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

Restatement
As discussed within the explanatory note of this report on Form 10-K/A, GAMCO is restating 2005 and 2006 results to reflect the reversal of certain previously-accrued expenses
for investment partnerships compensation that were identified subsequent to the issuance of the consolidated financial statements. It is the policy of GBL to accrue Investment
Partnership compensation expense on a monthly basis during the course of the year using the formula-based payout rate on net revenues and to specifically allocate to individuals at
year-end. It was determined that the amount accrued during 2006 and some accruals relating to 2005 were no longer appropriate following the departure of marketing staff, the
reassignment of management staff, and the reduction of rates for certain payouts. This determination was made subsequent to our issuance of the 2006 Form 10-K after an analysis
was performed. The information used in management’s analysis was available prior to the issuance of the 2006 Form 10-K. Management determined that this was an error and not
a change in an accounting estimate. Because it was deemed an error and the amounts were material to interim and full year periods in 2006, GBL amended its Form 10-K for the
year ended 2006 and 2005 to reflect the reversals. None of the accruals relate to periods prior to 2005. As a result of the restatement, there was a change in management
fees. As disclosed in Note I – Related Party Transactions, GBL and our Chairman entered into an Employment Agreement whereby GBL pays the Chairman 10% of our
aggregate pre-tax profits while he is an executive of GBL and devoting the substantial majority of his working time to the business of GBL. Any increase in profits or decrease in
expenses results directly in a higher management fee.
On the Consolidated Statements of Income, the effect of the restatement on 2005 and 2006 compensation costs is a decrease of $820,000 and $4,651,713, respectively. The
effect of the restatement on 2005 and 2006 management fee is an increase of $82,000 and $465,171, respectively. The effect of the restatement on 2005 and 2006 total expenses
is a decrease of $737,000 and $4,186,000 respectively. The effect of the restatement on 2005 and 2006 operating income is an increase of $737,000 and $4,186,000,
respectively. The effect of the restatement on 2005 and 2006 minority interest is an increase of $35,000 and $207,000, respectively. The effect of the restatement on 2005 and
2006 income taxes is an increase of $276,750 and $1,569,953, respectively. The effect of the restatement on 2005 and 2006 income before income taxes and minority interest is
an increase of $738,000 and $4,186,542, respectively. The effect of the restatement on 2005 and 2006 net income is an increase of $425,858 and $2,409,911, respectively
resulting in an increase in basic EPS of $0.02 and $0.08 per share in 2005 and 2006, respectively. The impact of the restatement on diluted EPS is an increase of $0.01 and
$0.09 per share in 2005 and 2006, respectively.
On the Consolidated Statements of Financial Condition, the effect of the restatement on 2005 and 2006 income taxes payable is an increase of $277,000 and $1,847,000,
respectively. The effect of the restatement on 2005 and 2006 compensation payable is a decrease of $739,000 and $4,924,000, respectively. The effect of the restatement on
2005 and 2006 total liabilities is a decrease of $462,000 and $3,077,000, respectively. The effect of the restatement on 2005 and 2006 minority interest is an increase of $35,000
and $242,000 respectively. The effect of the restatement on 2005 and 2006 retained earnings and total stockholders' equity is an increase of $427,000 and $2,835,000,
respectively.
On the Consolidated Statements of Cash Flows, the effect of the restatement on 2005 and 2006 minority interest in net income of consolidated subsidiaries is an increase of
$35,000 and $207,000, respectively. The effect of the restatement on 2005 and 2006 increase in income taxes payable is an increase of $277,000 and $1,570,000, respectively.
The effect of the restatement on 2005 and 2006 increase in compensation payable is a decrease of $739,000 and $4,186,000, respectively.
On Note D of the Notes to Consolidated Financial Statements, the effect of the restatement on 2005 and 2006 current federal income tax is an increase of $251,000 and
$1,561,000, respectively. The effect of the restatement on 2005 and 2006 current state income tax is an increase of $26,000 and $9,000, respectively. The effect of the
restatement on 2005 and 2006 total income tax is an increase of $277,000 and $1,570,000, respectively.
Material Weakness
As discussed in Item 9A of this report on Form 10-K/A, management concluded that the following material weaknesses existed in the Company’s internal control over financial
reporting at December 31, 2006 and disclosed this to the Audit Committee and to the independent registered public accountants. Management did not have adequate controls in
place to ensure that there was no more than a remote likelihood that a material misstatement of the annual or interim financial statements would be prevented or detected as it relates
to two items. First, there was a material weakness relating to the reporting of individual assets and liabilities of certain proprietary investment accounts in the consolidated financial
statements. We initially incorrectly recorded the assets and liabilities of certain proprietary accounts on a net basis as we were accounting for them in the same manner as we
account for an investment in a non-consolidated partnership. These proprietary investment accounts, however, were not held in a non-consolidated partnership but were in fact
investment accounts 100% owned by GBL. Accordingly, upon closer examination of our accounting policy, it was subsequently determined that they should be recorded on a
gross basis in accordance with APB 10 as they do not fall under FASB Interpretation 39 exceptions to APB 10. Next, there was a material weakness relating to the evaluation of
and accounting for certain non-routine transactions in accordance with U.S. generally accepted accounting principles. All required adjustments were made to the December 31,
2006 consolidated financial statements prior to issuance.
As a result of the first material weakness, the Company restated its consolidated statement of financial condition as of December 31, 2005. In the consolidated statement of
financial condition, the assets and liabilities (primarily short positions and margin) associated with these proprietary investments were reported on a net basis, rather than reported on
a gross basis. The effects of the restatement on the December 31, 2005 consolidated statement of financial condition are as follows: Cash and cash equivalents, investments in
securities, receivable from brokers and other assets increased by $2.5 million, $20.4 million, $1.3 million and $0.1 million, respectively, and investments in partnerships and affiliates
decreased by $17.1 million for a net increase in total assets of $7.2 million. Accrued expenses and other liabilities, payable to brokers, and securities sold, not yet purchased
increased by $0.1 million, $3.9 million and $3.2 million, respectively, for a total increase in liabilities of $7.2 million.
In the second material weakness relating to the evaluation of and accounting for certain non-routine transactions in accordance with U.S. generally accepted accounting principles,
the Company’s control deficiencies over accrual of compensation expense for investment partnerships compensation were contemplated in the determination of the material
weakness evaluation. As a result of the second material weakness, the Company filed Form 10-K/A of GAMCO Investors, Inc. on August 9, 2007, which constituted
Amendment No. 1 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2006 to restate the Financial Statements and amend Management’s
Discussion and Analysis of Financial Condition and Results of Operations (Including Quantitative and Qualitative Disclosure about Market Risk) in Part I, Items 1 and 2,
respectively, to reflect the reversal of certain previously-accrued expenses for investment partnerships compensation.
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