gbl10q063008.htm
SECURITIES & EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q

(Mark One)

[X]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2008
or

[ ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ___ to ___

Commission File No. 1-106

GAMCO INVESTORS, INC.
(Exact name of Registrant as specified in its charter)
       
New York
   
13-4007862
(State of other jurisdiction of incorporation or organization)
   
(I.R.S. Employer Identification No.)
         
One Corporate Center, Rye, NY
   
10580-1422
(Address of principle executive offices)
   
(Zip Code)
         
(914) 921-5100
Registrant’s telephone number, including area code
 
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
x
No
o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer", "accelerated filer", and "smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer ¨
 
Accelerated filer x
 
       
Non-accelerated filer o
 
Smaller reporting company o
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2).
Yes
o
No
 x

 
Indicate the number of shares outstanding of each of the Registrant’s classes of Common Stock, as of the latest practical date.
Class
 
Outstanding at July 31, 2008
 
Class A Common Stock, .001 par value
 
7,316,045
 
Class B Common Stock, .001 par value
 
20,626,644
 
 
 
1

 
 
INDEX
 
GAMCO INVESTORS, INC. AND SUBSIDIARIES
   
   
PART I.
FINANCIAL INFORMATION
     
   
   
Item 1.
Unaudited Condensed Consolidated Financial Statements
   
 
Condensed Consolidated Statements of Income:
 
-    Three months ended June 30, 2008 and 2007
 
-    Six months ended June 30, 2008 and 2007
   
 
Condensed Consolidated Statements of Financial Condition:
 
-    June 30, 2008
 
-    December 31, 2007 (audited)
 
-    June 30, 2007
   
 
Condensed Consolidated Statements of Stockholders’ Equity and Comprehensive Income:
 
-    Six months ended June 30, 2008 and 2007
 
 
 
Condensed Consolidated Statements of Cash Flows:
 
-    Six months ended June 30, 2008 and 2007
 
 
 
Notes to Condensed Consolidated Financial Statements
   
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
(Including Quantitative and Qualitative Disclosure about Market Risk)
   
Item 3. Quantitative and Qualitative Disclosures About Market Risk
   
Item 4.
Controls and Procedures
   
PART II.
OTHER INFORMATION
       
   
Item 2.
Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities
 
 
Item 4.  Submission of Matters to a Vote of Security Holders
   
Item 6.
Exhibits
   
   
   
SIGNATURES
 
   

 
2

 

GAMCO INVESTORS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
UNAUDITED
(In thousands, except per share data)
 
   
Three Months Ended
   
Six Months Ended
 
   
June 30,
   
June 30,
 
   
2008
   
2007
   
2008
   
2007
 
                         
Revenues
                       
Investment advisory and incentive fees
 
$
55,131
   
$
57,654
   
$
111,972
   
$
114,214
 
Commission revenue
   
3,664
     
4,036
     
6,920
     
8,056
 
Distribution fees and other income
   
6,629
     
6,587
     
13,080
     
12,613
 
Total revenues
   
65,424
     
68,277
     
131,972
     
134,883
 
Expenses
                               
Compensation costs
   
27,763
     
29,905
     
56,610
     
58,279
 
Management fee
   
2,586
     
3,449
     
4,567
     
6,850
 
Distribution costs
   
6,794
     
10,161
     
13,203
     
16,047
 
Other operating expenses
   
7,074
     
7,594
     
13,128
     
16,028
 
Total expenses
   
44,217
     
51,109
     
87,508
     
97,204
 
                                 
Operating income
   
21,207
     
17,168
     
44,464
     
37,679
 
Other income (expense)
                               
Net gain (loss) from investments
   
10
     
11,193
     
(8,379
   
16,763
 
Interest and dividend income
   
4,196
     
6,166
     
8,970
     
14,168
 
Interest expense
   
(2,199
)
   
(3,329
)
   
(4,266
)
   
(6,709
)
Total other income (expense), net
   
2,007
     
14,030
     
(3,675
   
24,222
 
Income before income taxes and minority interest
   
23,214
     
31,198
     
40,789
     
61,901
 
Income tax provision
   
8,719
     
12,856
     
16,045
     
24,063
 
Minority interest
   
36
     
345
     
(201
   
677
 
Net income
 
$
14,459
   
$
17,997
   
$
24,945
   
$
37,161
 
                                 
Net income per share:
                               
Basic
 
$
0.52
   
$
0.64
   
$
0.89
   
$
1.32
 
                                 
Diluted
 
$
0.51
   
$
0.63
   
$
0.89
   
$
1.30
 
                                 
Weighted average shares outstanding:
                               
Basic
   
27,948
     
28,160
     
28,070
     
28,194
 
                                 
Diluted
   
28,743
     
29,147
     
28,896
     
29,172
 
                                 
                                 
Dividends declared:
 
$
0.03
   
$
0.03
   
$
0.06
   
$
0.06
 
                                 
See accompanying notes.
                               
 
3


 
GAMCO INVESTORS, INC. AND SUBSIDIARIES
 
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
 
(In thousands)
 
                     
   
June 30,
   
December 31,
   
 June 30,
   
   
2008
   
2007
   
 2007
   
   
 (unaudited)
         
 (unaudited)
   
                     
Cash and cash equivalents, including restricted cash of $0, $0, and $443
  $ 266,344     $ 168,319    $
 104,726
   
Investments in securities, including restricted securities of $0, $0, and $52,117
    319,833       394,977    
 550,273
   
Investments in partnerships and affiliates
    77,955       100,031    
 69,869
   
Receivable from brokers
    21,936       40,145    
 43,187
   
Investment advisory fees receivable
    17,434       33,701    
 18,439
   
Other assets
    20,643       20,407    
 19,577
   
                         
Total assets
  $ 724,145     $ 757,580    $
 806,071
   
                         
LIABILITIES AND STOCKHOLDERS' EQUITY
                       
                         
Payable to brokers
  $ 4,888     $ 7,562    $
 30,973
   
Income taxes payable, including deferred taxes of $3,201, $5,814, and $10,012
    5,546       17,539    
 14,951
   
Compensation payable
    29,162       25,362    
 46,075
   
Capital lease obligation
    2,377       2,525    
 2,659
   
Securities sold, not yet purchased
    2,105       2,229    
 21,021
   
Accrued expenses and other liabilities
    18,094       38,810    
 35,597
   
                         
Total operating liabilities
    62,172       94,027    
 151,276
   
                         
Long term liabilities
                       
5.5% Senior notes (due May 15, 2013)
    100,000       100,000    
 100,000
   
6% Convertible note (due August 14, 2011) (A)
    39,726       49,608    
 49,561
   
                         
     Total liabilities
    201,898        243,635    
 300,837
   
                         
Minority interest
    11,318        12,630    
 14,441
   
                         
Stockholders’ equity
                       
Class A Common Stock, $0.001 par value; 100,000,000
                       
    shares authorized; 12,757,024, 12,574,995, 12,172,423
                       
    issued, respectively; 7,549,145, 7,819,741, and 7,489,369
    outstanding, respectively
    12       12    
 12
   
Class B Common Stock, $0.001 par value; 100,000,000
                       
    shares authorized; 24,000,000 shares issued,
    20,626,644, 20,626,644, 20,645,816 shares outstanding
    21       21    
 21
   
Additional paid-in capital
    243,449       230,483    
 230,010
   
Retained earnings
    468,365       445,121    
 432,542
   
Accumulated comprehensive gain
    17,445       20,815    
 19,791
   
Treasury stock, at cost (5,207,879, 4,755,254, and 4,683,054 shares, respectively)
    (218,363     (195,137  
 (191,583
 
Total stockholders' equity
    510,929       501,315    
 490,793
   
                         
Total liabilities and stockholders' equity
  $ 724,145     $ 757,580    $
 806,071
   
 
 
See accompanying notes.
 
