NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2018
(Unaudited)
|
A.
|
Basis of Presentation and Significant Accounting Policies
|
Unless we have indicated otherwise, or the context otherwise requires, references in this report to “Associated Capital Group, Inc.,” “AC Group,” “the
Company,” “AC,” “we,” “us” and “our” or similar terms are to Associated Capital Group, Inc., its predecessors and its subsidiaries.
The Spin-off and Related Transactions
We are a Delaware corporation that provides alternative investment management, institutional research and underwriting services. In addition, we derive
investment income/(loss) from proprietary trading of cash and other assets awaiting deployment in our operating businesses. On November 30, 2015, GAMCO Investors, Inc. (“GAMCO” or “GBL”) distributed all the outstanding shares of each class of AC
common stock on a pro rata one-for-one basis to the holders of each class of GAMCO’s common stock (the “Spin-off”).
We conduct our investment management business through Gabelli & Company Investment Advisers, Inc. (“GCIA” f/k/a Gabelli Securities, Inc.). GCIA and
its wholly-owned subsidiary, Gabelli & Partners, LLC, collectively serve as general partners or investment managers to investment funds including limited partnerships and offshore companies (collectively, “Investment Partnerships”), and
separate accounts. We primarily manage assets in equity event-driven value strategies, across a range of event and risk arbitrage portfolios. The business earns management and incentive fees from its advisory assets under management. GCIA is an
investment adviser registered with the Securities and Exchange Commission under the Investment Advisers Act of 1940, as amended.
We provide our institutional research and underwriting services through G.research, LLC (“G.research”), an indirect wholly-owned subsidiary of the
Company. G.research is a broker-dealer registered under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and is regulated by the Financial Industry Regulatory Authority. G.research’s revenues are derived primarily from
institutional research services.
In connection with the Spin-off, GAMCO issued a promissory note (the “GAMCO Note”) to AC Group in the original principal amount of $250 million bearing
interest at 4% per annum and with an original maturity date of November 30, 2020. GAMCO could prepay the GAMCO Note prior to maturity without penalty. As of June 30, 2018, AC had received principal repayments totaling $230 million on the GAMCO
Note and, during the third quarter, GBL repaid the outstanding $20 million balance. In addition, GCIA purchased 4,393,055 shares of GAMCO Class A common stock for $150 million.
Basis of Presentation
The unaudited interim condensed consolidated financial statements of AC Group included herein have been prepared in conformity with accounting principles
generally accepted in the United States of America (“GAAP”) 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
GAAP 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 nature, necessary for a fair
presentation of financial position, results of operations and cash flows of the Company for the interim periods presented and are not necessarily indicative of a full year’s results.
The interim condensed consolidated financial statements include the accounts of AC Group and its subsidiaries. All material intercompany transactions and
balances have been eliminated.
These interim condensed consolidated 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, 2017.
Use of Estimates
The preparation of the condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that
affect the amounts reported on the condensed consolidated financial statements and accompanying notes. Actual results could differ from those estimates.
Recent Accounting Developments
In May 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014-09,
Revenue from Contracts with Customers
, which supersedes the revenue recognition requirements in Accounting Standards Codification (“ASC”) Topic 605,
Revenue Recognition
, and most industry-specific guidance of the ASC. The core principle of ASU 2014-09 requires companies to recognize revenue from the transfer of goods or services to customers in amounts that reflect the
consideration the company expects to receive in exchange for those goods or services. The new standard also requires expanded disclosures about revenue recognition. The Company has adopted this ASU effective January 1, 2018 with no material
impact on its condensed consolidated financial statements other than expanded disclosure.
In January 2016, the FASB issued ASU 2016-01,
Financial
Instruments–Overall: Recognition and Measurement of Financial Assets and Financial Liabilities
, which amends the guidance in GAAP on the classification and measurement of financial instruments. Although the ASU retained many current
requirements, it significantly revised an entity’s accounting related to (1) the classification and measurement of investments in equity securities and (2) the presentation of certain fair value changes for financial liabilities measured at fair
value. Under the new guidance, all equity investments in unconsolidated entities (other than those accounted for using the equity method of accounting) will generally be measured at fair value through earnings. In addition, available for sale
(“AFS”) classification for equity securities with readily determinable fair values will no longer be available. As a result, changes in the fair value of such securities will be reported in net income rather than other comprehensive income. The
ASU also amends certain disclosure requirements associated with the fair value of financial instruments. The Company has adopted this ASU effective January 1, 2018 with no material impact on its condensed consolidated financial statements other
than the reclassification of the cumulative unrealized gain on equity AFS securities net of tax from accumulated comprehensive income to retained earnings.
In February 2016, the FASB issued ASU 2016-02,
Leases (Topic 842)
,
which amends the guidance in GAAP for the accounting for leases. ASU 2016-02 requires a lessee to recognize assets and liabilities arising from most operating leases in the consolidated statement of financial position. ASU 2016-02 is effective
beginning January 1, 2019. The Company is currently evaluating this guidance and the impact it will have on its condensed consolidated financial statements.
In August 2016, the FASB issued ASU 2016-15,
Statement of Cash Flows
(Topic 230): Classification of Certain Cash Receipts and Cash Payments
, which adds and clarifies guidance on the classification of certain cash receipts and payments in the consolidated statements of cash flows. The Company adopted this
ASU effective January 1, 2018 with no material impact on its condensed consolidated financial statements.
In January 2017, the FASB issued ASU 2017-04,
Intangibles – Goodwill
and Other
, to simplify the process used to test for impairment of goodwill. Under the new standard, an impairment loss must be recognized in an amount equal to the excess of the carrying amount of a reporting unit over its fair value,
limited to the total amount of goodwill allocated to that reporting unit. For public companies, the ASU is effective for annual and any interim impairment tests for periods beginning after December 15, 2019. Early adoption was permitted for
impairment tests that occur after January 1, 2017. The Company is currently evaluating this guidance and the impact it will have on its condensed consolidated financial statements.
On May 10, 2017, the FASB issued ASU 2017-09,
Compensation – Stock
Compensation
, which amends the scope of modification accounting for share-based payment arrangements. The ASU provides guidance on the types of changes to the terms or conditions of share-based payment awards to which an entity would be
required to apply modification accounting under ASC 718. Specifically, an entity would not apply modification accounting if the fair value, vesting conditions, and classification of the awards are the same immediately before and after the
modification. The Company has adopted this ASU effective January 1, 2018 with no material impact on its condensed consolidated financial statements.
On December 22, 2017, the SEC issued SAB 118,
Income Tax Accounting
Implications of the Tax Cuts and Jobs Act
, to address the application of ASC 740,
Income Taxes
, in the reporting period that includes December 22,
2017, the date legislation commonly referred to as the Tax Cuts and Jobs Act (the “Act”) was signed into law. In general, the SAB provides that a company should reflect the income tax impacts of the Act in the period in which the accounting under
ASC 740 is complete. If a company is unable to complete the required accounting as a result of incomplete information, preparation or analysis, however, it may record a reasonable estimate as a provisional amount. Additional provisions deal with
situations in which no reasonable estimate can be determined. Changes to estimates determined during a measurement period up to one year from the date of enactment will be reflected as an adjustment to tax expense or benefit in the reporting
period the amounts are determined. The SAB also provides requirements concerning financial statement disclosures about the material financial reporting impacts of the Act. With the exception of the book/tax differences related to the Company’s
investments in funds that are partnerships and/or passive foreign investment companies, the Company completed its analysis and made a reasonable estimate of the tax impact as part of the prior year’s tax provision. As additional information is
received from underlying funds (e.g., Form K-1s are received that set out AC’s share of the funds’ taxable income), these estimates will be adjusted, most likely in the fourth quarter of 2018 following the filing of the Company’s 2017
consolidated income tax return.
In February 2018, the FASB issued ASU 2018-02,
Reclassification of
Certain Tax Effects from Accumulated Other Comprehensive Income,
dealing with the accounting for the tax effects of components of other comprehensive income (“OCI”) as a result of the reduction of the U.S. federal corporate income tax
rate under the Act. We adopted this ASU as of January 1, 2018 and reflected an increase to OCI and a decrease to retained earnings of approximately $1.5 million in the first quarter of 2018.
In August 2018, the FASB issued ASU 2018-13,
Fair Value Measurement
(Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement
. This ASU adds certain disclosure requirements and modifies or eliminates disclosure requirements under current GAAP. This ASU is
effective for fiscal years beginning after December 15, 2019 and early adoption is permitted. The Company has early adopted the eliminated and modified disclosure requirements and is currently evaluating this guidance as it relates to the new
disclosure requirements.
In August 2018, the SEC issued Final Rule Release No. 33-10532,
Disclosure
Update and Simplification
. The rule amends certain disclosure requirements that have become redundant, overlapping, outdated or superseded. The rule is effective for the Company’s current quarterly report. The Company has elected,
however, to defer the changes to the interim period disclosure rules related to changes to shareholders’ equity until its first quarter report in 2019 as permitted under subsequent SEC guidance.
The Company’s major revenue sources are as follows:
Investment advisory and incentive fees.
The Company and
its subsidiaries act as general partner, investment manager or sub-advisor to investment funds and/or separately managed accounts of institutional investors (e.g., corporate pension plans). Investors in the investment funds include high net worth
individuals, family entities, and retirement plans. The fees that are paid to the Company are set forth in the offering documents for the investment fund or the separately managed account agreement. Investment advisory and incentive fee revenue
consists of:
|
a.
|
Asset-based advisory fees – The Company receives a management fee, payable monthly in advance based on value of the net assets of the client. It is generally set at a
rate of 1%-1.5% per annum. Asset-based management fee revenue is recognized only as the services are performed over the period.
|
|
b.
|
Performance-based advisory fees – Certain accounts’ management contracts call for additional fees and or allocations of income tied to a certain percentage, generally
20%, of the investment performance of the account over a measurement period, typically the calendar year. In addition, the contracts provide that performance-based fees or allocations become fixed in the event of an investor
redemption prior to the end of the measurement period. In the event that an account suffers a loss in one period, it must be recovered before incentive fees are earned by the Company; this is commonly referred to as a “high water
mark” provision. The Company does not recognize performance-based fees until the end of the measurement period or the time of the investor redemption when the liability for such fees becomes fixed and not subject to adjustment.
|
|
c.
|
Sub-advisory fees – Pursuant to agreements with other investment advisors, the Company receives a percentage of advisory fees received by such advisors from certain of
their investment fund clients. These fees may be either asset- or performance-based. In addition, they may be subject to reduction by certain expenses as set forth in the respective agreements. Sub-advisory fee revenue which is
asset-based is recognized only as the services are performed over the relevant period. Sub-advisory fee revenue which is performance-based is recognized only when it becomes fixed and not subject to adjustment.
|
The Company reserves the right to waive or reduce asset-based and performance-based fees with respect to certain investors in the investment funds which
may include investments by employees and other related parties. Advisory and incentive fees payable by investment funds are typically approved by third-party administrators and paid directly from the accounts’ assets. Such fees attributable to
separate accounts may be subject to review and approval by the client and may be paid either from the accounts’ assets or directly by the client.
Our advisory fee revenues are influenced by both the amount of assets under management (“AUM”) and the investment performance of our products. An overall
decline in the prices of securities may cause our advisory fees to decline by either causing the value of our AUM to decrease or causing our clients to withdraw funds in favor of investments they perceive to offer greater opportunity or lower
risk. Similarly, success in the investment management business is dependent on investment performance as well as distribution and client servicing. Good performance can stimulate sales of our investment products and tends to keep withdrawals and
redemptions low, which generates higher asset-based management fees. Conversely, poor performance, both in absolute terms and/or relative to peers and industry benchmarks, tends to result in decreased sales, increased withdrawals and redemptions
and in the loss of clients, with corresponding decreases in revenues to us.
Institutional Research Services.
The Company, through
G.research, generates institutional research services revenues via hard dollar payments or through commissions on securities transactions executed on an agency basis on behalf of clients. Clients include institutional investors (e.g., hedge funds
and asset managers) as well as affiliated mutual funds and managed accounts. These revenues consist of:
|
a.
|
Hard dollar payments – The Company receives direct payments for research services provided to related and unrelated parties. Where a contract for such services is in
place, the contractual fee for the period is recognized ratably over the contract period, typically a calendar year, which is considered the period over which the Company satisfies its performance obligation. Payments for contracts
with affiliated parties are collected monthly. For other payments where no research contract exists, revenue is not recognized until agreement is reached with the client that services have been performed, a value is assigned to those
services, and an invoice presented to the client for payment.
|
|
b.
|
Commissions – Commissions are charged on the execution of securities transactions made on behalf of client accounts on an agency basis and are based on a rate schedule.
