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| CLMS > SEC Filings for CLMS > Form 10-Q on 7-Nov-2012 | All Recent SEC Filings |
7-Nov-2012
Quarterly Report
We are a firm of 349 full-time associates that primarily provides investment advisory services to institutions and individuals, managing and servicing $34.3 billion in Total Assets as of September 30, 2012. Beginning this quarter we began reporting Total Assets. Total Assets includes assets under management totaling $33.2 billion as well as model-based strategies totaling $1.1 billion for separately managed accounts in which we provide model portfolio design and oversight. Prior to July 2012, model-based strategy balances were immaterial and therefore not disclosed.
Our operating results fluctuate primarily due to changes in the total value and
composition of our Total Assets. The value and composition of our Total Assets
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 Total
Assets; 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 Total Assets by product as of September 30, 2012 and 2011.
September 30 ,
(in millions) 2012 2011
Funds
Open-end funds $ 20,213 $ 19,257
Closed-end funds 5,544 5,056
Total Funds 25,757 24,313
Separate Accounts
Institutional accounts 6,193 5,274
Managed accounts 2,343 2,190
Total separate accounts 8,536 7,464
Total Assets $ 34,293 $ 31,777
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Our revenues are substantially comprised of investment management fees earned under contracts with Funds and separate accounts that we manage or service. Our revenues are also comprised of distribution and underwriting fees, including asset-based distribution 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 Total Assets; market appreciation and depreciation on investments; 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 Total Assets 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
Third Quarter and Nine Months Ended September 30, 2012 Compared to Third Quarter and Nine Months Ended September 30, 2011
Total Assets
Total Assets increased by $2.5 billion, or 8%, to $34.3 billion as of September
30, 2012 from $31.8 billion as of September 30, 2011. Our Total Assets consisted
of 75% Funds and 25% separate accounts as of September 30, 2012 and 77% Funds
and 23% separate accounts as of September 30, 2011.
Three Months Ended September 30, Nine Months Ended September 30,
Change Change
2012 2011 Amount Percent 2012 2011 Amount Percent
(in millions)
Funds
Beginning assets under
management $ 25,469 $ 28,468 $ (2,999 ) (11 )% $ 25,045 $ 27,352 $ (2,307 ) (8 )%
Net (redemptions) (901 ) (633 ) (268 ) 42 (1,473 ) (505 ) (968 ) *
Market appreciation
(depreciation) 1,189 (3,522 ) 4,711 * 2,185 (2,534 ) 4,719 *
Ending assets under
management 25,757 24,313 1,444 6 25,757 24,313 1,444 6
Average assets under
management 25,655 26,739 (1,084 ) (4 ) 26,119 27,964 (1,845 ) (7 )
Institutional
Beginning assets under
management 5,650 6,239 (589 ) (9 ) 5,505 5,559 (54 ) (1 )
Net
purchases (redemptions) 191 (247 ) 438 * 171 176 (5 ) (3 )
Market appreciation
(depreciation) 352 (718 ) 1,070 * 517 (461 ) 978 *
Ending assets under
management 6,193 5,274 919 17 6,193 5,274 919 17
Average assets under
management 5,945 5,826 119 2 5,973 5,932 41 1
Managed Accounts
Beginning assets 2,265 2,645 (380 ) (14 ) 2,227 2,503 (276 ) (11 )
Net redemptions (29 ) (45 ) 16 (36 ) (124 ) (71 ) (53 ) 75
Market appreciation
(depreciation) 107 (410 ) 517 * 240 (242 ) 482 *
Ending assets 2,343 2,190 153 7 2,343 2,190 153 7
Average assets 2,326 2,475 (149 ) (6 ) 2,352 2,577 (225 ) (9 )
Total Assets
Beginning Total Assets 33,384 37,352 (3,968 ) (11 ) 32,777 35,414 (2,637 ) (7 )
Net
purchases (redemptions) (739 ) (925 ) 186 (20 ) (1,426 ) (400 ) (1,026 ) *
Market appreciation
(depreciation) 1,648 (4,650 ) 6,298 * 2,942 (3,237 ) 6,179 *
Ending Total Assets 34,293 31,777 2,516 8 34,293 31,777 2,516 8
Average Total Assets $ 33,926 $ 35,040 $ (1,114 ) (3 )% $ 34,444 $ 36,473 $ (2,029 ) (6 )%
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* Not meaningful.
