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| CLMS > SEC Filings for CLMS > Form 10-Q on 9-May-2012 | All Recent SEC Filings |
9-May-2012
Quarterly Report
We are a firm of 341 full-time associates that provides investment advisory services to institutions and individuals, managing $36.2 billion in assets as of March 31, 2012. Our operating results fluctuate primarily due to changes in the total value and composition of our assets under management. The value and composition of our assets under management are, and will continue to be, influenced by a variety of factors including: purchases and redemptions of shares of open-end funds; net inflows into and withdrawals from separate accounts that we manage; fluctuations in the financial markets around the world that result in appreciation or depreciation of assets under management; and the number and types of our investment strategies and products.
We market our investment strategies to our clients through a variety of products designed to suit their investment needs. We currently categorize the portfolios that we manage within four investment product types captured in our Funds and separate accounts. The following table lists our assets under management by product as of March 31, 2012 and 2011.
March 31,
(in millions) 2012 2011
Funds
Open-end funds $ 21,872 $ 23,575
Closed-end funds 5,563 5,506
Total Funds 27,435 29,081
Separate Accounts
Institutional accounts 6,291 6,179
Managed accounts 2,491 2,701
Total separate accounts 8,782 8,880
Total Assets Under Management $ 36,217 $ 37,961
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Our revenues are substantially comprised of investment management fees earned under contracts with Funds and separate accounts that we manage. Our revenues are also comprised of distribution and underwriting fees, including asset-based distributions and/or service fees received pursuant to Rule 12b-1 plans. Investment management fees and distribution and underwriting fees may fluctuate based on a number of factors including: the total value and composition of our assets under management; market appreciation or depreciation on investment; the level of net inflows and outflows, which represent the sum of new and existing client funding, withdrawals and terminations; and purchases and redemptions of open-end fund shares. The mix of assets under management among our investment products impacts our revenues as our fee schedules vary by product.
Our largest operating expenses are typically related to: employee compensation and benefits expenses, which includes salaries, incentive compensation and related benefits costs; distribution expenses, which includes open-end funds distribution cost, including Rule 12b-1 payments; marketing and sales promotion expenses, which includes expenses necessary to market products offered by us; and amortization of deferred sales commissions for open-end funds. Operating expenses may fluctuate due to a number of factors including variations in staffing and compensation, changes in distribution expense as a result of fluctuations in open-end fund net sales and market appreciation or depreciation, and marketing-related expenses that include supplemental distribution payments.
Operating Results
Three Months Ended March 31, 2012 Compared to Three Months Ended March 31, 2011
Assets Under Management
Assets under management decreased by $1.7 billion, or 5%, to $36.2 billion as of
March 31, 2012 from $38.0 billion as of March 31, 2011. Our assets under
management consisted of 76% Funds and 24% separate accounts as of March 31, 2012
and 77% Funds and 23% separate accounts as of March 31, 2011.
Three Months Ended March 31, Change
(in millions) 2012 2011 Amount Percent
Funds
Beginning assets under management $ 25,045 $ 27,352 $ (2,307 ) (8 )%
Net (redemptions) purchases (32 ) 346 (378 ) *
Market appreciation 2,422 1,383 1,039 75
Ending assets under management 27,435 29,081 (1,646 ) (6 )
Average assets under management 26,700 28,367 (1,667 ) (6 )
Institutional
Beginning assets under management 5,505 5,559 (54 ) (1 )
Net purchases 241 254 (13 ) (5 )
Market appreciation 545 366 179 49
Ending assets under management 6,291 6,179 112 2
Average assets under management 6,019 5,815 204 4
Managed Accounts
Beginning assets under management 2,227 2,503 (276 ) (11 )
Net (redemptions) purchases (45 ) 18 (63 ) *
Market appreciation 309 180 129 72
Ending assets under management 2,491 2,701 (210 ) (8 )
Average assets under management 2,384 2,598 (214 ) (8 )
Total Assets Under Management
Beginning assets under management 32,777 35,414 (2,637 ) (7 )
Net inflows 164 618 (454 ) (73 )
Market appreciation 3,276 1,929 1,347 70
Ending assets under management 36,217 37,961 (1,744 ) (5 )
Average assets under management $ 35,103 $ 36,780 $ (1,677 ) (5 )%
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* Not meaningful.
