of our involvement with the partnership classified as a VIE includes our investment as well as being contingently liable for all of the partnership’s liabilities
in our capacity as general partner. On December 31, 2005 and 2006, we did not have an investment in this partnership.
We also consolidated five other investment partnerships and one other offshore fund in which we have a direct or indirect controlling financial interest as of and for the year ended
December 31, 2006. These entities have been consolidated within our consolidated financial statements for the year ended December 31, 2006 and will continue to be
consolidated in future periods as long as we continue to maintain a direct or indirect controlling financial interest. In addition to minor FIN 46R and EITF 04-5 adjustments to the
consolidated statements of income and consolidated statements of cash flows for the year ended December 31, 2006 related to these entities, the consolidation of these entities also
resulted in minor adjustments to our consolidated statements of financial condition at December 31, 2006. The consolidation of these entities on the consolidated statements of
financial condition has increased assets by $17.5 million, liabilities by $3.2 million and minority interest by $14.3 million. Prior to consolidation of these entities, our investments in
these entities were reflected within investments in partnerships and affiliates on the consolidated statements of financial condition and accounted for under the equity method.
For the year ended December 31, 2006, the consolidation of these entities had no impact on net income but did result in (a) the elimination of revenues and expenses which are now
intercompany transactions; (b) the recording of all the partnerships’ operating expenses of these entities including those pertaining to third-party interests; (c) the recording of all
other income of these entities including those pertaining to third-party interests; (d) recording of income tax expense of these entities including those pertaining to third party interests
and (e) the recording of minority interest which offsets the net amount of any of the partnerships’ revenues, operating expenses, other income and income taxes recorded in these
respective line items which pertain to third-party interest in these entities. While this had no impact on net income, the consolidation of these entities does affect the classification of
income between operating and other income.
We are general partner or co-general partner of various limited partnerships and the Investment Manager of various offshore funds whose underlying assets consist primarily of
marketable securities. As general partner or co-general partner, we are contingently liable for all of the partnerships’ liabilities. As described above, some of these partnerships and
offshore funds are consolidated and others are not. Summary financial information from partnerships that are not consolidated at December 31, 2005 and 2006 and for the years
then ended, is as follows (in thousands):
2005 2006
Total assets $ 250,129 $ 261,437
Total liabilities 48,164 3,637
Equity 201,965 257,800
Our balance sheet caption “investments in partnerships and affiliates” does include those investments which we account for under the equity method of accounting. We reflect the
equity in earnings of these equity method investees under the caption net gain from investments on the Consolidated Statements of Income. For 2004, 2005 and 2006, the equity in
earnings of these equity method investees was $4.8 million, $7.0 million and $7.4 million, respectively.
For the year ended December 31, 2006, the net earnings and Company's carrying value for the above partnerships that are not consolidated were $25,548,000 and $12,862,000,
respectively. For 2005, the net earnings and Company's carrying value for all the above partnerships were $13,804,000 and $24,642,000, respectively.
For the year ended December 31, 2006, the income from our investments in the above partnerships that are not consolidated was $849,000. For the years ended December 31,
2004 and 2005, the income from our investments for all of the partnerships was approximately $1,217,000 and $747,000.
As general partner or co-general partner of various limited partnerships, we receive a management fee based on a percentage of each partnership's net assets and a 20% incentive
allocation based on economic profits. For the year ended December 31, 2006 for the partnerships that were not consolidated, we earned management fees and incentive fees of
$1,606,000 and $2,373,000, respectively. For the years ended December 31, 2004 and 2005 for all of the partnerships, we earned management fees of approximately
$2,029,000 and $1,865,000, respectively and earned incentive allocations of $830,000 and $1,585,000, respectively.
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