The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and the notes thereto included in Part II, Item 8 of this Form 10-K "Financial Statements and Supplementary Data." This discussion contains forward-looking statements and involves numerous risks and uncertainties, including, but not limited to those described in Part I, Item 1A of this Form 10-K "Risk Factors." Our actual results could differ materially from those anticipated by such forward-looking statements due to factors discussed under "Risk Factors" and "Cautionary Statement Regarding Forward-Looking Statements" appearing elsewhere in this Form 10-K.
New York Stock Exchange("NYSE"): GBL), a company incorporated under the laws of Delaware, is a widely-recognized provider of investment advisory services to 24 open-end funds, 14 closed-end funds, actively managed semi-transparent ETFs, one société d'investissement à capital variable ("SICAV"), and approximately 1,400 institutional and private wealth management ("Institutional and PWM") investors principally in the United States("U.S."). We generally manage assets on a fully discretionary basis and invest in a variety of U.S.and international securities. Our revenues are based primarily on the Company's level of assets under management ("AUM") and fees associated with our various investment products. GAMCO serves a broad client base, including institutions, intermediaries, offshore investors, private wealth, and direct retail investors. In recent years, GAMCO has successfully integrated new teams of RIAs by providing attractive compensation arrangements and paying finder's fees.
GAMCO offers a wide range of solutions for clients in the areas of value and growth equities, ESG, convertibles, actively managed semi-transparent ETFs, sector strategies such as gold and utilities, merger arbitrage and fixed income. In 1977, GAMCO launched its flagship All Cap Value strategy, Gabelli Value, and in 1986 entered the mutual fund industry.
December 31, 2021, we had $35.0 billionof AUM. We conduct our investment advisory business principally through two subsidiaries, which are registered investment advisors: Gabelli Funds, LLC(open-end and closed-end funds) ("Gabelli Funds") and GAMCO Asset Management Inc.(Institutional and PWM) ("GAMCO Asset"). G.distributors, LLC ("G.distributors"), our broker-dealer subsidiary, acts as an underwriter and distributor of our open-end funds and actively managed semi-transparent ETFs. In December 2019, a novel strain of coronavirus ("COVID-19") surfaced in Chinaand has since spread globally. On March 11, 2020, COVID-19 was identified as a global pandemic by the World Health Organization. In response to its spread, governmental authorities have imposed restrictions on travel and congregation and the temporary closure of many non-essential businesses in affected jurisdictions, including, beginning in March 2020, in the U.S.As world leaders focused on the unprecedented human and economic challenges of COVID-19, global equity markets plunged as the coronavirus pandemic spread. In March 2020, the unfolding events led to the worst month for stocks since 2008 and the worst first quarter since 1937. In the remainder of 2020 and continuing through 2021, as a result of unprecedented fiscal and monetary stimulus and the fast tracking of COVID-19 vaccines, the markets have rebounded strongly. As a result of this pandemic, the Company allowed most of our employees ("teammates") to work remotely. This policy continued through the end of June 2021. Effective July 2021, the Company changed its policy and asked teammates to return to our offices. As a result, the majority of our teammates are now back in our offices. There continues to be no material impact of remote work arrangements on our operations, including our financial reporting systems, internal control over financial reporting, and disclosure controls and procedures, and there has been no material challenge in implementing our business continuity plan. 27
Here is the current organization chart of the Company:
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2021 Business and Investment Highlights
Securities. The fund, managed by our Dinsmore team, which marked the 50th
Bancroft Fund management anniversary in April, leverages
investment history in dedicated convertible securities portfolios. Several
share classes are suitable for global institutional investors as well as certain
• We launched our first actively managed semi-transparent ETF, the Love our
ETF Planet & People (LOPP), on
Growth Innovators (GGRW), on
• Our 31st Annual Pumps, Valves and Water Systems Symposium was held in February
25th. The meeting included presentations by senior management from several
leading industrial companies specializing in industrial and municipal water
the use and role of technology.
Symposium via webcast. The timely conference featured presentations by leading companies.
oversubscribed rights offering raising approximately
our team participated in roundtables on investment styles and
customers and prospects present on a virtual basis.
in our 13th Annual Entertainment and Broadcasting Symposium.
matured subordinated securities
million to record holders on
• The Company opened a relationship center in
modification of the company’s amended and restated certificate of incorporation.
issue of subscription rights for approximately
warrants, rights and convertible securities.