The Company recognizes commission revenue when the related securities transactions are executed. Commissions earned are typically collected from the clearing brokers utilized by G.research on a daily or weekly basis.
|
|
c.
|
Selling concessions – The Company participates as a member of the selling group of underwritten equity offerings and receives compensation based on the difference between
what its clients pay for the securities sold to its institutional clients and what the issuer receives. The terms of the selling concessions are set forth in contracts between the Company and the underwriter. The Company recognizes
selling commissions upon the sale of the related securities to its clients.
|
|
d.
|
Sales manager fees – The Company participates as sales manager of at-the-market offerings of certain affiliated closed-end funds and receives a tiered percentage of
proceeds as stipulated in agreements between the Company, the funds and the funds’ investment adviser. The Company recognizes sales manager fees upon sale of the related closed-end funds. Sales manager fees earned are typically
collected from the clearing brokers utilized by G.research on a daily or weekly basis.
|
Institutional research revenues are impacted by the perceived value of the research product provided to clients, the volume of securities transactions
and the acquisition or loss of new client relationships.
Other.
Other revenues include (a) underwriting fees
include gains, losses, and fees, net of syndicate expenses, arising from public equity and debt offerings in which G.research acts as underwriter or agent and are accrued as earned, and (b) other miscellaneous revenues.
Total revenues by type were as follows for the three and nine months ended September 30, 2018, respectively (in thousands):
|
|
|
Three months ended
September 30, 2018
|
|
|
Nine months ended
September 30, 2018
|
|
|
Investment advisory and incentive fees
|
|
|
|
|
|
|
|
Asset-based advisory fees
|
|
$
|
1,879
|
|
|
$
|
5,561
|
|
|
Performance-based advisory fees
|
|
|
27
|
|
|
|
34
|
|
|
Sub-advisory fees
|
|
|
899
|
|
|
|
2,354
|
|
|
|
|
|
2,805
|
|
|
|
7,949
|
|
|
|
|
|
|
|
|
|
|
|
|
Institutional research services
|
|
|
|
|
|
|
|
|
|
Hard dollar payments
|
|
|
541
|
|
|
|
2,236
|
|
|
Commissions
|
|
|
1,284
|
|
|
|
3,844
|
|
|
Selling concessions
|
|
|
15
|
|
|
|
84
|
|
|
Sales manager fees
|
|
|
15
|
|
|
|
15
|
|
|
|
|
|
1,855
|
|
|
|
6,179
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
Underwriting fees
|
|
|
-
|
|
|
|
19
|
|
|
Miscellaneous
|
|
|
6
|
|
|
|
18
|
|
|
|
|
|
6
|
|
|
|
37
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
4,666
|
|
|
$
|
14,165
|
|
|
C.
|
Investment in Securities
|
Investments in United States Treasury Bills and Notes with maturities of greater than three months at the time of purchase are classified as investments
in securities, and those with maturities of three months or less at the time of purchase are classified as cash equivalents.
Debt and equity securities are stated at fair value, with any unrealized gains or losses reported in current period earnings. Prior to the adoption of
ASU 2016-01 on January 1, 2018, only investments in securities held for resale in anticipation of short-term market movements were classified as trading securities. Other securities were treated as available for sale (“AFS”) investments and were
stated at fair value, with any unrealized gains or losses, net of taxes, generally reported as other comprehensive income, a component of equity. Realized gains and losses from AFS equity securities were reclassified from equity to current period
income and losses deemed to be other-than- temporary (“OTT”) were recorded as realized losses in the condensed consolidated statements of income.
Investments in securities, including GBL stock, at September 30, 2018 and December 31, 2017 consisted of the following (in thousands):
|
|
|
September 30, 2018
|
|
|
December 31, 2017
|
|
|
|
|
Cost
|
|
|
Fair Value
|
|
|
Cost
|
|
|
Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt and equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government obligations
|
|
$
|
34,970
|
|
|
$
|
35,256
|
|
|
$
|
53,681
|
|
|
$
|
53,804
|
|
|
Common stocks
|
|
|
319,880
|
|
|
|
313,742
|
|
|
|
209,686
|
|
|
|
228,557
|
|
|
Mutual funds
|
|
|
808
|
|
|
|
1,553
|
|
|
|
1,959
|
|
|
|
3,157
|
|
|
Other investments
|
|
|
5,446
|
|
|
|
5,132
|
|
|
|
825
|
|
|
|
1,824
|
|
|
Total debt and equity securities
|
|
|
361,104
|
|
|
|
355,683
|
|
|
|
266,151
|
|
|
|
287,342
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for sale securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stocks
|
|
|
-
|
|
|
|
-
|
|
|
|
65,331
|
|
|
|
65,024
|
|
|
Mutual funds
|
|
|
-
|
|
|
|
-
|
|
|
|
103
|
|
|
|
271
|
|
|
Total available for sale securities
|
|
|
-
|
|
|
|
-
|
|
|
|
65,434
|
|
|
|
65,295
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments in securities
|
|
$
|
361,104
|
|
|
$
|
355,683
|
|
|
$
|
331,585
|
|
|
$
|
352,637
|
|
Securities sold, not yet purchased at September 30, 2018 and December 31, 2017 consisted of the following (in thousands):
|
|
|
September 30, 2018
|
|
|
December 31, 2017
|
|
|
|
|
Proceeds
|
|
|
Fair Value
|
|
|
Proceeds
|
|
|
Fair Value
|
|
|
Debt and equity securities:
|
|
|
|
|
Common stocks
|
|
$
|
21,297
|
|
|
$
|
22,093
|
|
|
$
|
4,862
|
|
|
$
|
5,396
|
|
|
Other investments
|
|
|
2
|
|
|
|
260
|
|
|
|
1
|
|
|
|
335
|
|
|
Total securities sold, not yet purchased
|
|
$
|
21,299
|
|
|
$
|
22,353
|
|
|
$
|
4,863
|
|
|
$
|
5,731
|
|
Investments in affiliated registered investment companies at September 30, 2018 and December 31, 2017 consisted of the following (in thousands):
|
|
|
September 30, 2018
|
|
|
December 31, 2017
|
|
|
|
|
Cost
|
|
|
Fair Value
|
|
|
Cost
|
|
|
Fair Value
|
|
|
Debt and equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Closed-end funds
|
|
$
|
79,097
|
|
|
$
|
90,610
|
|
|
$
|
26,231
|
|
|
$
|
26,929
|
|
|
Mutual funds
|
|
|
47,727
|
|
|
|
55,836
|
|
|
|
41,950
|
|
|
|
48,328
|
|
|
Total debt and equity securities
|
|
|
126,824
|
|
|
|
146,446
|
|
|
|
68,181
|
|
|
|
75,257
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for sale securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Closed-end funds
|
|
|
-
|
|
|
|
-
|
|
|
|
53,782
|
|
|
|
66,218
|
|
|
Mutual funds
|
|
|
-
|
|
|
|
-
|
|
|
|
3,420
|
|
|
|
4,439
|
|
|
Total available for sale securities
|
|
|
-
|
|
|
|
-
|
|
|
|
57,202
|
|
|
|
70,657
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments in affiliated
registered investment companies
|
|
$
|
126,824
|
|
|
$
|
146,446
|
|
|
$
|
125,383
|
|
|
$
|
145,914
|
|
The following table identifies all reclassifications out of accumulated other comprehensive income (“AOCI”) into income for the three and nine months
ended September 30, 2018 and 2017 (in thousands):
|
Amount
Reclassified
from AOCI
|
|
Affected Line Items
in the Statements
Of Income
|
|
Reason for
Reclassification
from AOCI
|
|
Three months ended September 30,
|
|
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
-
|
|
|
$
|
125
|
|
Net gain/(loss) from investments
|
|
Realized gain on sale of AFS securities
|
|
|
-
|
|
|
|
125
|
|
Income/(loss) before income taxes
|
|
|
|
|
-
|
|
|
|
(45
|
)
|
Income tax (expense)/benefit
|
|
|
|
$
|
-
|
|
|
$
|
80
|
|
Net income/(loss)
|
|
|
|
Amount
Reclassified
from AOCI
|
|
Affected Line Items
in the Statements
Of Income
|
|
Reason for
Reclassification
from AOCI
|
|
Nine months ended September 30,
|
|
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
-
|
|
|
$
|
167
|
|
Net gain/(loss) from investments
|
|
Realized gain on sale of AFS securities
|
|
|
-
|
|
|
|
(19,131
|
)
|
Net gain/(loss) from investments
|
|
OTT impairment of AFS securities
|
|
|
-
|
|
|
|
(18,964
|
)
|
Income/(loss) before income taxes
|
|
|
|
|
-
|
|
|
|
6,827
|
|
Income tax (expense)/benefit
|
|
|
|
$
|
-
|
|
|
$
|
(12,137
|
)
|
Net income/(loss)
|
|
|
The Company recognizes all equity derivatives as either assets or liabilities measured at fair value and includes them in either investments in
securities or securities sold, not yet purchased on the condensed consolidated statements of financial condition. From time to time, the Company and/or the partnerships and offshore funds that the Company consolidates will enter into hedging
transactions to manage their exposure to foreign currencies and equity prices related to their investments. At September 30, 2018 and December 31, 2017, we held derivative contracts on 0.6 million and 1.7 million equity shares, respectively, that
are included in investments in securities or securities sold, not yet purchased on the condensed consolidated statements of financial condition. We had foreign exchange contracts outstanding at September 30, 2018, but none at December 31, 2017.
Except for the foreign exchange contracts entered into by the Company, these transactions are not designated as hedges for accounting purposes, and changes in fair values of these derivatives are included in net gain/(loss) from investments on
the condensed consolidated statements of income.
The following table identifies the fair values of all derivatives held by the Company (in thousands):
|
|
Asset Derivatives
|
|
Liability Derivatives
|
|
|
Statement of
Financial Condition
Location
|
|
Fair Value
|
|
Statement of
Financial Condition
Location
|
|
Fair Value
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Derivatives designated as hedging
instruments under FASB ASC 815-20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
Receivable from brokers
|
|
$
|
138
|
|
|
$
|
-
|
|
Payable to brokers
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sub total
|
|
|
$
|
138
|
|
|
$
|
-
|
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives not designated as hedging
instruments under FASB ASC 815-20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity contracts
|
Investments in
securities
|
|
$
|
425
|
|
|
$
|
229
|
|
Securities sold,
not yet purchased
|
|
$
|
260
|
|
|
$
|
335
|
|
|
Foreign exchange contracts
|
Receivable from brokers
|
|
|
-
|
|
|
|
-
|
|
Payable to brokers
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sub total
|
|
|
$
|
425
|
|
|
$
|
229
|
|
|
|
$
|
260
|
|
|
$
|
335
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivatives
|
|
|
$
|
563
|
|
|
$
|
229
|
|
|
|
$
|
260
|
|
|
$
|
335
|
|
The following table identifies gains and losses of all derivatives held by the Company (in thousands):
|
Type of Derivative
|
|
Income Statement Location
|
|
Three Months ended September 30,
|
|
|
Nine Months ended September 30,
|
|
|
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
|
Net gain/(loss) from investments
|
|
$
|
36
|
|
|
$
|
-
|
|
|
$
|
138
|
|
|
$
|
-
|
|
|
Equity contracts
|
|
Net gain/(loss) from investments
|
|
|
652
|
|
|
|
(456
|
)
|
|
|
3,304
|
|
|
|
(490
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
$
|
688
|
|
|
$
|
(456
|
)
|
|
$
|
3,442
|
|
|
$
|
(490
|
)
|
The Company is a party to enforceable master netting arrangements for swaps entered into with major U.S. financial institutions as part of the investment
strategy of the Company’s proprietary portfolio. They are typically not used as hedging instruments. These swaps, while settled on a net basis with the counterparties, are shown gross in assets and liabilities on the condensed consolidated
statements of financial condition. The swaps have a firm contract end date and are closed out and settled when each contract expires.