Net redemptions in our Funds were $901 million and $1.5 billion in the third quarter and first nine months of 2012, respectively, compared to net redemptions of $633 million and $505 million in the third quarter and first nine months of 2011. Net redemptions for both periods were, due largely to redemptions from our convertible strategies, which includes one fund that is currently closed to new purchases as well as redemptions from our U.S. growth funds. Excluding net redemptions in these funds would result in net sales for the quarter and nine months of 2012. Net sales were strongest in our global and international funds, which had net sales of $51 million and $624 million in the third quarter and nine months of 2012, respectively. Market appreciation in all of our Funds totaled $1.2 billion in the third quarter of 2012, an increase of $4.7 billion from depreciation of $3.5 billion in the third quarter of 2011. Market appreciation in all of our Funds totaled $2.2 billion in the first nine months of 2012, an increase of $4.7 billion from depreciation of $2.5 billion in the first nine months of 2011.
Separate accounts, which represent institutional and managed accounts, combined net purchases were $162 million and $47 million in the third quarter and first nine months of 2012, respectively, compared to net redemptions of $292 million and net purchases of $105 million in the third quarter and first nine months of 2011. Separate accounts combined market appreciation was $459 million and $757 million in the third quarter and first nine months of 2012, respectively, compared to market depreciation of $1.1 billion and $703
million during the third quarter and first nine months of 2011.
Financial Overview
Three Months Ended September 30, Nine Months Ended September 30,
Change Change
2012 2011 Amount Percent 2012 2011 Amount Percent
(in thousands,
except margin)
Operating income $ 31,733 $ 32,731 $ (998 ) (3 )% $ 91,723 $ 109,394 $ (17,671 ) (16 )%
Operating margin 38.8 % 37.8 % 1.0 % 3 % 36.7 % 40.5 % (3.8 )% (9 )%
Net income
attributable to
Calamos Asset
Management, Inc. $ 4,733 $ 4,609 $ 124 3 % $ 13,586 $ 15,934 $ (2,348 ) (15 )%
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Operating income for the third quarter of 2012 of $31.7 million decreased by $998,000, or 3%, from the third quarter of 2011. Operating margin for the third quarter of 2012 increased to 38.8% from 37.8% from the third quarter of 2011. Operating income for the first nine months of 2012 decreased by 16% to $91.7 million from $109.4 million for the same period a year ago. Operating margin was 36.7% for the first nine months of 2012, a decline from 40.5% for the first nine months of 2011.
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 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 third quarter and nine months ended September 30, 2012 and 2011:
Three Months Ended Nine Months Ended September
September 30, 30,
2012 2011 2012 2011
(in thousands)
Distribution and underwriting fees $ 16,684 $ 20,041 $ 52,444 $ 64,096
Distribution expenses (15,011 ) (16,797 ) (46,371 ) (53,306 )
Amortization of deferred sales commissions (946 ) (1,760 ) (3,621 ) (4,958 )
Net distribution fees $ 727 $ 1,484 $ 2,452 $ 5,832
Net distribution fee margin 4 % 7 % 5 % 9 %
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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 $4.6 million, or 5%, to $81.8 million for the third
quarter of 2012 from $86.5 million for the third quarter of 2011. Total revenues
decreased by $20.2 million, or 7%, to $249.8 million for the first nine months
of 2012 from $270.0 million for the first nine months of 2011. The decreases
were primarily due to lower investment management fees and distribution and
underwriting fees, as can be seen in the table below:
Three Months Ended September 30, Nine Months Ended September 30,
Change Change
2012 2011 Amount Percent 2012 2011 Amount Percent
(in thousands)
Investment
management fees $ 64,402 $ 65,646 $ (1,244 ) (2 )% $ 195,050 $ 203,390 $ (8,340 ) (4 )%
Distribution and
underwriting fees 16,684 20,041 (3,357 ) (17 ) 52,444 64,096 (11,652 ) (18 )
Other 761 796 (35 ) (4 ) 2,305 2,469 (164 ) (7 )
Total revenues $ 81,847 $ 86,483 $ (4,636 ) (5 )% $ 249,799 $ 269,955 $ (20,156 ) (7 )%
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Investment management fees decreased 2% in the third quarter of 2012 compared to the third quarter of 2011, which was primarily due to a $1.1 billion, or 3%, decrease in average Total Assets for the same periods. Investment management fees from open-end funds decreased to $39.7 million for the third quarter of 2012, from $41.9 million for the third quarter of 2011, driven by a $1.2 billion decrease in open-end fund average assets under management. Investment management fees from our closed-end funds increased to $12.5 million for the third quarter of 2012 from $12.3 million for the third quarter of 2011, due to a $120 million increase in closed-end fund average assets under management. Investment management fees from our separately managed accounts were $12.2 million for the third quarter of 2012, an increase from $11.5 million for the third quarter of 2011. Investment management fees that we earned as a percentage of average Total Assets were 0.76% for the third quarter of 2012 compared to 0.74% for the third quarter of 2011.