August 30th, the Gabelli Multimedia Trust Inc. (NYSE: GGT) completed an offering that raised approximately $18 million. 28
a private placement of
raised a similar
“Batteries included” in
senior management of major automotive and electric vehicle suppliers, with a
the focus on the battery ecosystem, technological innovation and industry
Annual Healthcare Symposium, which included presentations by healthcare leaders
professionals providing important information on the main trends in the clinic
innovation, health care delivery, access and economy.
of a private placement of
Giving back to society – (Your) “S” in ESG
The Board of Directors approved in
November 2021a $0.50per share shareholder designated charitable contribution ("SDCC"), a 100% increase from the prior year's $0.25per share designation under the program. We estimate this will total approximately $11.3 million. Since the inception of GAMCO's SDCC program in 2013, and counting this current amount, shareholders will have designated charitable gifts of $48 millionto more than 350 501(c)(3) institutions. When combined with our other charitable contributions, this boosts our total contributions to approximately $74 millionsince our initial public offering ("IPO") in February 1999.
Remuneration and shareholder initiatives
During 2021, we returned
$73.8 millionof our earnings to shareholders through dividends and stock repurchases, including a total of $0.10per share in regular quarterly cash dividends totaling $2.7 millionand $2.00per share in a special dividend to shareholders of Class A Stock and Class B Stockpayable in Subordinated Notes totaling $54.5 million. During 2020, we returned $30.7 millionof our earnings to shareholders through dividends and stock repurchases, including a total of $0.08per share in regular quarterly cash dividends and $0.90per share in a special dividend totaling $26.8 million. Through our stock buyback program (the "Stock Repurchase Program"), including routine open market purchases under Rules 10b5-1 and 10b-18 of the Securities Exchange Act of 1934, as amended and opportunistic private transactions, we repurchased 700,722 shares and 296,296 shares in 2021 and 2020, respectively, for approximately $16.5 millionand $3.9 million, respectively, or $23.54per share and $13.16per share, respectively. At December 31, 2021, the total shares available under the Stock Repurchase Program for Class A Stockto be repurchased in the future were 2,173,937. The Stock Repurchase Program is not subject to an expiration date. Assets Under Management AUM was $35.0 billionas of December 31, 2021, an increase of $2.4 billion, or 7.4%, from the December 31, 2020AUM of $32.6 billion. The activity for 2021 consisted of $5.3 billionof market appreciation, net cash outflows of $2.3 billionand recurring distributions, net of reinvestments, from open-end and closed-end funds (the "Funds") of $568 million. Average total AUM was $34.3 billionin 2021 versus $31.0 billionin 2020, an increase of 10.6%. We earn incentive fees for certain institutional client assets, assets attributable to certain preferred issues for our closed-end Funds, our GDL Fund(NYSE: GDL), the Gabelli Merger Plus+ Trust Plc (LSE: GMP), and the GAMCO Merger Arbitrage Fund. As of December 31, 2021, assets with incentive based fees were $1.3 billion, 18.2% above the $1.1 billionon December 31, 2020. The majority of these assets have calendar year-end measurement periods; therefore, our incentive fees are primarily recognized in the fourth quarter when the uncertainty is removed at the end of the annual measurement period. 29 --------------------------------------------------------------------------------
RESULTS OF OPERATIONS
Investment advisory and incentive fees, which are based on the amount and composition of AUM in our Funds and Institutional and PWM accounts, and distribution fees represent our largest source of revenues. In addition to the general level and trends of the stock market, growth in revenues depends on good investment performance, which influences the value of existing AUM as well as contributes to higher investment and lower redemption rates and facilitates the ability to attract additional investors while maintaining current fee levels. Growth in AUM is also dependent on being able to access various distribution channels, which is usually based on several factors, including performance and service. A majority of our cash inflows to mutual fund products have come through third party distribution programs, including no-transaction fee programs. We have also been engaged to act as a sub-advisor for other much larger financial services companies with much larger sales distribution organizations. These sub-advisory clients are subject to business combinations that may result in the termination of the relationship. The loss of a sub-advisory relationship could have a significant impact on our financial results in the future. Advisory fees from the Funds and sub-advisory accounts are computed daily or weekly based on average net assets. Advisory fees from Institutional and PWM clients are generally computed quarterly based on account values as of the end of the preceding quarter. These revenues are based on AUM, which is highly correlated to the stock market and can vary in direct proportion to movements in the stock market and the level of sales compared with redemptions, financial market conditions, and the fee structure for AUM. Revenues derived from the equity-oriented portfolios generally have higher advisory fee rates than fixed income portfolios. We also receive incentive fees from certain Institutional and PWM clients, which are based upon meeting or exceeding a specific benchmark index or indices. These fees are recognized at the end of the stipulated contract period, which may be quarterly or annually, for the respective account. Advisory fees on assets attributable to certain of the closed-end preferred shares are earned at year-end if the total return to common shareholders