|
|
|
Gross
Amounts of
Recognized
Assets
|
|
|
Gross Amounts
Offset in the
Statements of
Financial Condition
|
|
|
Net Amounts of
Assets Presented
in the Statements
of Financial Condition
|
|
|
Gross Amounts Not Offset in the
Statements of Financial Condition
|
|
|
|
|
|
|
|
|
|
|
Financial
Instruments
|
|
|
Cash Collateral
Received
|
|
|
Net Amount
|
|
|
Swaps:
|
|
(In thousands)
|
|
|
September 30, 2018
|
|
$
|
250
|
|
|
$
|
-
|
|
|
$
|
250
|
|
|
$
|
(250
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
December 31, 2017
|
|
|
229
|
|
|
|
-
|
|
|
|
229
|
|
|
|
(229
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
Gross
Amounts of
Recognized
Liabilities
|
|
|
Gross Amounts
Offset in the
Statements of
Financial Condition
|
|
|
Net Amounts of
Liabilities Presented
in the Statements
of Financial Condition
|
|
|
Gross Amounts Not Offset in the
Statements of Financial Condition
|
|
|
|
|
|
|
|
|
|
|
Financial
Instruments
|
|
|
Cash Collateral
Pledged
|
|
|
Net Amount
|
|
|
|
|
Swaps:
|
|
(In thousands)
|
|
|
September 30, 2018
|
|
$
|
259
|
|
|
$
|
-
|
|
|
$
|
259
|
|
|
$
|
(250
|
)
|
|
$
|
-
|
|
|
$
|
9
|
|
|
December 31, 2017
|
|
|
334
|
|
|
|
-
|
|
|
|
334
|
|
|
|
(229
|
)
|
|
|
-
|
|
|
|
105
|
|
The following is a summary of the cost, gross unrealized gains, gross unrealized losses and fair value of AFS investments as of December 31, 2017 (in
thousands):
|
|
|
December 31, 2017
|
|
|
|
|
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Fair
Value
|
|
|
|
|
|
|
|
|
|
|
|
Common stocks
|
|
$
|
65,331
|
|
|
$
|
-
|
|
|
$
|
(307
|
)
|
|
$
|
65,024
|
|
|
Closed-end funds
|
|
|
53,782
|
|
|
|
12,436
|
|
|
|
-
|
|
|
|
66,218
|
|
|
Mutual funds
|
|
|
3,523
|
|
|
|
1,187
|
|
|
|
-
|
|
|
|
4,710
|
|
|
Total available for sale securities
|
|
$
|
122,636
|
|
|
$
|
13,623
|
|
|
$
|
(307
|
)
|
|
$
|
135,952
|
|
Changes in net unrealized gains, net of taxes, for AFS securities for the three months ended September 30, 2017 of $1.7 million have been included in
other comprehensive income, a component of equity, at September 30, 2017. Return of capital on AFS securities was $0.5 million for the three months ended September 30, 2017. For the three months ended September 30, 2017, proceeds and gross gains
from the sales of AFS investments were approximately $0.2 million and $0.1 million, respectively.
Changes in net unrealized gains, net of taxes, for AFS securities for the nine months ended September 30, 2017 of $14.2 million have been included in
other comprehensive income, a component of equity, at September 30, 2017. Return of capital on AFS securities was $1.3 million for the nine months ended September 30, 2017. For the nine months ended September 30, 2017, proceeds and gross gains
from the sales of AFS investments were approximately $0.3 million and $0.2 million, respectively.
The Company determines the cost of a security sold by using specific identification.
Investments classified as available for sale that were in an unrealized loss position for which other-than-temporary impairment has not been recognized
consisted of the following (in thousands):
|
|
|
December 31, 2017
|
|
|
|
|
Cost
|
|
|
Unrealized
Losses
|
|
|
Fair Value
|
|
|
|
|
|
|
|
|
|
Common stocks
|
|
$
|
65,331
|
|
|
$
|
(307
|
)
|
|
$
|
65,024
|
|
Total available for sale securities
in unrealized loss position
|
|
$
|
65,331
|
|
|
$
|
(307
|
)
|
|
$
|
65,024
|
|
For the nine months ended September 30, 2017, AC recognized a $19.1 million OTT impairment on the GBL shares due to the magnitude and persistence of the
unrealized loss.
|
D.
|
Investment Partnerships and Variable Interest Entities
|
The Company is general partner or co-general partner of various affiliated entities in which the Company had investments totaling $122.1 million and
$124.5 million at September 30, 2018 and December 31, 2017, respectively, and whose underlying assets consist primarily of marketable securities (“Affiliated Entities”). We also had investments in unaffiliated partnerships, offshore funds and
other entities of $20.2 million and $21.1 million at September 30, 2018 and December 31, 2017, respectively (“Unaffiliated Entities”). We evaluate each entity for the appropriate accounting treatment and disclosure. Certain of the Affiliated
Entities, and none of the Unaffiliated Entities, are consolidated.
For those entities where consolidation is not deemed appropriate, we report them in our condensed consolidated statements of financial condition under
the caption “Investments in partnerships.” The caption includes investments in both Affiliated Entities and Unaffiliated Entities. The Company reflects its equity in earnings or the change in fair value of these entities under the caption “net
gain/(loss) from investments” on the condensed consolidated statements of income.
The following table highlights the number of entities that we consolidate as well as the basis under which they are consolidated:
|
Entities consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
VIEs
|
|
|
VOEs
|
|
|
Entities consolidated at December 31, 2016
|
|
|
1
|
|
|
|
1
|
|
|
Additional consolidated entities
|
|
|
-
|
|
|
|
1
|
|
|
Deconsolidated entities
|
|
|
-
|
|
|
|
-
|
|
|
Entities consolidated at September 30, 2017
|
|
|
1
|
|
|
|
2
|
|
|
Additional consolidated entities
|
|
|
-
|
|
|
|
1
|
|
|
Deconsolidated entities
|
|
|
-
|
|
|
|
-
|
|
|
Entities consolidated at December 31, 2017
|
|
|
1
|
|
|
|
3
|
|
|
Additional consolidated entities
|
|
|
-
|
|
|
|
2
|
|
|
Deconsolidated entities
|
|
|
-
|
|
|
|
-
|
|
|
Entities consolidated at September 30, 2018
|
|
|
1
|
|
|
|
5
|
|
The following table provides details regarding the investments in partnerships by accounting method used (in thousands):
|
|
|
September 30, 2018
|
|
|
Accounting method
|
|
Affiliated
|
|
|
Unaffiliated
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value
|
|
$
|
9,507
|
|
|
$
|
-
|
|
|
$
|
9,507
|
|
|
Equity Method
|
|
|
112,567
|
|
|
|
20,209
|
|
|
|
132,776
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
122,074
|
|
|
$
|
20,209
|
|
|
$
|
142,283
|
|
|
|
|
December 31, 2017
|
|
|
Accounting method
|
|
Affiliated
|
|
|
Unaffiliated
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value
|
|
$
|
9,442
|
|
|
$
|
-
|
|
|
$
|
9,442
|
|
|
Equity Method
|
|
|
115,046
|
|
|
|
21,103
|
|
|
|
136,149
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
124,488
|
|
|
$
|
21,103
|
|
|
$
|
145,591
|
|
The following table includes the net impact by line item on the condensed consolidated statements of financial condition for the consolidated entities
(in thousands):
|
|
|
September 30, 2018
|
|
|
|
|
Prior to
Consolidation
|
|
|
Consolidated
Entities
|
|
|
As Reported
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
351,253
|
|
|
$
|
(2,366
|
)
|
|
$
|
348,887
|
|
|
Investments in securities (including GBL stock)
|
|
|
226,918
|
|
|
|
128,765
|
|
|
|
355,683
|
|
|
Investments in affiliated investment companies
|
|
|
197,791
|
|
|
|
(51,345
|
)
|
|
|
146,446
|
|
|
Investments in partnerships
|
|
|
163,141
|
|
|
|
(20,858
|
)
|
|
|
142,283
|
|
|
Receivable from brokers
|
|
|
6,318
|
|
|
|
12,034
|
|
|
|
18,352
|
|
|
Investment advisory fees receivable
|
|
|
1,389
|
|
|
|
(22
|
)
|
|
|
1,367
|
|
|
Other assets
|
|
|
7,664
|
|
|
|
307
|
|
|
|
7,971
|
|
|
Total assets
|
|
$
|
954,474
|
|
|
$
|
66,515
|
|
|
$
|
1,020,989
|
|
|
Liabilities and equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities sold, not yet purchased
|
|
$
|
11,257
|
|
|
$
|
11,096
|
|
|
$
|
22,353
|
|
|
Accrued expenses and other liabilities
|
|
|
19,392
|
|
|
|
4,300
|
|
|
|
23,692
|
|
|
Redeemable noncontrolling interests
|
|
|
-
|
|
|
|
51,119
|
|
|
|
51,119
|
|
|
Total equity
|
|
|
923,825
|
|
|
|
-
|
|
|
|
923,825
|
|
|
Total liabilities and equity
|
|
$
|
954,474
|
|
|
$
|
66,515
|
|
|
$
|
1,020,989
|
|
|
|
|
December 31, 2017
|
|
|
|
|
Prior to
Consolidation
|
|
|
Consolidated
Entities
|
|
|
As Reported
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
287,963
|
|
|
$
|
5,149
|
|
|
$
|
293,112
|
|
|
Investments in securities (including GBL stock)
|
|
|
255,252
|
|
|
|
97,385
|
|
|
|
352,637
|
|
|
Investments in affiliated investment companies
|
|
|
198,469
|
|
|
|
(52,555
|
)
|
|
|
145,914
|
|
|
Investments in partnerships
|
|
|
160,456
|
|
|
|
(14,865
|
)
|
|
|
145,591
|
|
|
Receivable from brokers
|
|
|
11,722
|
|
|
|
23,159
|
|
|
|
34,881
|
|
|
Investment advisory fees receivable
|
|
|
5,749
|
|
|
|
(10
|
)
|
|
|
5,739
|
|
|
Other assets
|
|
|
28,865
|
|
|
|
176
|
|
|
|
29,041
|
|
|
Total assets
|
|
$
|
948,476
|
|
|
$
|
58,439
|
|
|
$
|
1,006,915
|
|
|
Liabilities and equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities sold, not yet purchased
|
|
$
|
5,405
|
|
|
$
|
326
|
|
|
$
|
5,731
|
|
|
Accrued expenses and other liabilities
|
|
|
24,924
|
|
|
|
11,883
|
|
|
|
36,807
|
|
|
Redeemable noncontrolling interests
|
|
|
-
|
|
|
|
46,230
|
|
|
|
46,230
|
|
|
Total equity
|
|
|
918,147
|
|
|
|
-
|
|
|
|
918,147
|
|
|
Total liabilities and equity
|
|
$
|
948,476
|
|
|
$
|
58,439
|
|
|
$
|
1,006,915
|
|
The following table includes the net impact by line item on the condensed consolidated statements of income for the consolidated entities (in thousands):
|
|
|
Three Months Ended September 30, 2018
|
|
|
|
|
Prior to
Consolidation
|
|
|
Consolidated
Entities
|
|
|
As Reported
|
|
|
Total revenues
|
|
$
|
4,683
|
|
|
$
|
(17
|
)
|
|
$
|
4,666
|
|
|
Total expenses
|
|
|
7,698
|
|
|
|
467
|
|
|
|
8,165
|
|
|
Operating loss
|
|
|
(3,015
|
)
|
|
|
(484
|
)
|
|
|
(3,499
|
)
|
|
Total other income/(expense), net
|
|
|
(5,222
|
)
|
|
|
641
|
|
|
|
(4,581
|
)
|
|
Loss/(income) before income taxes
|
|
|
(8,237
|
)
|
|
|
157
|
|
|
|
(8,080
|
)
|
|
Income tax benefit
|
|
|
(858
|
)
|
|
|
-
|
|
|
|
(858
|
)
|
|
Net income/(loss) before NCI
|
|
|
(7,379
|
)
|
|
|
157
|
|
|
|
(7,222
|
)
|
|
Net income attributable to noncontrolling interests
|
|
|
-
|
|
|
|
157
|
|
|
|
157
|
|
|
Net loss
|
|
$
|
(7,379
|
)
|
|
$
|
-
|
|
|
$
|
(7,379
|
)
|
|
|
|
Three Months Ended September 30, 2017
|
|
|
|
|
Prior to
Consolidation
|
|
|
Consolidated
Entities
|
|
|
As Reported
|
|
|
Total revenues
|
|
$
|
5,252
|
|
|
$
|
(4
|
)
|
|
$
|
5,248
|
|
|
Total expenses
|
|
|
10,188
|
|
|
|
1,172
|
|
|
|
11,360
|
|
|
Operating loss
|
|
|
(4,936
|
)
|
|
|
(1,176
|
)
|
|
|
(6,112
|
)
|
|
Total other income, net
|
|
|
6,522
|
|
|
|
990
|
|
|
|
7,512
|
|
|
Income/(loss) before income taxes
|
|
|
1,586
|
|
|
|
(186
|
)
|
|
|