Net redemptions in our Funds were $32 million in the first quarter of 2012, compared to net purchases of $346 million in the first quarter of 2011. While we attracted net sales from investors into 10 of our 18 open-end funds during 2012, these inflows were not sufficient to overcome the net outflows sustained from the net redemptions in our Growth Fund and Convertible Fund. Net inflows were strongest in our global and international strategies, which had net sales of $409 million in the first quarter of 2012. Market appreciation in all of our Funds totaled $2.4 billion in the first quarter of 2012 an increase of $1.0 billion from appreciation of $1.4 billion in the first quarter of 2011.
Separate accounts, which represent institutional and managed accounts, combined net purchases were $196 million in the first quarter of 2012, compared to net purchases of $272 million in the first quarter of 2011. Separate accounts combined market appreciation was $854 million in the first quarter of 2012, an increase of $308 million from market appreciation of $546 million in the first quarter of 2011. Separate accounts net purchases were driven primarily from our growth in domestic institutional accounts in our international and global equity strategies.
Financial Overview
Three Months Ended March 31, Change
(in thousands, except margin) 2012 2011 Amount Percent
Operating income $ 31,053 $ 37,315 $ (6,262 ) (17 )%
Operating margin 36.4 % 41.2 % (4.8 )% (12 )%
Net income attributable to Calamos Asset
Management, Inc. $ 7,039 $ 4,632 $ 2,407 52 %
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Operating income of $31.1 million decreased by $6.3 million, or 17% from the first quarter of 2011. Operating margin for the current quarter decreased to 36.4% from 41.2% for the first quarter of 2011. In spite of the decline in operating results, net income attributable to Calamos Asset Management, Inc. (CAM) increased by $2.4 million or 52% as a result of realized gains on our investment portfolio and dividends, net of losses on derivatives, totaling $23.0 million, compared to net losses of $1.7 million during the prior period. Derivatives are used as an economic hedge to price changes in our corporate investment portfolio. Unlike the changes in the security prices for the investment securities being hedged, price changes in the derivatives impact current period earnings.
In order to grow assets under management, we engage in distribution and underwriting activities, principally with respect to our family of open-end funds. When analyzing our business, we consider the result of these distribution activities on a net revenue basis as they are typically a result of a single open-end fund share purchase. Generally accepted accounting principles in the United States (GAAP) requires that we present these activities on a gross revenue basis, thus resulting in a reduction to our overall operating margin, as the margin on distribution activities is generally lower than the margins on the remainder of our business. While we do not adjust our margin for these activities on a net revenue basis, we believe the margin table below is useful to understanding the impact of distribution activities on our margin.
The following table summarizes the net distribution fee margin for the years ended March 31, 2012 and 2011:
Three Months Ended March 31,
(in thousands) 2012 2011
Distribution and underwriting fees $ 18,506 $ 22,112
Distribution expenses (16,072 ) (18,233 )
Amortization of deferred sales commissions (1,409 ) (1,748 )
Net distribution fees $ 1,025 $ 2,131
Net distribution fee margin 6 % 10 %
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Net distribution fee margin varies by share class because each share class has different distribution and underwriting activities, which are described in our 2011 Annual Report on Form 10-K. Distribution fee revenues and expenses vary with our average assets under management while deferred sales commissions are typically amortized on a straight-line basis with adjustments made upon redemption of existing assets. As a result, in periods of declining assets under management, our distribution margin will be more severely impacted by amortization expense.