of the closed-end fund for the calendar year exceeds the dividend rate of the preferred shares. These fees are recognized at the end of the measurement period. Distribution fees and other income primarily include distribution fee revenue earned in accordance with Rule 12b-1 of the Investment Company Act of 1940, as amended ("Company Act"), along with sales charges and underwriting fees associated with the sale of the mutual funds plus other revenues. Distribution fees fluctuate based on the level of AUM and the amount and type of mutual funds sold directly by G.distributors or through various distribution channels. Compensation costs include variable and fixed compensation and related expenses paid to officers, portfolio managers, sales, trading, research, and all other professional teammates. Variable compensation paid to sales teammates and portfolio management generally represents 40% of revenues and is the largest component of total compensation costs. Distribution costs include marketing, product distribution, and promotion costs. The management fee is incentive-based and entirely variable compensation in the amount of 10% of the aggregate pre-tax profits, which is paid to
Mr. Gabellior his designee for acting as CEO pursuant to his 2008 Employment Agreement so long as he is an executive of GBL and devotes the substantial majority of his working time to the business. Other operating expenses include general and administrative operating costs. Non-operating income/(loss) includes gain/(loss) from investments, net (which includes both realized and unrealized gains and losses from securities), interest and dividend income, interest expense, and shareholder-designated charitable contribution. The gain/(loss) from investments, net is derived from our proprietary investment portfolio consisting of various public investments. 30 -------------------------------------------------------------------------------- The following table (in thousands, except per share data) and discussion of our results of operations are based upon data derived from the consolidated statements of income contained in our consolidated financial statements and should be read in conjunction with those statements included in Part II, Item 8 of this Form 10-K. Years Ended December 31, 2021 2020 Revenues Investment advisory and incentive fees $ 274,531$
Distribution fees and other income 26,595 26,098 Total revenues 301,126 259,726 Expenses Compensation 118,186 102,347 Management fee 5,552 5,376 Distribution costs 30,276 28,474 Other operating expenses 29,692 23,920 Total expenses 183,706 160,117 Operating income 117,420 99,609 Non-operating income / (loss) Gain/(loss) from investments, net 269 (8,695 ) Interest and dividend income 550
Interest expense (2,919 ) (2,620 ) Shareholder-designated charitable contribution (11,279 ) (5,436 ) Total non-operating loss (13,379 ) (15,925 ) Income before income taxes 104,041 83,684 Provision for income taxes 30,842 24,991 Net income
$ 73,199 $ 58,693Earnings per share: Basic $ 2.79 $ 2.21Diluted $ 2.73 $ 2.20
Net income for 2021 was
$73.2 million, or $2.73per fully diluted share, versus $58.7 million, or $2.20per fully diluted share, in 2020. The year-to-year comparison was impacted by higher revenues and lower non-operating loss offset partially by higher variable compensation.
Total revenues were
$301.1 millionin 2021, $41.4 millionor 15.9% higher than the total revenues of $259.7 millionin 2020. The change in total revenues by component was as follows (dollars in millions): Years Ended December 31, Increase (decrease) 2021 2020 _$ _% Investment advisory $ 258.9 $ 224.7 $ 34.215.2 Incentive fees 15.6 8.9 6.7 75.3 Distribution fees and other income 26.6 26.1 0.5 1.9 Total revenues $ 301.1 $ 259.7 $ 41.415.9 Investment advisory fees excluding incentive fees, which comprised 86.0% of total revenues in 2021, are directly influenced by the level and mix of average AUM. Average total AUM increased 10.6% to $34.3 billionin 2021 as compared to $31.0 billionin 2020. Average equity AUM increased 15.3% to $32.4 billionin 2021 from $28.1 billionin 2020, primarily from market appreciation partially offset by net outflows. Incentive fees, which comprised 5.2% of total revenues in 2021, result from our ability to either generate an absolute return in a portfolio or meet or exceed a specific benchmark index or indices and can vary significantly from one period to another. Incentive fees were higher in 2021 as a larger number of portfolios exceeded their respective benchmarks as compared to 2020. 31
-------------------------------------------------------------------------------- Fund revenues increased
$29.0 millionor 18.3%, to $187.3 million, driven by higher average AUM. Revenue from open-end Funds increased $9.6 million, or 10.5%, to $100.8 millionfrom the prior year as average AUM in 2021 increased $0.9 billion, or 7.6%, to $12.7 billionfrom the $11.8 billionin 2020. Closed-end fund revenues increased $19.4 million, or 28.9%, to $86.5 millionfrom the prior year and were comprised of an increase of $5.4 millionin incentive fees on certain closed-end fund AUM and an increase of $14.0 millionin investment advisory fees attributable to higher average AUM. Revenue from Institutional and PWM accounts, which are generally billed on beginning quarter AUM, increased $8.9 million, or 13.8%, principally due to higher billable AUM levels throughout the course of 2021. In 2021, average AUM in our equity Institutional and PWM business increased $1.8 billion, or 16.8%, for the year to $12.5 billion. SICAV revenues were $14.1 millionin 2021, including $7.3 millionof incentive fees, up from $11.0 millionin 2020. Distribution fees and other income increased $0.5 million, or 1.9%, to $26.6 millionin 2021 from $26.1 millionin 2020 primarily from higher average open-end equity Fund AUM which increased 11.0%. Distribution fees were $23.7 millionin 2021 versus $23.1 millionin 2020 while other income was $2.9 millionin 2021 versus $3.0 millionin 2020.