Investment management fees decreased 4% in the first nine months of 2012 compared to the first nine months of 2011 primarily due to a $2.0 billion, or 6%, decrease in average Total Assets for the same periods. Investment management fees from open-end funds decreased to $121.3 million for the first nine months of 2012, from $130.0 million for the first nine months of 2011, driven by a $1.9 billion decrease in open-end fund average assets under management. Investment management fees from our closed-end funds increased to $37.2 million for the first nine months of 2012, from $37.0 million for the first nine months of 2011, driven by a $9 million increase in closed-end fund average assets under management. Investment management fees from our separately managed accounts were $36.5 million for the first nine months of 2012 an increase from $36.4 million for the first nine months of 2011. Investment management fees that we earned as a percentage of average Total Assets were 0.76% for the first nine months of 2012 compared to 0.75% for the first nine months of 2011.
Distribution and underwriting fees decreased by 17% in the third quarter of 2012 compared to the third quarter of 2011, partially due to a decrease of 6% in our average open-end fund assets for the same periods. Distribution and underwriting fees decreased by 18% in the first nine months of 2012 compared to the first nine months of 2011, partially due to a decrease of 8% in our average open-end fund assets for the same periods. The decreases in distribution and underwriting fees were 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 decreased by $3.6 million for the third quarter of 2012, reflecting decreases distribution expenses, amortization of deferred sales commissions, and general and administrative expenses, partially offset by increases in employee compensation and benefits expenses, and marketing and sales promotion expenses. Operating expenses decreased by $2.5 million for the first nine months of 2012, reflecting decreases in distribution expenses and amortization of deferred sales commission. These decreases were partially offset by increases to employee compensation and benefits expenses, marketing and sales promotion expenses, and general and administrative expenses.
Three Months Ended September 30, Nine Months Ended September 30,
Change Change
2012 2011 Amount Percent 2012 2011 Amount Percent
(in thousands)
Employee
compensation and
benefits $ 19,781 $ 19,458 $ 323 2 % $ 62,926 $ 60,299 $ 2,627 4 %
Distribution
expenses 15,011 16,797 (1,786 ) (11 ) 46,371 53,306 (6,935 ) (13 )
Amortization of
deferred sales
commissions 946 1,760 (814 ) (46 ) 3,621 4,958 (1,337 ) (27 )
Marketing and
sales promotion 4,608 4,285 323 8 14,562 12,415 2,147 17
General and
administrative 9,768 11,452 (1,684 ) (15 ) 30,596 29,583 1,013 3
Total operating
expenses $ 50,114 $ 53,752 $ (3,638 ) (7 )% $ 158,076 $ 160,561 $ (2,485 ) (2 )%
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Employee compensation and benefits expense increased by $323,000 and $2.6 million for the third quarter and first nine months of 2012, respectively, when compared to the third quarter and first nine months of 2011, due to an increase in salary expense and accruals for performance-based incentive compensation, partially offset by lower equity compensation expenses. Equity compensation expenses decreased in the third quarter as a result of a reversal of expenses due to forfeitures. Salary expenses increased throughout the year due to increases in the number of associates we employ and our investment into more distribution and client focused personnel.