(A) $50 million outstanding on December 31, 2007 and June 30, 2007. $40 million outstanding on June 30, 2008.
 
 
 
4

 

 
GAMCO INVESTORS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME
UNAUDITED
 (In thousands)
 
     
 Three Months Ended
   
Six Months Ended
 
     
 June 30,
   
June 30,
 
       2008    
 2007
   
2008
   
2007
 
Stockholders’ equity – beginning of period
  507,862   467,488    
$
501,315
   
$
451,576
 
                               
Cumulative effect of applying the provisions of FIN 48
at January 1, 2007
    -     -      
-
 
   
(822
                               
Comprehensive income:
                             
  Net income
    14,459     17,997      
24,945
     
37,161
 
  Foreign currency translation adjustments
    (21
  12      
-
     
13
 
  Net unrealized gain/(loss) on securities available for sale
    730     8,666      
(3,371
   
9,352
 
Total comprehensive income
    15,168     26,675      
21,574
     
46,526
 
                               
Dividends declared
    (844
)
  (844
   
(1,700
)
   
(1,691
)
Stock based compensation expense
    1,204     24      
2,402
     
45
 
Conversion of 6% convertible note     -     -       10,000       -  
Exercise of stock options including tax benefit
    (48
  194      
564
     
266
 
Purchase of treasury stock
    (12,413
  (2,744
   
(23,226
)
   
(5,107
)
Stockholders’ equity – end of period
  510,929   490,793    
$
510,929
   
$
490,793
 
                               
See accompanying notes.                              
 

 
 
5

 


 GAMCO INVESTORS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 UNAUDITED
 (In thousands)
 
   
Six Months Ended
 
   
June 30,
 
   
2008
   
2007
 
Operating activities 
           
Net income
  $
 24,945
     $
 37,161
 
 Adjustments to reconcile net income to net cash provided by operating activities:
               
                 
  Equity in net gains from partnerships and affiliates  
   
  1,498
     
  (4,744
  Depreciation and amortization  
   
  483
     
  522
 
  Stock based compensation expense   
   
  2,402
     
  45
 
  Deferred income tax  
   
858
     
  4,905
 
  Tax (expense) benefit from exercise of stock options    
   
  (6
   
  57
 
  Foreign currency loss  
   
  -
     
  13
 
  Other-than-temporary loss on available for sale securities
   
  262
     
  -
 
  Impairment of goodwill   
   
-
     
  56
 
  Acquisition of intangible asset
   
  (3,479
   
  -
 
  Market value of donated securities   
   
  157
     
  122
 
  Minority interest in net income of consolidated subsidiaries
   
  3
     
  520
 
  Realized gains on sales of available for sale securities
   
  (415
   
  (473
  Realized gains on sales of trading investments in securities, net
   
  (3,209
   
  (11,874
  Change in unrealized value of trading investments in securities and securities sold, not yet purchased, net
   
  9,249
     
  (2,498
)
  Realized (gains) losses on covers of securities sold, not yet purchased, net
   
  (378
   
  979
 
  Amortization on discount on debt 
   
  118
     
  56
 
(Increase) decrease in operating assets:
           
 
 
   Purchases of trading investments in securities
   
  (221,966
   
  (809,424
   Proceeds from sales of trading investments in securities
   
  282,645
     
  816,521
 
   Cost of covers on securities sold, not yet purchased
   
  (18,481
   
  (49,161
   Proceeds from sales of securities sold, not yet purchased
   
  19,015
     
  65,145
 
   Investments in partnerships and affiliates 
   
  (182
   
  (4,050
   Distributions from partnerships and affiliates 
   
  20,626
     
  13,149
 
   Receivable from brokers
   
  15,738
     
  10,022
 
   Investment advisory fees receivable 
   
  16,367
     
  12,681
 
   Other receivables from affiliates 
   
  2,950
     
  5,106
 
   Other assets  
   
  (194
   
  (153
Increase (decrease) in operating liabilities:
   
 
         
   Payable to brokers 
   
  (3,443
   
  (3,957
)
   Income taxes payable 
   
  (9,541
   
  (9,562
   Compensation payable
   
  4,567
     
  14,289
 
   Accrued expenses and other liabilities
   
  (20,819
   
  (5,050
Effects of consolidation of investment partnerships and offshore funds consolidated under FIN 46R and EITF 04-5:
           
 
 
Realized gains on sales of investments in securities and securities sold, not yet purchased, net
   
  (17
   
  (607
)
Change in unrealized value of investments in securities and securities sold, not yet purchased, net
   
  511
     
  85
 
Equity in net gains from partnerships and affiliates
   
  761
     
  (733
Purchases of trading investments in securities
   
  (6,848
   
  (34,002
)
Proceeds from sales of trading investments in securities
   
  7,105
     
  34,074
 
Cost of covers on securities sold, not yet purchased
   
 (11
   
 (434
Proceeds from sales of securities sold, not yet purchased
   
 -
     
 477
 
Investments in partnerships and affiliates
   
  -
     
  (2,000
)
Distributions from partnerships and affiliates
   
  -
     
  825
 
Increase in investment advisory fees receivable
   
  (100
   
  (26
)
Decrease in receivable from brokers
   
  2,471
     
  473
 
Decrease (increase) in other assets
   
  5
     
  (244
Increase (decrease) in payable to brokers
   
  769
     
  (1,416
)
(Decrease) increase in accrued expenses and other liabilities
   
  (48
   
  315
 
(Loss) income related to investment partnerships and offshore funds consolidated under FIN 46R and EITF 04-5, net
   
  (1,050
   
  996
 
Total adjustments 
   
  98,373
     
  41,025
 
Net cash provided by operating activities
   
  123,318
     
  78,186
 

6


 
GAMCO INVESTORS, INC. AND SUBSIDIARIES
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
 UNAUDITED
 (In thousands)
 
   
Six Months Ended
   
June 30,
   
2008
   
 2007
 
           
Investing activities
         
Purchases of available for sale securities
   $
  (777
 $
 (25,254
Proceeds from sales of available for sale securities
   
  618
   
  2,292
 
Net cash used in investing activities
   
  (159
 
  (22,962
               
Financing activities
             
Retirement of 5.22% senior notes
   
  -
   
  (82,308
Contributions related to investment partnerships and offshore funds consolidated under FIN 46R and EITF 04-5, net
   
(169
)  
  511
 
Proceeds from exercise of stock options
   
  570
   
  209
 
Dividends paid
   
  (1,700
 
  (1,691
Dividends declared on subsidiary stock to minority shareholders
   
  (608
 
  (241
Purchase of treasury stock
   
  (23,226
 
  (5,107
Net cash used in financing activities
   
  (25,133
 
  (88,627
Net increase (decrease) in cash and cash equivalents
   
  98,026
   
  (33,403
)
Effect of exchange rates on cash and cash equivalents
   
  (1
 
  16
 
Cash and cash equivalents at beginning of period
   
168,319
   
  138,113
 
Cash and cash equivalents at end of period
 
$
266,344
 
104,726
 
               
Non-cash activity: On January 22, 2008, Cascade Investment LLC elected to convert $10 million of the 6% convertible note into 188,697 GAMCO Investors Inc. common shares.
               