Total compensation costs, which are largely variable in nature, increased
$15.9 million, or 15.5%, to $118.2 millionin 2021 from $102.3 millionin 2020. Variable compensation costs, which are tied to revenues and principally consist of portfolio manager and relationship manager fees, increased $8.3 millionto $68.2 millionin 2021 from $59.9 millionin 2020 and decreased as a percent of revenues to 22.7% in 2021 from 23.1% in 2020. The increase of waived compensation by the CEO, in his capacity as a portfolio manager and a relationship manager, to $17.1 millionin 2021, as compared to $12.4 millionin 2020, partially offset the large increase in variable compensation costs due to higher average AUM. During 2021, the CEO elected to irrevocably waive all of his compensation for a total of five months ( July 1, 2021to November 30, 2021) as comparted to four months and ten days during 2020 ( July 1, 2020to November 10, 2020). Additionally, the accounting for the vesting of the deferred cash compensation agreement ("DCCA") decreased 2020 compensation by $1.5 million. Fixed compensation costs increased to $41.3 millionin 2021 from $38.2 millionin 2020. Stock based compensation was $8.7 millionin 2021, an increase of $4.5 million, as compared to $4.2 millionin 2020. The increase primarily results from the acceleration of all 2018 and 2019 restricted stock award grants during 2021 for an additional expense of $3.8 millionthat would have been recognized in future years. In 2021, management fee expense increased to $5.6 millionversus $5.4 millionin 2020. Management fee expense is incentive-based and entirely variable in the amount of 10% of the aggregate pre-tax profits, which is paid to Mr. Gabelli(or his designee) in accordance with his 2008 Employment Agreement. During 2021 and 2020, the CEO compensation waiver reduced management fee expense by $3.7 millionand $2.3 million. Distribution costs, which include marketing, promotion, and distribution costs increased $1.8 million, or 6.3%, to $30.3 millionin 2021 from $28.5 millionin 2020, driven by an increase in average open-end equity mutual funds AUM of 11.0%.
The other operating expenses were
Operating income increased
$17.8 million, or 17.9%, to $117.4 millionfor 2021 versus $99.7 millionin 2020. This increase in 2021 as compared to 2020 primarily resulted from higher revenues of $41.4 millionand a higher CEO compensation waiver of $4.7 million. Operating margin was 39.0% for the year ended December 31, 2021, versus 38.4% in the prior year. Operating income before management fee was $123.0 millionfor the year ended of 2021, versus $105.0 millionin the prior year. Operating margin before management fee was 40.8% in 2021 versus 40.4 % in 2020. The reconciliation of operating income before management fee and operating margin before management fee, both of which are non-GAAP measures, to their respective generally accepted accounting principles ("GAAP") measures is provided at the end of this section.
Total non-operating loss was
$13.4 millionfor the year ended December 31, 2021, compared to a loss of $15.9 millionin 2020. This was comprised of net gain from investments of $0.3 millionin 2021 as compared to a net loss from investments of $8.7 millionin 2020; interest and dividend income of $0.6 millionin 2021 versus $0.8 millionin 2020; interest expense of $2.9 millionin 2021 as compared to $2.6 millionin 2020; and shareholder-designated charitable contributions of $11.3 millionin 2021 and $5.4 millionin 2020. 32
The effective tax rate was 29.6% for the year ended
Non-GAAP Information and Reconciliation
Operating income before management fee expense is used by management for purposes of evaluating its business operations. We believe this measure is useful in illustrating the operating results of the Company as management fee expense is based on pre-tax income before management fee expense, which includes non-operating items including gain/(loss) from investments, net from our proprietary investment portfolio, interest and dividend income, interest expense, and shareholder-designated charitable contribution. We believe that an investor would find this useful in analyzing our business operations without the impact of the non-operating items such as trading and investment portfolios, interest and dividend income, interest expense, or shareholder-designated charitable contribution.