Revenues
Total revenues decreased by $5.3 million, or 6%, to $85.3 million for the first
quarter of 2012 from $90.5 million for the first quarter of 2011. The decrease
was primarily due to lower investment management fees and distribution and
underwriting fees, as can be seen in the table below:
Three Months Ended March 31, Change
(in thousands) 2012 2011 Amount Percent
Investment management fees $ 65,987 $ 67,608 $ (1,621 ) (2 )%
Distribution and underwriting fees 18,506 22,112 (3,606 ) (16 )
Other 783 828 (45 ) (5 )
Total revenues $ 85,276 $ 90,548 $ (5,272 ) (6 )%
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Investment management fees decreased 2% in the first quarter of 2012 compared to the first quarter of 2011 primarily due to a $1.7 billion, or 5%, decrease in average assets under management for the same periods. Investment management fees from open-end funds decreased to $41.3 million for the first quarter of 2012, from $43.4 million for the first quarter of 2011, driven by a $1.7 billion decrease in open-end fund average assets under management. Investment management fees from our closed-end funds increased to $12.4 million for the first quarter of 2012 from $12.1 million for the first quarter of 2011, due to a $70 million increase in closed-end fund average assets under management. Investment management fees from our separately managed accounts were $12.2 million for the first quarter of 2012 a slight increase from $12.1 million for the first quarter of 2011. Investment management fees that we earned as a percentage of average assets under management were 0.76% for the first quarter of 2012 compared to 0.75% for the first quarter of 2011.
Distribution and underwriting fees decreased by 16% in the first quarter of 2012 compared to the first quarter of 2011, partially due to a decrease of 8% in our average open-end fund assets for the same periods. The decrease in distribution and underwriting fees was also due to a shift in open-end fund assets from Class A, B and C shares to Class I shares. More open-end fund investors are choosing to compensate their financial advisors through fee based models, increasing the demand for and a shift in assets toward our Class I shares. Because we do not collect distribution fees from Class I shares, our distribution revenue has decreased with this shift in assets.
Operating Expenses
Operating expenses increased by $990,000 to $54.2 million in the first quarter
2012 from $53.2 million in the first quarter 2011 reflecting increased employee
compensation, marketing and administrative expenses, and partially offset by a
reduction in distribution and amortization of deferred sales expenses.
Three Months Ended March 31, Change
(in thousands) 2012 2011 Amount Percent
Employee compensation and benefits $ 22,203 $ 20,632 $ 1,571 8 %
Distribution expenses 16,072 18,233 (2,161 ) (12 )
Amortization of deferred sales commissions 1,409 1,748 (339 ) (19 )
Marketing and sales promotion 4,426 3,439 987 29
General and administrative 10,113 9,181 932 10
Total operating expenses $ 54,223 $ 53,233 $ 990 2 %
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Employee compensation and benefits expenses increased by $1.6 million to $22.2 million for first quarter of 2012 when compared to the first quarter of 2011. This increase is mostly attributable to an increase in salary, payroll taxes, equity compensation and performance-based incentive compensation. These increases are due to increases in the number of associates we employ and our investment into more distribution and client focused personnel.
Distribution expenses decreased by $2.2 million, or 12%, to $16.1 million for the first quarter of 2012 when compared to the first quarter of 2011. The decrease was due to a reduction of 8% in average assets under management for open-end funds during the same periods, and a continued shift of average open-end fund assets to Class I shares which do not result in distribution expenses. This decrease was partially offset by an increase in distribution expense as a result of an increase in the average Class C shares assets older than one year. As Class C shares age pass one year, the associated distribution fees are paid to broker-dealers and other intermediaries. As such, increases in the average Class C share assets older than one year results in an increase in distribution expenses.