See accompanying notes.

 
7

 
GAMCO INVESTORS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2008
(Unaudited)
A.  Basis of Presentation
 
Unless we have indicated otherwise, or the context otherwise requires, references in this report to “GAMCO Investors, Inc.,” “GAMCO,” “the Company,” “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 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 generally accepted accounting principles 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 and non-recurring nature (Note J), 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 condensed consolidated financial statements include the accounts of GAMCO and its subsidiaries.  All material intercompany accounts and transactions are eliminated.
 
These 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, 2007, from which the accompanying condensed consolidated Financial Statements were derived.
 
Certain items previously reported have been reclassified to conform to the current period’s condensed consolidated financial statement presentation.
 
Use of Estimates
 
The preparation of the condensed consolidated financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes.  Actual results could differ from those estimates.
 
Changes in Accounting Policy
 
GAMCO has adopted Financial Accounting Standards Board ("FASB") Statement No. 157, “Fair Value Measurements” (“Statement 157”). The statement provides guidance for using fair value to measure assets and liabilities. The statement provides guidance to companies about the extent of which to measure assets and liabilities at fair value, the information used to measure fair value, and the effect of fair value measurements on earnings. The statement applies whenever other standards require (or permit) assets or liabilities to be measured at fair value. The statement does not expand the use of fair value in any new circumstances. The statement is effective for financial statements issued for fiscal years beginning after November 15, 2007 and for interim periods within those fiscal years. The Company adopted this statement on January 1, 2008. Although the impact of adopting Statement 157 is immaterial to the Company’s financial statements, Statement 157 required additional disclosures within the footnotes to the financial statements. Please refer to Note E for further details.
 
B.  Recent Accounting Developments
 
In June 2007, the FASB issued Emerging Issues Task Force ("EITF") 06-11, "Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards". The EITF release discusses how an entity should recognize the income tax benefit received on dividends that are (a) paid to employees holding equity-classified nonvested shares, equity-classified nonvested share units, or equity-classified outstanding share options and (b) charged to retained earnings under FAS 123(R). The release became relevant to the Company after the Board of Directors authorized the issuance of restricted stock awards ("RSAs") (share based payments) to Company employees in December 2007. Employees of the Company who received an award in the 2007 restricted stock grant will accrue dividends during their vesting period and receive them only if their shares vest. Thus, this EITF did not have an impact on the Company's financial statements.
 
In December 2007, the FASB issued FASB Statement No. 160, "Noncontrolling Interests in Consolidated Financial Statements, an Amendment of ARB No. 51" ("Statement 160") to improve the relevance, comparability, and transparency of the financial information that a reporting entity with minority interests provides in its consolidated financial statements. Statement 160 changes the way the consolidated income statement is presented. It requires consolidated net income to be reported at amounts that include the amounts attributable to both the parent and the noncontrolling interest. It also requires disclosure, on the face of the consolidated statement of income, of the amounts of consolidated net income attributable to the parent and to the noncontrolling interest. Statement 160 requires expanded disclosures in the consolidated financial statements that clearly identify and distinguish between the interests of the parent’s owners and the interests of the noncontrolling owners of a subsidiary. Statement 160 does not change the provisions of “Consolidated Financial Statements” ("ARB 51") related to consolidation purpose or consolidation policy or the requirement that a parent consolidate all entities in which it has a controlling financial interest. Statement 160 does, however, amend certain of ARB 51’s consolidation procedures to make them consistent with the requirements of FASB Statement 141(R) "Business Combinations". It also amends ARB 51 to provide definitions for certain terms and to clarify some terminology. Statement 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. Earlier adoption is prohibited. The Company plans to adopt this statement on January 1, 2009. Statement 160 will impact the Company's financial statements presentation and disclosure of minority interest.
 
In March 2008, the FASB issued FASB Statement No. 161, "Disclosures about Derivative Instruments and Hedging Activities" ("Statement 161") to improve financial reporting about derivative instruments and hedging activities by requiring enhanced disclosures to enable investors to better understand their effects on an entity's financial position, financial performance, and cash flows. Statement 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. The Company is currently reviewing Statement 161 and its potential impact, if any, on the disclosure in the Company’s financial statements. The Company plans to adopt Statement 161 on January 1, 2009.
 
In April 2008, the FASB issued FASB Statement No. 142-3, "Determination of the Useful Life of Intangible Assets" ("Statement 142-3") which amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142 , "Goodwill and Other Intangible Assets"Statement 142-3 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Early adoption is prohibited. The Company plans to adopt this statement on January 1, 2009. Statement 142-3 is applicable to the Company however, the effect of its adoption is not expected to be material.
 
In June 2008, the FASB issued EITF 03-6-1, "Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities". The EITF release states that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method. EITF 03-6-1 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those years. EITF 03-6-1 will not apply to the Company.
 
C.  Investment in Securities

Management determines the appropriate classification of debt and equity securities at the time of purchase and reevaluates such designation as of each balance sheet date.  Investments in Treasury Bills and Notes with maturities of greater than three months at the time of purchase are classified as investments in securities and with maturities of three months or less at time of purchase are classified as cash and cash equivalents.  A substantial portion of investments in securities are held for resale in anticipation of short-term market movements and therefore are classified as trading securities. Trading securities are stated at fair value, with any unrealized gains or losses, net of deferred taxes, reported in current period earnings. Available for sale (“AFS”) investments are stated at fair value, with any unrealized gains or losses, net of management fee and taxes, reported as a component of stockholders’ equity except for losses deemed to be other than temporary which are recorded as realized losses in the condensed consolidated statements of income. For the three and six months ended June 30, 2008, there was an impairment of $0.1 and $0.3 million, respectively, in AFS securities. For the three months and six months ended June 30, 2007, there was no impairment in AFS securities.  Securities sold, not yet purchased are financial instruments purchased under agreements to resell and financial instruments sold under agreement to repurchase.  These financial instruments are stated at fair value and are subject to market risks resulting from changes in price and volatility. At June 30, 2008, December 31, 2007 and June 30, 2007, the market value of securities sold, not yet purchased was $2.1 million, $2.2 million and $21.0 million, respectively.
8

The Company accounts for derivative financial instruments in accordance with Statement of Financial Accounting Standards (“FAS”) No. 133, "Accounting for Derivative Instruments and Hedging Activities, as amended" (“Statement No. 133”). Statement No. 133 requires that an entity recognize all derivatives, as defined, as either assets or liabilities measured at fair value. The Company uses swaps and treasury futures to manage its exposure to market and credit risks from changes in certain equity prices, interest rates, and volatility and does not hold or issue swaps and treasury futures for speculative or trading purposes. These swaps and treasury futures are not designated as hedges, and changes in fair values of these derivatives are included in net gain (loss) from investments in the condensed consolidated statements of income. As of June 30, 2008 and 2007, the notional value of swaps and treasury futures was $0.1 million and $26.9 million, respectively. For the three and six months ended June 30, 2008, the effect of derivative transactions was immaterial to the Company's condensed consolidated statements of income.
 