Reconciliation of GAAP and non-GAAP financial measures (in thousands):
2021 2020 Revenues, U.S. GAAP basis
$ 301,126 $ 259,726
Operating profit before management fees
Operating margin 39.0 % 38.4 %
Operating margin before management fees 40.8% 40.4%
The Company deferred, through a DCCA, the cash compensation of the CEO relating to all of 2016 ("2016 DCCA") to provide the Company with flexibility to pay down debt and enhance our ability to execute lift-outs, make acquisitions, and seed new products. The DCCA deferred the CEO's compensation expense by amortizing it over the DCCA's vesting period. The CEO was not entitled to receive the compensation until the end of each respective vesting period, so
U.S.GAAP specifies that the expense is amortized over the vesting period. The 2016 DCCA was expensed ratably over 4 years. In addition to the ratable vesting, the expense was marked to market at each reporting period as the DCCA expense was indexed to GBL's stock price. Notwithstanding its ability to settle these agreements in stock, GAMCO made a cash payment to the CEO on the vesting date. While the agreement did not change the original calculation of the CEO's compensation, our reporting under U.S.GAAP for his compensation did change due to the ratable vesting and the indexing to the GBL stock price. The original value of the DCCA was based on the compensation earned in the period divided by the volume weighted average price ("VWAP") of the GBL stock price for the period ("Original VWAP") to calculate the number of restricted stock units ("RSUs") granted. Upon vesting, the DCCA was paid out based on the lesser of the VWAP of GBL's stock price on the vesting date ("Vesting Date VWAP") and the Original VWAP multiplied by the number of RSUs. The table below shows a summary of the DCCA (in millions, except RSUs and VWAPs): Vesting Impact of Vesting Number of Original Date Vesting Deferred Cash Indexing to GBL Date Cash RSUs VWAP VWAP Date
Waiver payment during compensation actions 2016 DCCA 2,314,695
(32.3 ) $ -
$ 43.7On January 2, 2020, the 2016 DCCA vested in accordance with the terms of the agreement and a cash payment of $43.7 millionwas made to the CEO. This payment was reduced by $32.3 millionresulting from the DCCA RSUs being indexed to GBL's stock price and utilizing the lesser of the Vesting Date VWAP ( $18.8812) versus the Original VWAP over 2016 ( $32.8187).
Thus, the evolution of the GBL share price of
The following tables present the impact of amortization and earnings per share (“EPS”), including indexation on the GBL share price, of the DCCA by quarter (in thousands, except per share data):
Amortization by quarter (increase / (decrease)): EPS impact by quarter: 2020 2020 _Q1 $ (1,409) _Q1
$ 0.04_Q2 - _Q2 - _Q3 - _Q3 - _Q4 - _Q4 - Year $ (1,409) Year $ 0.04The following tables (in thousands, except per share data) show a reconciliation of our results for the years ended December 31, 2021and 2020 between the U.S.GAAP basis and a non-GAAP adjusted basis ("as adjusted") as if all of the 2016 DCCA was recognized in 2016 without regard to the vesting schedule. We believe the non-GAAP financial measures below provide relevant and meaningful information to investors about our core operating results. These measures have been established in order to increase transparency for the purpose of evaluating our core business, for comparing results with prior period results, and to enable more appropriate comparisons with industry peers. However, non-GAAP financial measures should not be considered a substitute for financial measures calculated in accordance with U.S.GAAP and may be calculated differently by other companies. Years Ended December 31, 2021 2020 Net income, U.S. GAAP basis $ 73,199 $ 58,693Impact of 2016 DCCA on expenses and taxes: Compensation costs - (1,409 ) Management fee expense - - Provision for income taxes - 338 Total impact of 2016 DCCA - (1,071 ) Net income, as adjusted $ 73,199 $ 57,622Per share (basic): Net income, U.S. GAAP basis $ 2.79 $ 2.21Impact of DCCAs - (0.04 ) Net income, as adjusted $ 2.79 $ 2.17Per fully diluted share: Net income, U.S. GAAP basis $ 2.73 $ 2.20Impact of DCCAs - (0.04 ) Net income, as adjusted $ 2.73 $ 2.16
CASH AND CAPITAL RESOURCES
Our principal assets are highly liquid in nature and consist of cash and cash equivalents,
U.S.Treasury Bills, short-term investments, and securities held for investment purposes. Cash and cash equivalents are comprised primarily of U.STreasury Bills with maturities of three months or less at the time of purchase and a 100% U.S. Treasurymoney market fund managed by GAMCO (The Gabelli U.S. Treasury Money Market Fund). 34
Summary cash flow data for the years ended
December 31, 2021and 2020 was as follows (in thousands): Years Ended December 31, 2021 2020 Cash flows provided by (used in): Operating activities $ 96,131 $ 40,734Investing activities 59,515 (63,511 ) Financing activities (46,946 ) (30,026 ) Increase (decrease) in cash and cash equivalents 108,700 (52,803 ) Effect of exchange rates on cash and cash equivalents 2 (8 ) Net increase (decrease) in cash and cash equivalents 108,702 (52,811 ) Cash and cash equivalents at beginning of year 33,325 86,136
Cash and cash equivalents at the end of the year
Short-term investments in