1,400
|
|
|
Income tax expense
|
|
|
67
|
|
|
|
-
|
|
|
|
67
|
|
|
Net income
/(loss)
before NCI
|
|
|
1,519
|
|
|
|
(186
|
)
|
|
|
1,333
|
|
|
Net loss attributable to noncontrolling interests
|
|
|
-
|
|
|
|
(186
|
)
|
|
|
(186
|
)
|
|
Net income
|
|
$
|
1,519
|
|
|
$
|
-
|
|
|
$
|
1,519
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2018
|
|
|
|
|
Prior to
Consolidation
|
|
|
Consolidated
Entities
|
|
|
As Reported
|
|
|
Total revenues
|
|
$
|
14,215
|
|
|
$
|
(50
|
)
|
|
$
|
14,165
|
|
|
Total expenses
|
|
|
23,913
|
|
|
|
1,447
|
|
|
|
25,360
|
|
|
Operating loss
|
|
|
(9,698
|
)
|
|
|
(1,497
|
)
|
|
|
(11,195
|
)
|
|
Total other income/(expense), net
|
|
|
(12,290
|
)
|
|
|
2,550
|
|
|
|
(9,740
|
)
|
|
Loss before income taxes
|
|
|
(21,988
|
)
|
|
|
1,053
|
|
|
|
(20,935
|
)
|
|
Income tax benefit
|
|
|
(4,204
|
)
|
|
|
-
|
|
|
|
(4,204
|
)
|
|
Net income/(loss) before NCI
|
|
|
(17,784
|
)
|
|
|
1,053
|
|
|
|
(16,731
|
)
|
|
Net income attributable to noncontrolling interests
|
|
|
-
|
|
|
|
1,053
|
|
|
|
1,053
|
|
|
Net loss
|
|
$
|
(17,784
|
)
|
|
$
|
-
|
|
|
$
|
(17,784
|
)
|
|
|
|
Nine Months Ended September 30, 2017
|
|
|
|
|
Prior to
Consolidation
|
|
|
Consolidated
Entities
|
|
|
As Reported
|
|
|
Total revenues
|
|
$
|
15,345
|
|
|
$
|
(15
|
)
|
|
$
|
15,330
|
|
|
Total expenses
|
|
|
30,959
|
|
|
|
1,268
|
|
|
|
32,227
|
|
|
Operating loss
|
|
|
(15,614
|
)
|
|
|
(1,283
|
)
|
|
|
(16,897
|
)
|
|
Total other income/(expense), net
|
|
|
(16
|
)
|
|
|
1,188
|
|
|
|
1,172
|
|
|
Loss before income taxes
|
|
|
(15,630
|
)
|
|
|
(95
|
)
|
|
|
(15,725
|
)
|
|
Income tax benefit
|
|
|
(8,667
|
)
|
|
|
-
|
|
|
|
(8,667
|
)
|
|
Net loss before NCI
|
|
|
(6,963
|
)
|
|
|
(95
|
)
|
|
|
(7,058
|
)
|
|
Net loss attributable to noncontrolling interests
|
|
|
-
|
|
|
|
(95
|
)
|
|
|
(95
|
)
|
|
Net loss
|
|
$
|
(6,963
|
)
|
|
$
|
-
|
|
|
$
|
(6,963
|
)
|
Variable Interest Entities
With respect to each consolidated VIE, its assets may only be used to satisfy its obligations. The investors and creditors of these VIEs have no recourse
to the Company’s general assets. In addition, the Company neither benefits from the VIE’s assets nor bears the related risk beyond its beneficial interest in the VIE.
The following table presents the balances related to VIEs that are consolidated and included on the condensed consolidated statements of financial
condition as well as the Company’s net interest in these VIEs (in thousands):
|
|
|
September 30,
2018
|
|
|
December 31,
2017
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
2,546
|
|
|
$
|
120
|
|
|
Investments in securities
|
|
|
8,177
|
|
|
|
8,757
|
|
|
Receivable from brokers
|
|
|
364
|
|
|
|
1,657
|
|
|
Other assets
|
|
|
(2
|
)
|
|
|
(19
|
)
|
|
Accrued expenses and other liabilities
|
|
|
(27
|
)
|
|
|
(29
|
)
|
|
Redeemable noncontrolling interests
|
|
|
(420
|
)
|
|
|
(284
|
)
|
|
AC Group’s net interests in consolidated VIE
|
|
$
|
10,638
|
|
|
$
|
10,202
|
|
The following tables present information about the Company’s assets and liabilities by major category measured at fair value on a recurring basis as of
September 30, 2018 and December 31, 2017 and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value. Investments in certain entities that calculate net asset value per share and other
investments that are not held at fair value are provided as separate items to permit reconciliation of the fair value of investments included in the fair value hierarchy to the total amounts presented in the condensed consolidated statements of
financial condition.
Assets and Liabilities Measured at Fair Value on a Recurring Basis as of September 30, 2018 (in thousands)
|
Assets
|
|
Quoted Prices in Active
Markets for Identical
Assets (Level 1)
|
|
|
Significant Other
Observable
Inputs (Level 2)
|
|
|
Significant
Unobservable
Inputs (Level 3)
|
|
|
Investments
Measured at
NAV (a)
|
|
|
Other Assets
Not Held at
Fair Value (b)
|
|
|
Balance as of
September 30,
2018
|
|
|
Cash equivalents
|
|
$
|
353,402
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
353,402
|
|
|
Investments in partnerships
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
137,887
|
|
|
|
4,396
|
|
|
|
142,283
|
|
|
Investments in securities (including GBL stock):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gov’t obligations
|
|
|
35,256
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
35,256
|
|
|
Common stocks
|
|
|
306,127
|
|
|
|
7,603
|
|
|
|
12
|
|
|
|
-
|
|
|
|
-
|
|
|
|
313,742
|
|
|
Mutual funds
|
|
|
1,553
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,553
|
|
|
Other
|
|
|
172
|
|
|
|
425
|
|
|
|
4,535
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,132
|
|
|
Total investments in securities
|
|
|
343,108
|
|
|
|
8,028
|
|
|
|
4,547
|
|
|
|
-
|
|
|
|
-
|
|
|
|
355,683
|
|
|
Investments in affiliated registered investment companies:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Closed-end funds
|
|
|
90,610
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
90,610
|
|
|
Mutual funds
|
|
|
55,836
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
55,836
|
|
Total investments in affiliated
registered investment companies
|
|
|
146,446
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
146,446
|
|
|
Total investments
|
|
|
489,554
|
|
|
|
8,028
|
|
|
|
4,547
|
|
|
|
137,887
|
|
|
|
4,396
|
|
|
|
644,412
|
|
|
Total assets at fair value
|
|
$
|
842,956
|
|
|
$
|
8,028
|
|
|
$
|
4,547
|
|
|
$
|
137,887
|
|
|
$
|
4,396
|
|
|
$
|
997,814
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities sold, not yet purchased
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stocks
|
|
$
|
22,093
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
22,093
|
|
|
Other
|
|
|
-
|
|
|
|
260
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
260
|
|
|
Total liabilities at fair value
|
|
$
|
22,093
|
|
|
$
|
260
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
22,353
|
|
Assets and Liabilities Measured at Fair Value on a Recurring Basis as of December 31, 2017 (in thousands)
|
Assets
|
|
Quoted Prices in Active
Markets for Identical
Assets (Level 1)
|
|
|
Significant Other
Observable
Inputs (Level 2)
|
|
|
Significant
Unobservable
Inputs (Level 3)
|
|
|
Investments
Measured at
NAV (a)
|
|
|
Other Assets
Not Held at
Fair Value (b)
|
|
|
Balance as of
December 31,
2017
|
|
|
Cash equivalents
|
|
$
|
290,043
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
290,043
|
|
|
Investments in partnerships
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
140,617
|
|
|
|
4,974
|
|
|
|
145,591
|
|
|
Investments in securities (including GBL stock):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AFS - Common stocks
|
|
|
65,024
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
65,024
|
|
|
AFS - Mutual funds
|
|
|
271
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
271
|
|
|
Trading - Gov’t obligations
|
|
|
53,804
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
53,804
|
|
|
Trading - Common stocks
|
|
|
227,938
|
|
|
|
1
|
|
|
|
618
|
|
|
|
-
|
|
|
|
-
|
|
|
|
228,557
|
|
|
Trading - Mutual funds
|
|
|
3,157
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,157
|
|
|
Trading - Other
|
|
|
426
|
|
|
|
229
|
|
|
|
1,169
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,824
|
|
|
Total investments in securities
|
|
|
350,620
|
|
|
|
230
|
|
|
|
1,787
|
|
|
|
-
|
|
|
|
-
|
|
|
|
352,637
|
|
|
Investments in affiliated registered investment companies:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AFS - Closed-end funds
|
|
|
66,218
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
66,218
|
|
|
AFS - Mutual funds
|
|
|
4,439
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,439
|
|
|
Trading - Closed-end funds
|
|
|
26,929
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
26,929
|
|
|
Trading - Mutual funds
|
|
|
48,328
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
48,328
|
|
Total investments in affiliated
registered investment companies
|
|
|
145,914
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
145,914
|
|
|
Total investments
|
|
|
496,534
|
|
|
|
230
|
|
|
|
1,787
|
|
|
|
140,617
|
|
|
|
4,974
|
|
|
|
644,142
|
|
|
Total assets at fair value
|
|
$
|
786,577
|
|
|
$
|
230
|
|
|
$
|
1,787
|
|
|
$
|
140,617
|
|
|
$
|
4,974
|
|
|
$
|
934,185
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities sold, not yet purchased
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading - Common stocks
|
|
$
|
5,396
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
5,396
|
|
|
Trading - Other
|
|
|
-
|
|
|
|
335
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
335
|
|
|
Total liabilities at fair value
|
|
$
|
5,396
|
|
|
$
|
335
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
5,731
|
|
|
(a)
|
Amounts include certain investments measured at fair value using NAV or its equivalent as a practical expedient. At September 30, 2018 and December 31, 2017, these
amounts were $9,507 and $9,442, respectively. Amounts also include certain equity method investments which account for their financial assets and most financial liabilities under fair value measures and therefore the Company’s
investment approximates fair value. At September 30, 2018 and December 31, 2017, these amounts were $128,380 and $131,175, respectively. These investments have not been classified in the fair value hierarchy.
|
|
(b)
|
Amounts include certain equity method investments which are not accounted for under a fair value measure. In accordance with GAAP, certain equity method investees do
not account for both their financial assets and liabilities under fair value measures; therefore, the Company’s investment in such equity method investees may not represent fair value.
|
Investments measured at NAV shown in the above tables include investments in Affiliated and Unaffiliated Entities. Capital may generally be redeemed
from Affiliated Entities on a monthly basis upon adequate notice as determined in the sole discretion of each entity’s investment manager. Capital invested in Unaffiliated Entities may generally be redeemed at various intervals ranging from
monthly to annually upon notice of 30 to 95 days. Certain Unaffiliated Entities may require a minimum investment period before capital can be voluntarily redeemed (a “Lockup Period”). No investment in an Unaffiliated Entity has an unexpired
Lockup Period. The Company has no outstanding capital commitments to any Affiliated or Unaffiliated Entity.