At June 30, 2008, December 31, 2007 and June 30, 2007, the market value of investments available for sale was $127.1 million, $134.5 million and $140.4 million, respectively.  Unrealized gains in market value, net of management fee and taxes, for the three months ended June 30, 2008 and 2007 of $0.7 million and $8.7 million have been included in stockholders’ equity at June 30, 2008 and 2007, respectively. Unrealized gains (losses) in market value, net of management fee and taxes, for the six months ended June 30, 2008 and 2007 of ($3.4 million) and $9.4 million, have been included in stockholders’ equity at June 30, 2008 and 2007, respectively. Proceeds from sales of investments available for sale were approximately $0.2 million and $1.4 million for the three-month periods ended June 30, 2008 and 2007, respectively.  Proceeds from sales of investments available for sale were approximately $0.6 million and $2.3 million for the six-month periods ended June 30, 2008 and 2007, respectively. For the three and six months ended June 30, 2008, gross gains on the sale of investments available for sale amounted to $0.2 and $0.4 million, respectively; there were no gross losses on the sale of investments available for sale.  For the three and six months ended June 30, 2007, gross gains on the sale of investments available for sale amounted to $0.3 and $0.5 million, respectively; there were no gross losses on the sale of investments available for sale.
 
D. Investments in Partnerships and Affiliates
 
The provisions of FASB Interpretation No. ("FIN") 46R, "Consolidation of Variable Interest Entities", and EITF 04-5, "Investor's Accounting for an Investment in a Limited Partnership When the Investor is the Sole General Partner and the Limited Partners Have Certain Rights", require consolidation of several of our investment partnerships and offshore funds managed by our subsidiaries into our condensed consolidated financial statements.
 
For the three and six months ended June 30, 2008, 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 did affect the classification of income between operating and other income.  Cash and cash equivalents, investments in securities and receivable from brokers held by investment partnerships and offshore funds consolidated under FIN 46R and EITF 04-5 of $4.5 million, $5.2 million and $7.4 million as of June 30, 2008, December 31, 2007 and June 30, 2007, respectively, are also restricted from use for general operating purposes.
 
E. Fair Value

In September 2006, the FASB issued Statement 157, which defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. All of the instruments within investments in securities and securities sold, not yet purchased are measured at fair value.

The Company’s assets and liabilities recorded at fair value have been categorized based upon a fair value hierarchy in accordance with Statement 157. The levels of the fair value hierarchy and their applicability to the Company are described below:

-  
Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities.
-  
Level 2 inputs utilize inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets and liabilities in active markets and inputs other than quoted prices that are observable for the asset or liability, such as interest rates and yield curves that are observable at commonly-quoted intervals.
-  
Level 3 inputs are unobservable inputs for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability. 
 
In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, per Statement 157, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.

The availability of observable inputs can vary from product to product and is affected by a wide variety of factors, including, for example, the type of product, whether the product is new and not yet established in the marketplace, and other characteristics particular to the transaction. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised by the Company in determining fair value is greatest for instruments categorized as Level 3.
 
Many of our securities have bid and ask prices that can be observed in the marketplace. Bid prices reflect the highest price that the Company and others are willing to pay for an asset. Ask prices represent the lowest price that the Company and others are willing to accept for an asset.

Cash and cash equivalents - Cash and cash equivalents are valued using quoted market prices. Valuation adjustments are not applied. Accordingly, cash and cash equivalents are categorized in Level 1 of the fair value hierarchy.

Investments in securities and securities sold, not yet purchased - Investments in securities and securities sold, not yet purchased are generally valued based on quoted prices from the exchange. To the extent these securities are actively traded, valuation adjustments are not applied and they are categorized in Level 1 of the fair value hierarchy. Listed derivatives that are actively traded and are valued based on quoted prices from an exchange are also categorized in Level 1 of the fair value hierarchy. Listed derivatives that are not actively traded are valued using the same approaches as those applied to over the counter derivatives and they are generally categorized in Level 2 of the fair value hierarchy. Nonpublic and infrequently traded investments are included in Level 3 of the fair value hierarchy because fair value is unobservable.
 
The following table presents information about the Company’s assets and liabilities by major categories measured at fair value on a recurring basis as of June 30, 2008 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 June 30, 2008 (in thousands)
 
Assets
 
Quoted Prices in Active Markets for Identical Assets (Level 1)
   
Significant Other Observable Inputs (Level 2)
   
Significant Unobservable Inputs (Level 3)
   
Balance as of June 30, 2008
 
Cash and cash equivalents   $ 266,344     $ -     $ -     $ 266,344  
Investments in securities:                                
   Available-for-sale     127,126       -       -       127,126  
   Trading     190,512       183       2,012        192,707  
Total investments in securities     317,638       183       2,012       319,833  
Total financial instruments owned   $ 583,982     $ 183     $ 2,012     $ 586,177  
Liabilities
                               
Securities sold, not yet purchased   $ 2,105     $ -     $ -     $ 2,105  
 
 
9

 
The following table presents additional information about assets and liabilities by major categories measured at fair value on a recurring basis and for which the Company has utilized Level 3 inputs to determine fair value:
 
Changes in Level 3 Assets and Liabilities Measured at Fair Value on a Recurring Basis for the Three Months ended June 30, 2008 (in thousands)
 
         
Total Realized and Unrealized Gains or (Losses) in Income
                               
Asset
 
Beginning Balance
   
Trading
   
Investments
   
Total Unrealized Gains or (Losses) Included in Other Comprehensive Income
   
Total Realized and Unrealized Gains or (Losses)
   
Purchases and Sales, net
   
Net Transfers In and/or (Out) of Level 3
   
Ending Balance
 
Financial instruments owned:                                                                
 Investments in securities - trading   $ 1,188     $ (302 )   $ -     $ -     $ (302 )   $ 735     $ 391     $ 2,012  
 Total   $ 1,188     $ (302 )   $ -     $ -     $ (302 )   $ 735     $ 391     $ 2,012  
 
 
Changes in Level 3 Assets and Liabilities Measured at Fair Value on a Recurring Basis for the Six Months ended June 30, 2008 (in thousands)
 
         
Total Realized and Unrealized Gains or (Losses) in Income
                               
Asset
 
Beginning Balance
   
Trading
   
Investments
   
Total Unrealized Gains or (Losses) Included in Other Comprehensive Income
   
Total Realized and Unrealized Gains or (Losses)
   
Purchases and Sales, net
   
Net Transfers In and/or (Out) of Level 3
   
Ending Balance
 
Financial instruments owned:                                                                
 Investments in securities - trading   $ 1,423     $ (537 )   $ -     $ -     $ (537 )   $ 735     $ 391     $ 2,012  
 Total   $ 1,423     $ (537 )   $ -     $ -     $ (537 )   $ 735     $ 391     $ 2,012  
 
In February 2007, the FASB issued FAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities" ("Statement 159"), which provides a fair value option election that allows companies to irrevocably elect fair value as the initial and subsequent measurement attribute for certain financial assets and liabilities, with changes in fair value recognized in earnings as they occur. Statement 159 permits the fair value option election on an instrument by instrument basis at initial recognition of an asset or liability or upon an event that gives rise to a new basis of accounting for that instrument.
 
At this time, the Company does not intend to elect fair value treatment for any other financial asset or financial liability.
 
F. Debt
 
On February 17, 2007, the $82.3 million of 5.22% Senior Notes matured. The Company paid the principal plus accrued interest. This debt was originally issued in connection with GAMCO's sale of mandatory convertible securities in February 2002 and was remarketed in November 2004.
 