Amortization of deferred sales commissions decreased by $339,000 to $1.4 million for the first quarter of 2012 when compared to the first quarter of 2011, due to the increase in the average Class C share assets older than one. As mentioned earlier, once Class C shares age past one year they are no longer retained and amortized, but paid to broker-dealers and other intermediaries and recorded as distribution expenses. Hence, the aging of Class C shares reduces amortization of deferred sales commission, but increases distribution expenses.
Marketing and sales promotion increased by $987,000 to $4.4 million for the first quarter of 2012 when compared to the first quarter of 2011, largely the result of an increase in fund administrative "Cap" expenses, which are non-reimbursable expenses we pay to reduce the service fees to our fund investors, and an increase in marketing and sales promotion expenses due to our increase spending to build awareness about our investment strategies. These increases were partially offset by a decrease in supplemental distribution payments to distribution intermediaries. Supplemental distribution payments to are positively correlated with the levels of open-end fund assets that we manage.
General and administrative expenses increased by $932,000 to $10.1 million for the first quarter of 2012. Many offsetting factors gave rise to the net increase in expense during the quarter. However, the main drivers to the increase are client reimbursements related to trade correction expenses, software maintenance costs, partially offset by reduced outside professional services.
Non-operating Activities, Net of Non-controlling Interest in Partnership Investments
Non-operating income (loss), net of non-controlling interest in partnerships increased by $23.6 million to $20.0 million for the first quarter of 2012 when compared to the first quarter of 2011. The increase was due to an increase in investment income, net of losses on option contracts, of $24.7 million for the periods. Increase in investment income was a result of realized gains on our investments, as part of our tax harvesting strategy. Option contracts are used to hedge our corporate investment portfolio. The increase in non-operating income (loss), net of non-controlling interest in partnerships was also partially due to lower interest expense of $460,000 as a result of debt repayment during the second quarter of 2011. The following table summarizes our non-operating activities, net of non-controlling interest in partnership investments for the three months ended March 31, 2012 and 2011:
Three Months Ended March 31,
(in thousands) 2012 2011 Change
Interest income $ 88 $ 69 $ 19
Interest expense (1,504 ) (1,964 ) 460
Net interest expense (1,416 ) (1,895 ) 479
Investment income (loss) 22,198 (2,485 ) 24,683
Dividend income 785 821 (36 )
Miscellaneous other income 87 37 50
Investment and other income (loss) 23,070 (1,627 ) 24,697
Non-operating income (loss) 21,654 (3,522 ) 25,176
Net income attributable to non-controlling
interest in partnership investments (1,606 ) (5 ) (1,601 )
Non-operating income (loss), net of
non-controlling interest in partnerships $ 20,048 $ (3,527 ) $ 23,575
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The following table provides a summary of the returns that we generated from our corporate investment portfolio. This table combines the investment and dividend income as reported in our statement of operations with the change in fair value of our investment securities that are recorded in accumulated other comprehensive income, a component of stockholders' equity, for the three months ended March 31, 2012:
Three Months Ended March 31, 2012
Change in
Accumulated
Other
Non-Operating Comprehensive
(in thousands) Income Income Total
Funds and common stock $ 26,901 $ 2,813 $ 29,714
Partnership investments 3,407 - 3,407
Option contracts (8,110 ) - (8,110 )
Investment income 22,198 2,813 25,011
Dividend income 785 785
Non-controlling interest in partnership investments (1,606 ) (1,606 )
Investment portfolio results $ 21,377 $ 24,190
Less: Non-controlling
interest in Calamos Investments LLC (2,197 )
Deferred income taxes (228 )
Change in accumulated other comprehensive income $ 388
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Our investment portfolio returned $24.2 million, or 7.3%, in the first quarter of 2012. These results primarily reflect realized and unrealized gains from investment securities, partially offset by net realized and unrealized gains and losses on option contracts used to hedge market value fluctuations in the corporate investment portfolio.
Income Tax Provision
Calamos Investments LLC (Calamos Investments) is subject to certain income-based state taxes; therefore, income taxes reflect not only the portion attributed to us but also income taxes attributable to non-controlling interests. Our effective income tax rates for the three month periods ended March 31, 2012 and 2011 were 37.4% and 37.3%, respectively.