The following tables summarize changes in assets reported at fair value for which level 3 inputs have been used to determine fair value for the three and nine months
ended September 30, 2018 and 2017, respectively (in thousands):
|
|
|
Three months ended September 30, 2018
|
|
|
Three months ended September 30, 2017
|
|
|
|
|
Common
Stocks
|
|
|
Other
|
|
|
Total
|
|
|
Common
Stocks
|
|
|
Other
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
590
|
|
|
$
|
4,465
|
|
|
$
|
5,055
|
|
|
$
|
510
|
|
|
$
|
449
|
|
|
$
|
959
|
|
|
Total gains/(losses)
|
|
|
2
|
|
|
|
2
|
|
|
|
4
|
|
|
|
2
|
|
|
|
39
|
|
|
|
41
|
|
|
Purchases
|
|
|
-
|
|
|
|
15
|
|
|
|
15
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Sales
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(142
|
)
|
|
|
(142
|
)
|
|
Transfers
|
|
|
(580
|
)
|
|
|
53
|
|
|
|
(527
|
)
|
|
|
(36
|
)
|
|
|
-
|
|
|
|
(36
|
)
|
|
Ending balance
|
|
$
|
12
|
|
|
$
|
4,535
|
|
|
$
|
4,547
|
|
|
$
|
476
|
|
|
$
|
346
|
|
|
$
|
822
|
|
|
Changes in net unrealized gain/(loss) included in Net gain/(loss) from investments related to level
3 assets still held as of the reporting date
|
|
$
|
2
|
|
|
$
|
2
|
|
|
$
|
4
|
|
|
$
|
2
|
|
|
$
|
1
|
|
|
$
|
3
|
|
|
|
|
Nine months ended September 30, 2018
|
|
|
Nine months ended September 30, 2017
|
|
|
|
|
Common
Stocks
|
|
|
Other
|
|
|
Total
|
|
|
Common
Stocks
|
|
|
Other
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
618
|
|
|
$
|
1,169
|
|
|
$
|
1,787
|
|
|
$
|
461
|
|
|
$
|
283
|
|
|
$
|
744
|
|
|
Consolidated fund
|
|
|
-
|
|
|
|
984
|
|
|
|
984
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Total gains/(losses)
|
|
|
(1
|
)
|
|
|
(2,413
|
)
|
|
|
(2,414
|
)
|
|
|
51
|
|
|
|
46
|
|
|
|
97
|
|
|
Purchases
|
|
|
-
|
|
|
|
4,773
|
|
|
|
4,773
|
|
|
|
-
|
|
|
|
167
|
|
|
|
167
|
|
|
Sales
|
|
|
-
|
|
|
|
(31
|
)
|
|
|
(31
|
)
|
|
|
-
|
|
|
|
(150
|
)
|
|
|
(150
|
)
|
|
Transfers
|
|
|
(605
|
)
|
|
|
53
|
|
|
|
(552
|
)
|
|
|
(36
|
)
|
|
|
-
|
|
|
|
(36
|
)
|
|
Ending balance
|
|
$
|
12
|
|
|
$
|
4,535
|
|
|
$
|
4,547
|
|
|
$
|
476
|
|
|
$
|
346
|
|
|
$
|
822
|
|
|
Changes in net unrealized gain/(loss) included in Net gain/(loss) from investments related to level
3 assets still held as of the reporting date
|
|
$
|
-
|
|
|
$
|
(2,429
|
)
|
|
$
|
(2,429
|
)
|
|
$
|
42
|
|
|
$
|
3
|
|
|
$
|
45
|
|
Total realized and unrealized gains and losses for level 3 assets are reported in net gain/(loss) from investments in the condensed consolidated
statements of income.
During the three months ended September 30, 2018 and September 30, 2017, the Company transferred investments with values of approximately $580,000 and
$36,000, respectively, from level 3 to level 1 due to increased availability of market price quotations. During the nine months ended September 30, 2018 and September 30, 2017, the Company transferred investments with values of approximately
$605,000 and $36,000, respectively, from level 3 to level 1 due to increased availability of market price quotations. During the three and nine months ended September 30, 2018, the Company transferred investments with a value of approximately
$53,000 from level 1 to level 3 due to the unavailability of observable inputs.
The effective tax rate (“ETR”) for the three months ended September 30, 2018 and September 30, 2017 was 10.6% and 4.8%, respectively. The ETR in the
third quarter of 2018 differs from the standard corporate tax rate of 21% primarily due to state and local taxes (net of federal benefit) and the impact of (a) income attributable to noncontrolling interests, (b) capital losses for which the
Company does not expect to realize a tax benefit, and (c) the dividends received deduction. The ETR in the third quarter of 2017 differs from the standard corporate tax rate of 34% primarily due to the benefit of (x) the dividends received
deduction, and (y) the acceleration of restricted stock awards (“RSAs”).
The ETR for the nine months ended September 30, 2018 and September 30, 2017 was 20.1% and 55.1%, respectively. The 2018 year-to-date ETR differs from
the standard corporate tax rate of 21% primarily due to state and local taxes (net of federal benefit) and the impact of (a) income attributable to noncontrolling interests, (b) capital losses for which the Company does not expect to realize a
tax benefit, and (c) the dividends received deduction. The 2017 year-to-date ETR differs from the standard corporate tax rate of 34% primarily due to state and local taxes (net of federal benefit) and the benefit of (x) the donation of
appreciated securities, (y) the dividends received deduction, and (z) the acceleration of RSAs.
Basic earnings per share is computed by dividing net income/(loss) per share attributable to our shareholders by the weighted average number of shares
outstanding during the period. Diluted earnings per share is computed by dividing net income/(loss) per share attributable to our shareholders by the weighted average number of shares outstanding during the period, adjusted for the dilutive
effect of outstanding RSAs.
The computations of basic and diluted net income/(loss) per share are as follows:
|
|
|
Three Months Ended September 30,
|
|
|
(amounts in thousands, except per share amounts)
|
|
2018
|
|
|
2017
|
|
|
Basic:
|
|
|
|
|
|
|
|
Net income/(loss) attributable to Associated Capital Group, Inc.’s shareholders
|
|
$
|
(7,379
|
)
|
|
$
|
1,519
|
|
|
Weighted average shares outstanding
|
|
|
22,979
|
|
|
|
23,841
|
|
Basic net income/(loss) attributable to Associated Capital Group, Inc.’s
shareholders per share
|
|
$
|
(0.32
|
)
|
|
$
|
0.06
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
Net income/(loss) attributable to Associated Capital Group, Inc.’s shareholders
|
|
$
|
(7,379
|
)
|
|
$
|
1,519
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average share outstanding
|
|
|
22,979
|
|
|
|
23,841
|
|
|
Dilutive restricted stock awards
|
|
|
-
|
|
|
|
-
|
|
|
Total
|
|
|
22,979
|
|
|
|
23,841
|
|
Diluted net income/(loss) attributable to Associated Capital Group, Inc.’s
shareholders per share
|
|
$
|
(0.32
|
)
|
|
$
|
0.06
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
(amounts in thousands, except per share amounts)
|
|
2018
|
|
|
2017
|
|
|
Basic:
|
|
|
|
|
|
|
|
Net loss attributable to Associated Capital Group, Inc.’s shareholders
|
|
$
|
(17,784
|
)
|
|
$
|
(6,963
|
)
|
|
Weighted average shares outstanding
|
|
|
23,187
|
|
|
|
23,826
|
|
Basic net loss attributable to Associated Capital Group, Inc.’s
shareholders per share
|
|
$
|
(0.77
|
)
|
|
$
|
(0.29
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
Net loss attributable to Associated Capital Group, Inc.’s shareholders
|
|
$
|
(17,784
|
)
|
|
$
|
(6,963
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average share outstanding
|
|
|
23,187
|
|
|
|
23,826
|
|
|
Dilutive restricted stock awards
|
|
|
-
|
|
|
|
-
|
|
|
Total
|
|
|
23,187
|
|
|
|
23,826
|
|
Diluted net loss attributable to Associated Capital Group, Inc.’s
shareholders per share
|
|
$
|
(0.77
|
)
|
|
$
|
(0.29
|
)
|
Diluted weighted average shares outstanding for the nine months ended September 30, 2017 exclude outstanding RSAs as we have a net loss for this period
and their inclusion would be anti-dilutive. There were no outstanding RSAs during the nine months ended September 30, 2018.
Shares outstanding were 23.0 million and 23.6 million on September 30, 2018 and December 31, 2017, respectively.
Dividends
During the nine months ended September 30, 2018 and 2017, the Company declared dividends of $0.10 per share to class A and class B shareholders.
Voting Rights
The holders of Class A Common stock (“Class A Stock”) and Class B Common stock (“Class B Stock”) have identical rights except that (a) holders of Class
A Stock are entitled to one vote per share, while holders of Class B Stock are entitled to ten votes per share on all matters to be voted on by shareholders in general, and (b) holders of each share class are not eligible to vote on matters
relating exclusively to the other share class.
Stock Award and Incentive Plan
There were no RSAs issued by AC during the three and nine months ended September 30, 2018 or 2017.
On November 30, 2015, in connection with the spin-off, the Company issued 554,100 AC RSA shares to GAMCO employees (including GAMCO employees who
became AC employees) who held 554,100 GAMCO RSA shares at that date. The purpose of the issuance was to ensure that any employee who had GAMCO RSAs was granted an equal number of AC RSAs so that the total value of the RSAs post-spin-off was
equivalent to the total value pre-spin-off. The value of the GAMCO RSAs held by AC employees is recognized as expense by the Company over the remaining vesting period because the employees’ services are for the benefit of the Company. In
accordance with GAAP, we have allocated the stock compensation costs between GAMCO and AC based upon each employee’s individual allocation of their responsibilities between GAMCO and AC.
As of December 31, 2017, there were no AC RSA shares and 19,400 GAMCO RSA shares outstanding.
During the first quarter of 2018, the compensation committee of GAMCO’s Board of Directors accelerated the vesting of the remaining 19,400 GAMCO RSA shares outstanding.
At its August 2018 meeting, the Company’s Board of Directors approved the grant of 171,800 shares of Phantom Restricted Stock awards (“Phantom RSAs”).
Under the terms of the grants, which were effective August 8, the Phantom RSAs vest 30% and 70% after three and five years, respectively. The Phantom RSAs will be settled by a cash payment, net of applicable withholding tax, on the vesting
dates. In addition, an amount equivalent to the cumulative dividends declared on shares of the Company’s Class A common stock during the vesting period will be paid to participants on vesting. Based on the price of the Company’s stock, the
total value of the Phantom RSAs was $6.1 million as of the grant date.
Pursuant to ASC 718, the Phantom RSAs will be treated as a liability because cash settlement is required and compensation will be recognized over the
vesting period. In determining the compensation expense to be recognized each period, the Company will remeasure the fair value of the liability at each reporting date taking into account the remaining vesting period attributable to each award
and the current market value of the Company’s Class A stock. In making these determinations, the Company will consider the impact of Phantom RSAs that have been forfeited prior to vesting (e.g., due to an employee termination). The Company has
elected to consider forfeitures as they occur.
The expense attributable to the Phantom RSAs is allocated solely to AC.
As of September 30, 2018, there were 169,800 Phantom RSAs outstanding. The unrecognized compensation cost related to these was $6.9 million which is
expected to be recognized over a weighted-average period of 2.6 years.
For the three months ended September 30, 2018 and 2017, the Company recorded approximately $0.3 million and $1.9 million in stock-based compensation
expense, respectively. For the nine months ended September 30, 2018 and 2017, the Company recorded approximately $0.4 million and $5.2 million in stock-based compensation expense, respectively.
|
I.
|
Goodwill and Identifiable Intangible Assets
|
At September 30, 2018, goodwill and intangible assets on the condensed consolidated statements of financial condition includes $3.4 million of goodwill
related to GCIA. The Company assesses the recoverability of goodwill at least annually, or more often should events warrant, using a qualitative assessment of whether it is more likely than not that an impairment has occurred to determine if a
quantitative analysis is required. There were no indicators of impairment for the three and nine months ended September 30, 2018 or September 30, 2017, and as such there was no impairment analysis performed or charge recorded.
|
J.
|
Commitments and Contingencies
|
From time to time, the Company may be named in legal actions and proceedings. These actions may seek substantial or indeterminate compensatory as well
as punitive damages or injunctive relief. We are also subject to governmental or regulatory examinations or investigations. The examinations or investigations could result in adverse judgments, settlements, fines, injunctions, restitutions or
other relief. For any such matters, the condensed consolidated financial statements include the necessary provisions for losses that the Company believes are probable and estimable. Furthermore, the Company evaluates whether losses exist which
may be reasonably possible and will, if material, make the necessary disclosures. However, management believes such amounts, both those that are probable and those that are reasonably possible, are not material to the Company’s financial
condition, results of operations or cash flows at September 30, 2018.