On January 18, 2008, the Securities and Exchange Commission ("Commission") declared effective a registration statement on Form S-3 for the registration for resale by Cascade Investment LLC ("Cascade") of an aggregate of 943,396 shares of GAMCO's Class A Common Stock issuable upon conversion of the 6% convertible note (the "Note") of the Company issued to Cascade on August 14, 2001. On January 22, 2008, Cascade elected to convert $10 million of the Note into 188,697 GAMCO shares. Cascade requested that the remaining $40 million face value of notes be segregated into eight notes each with a face value of $5 million.
 
G. Income Taxes
 
The effective tax rate for the three months and six months ended June 30, 2008 was 37.6% and 39.3%, respectively, compared to the prior year period’s effective rates of 41.2% and 38.9%, respectively. The decrease in the effective income tax rate for the three months ended June 30, 2008 reflects a one-time FIN 48 adjustment related to the pre-2007 period booked during the second quarter of 2007. The increase in the effective income tax rate for the six months ended June 30, 2008 relates to the tax impact of a change in the deductibility for a portion of the reserve for a settlement, that one of GAMCO's affiliates entered into with the Commission. 
 
The Company adopted the provisions of FIN 48 on January 1, 2007.  Upon such adoption, the Company had a cumulative effect of $0.8 million, which was accounted for as a reduction to the January 1, 2007 balance of retained earnings.  As of December 31, 2007, the total amount of gross unrecognized tax benefits was approximately $8.1 million, of which recognition of $5.3 million would impact the Company’s effective tax rate. As of June 30, 2008, the total amount of gross unrecognized tax benefits was approximately $9.1 million, of which recognition of $6.0 million would impact the Company’s effective tax rate. The $0.5 and $1.0 million increase of gross unrecognized tax benefits for the three and six months ended June 30, 2008 reflects accruals for state and local income taxes for uncertain tax positions taken in prior periods.

The Company’s historical accounting policy with respect to penalties and interest related to tax uncertainties has been to classify these amounts as income taxes, and the Company continued this classification upon the adoption of FIN 48.  As of June 30, 2008, December 31, 2007 and June 30, 2007, the total amount of accrued penalties and interest related to uncertain tax positions recognized in the condensed consolidated statement of financial condition was approximately $3.2 million, $2.6 million and $2.2 million, respectively. For the three months ended June 30, 2008 and 2007, the total amount of accrued interest and penalties recognized in the condensed consolidated statements of income was $0.2 million and $0.9 million, respectively. For the six months ended June 30, 2008 and 2007, the total amount of accrued interest and penalties recognized in the condensed consolidated statements of income was $0.6 million and $1.2 million, respectively.
 
The federal income tax returns for years after 2004 are subject to potential future audit by the IRS. The Company is currently being audited by New York State for its income tax returns filed between 1999 and 2003.  It is reasonably possible that the Company will conclude the audits of 1999 and 2000 within the next 12-month period and the Company does not expect that the potential assessments or refunds will be material to its results of operations.  The state income tax returns for all years after 2003 are subject to potential future audit by tax authorities in the Company’s major state tax jurisdictions.
 
Income tax expense is based on pre-tax financial accounting income, including adjustments made for the recognition or derecognition related to uncertain tax positions.  The recognition or derecognition of income tax expense related to uncertain tax positions is determined under the guidance as prescribed by FIN 48.  Deferred tax assets and liabilities are recognized for the future tax attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.  Deferred tax assets and liabilities are measured using enacted tax rates expected to be recovered or concluded.  The effect on deferred tax assets and liabilities of a change in tax rates is recognized in earnings in the period that includes the enactment date.
 
 
10

 
H. Earnings Per Share
 
The computations of basic and diluted net income per share are as follows:
 
(in thousands, except per share amounts)
 
Three Months Ended
June 30, 2008
   
Three Months Ended
June 30, 2007
   
Six Months Ended
June 30, 2008
   
Six Months Ended
June 30, 2007
 
Basic:
                       
Net income
 
$
14,459
   
$
17,997
   
$
24,945
   
$
37,161
 
Average shares outstanding
   
27,948
     
28,160
     
28,070
     
28,194
 
Basic net income per share
 
$
0.52
   
$
0.64
   
$
0.89
   
$
1.32
 
                                 
Diluted:
                               
Net income
 
$
14,459
   
$
17,997
   
$
24,945
   
$
37,161
 
Add interest expense on convertible note, net of management fee and taxes
   
343
     
429
     
709
     
857
 
Total
 
$
14,802
   
$
18,426
   
$
25,654
   
$
38,018
 
                                 
Average shares outstanding
   
27,948
     
28,160
     
28,070
     
28,194
 
Dilutive stock options
   
40
     
44
     
46
     
35
 
Assumed conversion of convertible note
   
755
     
943
     
780
     
943
 
Total
   
28,743
     
29,147
     
28,896
     
29,172
 
Diluted net income per share
 
$
0.51
   
$
0.63
 
 
$
0.89
   
$
1.30
 
 
I. Stockholders’ Equity
 
Shares outstanding on June 30, 2008 were 28.2 million, 0.2 million below March 31, 2008 shares of 28.4 million and slightly above the 28.1 million shares outstanding on June 30, 2007.  Fully diluted shares outstanding for the second quarter of 2008 were 28.7 million, slightly below both the the first quarter 2008’s level of 29.0 million and second quarter 2007’s level of 29.1 million.

The Board of Directors declared a quarterly dividend of $0.03 per share that was paid on June 27, 2008 to shareholders of record on June 13, 2008.
 
Voting Rights

The holders of Class A Common Stock and Class B Common Stock have identical rights except that (i) holders of Class A Common Stock are entitled to one vote per share, while holders of Class B Common 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 Common Stock  are not eligible to vote on matters relating exclusively to Class B Common Stock and vice versa.
 
Stock Award and Incentive Plan
 
Effective January 1, 2003, we adopted the fair value recognition provisions of FAS No. 123 "Accounting for Stock-Based Compensation" ("Statement 123") in accordance with the transition and disclosure provisions under the recently issued FAS No. 148, “Accounting for Stock Based Compensation – Transition and Disclosure.”
 
We adopted 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.  On December 7, 2007, employees of the Company were granted a total of 385,400 RSAs. The grant of the RSAs was recommended by the Company's Chairman who did not receive an RSA award. The grant date fair value of the RSAs is $63.50 per share which was the closing share price of GAMCO shares on December 20, 2007, the effective grant date under Statement 123(R) and Statement 123(R)-2 for purposes of calculation of the compensation expense. This expense will be recognized over the vesting period for these awards which is 30% over three years and 70% over five years. 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 are charged to retained earnings on the declaration date.
 