Net Income
Net income attributable to CAM was $7.0 million in the first quarter of 2012, compared to $4.6 million in the first quarter of 2011. Non-GAAP net income attributable to CAM was $6.3 million in the first quarter of 2012, compared to $7.1 million in the first quarter of 2011. See "Supplemental Non-GAAP Financial Measures" of the MD&A below for descriptions of non-GAAP financial measures and a reconciliation of non-GAAP financial measures to GAAP financial measures.
The Calamos Interests has reserved the right to exchange their interest in Calamos Investments for newly issued Class A common shares. At the time of exchange, the Calamos Interests would be granted Class A common shares with a value equal to the fair value of their ownership in Calamos Investments. The method for determining the number of shares the Calamos Interests receive upon exchange is described in Section 3 (c) (ii) of Article IV of the Second Amended and Restated Certificate of Incorporation of CAM. Based upon the number of outstanding shares of Class A common stock at March 31, 2012, and excluding the value of assets we own other than our 22% interest in Calamos Investments, such exchange would result in the Calamos Interests receiving 78% of CAM's then outstanding Class A common stock.
Following a complete exchange of the Calamos Interests' 78% ownership interest in Calamos Investments for newly issued Class A common stock, net income attributable to non-controlling interests in Calamos Investments would no longer be presented as a separate line item within our consolidated statement of operations because we would then own 100% of Calamos Investments.
Supplemental Non-GAAP Financial Measures
We provide investors with certain adjusted, non-GAAP financial measures including non-GAAP net income attributable to CAM and non-GAAP diluted earnings per share. These non-GAAP financial measures are provided to supplement our consolidated financial statements presented on a GAAP basis. These non-GAAP financial measures adjust GAAP financial measures to include the tax benefit from amortization of deferred taxes on intangible asset and to exclude CAM's non-operating income (loss), net of taxes. We believe these adjustments are appropriate to enhance an overall understanding of our operating financial performance, as well as to facilitate comparisons with our historical earnings results. These adjustments to our GAAP results are made with the intent of providing investors a more complete understanding of our underlying earnings results and trends and our marketplace performance. In addition, these non-GAAP financial measures are among the primary indicators management uses as a basis of managing our business.
The presentation of this additional information is not meant to be considered in isolation or as a substitute for the directly comparable financial measures prepared in accordance with GAAP. Investors should review the reconciliations of the non-GAAP financial measures to their most directly comparable GAAP financial measures as provided in the table below:
Three Months Ended
March 31,
2012 2011
(in thousands, except per share data)
Net income attributable to CAM $ 7,039 $ 4,632
Adjustments:
Deferred tax amortization on intangible assets 1,979 1,979
Non-operating (income) loss, net of taxes (2,766 ) 483
Non-GAAP net income attributable to CAM $ 6,252 $ 7,094
Diluted - Weighted average shares outstanding 20,650,379 20,478,456
Diluted earnings per share $ 0.34 $ 0.23
Non-GAAP diluted earnings per share $ 0.30 $ 0.35
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Non-GAAP net income attributable to CAM is calculated by adjusting the following items from GAAP net income attributable to CAM:
(i) amortization of deferred taxes on intangible assets associated with the election under section 754 of the Internal Revenue Code of 1986, as amended (Section 754 election); and
(ii) CAM's non-operating income (loss), net of taxes.
Non-GAAP diluted earnings per share is calculated by dividing (i) Non-GAAP net income attributable to CAM by (ii) diluted weighted average shares outstanding.
The deferred tax assets from the Section 754 election allows for a quarterly reduction of $2.0 million in future income taxes owed by us through 2019, to the extent that a tax payable exists during the quarter. As a result, this cash savings will accrue solely for the benefit of the shareholders of CAM's common . . .
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