G.research has agreed to indemnify the clearing brokers for losses they may sustain from customer accounts introduced by G.research that trade on
margin. At each of September 30, 2018 and December 31, 2017, the total amount of customer balances subject to indemnification (i.e., unsecured margin debits) was immaterial.
The Company has also entered into arrangements with various other third parties many of which provide for indemnification of the third parties against
losses, costs, claims and liabilities arising from the performance of obligations under the agreements. The Company has had no claims or payments pursuant to these or prior agreements and believes the likelihood of a claim being made is remote,
and therefore no accrual has been made on the condensed consolidated financial statements.
|
K.
|
Shareholder-Designated Contribution Program
|
During the first quarter of 2017 each shareholder was eligible to designate a charity to which the Company would make a donation at a rate of $0.25 per
share based upon the number of shares registered in the shareholder’s name under the Company’s Shareholder-Designated Charitable Contribution program. Shares held in nominee or street name were not eligible to participate. For the three and
nine months ended September 30, 2017, the Company recorded a cost of $0.0 million and $4.9 million, respectively, related to this contribution which was included in shareholder-designated contribution in the condensed consolidated statements of
income. There was no comparable expense in the current periods.
|
L.
|
Contractual Obligations
|
In February 2018, the Company renewed its sublease agreement with GAMCO for an additional year ending March 31, 2019. Future minimum lease commitments
under this operating lease as of September 30, 2018 are as follows (in thousands):
|
2018
|
|
$
|
121
|
|
|
2019
|
|
|
121
|
|
|
Total
|
|
$
|
242
|
|
In September 2018, the Company commenced a tender offer for its Class A shares. Tendering shareholders received 1.9 GAMCO shares for each Class A
share. Upon its expiration on October 29, the Company acquired approximately 370,000 shares in exchange for approximately 710,000 GAMCO shares with a value of approximately $14.6 million.
At its meeting on November 6, 2018, the Company’s Board of Directors declared a semi-annual dividend of $0.10 per share payable on January 9, 2019 to
its Class A and Class B shareholders of record on December 26, 2018.
In addition, the Board approved a 2018 allocation to
its Shareholder-Designated Contribution Program. Each shareholder of record on November 30, 2018 will be eligible to identify a qualified charity to which AC will make a twenty-five cent ($0.25) per share donation on the shareholder's behalf.
As in the past, shares held in nominee or street name will not be eligible to participate.
|
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (INCLUDING QUANTITATIVE AND
QUALITATIVE DISCLOSURES ABOUT MARKET RISK) (“MD&A”)
|
Introduction
MD&A is provided as a supplement to, and should be read in conjunction with, the Company’s unaudited interim consolidated financial statements and
accompanying notes thereto included in this Quarterly Report on Form 10-Q, as well as the Company’s audited annual financial statements included in our Form 10-K filed with the SEC on March 8, 2018 to help provide an understanding of our
financial condition, changes in financial condition and results of operations. Unless the context otherwise requires, all references to “we,” “us,” “our,” “AC Group” or the “Company” refer collectively to Associated Capital Group, Inc., a
holding company, and its subsidiaries through which our operations are actually conducted.
Overview
We are a Delaware corporation that provides alternative investment management, institutional research and underwriting services. In addition, we derive
investment income/(loss) from proprietary trading of cash and other assets awaiting deployment in our operating businesses. On November 30, 2015, GAMCO Investors, Inc. (“GAMCO” or “GBL”) distributed all the outstanding shares of each class of
AC common stock on a pro rata one-for-one basis to the holders of each class of GAMCO’s common stock (the “Spin-off”).
We conduct our investment management business through Gabelli & Company Investment Advisers, Inc. (“GCIA” f/k/a Gabelli Securities, Inc.). GCIA and
its wholly-owned subsidiary, Gabelli & Partners, LLC, collectively serve as general partners or investment managers to investment funds including limited partnerships and offshore companies (collectively, “Investment Partnerships”), and
separate accounts. We primarily manage assets in equity event-driven value strategies, across a range of risk and event arbitrage portfolios. The business earns management and incentive fees from its advisory assets under management. GCIA is an
investment adviser registered with the Securities and Exchange Commission under the Investment Advisers Act of 1940, as amended.
We provide our institutional research and underwriting services through G.research, LLC (“G.research”), an indirect wholly-owned subsidiary of the
Company. G.research is a broker-dealer registered under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and is regulated by the Financial Industry Regulatory Authority. G.research’s revenues are derived primarily from
institutional research services.
In connection with the Spin-off, GAMCO issued a promissory note (the “GAMCO Note”) to AC Group in the original principal amount of $250 million bearing
interest at 4% per annum and with an original maturity date of November 30, 2020. Under its terms, GAMCO could prepay the GAMCO Note prior to maturity without penalty. As of June 30, 2018, AC had received principal repayments totaling $230
million on the GAMCO Note and, during the third quarter, GBL repaid the outstanding $20 million balance. In addition, GCIA purchased 4,393,055 shares of GAMCO Class A common stock for $150 million.
Condensed Consolidated Statements of Income
Investment advisory and incentive fees, which are based on the amount and composition of assets under management (“AUM”) in our funds and accounts,
represent our largest source of revenues. 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.
Incentive fees generally consist of an incentive allocation on the absolute gain in a portfolio or a fee of 20% of the economic profit, as defined in
the agreements governing the investment vehicle. We recognize incentive revenue only when the measurement period has been completed or at the time of an investor redemption.
Institutional research services revenues consist of brokerage commissions derived from securities transactions executed on an agency basis or direct
payments on behalf of institutional clients. Commission revenues vary directly with the perceived value of the research, as well as account trading activity and new account generation.
Compensation costs include variable and fixed compensation and related expenses paid to officers, portfolio managers, sales, trading, research and all
other professional staff. Variable compensation paid to sales personnel and portfolio management generally represents 40% of revenues and is the largest component of total compensation costs.
Management fee is incentive-based and entirely variable compensation in the amount of 10% of the aggregate pre-tax profits which is paid to Mario J.
Gabelli or his designee for acting as Executive Chairman pursuant to his Employment Agreement so long as he is with the Company.
Other operating expenses include general and administrative operating costs and clearing charges and fees incurred by the brokerage business.
Other income and expenses include net gains and losses from investments (which include both realized and unrealized gains and losses from trading
securities and equity in earnings of investments in partnerships), and interest and dividend income. Net gains and losses from investments are derived from our proprietary investment portfolio consisting of various public and private
investments.
Net income/(loss) attributable to noncontrolling interests represents the net income/(loss) attributable to third party limited partners of certain
partnerships and offshore funds we consolidate. Please refer to Notes A and D in our condensed consolidated financial statements included elsewhere in this report.
Condensed Consolidated Statements of Financial Condition
We ended the third quarter of 2018 with approximately $971 million in cash and investments, net of securities sold, not yet purchased of $22 million.
This includes $384 million of cash and short term US treasuries; $298 million of securities, net, including 3.7 million shares of GAMCO stock; and $289 million invested in affiliated and third party funds and partnerships. Our liquid financial
resources underpin our flexibility to pursue strategic objectives which may include acquisitions, lift-outs, seeding new investment strategies, and co-investing, as well as shareholder compensation in the form of share repurchases and
dividends.
Total shareholders’ equity was $924 million or $40.22 per share at September 30, 2018 compared to $918 million or $38.84 per share on December 31,
2017. The increase in equity from the end of 2017 is driven primarily by our $50 million principal prepayments of the GAMCO Note during the period partially offset by our net loss.
As discussed above, during the quarter, GAMCO repaid the outstanding balance of the GAMCO Note. Under GAAP, the balance of the GAMCO Note was treated
as a reduction of equity. In prior periods, the Company reported adjusted economic book value (“AEBV”), a non-GAAP financial measure defined as total GAAP equity plus the outstanding balance of the GAMCO Note. This measure is no longer
relevant.
RESULTS OF OPERATIONS
|
(in thousands, except per share data)
|
|
Three months ended September 30,
|
|
|
Nine months ended September 30,
|
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment advisory and incentive fees
|
|
$
|
2,805
|
|
|
$
|
2,587
|
|
|
$
|
7,949
|
|
|
$
|
7,318
|
|
|
Institutional research services
|
|
|
1,855
|
|
|
|
2,584
|
|
|
|
6,179
|
|
|
|
7,917
|
|
|
Other
|
|
|
6
|
|
|
|
77
|
|
|
|
37
|
|
|
|
95
|
|
|
Total revenues
|
|
|
4,666
|
|
|
|
5,248
|
|
|
|
14,165
|
|
|
|
15,330
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation
|
|
|
5,618
|
|
|
|
6,492
|
|
|
|
17,812
|
|
|
|
19,696
|
|
|
Stock-based compensation
|
|
|
289
|
|
|
|
1,862
|
|
|
|
361
|
|
|
|
5,226
|
|
|
Other operating expenses
|
|
|
2,258
|
|
|
|
3,006
|
|
|
|
7,187
|
|
|
|
7,305
|
|
|
Total expenses
|
|
|
8,165
|
|
|
|
11,360
|
|
|
|
25,360
|
|
|
|
32,227
|
|
|
Operating loss
|
|
|
(3,499
|
)
|
|
|
(6,112
|
)
|
|
|
(11,195
|
)
|
|
|
(16,897
|
)
|
|
Other income/(expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net gain/(loss) from investments
|
|
|
(7,977
|
)
|
|
|
5,234
|
|
|
|
(18,936
|
)
|
|
|
(1,018
|
)
|
|
Interest and dividend income
|
|
|
3,466
|
|
|
|
2,347
|
|
|
|
9,338
|
|
|
|
7,295
|
|
|
Interest expense
|
|
|
(70
|
)
|
|
|
(69
|
)
|
|
|
(142
|
)
|
|
|
(210
|
)
|
|
Shareholder-designated contribution
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(4,895
|
)
|
|
Total other income/(expense), net
|
|
|
(4,581
|
)
|
|
|
7,512
|
|
|
|
(9,740
|
)
|
|
|
1,172
|
|
|
Income/(loss) before income taxes
|
|
|
(8,080
|
)
|
|
|
1,400
|
|
|
|
(20,935
|
)
|
|
|
(15,725
|
)
|
|
Income tax expense/(benefit)
|
|
|
(858
|
)
|
|
|
67
|
|
|
|
(4,204
|
)
|
|
|
(8,667
|
)
|
|
Net income/(loss)
|
|
|
(7,222
|
)
|
|
|
1,333
|
|
|
|
(16,731
|
)
|
|
|
(7,058
|
)
|
|
Net income/(loss) attributable to noncontrolling interests
|
|
|
157
|
|
|
|
(186
|
)
|
|
|
1,053
|
|
|
|
(95
|
)
|
|
Net income/(loss) attributable to Associated Capital Group, Inc.’s shareholders
|
|
$
|
(7,379
|
)
|
|
$
|
1,519
|
|
|
$
|
(17,784
|
)
|
|
$
|
(6,963
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income/(loss) attributable to Associated Capital Group, Inc.’s shareholders per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.32
|
)
|
|
$
|
0.06
|
|
|
$
|
(0.77
|
)
|
|
$
|
(0.29
|
)
|
|
Diluted
|
|
|
(0.32
|
)
|
|
|
0.06
|
|
|
|
(0.77
|
)
|
|
|
(0.29
|
)
|
Three Months Ended September 30, 2018 Compared To Three Months Ended September 30, 2017
Overview
Our operating loss for the quarter was $3.5 million compared to $6.1 million for the comparable quarter of 2017. Lower revenue was offset by lower
expenses, primarily stock-based compensation. Other income was a loss of $4.6 million in the 2018 quarter compared to a gain of $7.5 million in the prior year’s quarter primarily due to mark-to-market changes in the value of our investment
portfolio. The Company recorded an income tax benefit in the current quarter of $0.9 million compared to an expense of $0.1 million in the year ago quarter. Consequently, our current quarter net loss was $7.4 million, or $(0.32) per diluted
share, compared to a gain of $1.5 million, or $0.06 per diluted share, in the prior year’s comparable quarter.