For the three months ended June 30, 2008 and 2007, we recognized stock-based compensation expense of $1,204,000 and $24,000, respectively. For the six months ended June 30, 2008 and 2007, we recognized stock-based compensation expense of $2,402,000 and $45,000, respectively. Stock-based compensation expense, for RSAs outstanding at June 30, 2008, for the years ended December 31, 2007 through December 31, 2012 is as follows ($ in thousands):
 
     
2007
   
2008
   
2009
   
2010
   
2011
   
2012
 
 
Q1
    $ 21     $ 1,198     $ 1,199      $ 1,188     $ 694      $ 687   
 
Q2
      24       1,204       1,195        1,185       689        686   
 
Q3
      24       1,207       1,194        1,185       687        685   
 
Q4
      414      
1,201
      1,192        1,021       687        457   
Full Year
    $ 483     $ 4,810      $ 4,780      $ 4,579      $ 2,757      $ 2,515   
 
The total compensation costs related to non-vested awards and options not yet recognized is approximately $17,039,000, of which $2,408,000 will be recognized in the remainder of 2008. Proceeds from the exercise of 50 and 5,400 stock options were $1,000 and $162,000 for the three months ended June 30, 2008 and 2007, respectively, resulting in a tax (benefit) expense to GAMCO of $49,000 and ($32,000) for the three months ended June 30, 2008 and 2007, respectively. Proceeds from the exercise of 15,550 and 8,150 stock options were $570,000 and $209,000 for the six months ended June 30, 2008 and 2007, respectively, resulting in a tax (benefit) expense to GAMCO of $6,000 and ($57,000) for the six months ended June 30, 2008 and 2007, respectively. Additionally, during the three and six months ended June 30, 2008 the Company reversed a previously recognized tax benefit of $50,000.
 
Stock Repurchase Program
 
In March 1999, GAMCO's Board of Directors established the Stock Repurchase Program to grant us authority to repurchase shares of our Class A Common Stock.  For the three and six months ended June 30, 2008, we repurchased approximately 244,000 and 453,000 shares, respectively, at an average investment of $50.85 and $51.30, respectively.  For the three and six months ended June 30, 2007, we repurchased approximately 56,000 and 114,000 shares, respectively, at an average investment of $49.35 and $44.71, respectively. Since the inception of the program, we have repurchased approximately 5,309,000 shares at an average investment of $40.71 per share.  At June 30, 2008, the total shares available under the program to be repurchased was approximately 908,000.

J. Goodwill and Identifiable Intangible Assets
 
In accordance with FAS 142 “Accounting for Goodwill and Other Intangible Assets,” we assess the recoverability of goodwill and other intangible assets at least annually, or more often should events warrant, using a present value cash flow method.  There was no impairment charge recorded for the three or six months ended June 30, 2008. There was an impairment charge of $56,000 recorded for the six months ended June 30, 2007 as a result of the voluntary deregistration of an inactive broker dealer subsidiary. At June 30, 2008, there remains $3.5 million of goodwill related to our 92%-owned subsidiary, Gabelli Securities, Inc.
 
On March 10, 2008, the Enterprise Mergers and Acquisitions Fund's (the "Fund") Board of Directors, subsequent to obtaining shareholder approval, approved the assignment of the advisory contract to Gabelli Funds, LLC (the "Adviser") as the investment adviser to the Fund. GAMCO Asset Management, Inc. had been the sub-adviser to the Fund. On July 8, 2008, the Fund was renamed the Gabelli Enterprise Merger and Acquisitions Fund. The liability of the Company for the assignment of the advisory contract is calculated based upon assets under management ("AUM") on the six-month anniversary date subject to certain minimums. As a result of becoming the adviser to the rebranded Gabelli Enterprise Mergers and Acquisitions Fund, the Company maintains an identifiable intangible asset within other assets and related liability within accrued expenses and other liabilities within the condensed consolidated statement of financial condition of approximately $3.4 million at June 30, 2008. The investment advisory agreement is subject to annual renewal by the Fund's Board of Directors, and the Company does not expect to incur additional expense as a result, which is consistent with other investment advisory agreements entered into by GAMCO. The Company does not anticipate canceling the investment advisory agreement before the end of the current fiscal year.
 
11

 
K.  Other Matters
 
We indemnify our clearing brokers for losses they may sustain from the customer accounts introduced by our broker-dealer subsidiary.  In accordance with NYSE rules, customer balances are typically collateralized by customer securities or supported by other recourse provisions.  In addition, we further limit margin balances to a maximum of 25% versus 50% permitted under Regulation T of the Federal Reserve Board and exchange regulations.  At June 30, 2008, the total amount of customer balances subject to indemnification (i.e. unsecured margin debits) was immaterial.  The Company also has entered into arrangements with various other third parties which provide for indemnification against losses, costs, claims and liabilities arising from the performance of their obligations under our agreement, except for gross negligence or bad faith.  The Company has had no claims or payments pursuant to these or prior agreements, and we believe the likelihood of a claim being made is remote.  Utilizing the methodology in the FASB issued Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others”, our estimate of the value of such agreements is de minimis, and therefore an accrual has not been made in the condensed consolidated financial statements.

L. Subsequent Events
 
From July 1, 2008 through August 6, 2008, we repurchased 227,100 shares of our Class A Common Stock, under the Stock Repurchase Program, at an average investment of $43.30 per share.
 
On August 5, 2008, our Board of Directors declared a special dividend of $1.00 per share to all of its Class A and Class B shareholders, payable on September 16, 2008 to shareholders of record on September 2, 2008 and a quarterly dividend of $.03 per share to all of its Class A and Class B shareholders, payable on September 30, 2008 to shareholders of record on September 16, 2008.
 
On August 5, 2008, our Board of Directors authorized the repurchase of up to an additional 400,000 shares of its class A common stock at such times, prices, and amounts to be determined by the Company. This brings the remaining authorization, under the stock buyback program, to approximately 1,082,000 shares.

 
12

 

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 CatalystTM investment approach, is a widely-recognized provider of investment advisory services to mutual funds, institutional and high net worth investors, and investment partnerships, principally in the United States.  Through Gabelli & Company, Inc., we provide institutional research services to institutional clients and investment partnerships.  We generally manage assets on a discretionary basis and invest in a variety of U.S. and international securities through various investment styles.  Our revenues are based primarily on the firm’s levels of assets under management and fees associated with our various investment products.
 
Since 1977, we have been identified with and enhanced the “value” style approach to investing. Our investment objective is to earn a superior risk-adjusted return for our clients over the long-term through our proprietary fundamental research.  In addition to our value portfolios, we offer our clients a broad array of investment strategies that include global, growth, international and convertible products.  We also offer a series of investment partnership (performance fee-based) vehicles that provide a series of long-short investment opportunities in market and sector specific opportunities, including offerings of non-market correlated investments in merger arbitrage, as well as fixed income strategies.
 
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 directly 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.  It is our belief that general stock market trends will have the greatest impact on our level of assets under management and hence, revenues.
 
We conduct our investment advisory business principally through: GAMCO Asset Management Inc. (Separate Accounts), Gabelli Funds, LLC (Mutual Funds) and Gabelli Securities, Inc. (Investment Partnerships).  We also act as an underwriter, are a distributor of our open-end mutual funds and provide institutional research through Gabelli & Company, Inc., our broker-dealer subsidiary.
 
Assets Under Management (AUM) were $28.3 billion as of June 30, 2008, 1.3% lower than March 31, 2008 AUM of $28.7 billion and 7.5% below June 30, 2007 AUM of $30.6 billion.  Equity AUM were $27.2 billion on June 30, 2008, 0.4% less than March 31, 2008 equity assets of $27.3 billion and 9.3% below the $29.9 billion on June 30, 2007.

-  
Our open-end equity fund AUM were $9.5 billion on June 30, 2008, unchanged from March 31, 2008 and June 30, 2007.

