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

Diluted net income per share, in addition to the weighted average number of shares determined for basic net income per share, includes common stock equivalents which would
arise from the exercise of stock options using the treasury stock method and, if dilutive, assumes the conversion of our convertible note for the period outstanding since its issuance
in August 2001. An average of 208,000, 151,000 and 29,000 incremental shares were included as the dilutive effect of stock options in 2004, 2005 and 2006, respectively. In
2004, net income is adjusted for interest expense, net of management fees and taxes, of $2,862,000 and the weighted average shares outstanding includes 1,923,000 incremental
shares as the convertible note had a dilutive effect. In 2005, net income is adjusted for interest expense, net of management fees and taxes, of $1,758,000 and the weighted
average shares outstanding includes 1,199,000 incremental shares as the convertible note had a dilutive effect. In 2006, net income is adjusted for interest expense, net of
management fees and taxes, of $1,489,000 and the weighted average shares outstanding includes 956,000 incremental shares as the convertible note had a dilutive effect.
Stock Based Compensation
We currently sponsor stock option plans previously adopted and approved by our shareholders as a means to attract, retain and motivate employees. Effective January 1, 2003, we
adopted the fair value recognition provisions of SFAS No. 123 “Accounting for Stock-Based Compensation” in accordance with the transition and disclosure provisions under the
recently issued SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure.” Previously we had elected to use the intrinsic value method prescribed
in Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees” and related interpretations. Accordingly, no compensation expense was
recognized where the exercise price equaled or exceeded the market price of the underlying stock on the date of grant. We adopted Statement 123 (R) “Share-Based
Payment” (“Statement 123 (R)”) on January 1, 2005. In light of our modified prospective adoption of the fair value recognition provisions of Statement 123 (R) for all grants of
employee stock options, the adoption of Statement 123 (R) did not have a material impact on our consolidated financial statements. In 2004, 2005 and 2006, we have recognized
a total of $1,819,000, $2,770,000 and $53,000, respectively, in option expense. We expense stock option compensation over the vesting period of the option in line with the
vesting characteristics. Refer also to Note F.
Business Segments
We operate predominantly in one business segment, the investment advisory and asset management business. We conduct our investment advisory business principally through:
GAMCO (Separate Accounts), Funds Advisor (Mutual Funds) and GSI (Investment Partnerships). We also act as an underwriter, are a distributor of our open-end mutual funds
and provide institutional research through Gabelli & Company, our broker-dealer subsidiary.
Reclassifications
Certain prior period amounts reflect reclassifications to conform with the current year’s presentation.
Changes in Accounting Policy
GBL has voluntarily changed its accounting method to recognize management fee revenues on closed-end preferred shares at the end of the measurement period, effective January
1, 2006. Unlike most money management firms, GBL does not charge fees on leverage in its closed-end funds unless the total return to the common shareholders (of the closedend
fund at year-end) exceeds the dividend rate of the preferred shares. Prior to the accounting change, GBL recognized these revenues during each interim reporting period if and
when the total return to common shareholders of the closed-end fund exceeded the dividend rate of the preferred shares. Under this method, management fee revenues recognized
in prior interim periods during the measurement period were subject to possible reversal in subsequent periods during that measurement period. This change in method had no
impact on full year net income as the measurement date is the same as the fiscal year end.
In addition, GBL has changed its accounting method to recognize incentive allocation or fee revenues on investment partnerships at the end of the measurement period, effective
January 1, 2006. Prior to the accounting change, GBL recognized these revenues during each interim reporting period. Under this method, incentive fee revenues recognized in
prior interim periods during the measurement period were subject to possible reversal in subsequent periods during the measurement period. Had this method not changed, we
would have recorded approximately $0.2 million less in incentive fee revenues on investment partnerships for the year ended December 31, 2006.
After considering the guidance provided in EITF D-96, “Accounting for Management Fees Based on a Formula”, GBL believes that the preferable method of accounting is to
recognize management fee revenues on closed-end preferred shares and incentive fees on investment partnerships at the end of the measurement period. This method results in
revenue recognition only when the measurement period has been completed and when the management fees and incentive fees have been earned. This eliminates the possibility of
revenues that have been recognized in interim measurement periods subsequently being reversed in later periods during a fiscal year.
Under SFAS No. 154 “Accounting Changes and Error Corrections,” which GBL adopted on January 1, 2006, a voluntary change in accounting principle requires retrospective
application to each period presented as if the different accounting principle had always been used and requires an adjustment at the beginning of the first period presented for the
cumulative effect of the change to the new accounting principle. Whereas some investment partnerships have a fiscal year-end differing from GBL’s fiscal year-end, there is an
adjustment for the cumulative effect of a change to the accounting principle at January 1, 2004. Such cumulative effect of change in accounting amounted to $210,000 as of January
1, 2004 which is presented in the consolidated statement of stockholder’s equity. Additionally, there is a change in full year 2004 and 2005 revenues and net income from what
was previously reported. Therefore, this change in accounting principle resulted in an increase of revenues of approximately $0.6 million and $1.0 million in 2004 and 2005,
respectively, an increase in net income of approximately $32,000 and $125,000, respectively and an increase in earnings per share of $0.00 and $0.01 in 2004 and 2005,
respectively. In 2006, if the policy had not changed, revenue and net income would have been decreased by approximately $0.1 million and $35,000, respectively, and there would
have been no effect on earnings per share.
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