In comparing the current quarter’s results with those of the year ago period, it is important to note the impact of a change in the accounting
treatment of available for sale (“AFS”) equity securities resulting from the adoption of Accounting Standards Update (“ASU”) 2016-01 on January 1, 2018. In prior periods, the change in unrealized gains or losses attributable to AFS equity
securities was reflected in equity and classified as other comprehensive income rather than net income. Beginning in 2018, however, the mark-to-market adjustments for the entire portfolio flow through net income. On a comparable basis, the
third quarter 2017 investment and other non-operating income/(expense), net would have been a gain of $10.1 million.
On a comparable basis of accounting for AFS securities,
the year ago period would have reported a net gain of $3.2 million (i.e., the Company’s reported comprehensive income).
Revenues
Total revenues were $4.7 million for the quarter ended September 30, 2018 compared to $5.2 million for the quarter ended September 30, 2017.
We earn advisory fees based on the average level of AUM in our products. Advisory fees were $2.8 million for the 2018 quarter compared to $2.6 million
for the prior year quarter, an increase of $0.2 million. This increase is due to the increase in AUM to $1.6 billion in the third quarter of 2018 from $1.5 billion in the third quarter of 2017. Incentive fees are generally not recognized until
the measurement period ends, typically annually on December 31. If the measurement period had instead ended on September 30, we would have recognized $0.7 million and $0.4 million of incentive fees for each of the quarters ended September 30,
2018 and 2017, respectively.
Institutional research services revenues in the current year’s first quarter decreased to $1.9 million, from the prior year’s period of $2.6 million
due to a reduction in commissions and hard dollar payments generated by our institutional research operations.
Expenses
Compensation, which includes variable compensation, salaries, bonuses and benefits, was $5.6 million for the quarter ended September 30, 2018, compared
to $6.5 million for the quarter ended September 30, 2017. Fixed compensation, which includes salaries and benefits, declined to $2.9 million for the third quarter 2018 from $3.8 million in the 2017 period. Discretionary bonus accruals were $1.0
million and $0.9 million in the third quarter of 2018 and 2017, respectively. The remainder of the compensation expense represents variable compensation that fluctuates with management fee and incentive allocation revenues and gains on
investment portfolios. Variable payouts as a percent of revenues are impacted by the mix of products upon which performance fees are earned and the extent to which they may exceed their allocated costs.
For the three months ended September 30, 2018 and 2017, stock-based compensation was $0.3 million and $1.9 million, respectively. The 2017 period
reflects the acceleration of GAMCO RSAs.
Management fee expense represents incentive-based and entirely variable compensation in the amount of 10% of the aggregate pre-tax profits which is
payable to Mario J. Gabelli pursuant to his employment agreement. AC recorded no management fee expense in the third quarter of 2018 and 2017 due to the year to date pre-tax loss in both periods.
Other operating expenses were $2.3 million during the third quarter of 2018 compared to $3.0 million in the prior year quarter, a decrease of $0.7
million primarily due to initial offering costs relating to a consolidated fund the Company launched in July 2017 and recognized in the year-ago period.
Other
Net gain from investments is primarily related to the performance of our securities portfolio and investments in partnerships. Investment losses were
$8.0 million in the 2018 quarter versus a gain of $5.2 million in the comparable 2017 quarter reflecting mark-to-market changes in the value of our investments.
Interest and dividend income increased to $3.5 million in the 2018 quarter from $2.3 million in the 2017 quarter primarily due to higher interest rates
on our cash balances and US Treasuries offset by reduced interest earned on the GAMCO Note due to principal payments received.
Nine Months Ended September 30, 2018 Compared To Nine Months Ended September 30, 2017
Overview
Our operating loss for the year-to-date period was $11.2 million compared to $16.9 million for the comparable period of 2017.
Lower revenue was offset by lower expenses, primarily stock-based and other compensation. Other income was a loss of $9.7 million in the 2018 period compared to a gain of $1.2 million in the prior year’s period primarily due to mark-to-market
changes on our investment portfolio and the adoption of ASU 2016-01 on January 1, 2018. Stock-based compensation fell by $4.9 million year-over-year. The Company recorded an income tax benefit of $4.2 million in the current year compared to a
benefit of $8.7 million in the year ago period.
Consequently, our 2018 period net loss increased to $17.8 million, or $(0.77) per diluted share, from $7.0 million, or
$(0.29) per diluted share, in the prior year’s comparable period.
On a comparable basis of accounting for AFS equity securities, the 2017 period investment and other non-operating income/(expense), net would have been
a gain of $23.4 million and net income would have been $7.2 million (i.e., the Company’s reported comprehensive income).
Revenues
Total revenues were $14.2 million for the nine months ended September 30, 2018 compared to $15.3 million for the nine months ended September 30, 2017.
Advisory fees were $7.9 million for the 2018 nine months compared to $7.3 million for the prior year nine months, an increase of $0.6 million. This
increase is due to the increase in AUM over the period. Incentive fees are generally not recognized until the measurement period ends, typically annually on December 31. If the measurement period had instead ended on September 30, we would have
recognized $3.0 million and $3.5 million of incentive fees for each of the nine months ended September 30, 2018 and 2017, respectively.
Institutional research services revenues in the current year’s first nine months decreased to $6.2 million, from the prior year’s period of $7.9
million due to a reduction in commissions and hard dollar payments generated by our institutional research operations.
Expenses
Compensation, which includes variable compensation, salaries, bonuses and benefits, was $17.8 million for the nine months ended September 30, 2018,
compared to $19.7 million for the nine months ended September 30, 2017. Fixed compensation, which includes salaries and benefits, declined to $10.0 million for the 2018 period from $11.6 million in the prior year. Discretionary bonus accruals
were $3.1 million and $2.6 million in the 2018 and 2017 periods, respectively. The remainder of the compensation expense represents variable compensation that fluctuates with management fee and incentive allocation revenues and gains on
investment portfolios. Variable payouts as a percent of revenues are impacted by the mix of products upon which performance fees are earned and the extent to which they may exceed their allocated costs.
For the nine months ended September 30, 2018 and 2017, stock-based compensation was $0.4 million and $5.2 million, respectively. The 2017 period
reflects the acceleration of AC and GAMCO RSAs.
Management fee expense represents incentive-based and entirely variable compensation in the amount of 10% of the aggregate pre-tax profits which is
payable to Mario J. Gabelli pursuant to his employment agreement. AC recorded no management fee expense for these periods due to the year to date pre-tax loss.
Other operating expenses were $7.2 million during the first nine months of 2018 compared to $7.3 million in the prior year.
Other
Investment losses were $18.9 million in the 2018 nine month period compared to $1.0 million in the comparable 2017 period reflecting mark-to-market
changes in the value of our investments.
Interest and dividend income increased to $9.3 million in the 2018 period from $7.3 million in 2017 primarily due to dividend income of a consolidated
fund launched in July 2017 and higher interest rates on our cash balances and U.S. Treasuries offset by reduced interest earned on the GAMCO Note due to principal payments received.
The 2017 nine-month period included an expense of $4.9 million related to the Company’s shareholder-designated contribution program. There was no
comparable expense in the 2018 period.
ASSETS UNDER MANAGEMENT
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, and 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.
Assets under management were $1.6 billion as of September 30, 2018, an increase of 5.1% and 4.8% over the prior nine and twelve months, respectively.
The increases were attributable to market appreciation and additional investor contributions, net of redemptions.
Assets Under Management (in millions)
|
|
|
|
|
|
|
|
|
|
|
|
% Change From
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Event Merger Arbitrage
|
|
$
|
1,466
|
|
|
$
|
1,384
|
|
|
$
|
1,395
|
|
|
|
5.9
|
|
|
|
5.1
|
|
|
Event-Driven Value
|
|
|
89
|
|
|
|
91
|
|
|
|
85
|
|
|
|
(2.2
|
)
|
|
|
4.7
|
|
|
Other
|
|
|
64
|
|
|
|
66
|
|
|
|
65
|
|
|
|
(3.0
|
)
|
|
|
(1.5
|
)
|
|
Total AUM
|
|
$
|
1,619
|
|
|
$
|
1,541
|
|
|
$
|
1,545
|
|
|
|
5.1
|
|
|
|
4.8
|
|
Fund flows for the three months ended September 30, 2018 (in millions):
|
|
|
June 30,
2018
|
|
|
Market
appreciation/
(depreciation)
|
|
|
Net cash
flows
|
|
|
September 30,
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Event Merger Arbitrage
|
|
$
|
1,480
|
|
|
$
|
6
|
|
|
$
|
(20
|
)
|
|
$
|
1,466
|
|
|
Event-Driven Value
|
|
|
87
|
|
|
|
2
|
|
|
|
-
|
|
|
|
89
|
|
|
Other
|
|
|
66
|
|
|
|
1
|
|
|
|
(3
|
)
|
|
|
64
|
|
|
Total AUM
|
|
$
|
1,633
|
|
|
$
|
9
|
|
|
$
|
(23
|
)
|
|
$
|
1,619
|
|
Fund flows for the nine months ended September 30, 2018 (in millions):
|
|
|
December 31,
2017
|
|
|
Market
appreciation/
(depreciation)
|
|
|
Net cash
flows
|
|
|
September 30,
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Event Merger Arbitrage
|
|
$
|
1,384
|
|
|
$
|
12
|
|
|
$
|
70
|
|
|
$
|
1,466
|
|
|
Event-Driven Value
|
|
|
91
|
|
|
|
1
|
|
|
|
(3
|
)
|
|
|
89
|
|
|
Other
|
|
|
66
|
|
|
|
1
|
|
|
|
(3
|
)
|
|
|
64
|
|
|
Total AUM
|
|
$
|
1,541
|
|
|
$
|
14
|
|
|
$
|
64
|
|
|
$
|
1,619
|
|
LIQUIDITY AND CAPITAL RESOURCES
Our principal assets are highly liquid in nature and consist of cash and cash equivalents, short-term investments, marketable securities and
investments in funds and investment partnerships. Cash and cash equivalents are comprised primarily of U.S. Treasury money market funds. Although investments in partnerships and offshore funds are subject to restrictions as to the timing of
redemptions, the underlying investments of such partnerships or funds are, for the most part, liquid, and the valuations of these products reflect that underlying liquidity.
Summary cash flow data is as follows (in thousands):
|
|
|
Nine months ended September 30,
|
|
|
|
|
2018
|
|
|
2017
|
|
|
Cash flows provided by (used in):
|
|
|
|
|
Operating activities
|
|
$
|
4,617
|
|
|
$
|
(119,520
|
)
|
|
Investing activities
|
|
|
15,000
|
|
|
|
(1,975
|
)
|
|
Financing activities
|
|
|
36,111
|
|
|
|
49,704
|
|
|
Net increase (decrease)
|
|
|
55,728
|
|
|
|
(71,791
|
)
|
|
Cash and cash equivalents at beginning of period
|
|
|
293,112
|
|
|
|
314,093
|
|
|
Increase in cash from consolidation
|
|
|
47
|
|
|
|
-
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
348,887
|
|
|
$
|
242,302
|
|
We require relatively low levels of capital expenditures and have a highly variable cost structure which fluctuates based on the level of revenues we
receive. We anticipate that our available liquid assets should be more than sufficient to meet our cash requirements. At September 30, 2018, we had total cash and cash equivalents of $349 million and $622 million in net investments. Of these
amounts, $3 million and $127 million, respectively, were held by consolidated investment funds and may not be readily available for the Company to access.
Net cash provided by operating activities was $4.6 million for the nine months ended September 30, 2018 primarily due to our net loss increased by $5.5
million of net proceeds of trading securities and net distributions from investment partnerships and net changes of $19.4 million to accrued expenses and receivables reduced by non-cash items of $3.6 million. Net cash provided by investing
activities was $15.0 million due to the repayment of a short-term note. Net cash provided by financing activities was $36.1 million for the quarter, largely resulting from the $50 million prepayment of the GAMCO Note offset by dividends and
stock buyback payments of $11.2 million and redemptions of redeemable noncontrolling interests of $2.7 million.
For the nine months ended September 30, 2017, cash used in operating activities was $119.5 million, primarily due to the quarter’s loss adjusted for
non-cash items and net changes to assets and liabilities. Cash used in investing activities, primarily related to transactions related to AFS securities, was $2.0 million in the first nine months of 2017. Cash provided by financing activities
for the period was $49.7 million due to the principal repayment of the GAMCO Note and contributions from redeemable noncontrolling interests offset in part by purchases of treasury shares and dividends.