-  
Our closed-end equity funds had AUM of $5.7 billion on June 30, 2008, down 1.0% from $5.8 billion on March 31, 2008 and 11.0% from the $6.4 billion on June 30, 2007.

-  
Our institutional and private wealth management business ended the quarter with $11.6 billion in separately managed accounts, level with March 31, 2008 and 14.0% lower than the $13.5 billion on June 30, 2007. The reclassification of the Gabelli Enterprise Mergers and Acquisitions Fund from institutional sub-advisory to mutual fund advisory in March 2008 partially accounted for the decline in institutional and private wealth management AUM. On a pro-forma basis, AUM was 8.4% lower than the $12.7 million AUM on June 30, 2007.

-  
Our Investment Partnerships AUM were $354 million on June 30, 2008 versus $396 million on March 31, 2008 and $486 million on June 30, 2007.

-  
Fixed income AUM were up 67.5% to $1.2 billion on June 30, 2008, versus the $0.7 billion on June 30, 2007. For the quarter, the assets were down 18.4% as of March 31, 2008.

-  
We receive incentive and fulcrum fees for certain institutional client assets as well as for preferred issues for our closed-end funds, fulcrum fees for the Gabelli Global Deal Fund (NYSE: GDL) common shares, and incentive fees for investment partnership assets. As of June 30, 2008, incentive and fulcrum fee assets were $3.2 billion, slightly below $3.3 billion on March 31, 2008 and 12.1% below $3.6 billion on June 30, 2007.
 
 
13

 
 
The Company reported Assets Under Management as follows:

 Table I:
                   
Mutual Funds:
June 30, 2008
 
June 30, 2007
 
% Inc. (Dec.) 
Adjusted % Inc. (Dec) (a)
Open-end
$
9,486
 
$
9,529
 
(0.5
)
(4.0
)
Closed-end
 
5,704
   
6,412
 
(11.0
)
(11.0
)
Fixed Income
 
1,164
   
684
 
70.2
 
70.2
 
Total Mutual Funds
 
16,354
   
16,625
 
(1.6
)
(3.6
)
Institutional & PWM:
                   
Equities: direct
 
9,564
   
11,116
 
(14.0
)
(14.0
)
“      "  sub-advisory
 
2,043
   
2,383
 
(14.3
)
0.0
 
Fixed Income
 
17
   
21
 
(19.0
)
(19.0
)
Total Institutional & PWM
 
11,624
   
13,520
 
(14.0
)
(11.5
)
Investment Partnerships
 
354
   
486
 
(27.2
)
(27.2
)
Total Assets Under Management
$
28,332
 
$
30,631
 
(7.5
)
(7.5
)
                     
Equities
$
27,151
 
$
29,926
 
(9.3
)
(9.3
)
Fixed Income
 
1,181
   
705
 
67.5
 
67.5
 
Total Assets Under Management
$
28,332
 
$
30,631
 
(7.5
)
(7.5
)
 
 Table II:
 
Assets Under Management By Quarter (millions)
 
                                 
% Increase/(decrease)
 
Mutual Funds
   
6/08
     
3/08
     
12/07
     
9/07
     
6/07
     
12/07 (a)
 
 
3/08 
         
Open-end
 
$
9,486
   
$
9,459
   
$
9,774
   
$
9,866
   
$
9,529
     
(6.4
)
 
0.3
         
Closed-end
   
5,704
     
  5,762
     
6,341
     
  6,443
     
6,412
     
(10.0
)
 
(1.0
)
       
Fixed income
   
1,164
     
  1,445
     
1,122
     
  1,048
     
684
     
3.7
   
(19.4
)
       
Total Mutual Funds
   
16,354
     
 16,666
     
17,237
     
 17,357
     
16,625
     
(7.1
)
 
(1.9
)
       
Institutional & PWM:
                                                             
Equities: direct
   
9,564
     
 9,746
     
10,708
     
 11,266
     
11,116
     
(10.7
)
 
(1.9
)
       
“        sub-advisory
   
2,043
     
 1,887
     
2,584
     
 2,494
     
2,383
     
(7.7
)
 
8.3
         
Fixed Income
   
17
     
  2
     
24
     
  27
     
21
     
(29.2
)
 
750.0
         
Total Institutional & PWM
   
11,624
     
11,635
     
13,316
     
13,787
     
13,520
     
(12.7
)
 
(0.1
)
       
Investment Partnerships
   
354
     
396
     
460
     
491
     
486
     
(23.0)
   
(10.6
)
       
Total Assets Under Management
 
$
28,332
   
$
28,697
   
$
31,013
   
$
31,635
   
$
30,631
     
(8.6
)
 
(1.3
)
       
 
Table III:
                                   
 
 March 31, 2008
Net Cash Flows
Market
Appreciation / (Depreciation)
June 30, 2008
   
Mutual Funds:
                       
Equities
 
$
  15,221
   
$
(51
)
   
20
   
$
15,190
 
Fixed Income
   
  1,445
     
(282
)
   
1
     
1,164
 
Total Mutual Funds
   
  16,666
     
(333
)
   
21
     
16,354
 
Institutional & PWM
                               
Equities: direct
   
  9,746
     
(39
)
   
(143
   
9,564
 
“     "   sub-advisory
   
  1,887
     
163
     
(7
   
2,043
 
Fixed Income
   
  2
     
16
     
(1
   
17
 
Total Institutional & PWM
   
  11,635
     
140
     
(151
   
11,624
 
                                 
Investment Partnerships
   
  396
     
(46
)
   
4
     
354
 
Total Assets Under Management
 
$
  28,697
   
$
(239
)
   
(126
 
$
28,332
 
 
(a) Adjusted for reclassification. Reclass is Enterprise Mergers & Acquisitions Fund to open-end equity for the quarters ended June 30, 2007 and December 31, 2007 from institutional sub-advisory.
 
 
14

 
 
Regulatory
 
On April 24, 2008, the Adviser settled an administrative proceeding with the Commission regarding frequent trading in shares of a mutual fund it advises, without admitting or denying the findings or allegations of the Commission.  As previously disclosed, the inquiry involved the Adviser's treatment of one investor who had engaged in frequent trading in one of the funds (the prospectus of which did not at that time impose limits on frequent trading), and who had subsequently made an investment in a hedge fund managed by an affiliate of the Adviser.  The investor was banned from the fund in August 2002, only after certain other investors were banned.  The principal terms of the settlement include an administrative cease and desist order from violating certain provisions of the federal securities laws, and the payment of $11 million in disgorgement and prejudgment interest and $5 million in a civil monetary penalty, or $0.37 per fully diluted share in total, of which $0.01 per fully diluted share was reserved for in first quarter 2008 and the remainder had been reserved for in prior periods.
 
In September 2005, we were contacted by the staff of the Commission ("the Staff") concerning the actions of two of the closed-end funds managed by the Adviser relating to Section 19(a) of the Investment Company Act of 1940 and Rule 19a-1 thereunder.  These provisions require registered investment companies to provide written statements to shareholders when a dividend is made from a source other than from net investment income.  The two closed-end funds did send annual statements containing the information and IRS Form 1099-Div statements that identified the source of the shareholders’ distributions, but the funds did not send written statements to shareholders with each distribution in 2002 and 2003 as required by Section 19(a) and Rule 19a-1.  The closed-end funds changed their notification procedures, and we believe that all of the funds have been in compliance since 2004.
 