U.S. TreasuryBills $ - $ 64,988Cash, cash equivalents, short-term investments in U.STreasury Bills, and investments in fixed maturity securities $ 142,027 $ 98,313Cash and liquidity requirements have historically been met through cash generated by operating income and our borrowing capacity. We filed a "shelf" registration statement with the Securities and Exchange Commission("SEC") that was declared effective in April 2018. The shelf provides us opportunistic flexibility to sell any combination of senior and subordinate debt securities, convertible debt securities, equity securities (including common and preferred stock), and other securities up to a total amount of $500 million. The shelf was available through April 2021. On July 21, 2021, the Company filed a new "shelf" registration statement on Form S-3 on similar terms, which was declared effective on July 27, 2021. On January 2, 2020, the 2016 DCCA vested in accordance with the terms of the agreement and a cash payment in the amount of $43.7 millionwas made to the CEO. On July 1, 2020, the Company announced that the CEO elected to irrevocably waive all of his compensation that he would otherwise have been entitled to for the period from July 1, 2020to November 10, 2020. On June 30, 2021, the Company announced that the CEO elected to irrevocably waive all of his compensation that he would otherwise have been entitled to for the period from July 1, 2021to November 30, 2021. As a result of these waivers, there was $20.8 millionand $14.7 millionof compensation and management fee waived by the CEO for the years ended December 31, 2021and 2020, respectively. As of December 31, 2021, we had cash, cash equivalents, short-term investments in U.S.Treasury Bills, and investments in fixed maturity securities of $142.0 million, an increase of $43.7 millionfrom the prior year-end balance of $98.3 millionprimarily due to the Company's operating and investing activities, partially offset by the Company's financing activities, described below. Total debt outstanding at December 31, 2021was $51.0 million, which consisted of the Subordinated Notes. Total debt outstanding at December 31, 2020was $24.2 million, which consisted of 5.875% senior notes due June 1, 2021.
Net cash provided by operating activities was
Net cash provided by investing activities in 2021 was
$59.5 millionrelating to net maturities of U.S.Treasuries held for investment purposes, as compared to $63.5 millionused in 2020 relating to net purchases of U.S.Treasuries held for investment purposes. As of December 31, 2021, we had total investments of $32.3 million, a decrease in total investments of $58.5 millionfrom the prior year-end balance of $90.8 million. Net cash used in financing activities in 2021 was $46.9 million, including $24.2 millionpaid for the repurchase of 5.875% senior notes due June 1, 2021, $16.5 millionpaid for the purchase of treasury stock, $4.3 millionpaid in dividends, $1.6 millionpaid for the repurchase of Subordinated Notes that were put back to the Company, and $0.3 millionpaid on the principal portion of lease liabilities, as compared to $30.0 millionused in 2020. The Company's principal contractual commitments include repayments of the Subordinated Notes and payments of lease obligations. At December 31, 2021, we had $51.0 millionof Subordinated Notes due June 2023, which we expect to satisfy with cash and cash equivalents. Under the terms of the lease of our Rye, New Yorkoffice, we are obligated to make minimum total payments of $7.8 millionthrough December 2028. We are obligated to make future payments under various contracts such as debt agreements and finance and operating lease agreements of $7.8 millionand $3.8 million, respectively. We also had a net liability for unrecognized tax benefits related to uncertain tax positions of $20.2 million, including penalties and interest related to tax uncertainties in income taxes of approximately $9.5 million, some or all of which could result in future cash payments to various taxing authorities. At this time, we are unable to estimate the timing and amount of any future cash outflows related to these uncertain tax positions. As such amounts above, both individually and in the aggregate, can be satisfied with cash on hand and investments, we do not believe they represent a material liquidity risk to the company. We do not invest in any other off-balance sheet vehicles that provide financing, liquidity, market, or credit risk support or engage in any leasing activities that expose us to any liability that is not reflected on the consolidated financial statements. 35 -------------------------------------------------------------------------------- We have one broker-dealer subsidiary, G.distributors, which is subject to certain net capital requirements. G.distributors computes its net capital under the alternative method permitted, which requires minimum net capital of the greater of $250,000or 2% of the aggregate debit items in the reserve formula for those broker-dealers subject to Rule 15c3-3 promulgated under the Securities Exchange Act of 1934, as amended. The requirement was $250,000for the broker-dealer at December 31, 2021and 2020. At December 31, 2021and 2020, G.distributors had net capital, as defined in the Rule, of approximately $1.9 millionand $1.4 million, respectively, exceeding the regulatory requirement by approximately $1.6 millionand $1.1 million, respectively. Net capital requirements for our affiliated broker-dealer may increase in accordance with the rules and regulations applicable to broker-dealers to the extent G.distributors engages in other business activities. Our subsidiary, GAMCO Asset Management (UK) Limited, is authorized and regulated by the Financial Conduct Authority("FCA"). At December 31, 2021and 2020, GAMCO Asset Management (UK) Limitedheld total capital of £746 thousand and £708 thousand ( $1.0 millionand $961 thousand), respectively, and had a Financial Resources Requirement of £310 thousand and £195 thousand ( $419 thousandand $265 thousand), respectively. We have consistently met or exceeded these minimum requirements.