Distribution expenses decreased by $1.8 million and $6.9 million for the third quarter and first nine months of 2012, respectively, when compared to the third quarter and first nine months of 2011. The decreases were due to a reduction in average assets under management for open-end funds of 6% and 8% for the third quarter and first nine months of 2012, respectively, and a continued shift of average open-end fund assets to Class I shares which do not result in distribution expenses. These decreases were partially offset by increases in distribution expenses as a result of an increase in the average Class C shares assets older than one year. As Class C shares age past 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 $814,000 and $1.3 million for the third quarter and first nine months of 2012, respectively, when compared to the third quarter and first nine months of 2011, due to the increase in the average Class C share assets older than one year and for the third quarter the increase in the average age of Class B share assets. As mentioned earlier, once Class C shares age past one year the associated distribution fees 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 $323,000 and $2.1 million for the third quarter and first nine months of 2012, respectively, when compared to the third quarter and first nine months of 2011, largely the result of an increase in waived fund expenses which limit the annual ordinary operating expenses of each fund, and an increase in marketing and sales promotion expenses due to our increase spending to build awareness around our investment strategies. These increases were partially offset by a decrease in supplemental distribution payments to distribution intermediaries. Supplemental distribution payments are positively correlated with the levels of open-end fund assets that we manage.
General and administrative expenses decreased by $1.7 million for the third quarter of 2012, when compared to the third quarter of 2011, due to expenses incurred in 2011 related to the company's initiative to review options for creating a greater degree of clarity regarding the firm's total market capitalization. These decreases were partially offset by an increase in professional services expenses related to the acquisition of Black Capital, LLC (Black Capital). General and administrative expenses increased by $1.0 million for the first nine months of 2012, when compared to the first nine months of 2011. Many offsetting factors gave rise to the net increases in expenses during the periods. However, the main drivers to the increases for the first nine months of 2012 were travel expenses, professional services expenses related to the acquisition of Black Capital, client reimbursement related to trade correction expenses in the first quarter, and outsourcing of middle office functions.
Non-operating Activities, Net of Non-controlling Interest in Partnership Investments
Non-operating income, net of non-controlling interest in partnerships decreased by $10.9 million and increased by $1.5 million for the third quarter and first nine months of 2012, respectively, when compared to the third quarter and first nine months of 2011. The decrease in the third quarter of 2012 was due to a decrease in investment income of $10.0 million when compared to the third quarter of 2011. The main driver of this decrease was principally due to options contracts, which went from realized gains in the third quarter of 2011 to realized losses in the third quarter of 2012. The increase in the first nine months of 2012 was due to an increase in investment income of $2.1 million when compared to the first nine months of 2011. The increase in investment income in the first nine months of 2012 was a result of realized gains on our investments, as part of our tax harvesting strategy, partially offset by an increase in realized losses on option contracts.
The following table summarizes our non-operating activities, net of non-controlling interest in partnership investments for the third quarter and nine months ended September 30, 2012 and 2011:
Three Months Ended September 30, Nine Months Ended September 30,
2012 2011 Change 2012 2011 Change
(in thousands)
Interest income $ 107 $ 93 $ 14 $ 291 $ 215 $ 76
Interest expense (1,503 ) (1,521 ) 18 (4,511 ) (5,147 ) 636
Net interest expense (1,396 ) (1,428 ) 32 (4,220 ) (4,932 ) 712
Investment income 3,187 13,229 (10,042 ) 22,811 20,678 2,133
Dividend income 877 767 110 2,453 2,367 86
Miscellaneous other
income 88 42 46 244 145 99
Investment and other
income 4,152 14,038 (9,886 ) 25,508 23,190 2,318
Non-operating income 2,756 12,610 (9,854 ) 21,288 18,258 3,030
Net (income)
attributable to
non-controlling
interest in
partnership
investments (1,058 ) - (1,058 ) (1,572 ) (5 ) (1,567 )
Non-operating income,
net of non-
controlling interest
in partnership
investments $ 1,698 $ 12,610 $ (10,912 ) $ 19,716 $ 18,253 $ 1,463
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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 third quarter and nine months ended September 30, 2012:
Three Months Ended September 30, 2012 Nine Months Ended September 30, 2012
Change in Change in
Accumulated Accumulated
Other Other
Non-Operating Comprehensive Non-Operating Comprehensive
Income, net Income Total Income, Net Income Total
(in thousands)
Funds and common stock $ 1,987 $ 15,649 $ 17,636 $ 28,591 $ 1,429 $ 30,020
Partnership investments 2,436 - 2,436 3,674 - 3,674
Equity option contracts (1,236 ) - (1,236 ) (9,454 ) - (9,454 )
. . .
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