The Staff has indicated that it intends to recommend to the Commission that the Adviser be held accountable for violations of Section 19(a) and Rule 19a-1 by the two closed-end funds.  The Adviser has cooperated with the Staff’s investigation by voluntarily providing documents and testimony requested by the Staff, and the Adviser has made written submissions in its defense.  If the Commission authorizes the commencement of an administrative proceeding against the Adviser, this proceeding could result in sanctions, including a civil monetary penalty.
 
The investment management industry is likely to continue facing a high level of regulatory scrutiny and become subject to additional rules designed to increase disclosure, tighten controls and reduce potential conflicts of interest.  In addition, the Commission has substantially increased its use of focused inquiries in which it requests information from a number of fund complexes regarding particular practices or provisions of the securities laws.  We participate in some of these inquiries in the normal course of our business.  Changes in laws, regulations and administrative practices by regulatory authorities, and the associated compliance costs, have increased our cost structure and could in the future have a material impact.
 
 
15

 
The following discussion should be read in conjunction with the Condensed Consolidated Financial Statements and the notes thereto included in Item 1 to this report.

RESULTS OF OPERATIONS
 
Three Months Ended June 30, 2008 Compared To Three Months Ended June 30, 2007
 
(Unaudited; in thousands, except per share data)
   
2008
   
2007
Revenues
         
  Investment advisory and incentive fees
  $ 55,131     $ 57,654  
  Commission revenue
    3,664       4,036  
  Distribution fees and other income
    6,629       6,587  
     Total revenues
    65,424       68,277  
Expenses
               
  Compensation and related costs
    27,763       29,905  
  Management fee
    2,586       3,449  
  Distribution costs
    6,794       10,161  
  Other operating expenses
    7,074       7,594  
     Total expenses
    44,217       51,109  
Operating income
    21,207       17,168  
Other income
               
Net gain from investments
    10       11,193  
Interest and dividend income
    4,196       6,166  
Interest expense
    (2,199 )     (3,329 )
Total other income, net
    2,007       14,030  
Income before taxes and minority interest
    23,214       31,198  
Income tax provision
    8,719       12,856  
Minority interest
    36       345  
Net income
  $ 14,459     $ 17,997  
                 
Net income per share:
               
   Basic
  $ 0.52     $ 0.64  
   Diluted
  $ 0.51     $ 0.63  
                 
Reconciliation of Net income to Adjusted EBITDA:
               
                 
Net income
  $ 14,459     $ 17,997  
Interest Expense
    2,199       3,329  
Income tax provision and minority interest
    8,755       13,201  
Depreciation and amortization
    254       216  
Adjusted EBITDA (a)
  $ 25,667     $ 34,743  
                 
(a) Adjusted EBITDA is defined as earnings before interest, taxes, depreciation and amortization, and minority interest.  Adjusted EBITDA is a non-GAAP measure and should not be considered as an alternative to any measure of performance as promulgated under accounting principles generally accepted in the United States nor should it be considered as an indicator of our overall financial performance.  We use Adjusted EBITDA as a supplemental measure of performance as we believe it gives investors a more complete understanding of our operating results before the impact of financing activities as a tool for determining the private market value of an enterprise.
 
Total revenues were $65.4 million in the second quarter of 2008, 4.2% below the $68.3 million reported in the second quarter of 2007.  Operating income was $21.2 million, an increase of $4.0 million or 23.5% from the $17.2 million in the second quarter of 2007. Total other income, net of interest expense, was $2.0 million for the second quarter 2008 versus $14.0 million in the prior year’s quarter. In the short-run, our results remain sensitive to changes in the equity market.  Net income for the quarter was $14.5 million or $0.51 per fully diluted share versus $18.0 million or $0.63 per fully diluted share in the prior year’s quarter.
 
Investment advisory fees for the second quarter 2008 were $55.1 million, 4.4% below the 2007 comparative figure of $57.7 million. Open-end mutual funds revenues grew by 7.0% to $24.9 million from $23.3 million in second quarter 2007 primarily due to higher average AUM. Our closed-end funds revenues fell 8.2% to $11.8 million in the second quarter 2008 from $12.8 million in 2007 primarily due to decreased average AUM. Institutional and high net worth separate accounts revenues, whose revenues are based upon prior quarter-end AUM, decreased 12.4% to $17.7 million from $20.2 million in second quarter 2007 primarily due to lower AUM. Investment Partnership revenues declined $0.6 million or 45.7% below revenues from $1.2 million in 2007.  This decline was primarily due to both decreased incentive fees and AUM.
 
Commission revenues from our institutional research affiliate, Gabelli & Company, Inc., were $3.7 million in the second quarter 2008, down 9.2% from the prior year.  The decrease was primarily due to a decline in share volume slightly offset by an increase in average revenue earned per share traded.
 
Mutual fund distribution fees and other income were $6.6 million for the second quarter 2008, remaining flat compared to second quarter 2007.
 
Total expenses, excluding management fee, were $41.6 million in the second quarter of 2008, a 12.7% decrease from total expenses of $47.7 million in the second quarter of 2007.
 
Compensation costs, which are largely variable, were $27.8 million or 7.2% lower than the $29.9 million recorded in the prior year period.  This decrease was driven by lower AUM in our Institutional and Private Wealth Management business at March 31, 2008 and lower average AUM in our investment partnership business.  
 
Management fee expense, which is totally variable and based on pretax income, declined $0.8 million to $2.6 million in the second quarter of 2008 versus $3.4 million in the 2007 period.
 
Distribution costs were $6.8 million, a decrease of 33.1% from $10.1 million in the prior year’s period, which included a $4.2 million expense to terminate a compensation arrangement for one of our closed-end funds. Without the termination expense, distrbution costs would have increased $0.8 million, or 13.7%.
 
Other operating expenses decreased by $0.5 million to $7.1 million in the second quarter of 2008 from the prior year second quarter of $7.6 million.  
 
Total other income, net of interest expense, was $2.0 million for the second quarter 2008 versus $14.0 million in the prior year’s quarter. $11.2 million of this decline is from the effect of mark to market decline in equity instruments and interest income was lower by $2.3 million. Partially offseting the decline was an increase in dividend income of $0.3 million. Interest expense fell to $2.2 million for first quarter 2008 from $3.3 million for the prior year quarter.
 
The effective tax rate for the three months ended June 30, 2008 was 37.6% compared to the prior year period’s effective rate of 41.2%. The decrease in the effective income tax rate reflects a one-time FIN 48 adjustment related to the pre-2007 period booked during the second quarter of 2007.
 
Minority interest decreased to less than $0.1 million in 2008 from $0.3 million in 2007.
16

 
The following discussion should be read in conjunction with the Condensed Consolidated Financial Statements and the notes thereto included in Item 1 to this report.

RESULTS OF OPERATIONS
 
Six Months Ended June 30, 2008 Compared To Six Months Ended June 30, 2007
 
(Unaudited; in thousands, except per share data)
   
2008
   
2007
Revenues
         
  Investment advisory and incentive fees
  $ 111,972     $ 114,214  
  Commission revenue
    6,920       8,056  
  Distribution fees and other income
    13,080       12,613  
     Total revenues
    131,972       134,883  
Expenses
               
  Compensation and related costs
    56,610       58,279  
  Management fee
    4,567       6,850  
  Distribution costs
    13,203       16,047  
  Other operating expenses
    13,128       16,028  
     Total expenses
    87,508       97,204