CRITICAL ACCOUNTING METHODS
The preparation of the consolidated financial statements in conformity with
U.S.GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the dates of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods presented. We base our estimates on historical experience, when available, and on other various assumptions that are believed to be reasonable under the circumstances. Actual results could differ significantly from those estimates.
Critical accounting policies should be read in conjunction with our “Risk Factors” in Part I, Section 1A of this Form 10-K.
Main revenue-generating services and revenue recognition
The Company’s revenues are primarily derived from investment advisory fees and incentive and distribution fees.
Investment advisory and incentive fees are directly influenced by the level and mix of AUM, as fees are derived from a contractually-determined percentage of AUM for each account as well as incentive fees earned on certain accounts. Advisory fees from the Funds and sub-advisory accounts are computed daily or weekly based on average net assets and amounts receivable are included in investment advisory fees receivable on the consolidated statements of financial condition. Advisory fees from Institutional and PWM accounts are generally computed quarterly based on account values as of the end of the preceding quarter, and amounts receivable are included in investment advisory fees receivable on the consolidated statements of financial condition. The Company derived approximately 90% of its total revenues from advisory fees, including incentive fees, for the years ended
December 31, 2021and 2020. These revenues vary depending upon the level of sales compared with redemptions, financial market conditions, performance, and the fee structure for AUM. Revenues derived from the equity-oriented portfolios generally have higher advisory fee rates than fixed income portfolios. For The GDL Fund, there is an incentive fee earned as of the end of the calendar year which varies to the extent the total return of the fund is in excess of the ICE Bank of America Merrill Lynch3 Month U.S.Treasury Bill Index total return. This fee is recognized at the end of the measurement period, which is annually on a calendar year basis. Receivables due on incentive fees relating to The GDL Fundare included in investment advisory fees receivable on the consolidated statements of financial condition and were $1.1 millionand $0.1 millionas of December 31, 2021and 2020, respectively. For the Gabelli Merger Plus+ Trust Plc, there is an incentive fee which is earned and recognized at the end of the measurement period, June 30thand varies to the extent the total return of the fund is in excess of twice the rate of return of the 13 week Treasury Bills over the performance period. There were no incentive fees receivable as of December 31, 2021or 2020. Advisory fees on certain of the closed-end preferred shares are earned at year-end if the total return to common shareholders of the closed-end fund for the calendar year exceeds the dividend rate of the preferred shares. These fees are recognized at the end of the measurement period, which is annually, or earlier if there is a redemption. Receivables due for advisory fees on closed-end preferred shares are included in investment advisory fees receivable on the consolidated statements of financial condition. There were $1.5 millionand $2.5 millionin advisory fees receivable on the closed-end preferred shares as of December 31, 2021and 2020, respectively. 36 -------------------------------------------------------------------------------- For the GAMCO Merger Arbitrage SICAV, there is an incentive fee earned as of the end of the calendar year when the total return of a share class exceeds the hurdle rate (return on the 13-week UST) and the NAV exceeds the high water mark, at the rate of fifteen percent of the total return of share classes not denominated in the base currency and at the rate of twenty percent of the total return of share classes denominated in the base currency. This fee is recognized at the end of the measurement period, which is annually on a calendar year basis, or earlier if there is a redemption. Receivables due on incentive fees relating to the GAMCO Merger Arbitrage SICAV are included in investment advisory fees receivable on the consolidated statements of financial condition and were $6.4 millionand $5.6 millionas of December 31, 2021and 2020, respectively. Distribution fees revenues are derived primarily from the distribution of Gabelli and GAMCO open-end Funds as well as the affiliated TETON Westwood and Keeley open-end funds advised by either a subsidiary of GBL ( Gabelli Funds), a subsidiary of GGCP, Inc.(Teton), or a subsidiary of Teton ( Keeley-Teton Advisors, Inc.). G.distributors distributes the open-end Funds pursuant to distribution agreements with each Fund. Under each distribution agreement with an open-end Fund, G.distributors offers and sells such open-end Fund shares on a continuous basis and pays all of the costs of marketing and selling the shares, including printing and mailing prospectuses and sales literature, advertising and maintaining sales and customer service teammates and sales and services fulfillment systems, and payments to the sponsors of third party distribution programs, financial intermediaries, and G.distributors' sales teammates. G.distributors receives fees for such services pursuant to distribution plans adopted under provisions of Rule 12b-1 of the Company Act. G.distributors is the principal underwriter for funds distributed in multiple classes of shares which carry front-end or back-end sales charge or no-load to certain investors. Under the distribution plans, the Class AAA shares of the open-end Funds (except The Gabelli U.S. Treasury Money Market Fund, Gabelli Capital Asset Fund, and The Gabelli ABC Fund) and the Class A and ADV shares of certain Funds pay G.distributors a distribution fee of 0.25% per year on the average daily net assets of the Fund. Class C shares have a 12b-1 distribution plan with a distribution fee totaling 1.00%.