G.research is a registered broker-dealer, and is subject to the SEC Uniform Net Capital Rule 15c3-1 (the “Rule”), which specifies, among other
requirements, minimum net capital requirements for registered broker-dealers. G.research computes its net capital under the alternative method as permitted by the Rule, which requires that minimum net capital be the greater of $250,000 or 2% of
the aggregate debit items in the reserve formula for those broker-dealers subject to Rule 15c3-3. G.research had net capital, as defined, of $37.1 million, exceeding the required amount of $250,000 by $36.9 million at September 30, 2018.
G.research’s net capital requirements may increase to the extent it engages in other business activities in accordance with applicable rules and regulations.
Market Risk
Our primary market risk exposures are to changes in equity prices and interest rates. Since a majority of our AUM is invested in equities, our
financial results are subject to equity market risk as revenues from our investment management services are sensitive to stock market dynamics. In addition, returns from our proprietary investment portfolio are exposed to interest rate and
equity market risk.
The Company’s Executive Chairman oversees the proprietary investment portfolios and allocations of proprietary capital among the various strategies.
The Executive Chairman and the Board of Directors review the proprietary investment portfolios throughout the year. Additionally, the Company monitors its proprietary investment portfolios to ensure that they are in compliance with the
Company’s guidelines.
Equity Price Risk
The Company earns a substantial portion of its revenue as advisory fees from investment partnership and separate account assets. Such fees represent a
percentage of AUM, and the majority of these assets are in equities. Accordingly, since revenues are proportionate to the value of those investments, a substantial increase or decrease in overall equity markets will likely have a corresponding
effect on the Company’s revenues.
Investments consisted of the following (in thousands):
|
|
|
September 30, 2018
|
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
Investment in securities:
|
|
|
|
|
|
|
|
Government obligations
|
|
$
|
35,256
|
|
|
$
|
53,804
|
|
|
GBL stock
|
|
|
87,269
|
|
|
|
130,254
|
|
|
Common stocks
|
|
|
226,473
|
|
|
|
163,327
|
|
|
Mutual funds
|
|
|
1,553
|
|
|
|
3,428
|
|
|
Other investments
|
|
|
5,132
|
|
|
|
1,824
|
|
|
Total investments in securities
|
|
|
355,683
|
|
|
|
352,637
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments in affiliated registered investment companies:
|
|
|
|
|
|
|
Closed-end funds
|
|
|
90,610
|
|
|
|
93,147
|
|
|
Mutual funds
|
|
|
55,836
|
|
|
|
52,767
|
|
Total investments in affiliated registered
investment companies
|
|
|
146,446
|
|
|
|
145,914
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments in partnerships:
|
|
|
|
|
|
|
|
|
|
Investments in partnerships
|
|
|
142,283
|
|
|
|
145,591
|
|
|
Total investments in partnerships
|
|
|
142,283
|
|
|
|
145,591
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities sold, not yet purchased:
|
|
|
|
|
|
|
|
|
|
Common stocks
|
|
|
(22,093
|
)
|
|
|
(5,396
|
)
|
|
Other investments
|
|
|
(260
|
)
|
|
|
(335
|
)
|
|
Total securities sold, not yet purchased
|
|
|
(22,353
|
)
|
|
|
(5,731
|
)
|
|
|
|
|
|
|
|
|
|
|
Total investments net of securities sold,
not yet purchased
|
|
$
|
622,059
|
|
|
$
|
638,411
|
|
We may alter our investment holdings from time to time in response to changes in market risks and other factors considered appropriate by management.
Of the approximately $313.7 million and $293.6 million invested in common stocks at September 30, 2018 and December 31, 2017, respectively, $155.5 million and $108.7 million was invested by the Company in arbitrage opportunities in connection
with mergers, consolidations, acquisitions, tender offers or other similar transactions. Risk arbitrage generally involves investing in securities of companies that have announced corporate transactions with agreed upon terms and conditions,
including pricing, and typically involves less market risk than holding common stocks in a trading portfolio. The principal risk associated with merger arbitrage transactions is the inability of the companies involved to complete the
transaction.
Of the investments in affiliated registered investment companies at September 30, 2018 and December 31, 2017, $58.0 million and $57.8 million,
respectively, consisted of investment companies which invest in merger arbitrage opportunities. Securities sold, not yet purchased are stated at fair value and are subject to market risks resulting from changes in price and volatility. At
September 30, 2018 and December 31, 2017, the fair value of securities sold, not yet purchased was $22.4 million and $5.7 million, respectively. Investments in partnerships totaled $142.3 million and $145.6 million at September 30, 2018 and
December 31, 2017, respectively, $105.3 million and $102.3 million of which consisted of investment partnerships and offshore funds which invest in risk arbitrage opportunities.
The following table provides a sensitivity analysis for our investments in equity securities and partnerships and affiliated registered investment
companies which invest primarily in equity securities, excluding arbitrage products for which the principal exposure is to deal closure and not overall market conditions, as of September 30, 2018 and December 31, 2017. The sensitivity analysis
assumes a 10% increase or decrease in the value of these investments (in thousands):
|
|
|
Fair Value
|
|
|
Fair Value
assuming
10% decrease in
equity prices
|
|
|
Fair Value
assuming
10% increase in
equity prices
|
|
|
At September 30, 2018:
|
|
|
|
|
|
|
|
|
|
|
Equity price sensitive investments, at fair value
|
|
$
|
360,542
|
|
|
$
|
324,488
|
|
|
$
|
396,596
|
|
|
At December 31, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity price sensitive investments, at fair value
|
|
$
|
321,550
|
|
|
$
|
289,395
|
|
|
$
|
353,705
|
|
Interest Rate Risk
Our exposure to interest rate risk principally results from our investment of excess cash in a related money market fund that holds U.S. government
securities. These investments are primarily short term in nature, and the carrying value of these investments generally approximates fair value. Based on the September 30, 2018 cash and cash equivalent balance of $349 million, a 1% change in
interest rates would increase or decrease our interest income by $3.5 million annually.
Critical Accounting Policies and Estimates
The preparation of the condensed consolidated financial statements in conformity with 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 date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting
periods. Actual results could differ significantly from those estimates. See Note A and the Company’s Critical Accounting Policies in Management’s Discussion and Analysis of Financial Condition and Results of Operations in AC’s 2017 Annual
Report on Form 10-K filed with the SEC on March 8, 2018 for details on Critical Accounting Policies.
|
|
Quantitative and Qualitative Disclosures About Market Risk
|
In the normal course of its business, AC is exposed to risk of loss due to fluctuations in the securities market and general economy. Management is
responsible for identifying, assessing and managing market and other risks.
Our exposure to pricing risk in equity securities is directly related to our role as financial intermediary and advisor for AUM in our investment
partnerships and separate accounts as well as our proprietary investment and trading activities. At September 30, 2018, we had equity investments, including open-end funds and closed-end funds largely invested in equity products, of $461.7
million. Included in this total are investments in open-end funds and closed-end funds of $148.0 million which seek to reduce market risk through the diversification of financial instruments within their portfolios. In addition, we may alter
our investment holdings from time to time in response to changes in market risks and other factors considered appropriate by management. We also hold investments in partnerships which invest primarily in equity securities and which are subject
to changes in equity prices. These investments totaled $142.3 million at September 30, 2018, $105.3 million of which comprised partnerships which invest in risk arbitrage. Risk arbitrage is primarily dependent upon deal closure rather than the
overall market environment. The equity investment portfolio is recorded at fair value and will generally move in line with the equity markets. The portfolio changes are recorded as net gain/(loss) from investments in the condensed consolidated
statements of income.
|
Item 4.
|
Controls and Procedures
|
We evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2018. Disclosure controls and procedures, as defined under
the Exchange Act Rule 13a-15(e), are designed to ensure that the information we are required to disclose in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time period
specified in SEC rules and regulations. Disclosure controls and procedures include, without limitation, controls and procedures accumulated and communicated to our management, including our Chief Executive Officer (“CEO”) and Chief Financial
Officer (“CFO”), to allow timely decisions regarding required disclosure. Our CEO and CFO participated in this evaluation and concluded that our disclosure controls and procedures were effective as of September 30, 2018.
There have been no changes in our internal control over financial reporting, as defined by Rule 13a-15(f), that occurred during our most recently
completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Forward-Looking Information
Our disclosure and analysis in this report contain some forward-looking statements. Forward-looking statements give our current expectations or
forecasts of future events. You can identify these statements because they do not relate strictly to historical or current facts. They use words such as “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe,” and other words
and terms of similar meaning. They also appear in any discussion of future operating or financial performance. In particular, these include statements relating to future actions, future performance of our products, expenses, the outcome of any
legal proceedings, and financial results. Although we believe that we are basing our expectations and beliefs on reasonable assumptions within the bounds of what we currently know about our business and operations, there can be no assurance
that our actual results will not differ materially from what we expect or believe. Some of the factors that could cause our actual results to differ from our expectations or beliefs include, without limitation:
|
·
|
the adverse effect from a decline in the securities markets
|
|
·
|
a decline in the performance of our products
|
|
·
|
a general downturn in the economy
|
|
·
|
changes in government policy or regulation
|
|
·
|
changes in our ability to attract or retain key employees
|
|
·
|
unforeseen costs and other effects related to legal proceedings or investigations of governmental and self-regulatory organizations
|
We also direct your attention to any more specific discussions of risk contained in our Form 10 and other public filings. We are providing these
statements as permitted by the Private Litigation Reform Act of 1995. We do not undertake to update publicly any forward-looking statements if we subsequently learn that we are unlikely to achieve our expectations or if we receive any
additional information relating to the subject matters of our forward-looking statements.
Part II: Other Information
From time to time, the Company may be named in legal actions and proceedings. These actions may seek substantial or indeterminate compensatory as well
as punitive damages or injunctive relief. The Company is also subject to governmental or regulatory examinations or investigations. The examinations or investigations could result in adverse judgments, settlements, fines, injunctions,
restitutions or other relief. For any such matters, the condensed consolidated financial statements include the necessary provisions for losses that the Company believes are probable and estimable. Furthermore, the Company evaluates whether
there exist losses which may be reasonably possible and will, if material, make the necessary disclosures. However, management believes such amounts, both those that would be probable and those that would be reasonably possible, are not
material to the Company’s financial condition, results of operations or cash flows at September 30, 2018.
|
Item 2.
|
Unregistered Sales of Equity Securities and Use of Proceeds
|
The following table provides information with respect to the repurchase of Class A Common Stock of AC during the three months ended September 30, 2018:
|
|
|
Total
Number of
Shares
Repurchased
|
|
|
Average
Price Paid Per
Share, net of
Commissions
|
|
|
Total Number of
Shares Repurchased as
Part of Publicly
Announced Plans
or Programs
|
|
|
Maximum
Number of Shares
That May Yet Be
Purchased Under
the Plans or Programs
|
|
|
July 2018
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
|
1,236,850
|
|
|
August 2018
|
|
|
20,155
|
|
|
|
36.27
|
|
|
|
20,155
|
|
|
|
1,216,695
|
|
|
September 2018
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,216,695
|
|
|
Total
|
|
|
20,155
|
|
|
$
|
36.27
|
|
|
|
20,155
|
|
|
|
|
|
|
Item 6.
|
(a) Exhibits
|
|
|
|
|
|
Certification of CEO pursuant to Rule 13a-14(a).
|
|
|
|
|
|
Certification of CFO pursuant to Rule 13a-14(a).
|
|
|
|
|
|
Certification of CEO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
|
|
Certification of CFO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes- Oxley Act of 2002.
|
|
|
|
|
101.INS
|
XBRL Instance Document
|
|
|
|
|
101.SCH
|
XBRL Taxonomy Extension Schema Document
|
|
|
|
|
101.CAL
|
XBRL Taxonomy Extension Calculation Linkbase Document
|
|
|
|
|
101.DEF
|
XBRL Taxonomy Extension Definition Linkbase Document
|
|
|
|
|
101.LAB
|
XBRL Taxonomy Extension Label Linkbase Document
|
|
|
|
|
101.PRE
|
XBRL Taxonomy Extension Presentation Linkbase Document
|
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ASSOCIATED CAPITAL GROUP, INC.
(Registrant)
By: /s/ Francis J. Conroy
Name: Francis J. Conroy
Title: Interim Chief Financial Officer
Date: November 6, 2018
38