Distribution fees for open-ended funds are calculated daily on the basis of average net assets. Amounts receivable for distribution commissions are included in accounts receivable from affiliates in the consolidated statements of financial position.
Note 2 to the consolidated financial statements includes additional information on the Company’s revenue recognition policy.
Investments in securities
Equity securities held are recognized at fair value on the statements of financial position, with any unrealized gain or loss recognized in profit for the current period in gain/(loss) on investments, net in the statements. consolidated results, in accordance with
Management determines the appropriate classification of debt securities at the time of purchase. Government debt with maturities of greater than three months at the time of purchase are considered investments in debt securities. Investments in debt securities are accounted for as either trading, available for sale ("AFS"), or held-to-maturity. The Company does not hold any investments in debt securities accounted for as trading or AFS. The Company's investments in debt securities are classified as held-to-maturity, as the Company has the intent and ability to hold these securities until maturity, and represent fixed income securities recorded at amortized cost. Discounts from and premiums to par value on held-to-maturity investments are accreted/amortized into interest income over the life of the respective security using the effective interest method. The amortized cost of debt investments represents the original cost adjusted for the accretion of discounts and amortization of premiums, if any. Held-to-maturity securities are evaluated for other than temporary impairment each reporting period and any impairment charges are recorded in gain/(loss) from investments, net on the consolidated statements of income. As of
December 31, 2021and 2020, there were no impairments on the Company's investments in debt securities classified as held-to-maturity. Securities transactions and any related gains and losses are recorded on a trade date basis. Realized gains and losses from equity and debt securities transactions are recorded on the specific identified cost basis and are included in gain/(loss) from investments, net on the consolidated statements of income. 37
We operate in numerous states and countries through our subsidiaries and therefore must allocate our income, expenses, and earnings to these taxing jurisdictions taking into account the various laws and regulations in each jurisdiction. Each year, we file tax returns in each jurisdiction and settle our tax liabilities, which may be subject to audit by the taxing authorities. Deferred tax assets and liabilities are recorded for temporary differences between the tax basis of assets and liabilities and the reported amounts on the consolidated financial statements using the statutory tax rates in effect for the year when the reported amount of the asset or liability is recovered or settled, respectively. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the results of operations in the period that includes the enactment date. A valuation allowance is recorded to reduce the carrying values of deferred tax assets to the amount that is more likely than not to be realized. The calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax laws and regulations in several jurisdictions. In accordance with Accounting Standards Codification ("ASC") Topic 740, Income Taxes ("ASC 740"), a tax benefit from an uncertain tax position may be recognized when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, on the basis of the technical merits. We record a liability for unrecognized tax benefits in accordance with ASC 740 and adjust these liabilities when our judgment changes as a result of the evaluation of new information not previously available. Because of the complexity of some of these uncertainties, the ultimate resolution may differ from our current estimate of the liabilities for unrecognized tax benefits. These differences are reflected as increases or decreases in income tax expense in the period in which new information becomes available. The Company recognizes the accrual of interest on uncertain tax positions and penalties in income tax provision on the consolidated statements of income.
Seasonality and inflation
We do not believe our operations are subject to significant seasonal fluctuations. We do not believe inflation will significantly affect our compensation costs, as they are substantially variable in nature. However, the rate of inflation may affect our expenses, such as information technology and occupancy costs. To the extent inflation results in rising interest rates and has other effects upon the securities markets, it may adversely affect our financial condition and results of operations by reducing our AUM, revenues, or otherwise.
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