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CLMS > SEC Filings for CLMS > Form 10-Q on 8-May-2013All Recent SEC Filings

Show all filings for CALAMOS ASSET MANAGEMENT, INC. /DE/ | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for CALAMOS ASSET MANAGEMENT, INC. /DE/


8-May-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

We are a firm of 353 full-time associates that primarily provides investment advisory services to institutions and individuals, managing and servicing $29.3 billion in Total Assets as of March 31, 2013. Total Assets includes assets under management totaling $28.3 billion as well as model-based strategies totaling $939 million for separately managed accounts in which we provide model portfolio design and oversight.

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 March 31, 2013 and 2012.

                                March 31,
(in millions)               2013         2012
Funds
Open-end funds            $ 16,825     $ 21,872
Closed-end funds             5,734        5,563
Total Funds                 22,559       27,435
Separate Accounts
Institutional accounts       4,646        6,291
Managed accounts             2,059        2,491
Total separate accounts      6,705        8,782
Total Assets              $ 29,264     $ 36,217

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 include salaries, incentive compensation and related benefits costs; distribution expenses, which include open-end funds distribution cost (such as Rule 12b-1 payments) and amortization of deferred sales commissions; and marketing and sales promotion expenses, which include expenses necessary to market products offered by us. 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, 2013 Compared to Three Months Ended March 31, 2012

Total Assets

Total Assets decreased by $7.0 billion, or 19%, to $29.3 billion as of March 31,
2013 from $36.2 billion as of March 31, 2012. Our Total Assets consisted of 77%
Funds and 23% separate accounts as of March 31, 2013 and 76% Funds and 24%
separate accounts as of March 31, 2012.

                                         Three Months Ended
                                             March 31,
                                                            Change
                            2013         2012        Amount       Percent
(in millions)
Funds
Beginning Total Assets    $ 23,329     $ 25,045     $ (1,716 )          (7 )%
Net redemptions             (1,644 )        (32 )     (1,612 )           *
Market appreciation            874        2,422       (1,548 )         (64 )
Ending Total Assets         22,559       27,435       (4,876 )         (18 )
Average Total Assets        23,163       26,700       (3,537 )         (13 )
Institutional Accounts
Beginning Total Assets       5,191        5,505         (314 )          (6 )
Net sales (redemptions)       (760 )        241       (1,001 )           *
Market appreciation            215          545         (330 )         (61 )
Ending Total Assets          4,646        6,291       (1,645 )         (26 )
Average Total Assets         4,921        6,019       (1,098 )         (18 )
Managed Accounts
Beginning Total Asset        2,060        2,227         (167 )          (7 )
Net redemptions               (119 )        (45 )        (74 )           *
Market appreciation            118          309         (191 )         (62 )
Ending Total Assets          2,059        2,491         (432 )         (17 )
Average Total Assets         2,088        2,384         (296 )         (12 )
Total Assets
Beginning Total Assets      30,580       32,777       (2,197 )          (7 )
Net sales (redemptions)     (2,523 )        164       (2,687 )           *
Market appreciation          1,207        3,276       (2,069 )         (63 )
Ending Total Assets         29,264       36,217       (6,953 )         (19 )
Average Total Assets      $ 30,172     $ 35,103     $ (4,931 )         (14 )%

* Not meaningful.

Net redemptions in our Funds were $1.6 billion in the first quarter of 2013, compared to net redemptions of $32 million in the first quarter of 2012. Net redemptions for first quarter of 2013 were due largely to redemptions from our equity and low-volatility equity funds as well as redemptions from our convertible fund that is currently closed to new purchases. Net sales were strongest in our alternative fund, which had net sales of $160 million in the first quarter of 2013. Market appreciation in all of our Funds totaled $874 million in the first quarter of 2013, a decrease of $1.5 billion from appreciation of $2.4 billion in the first quarter of 2012.

Separate accounts, which represent institutional and managed accounts, combined net redemptions were $879 million in the first quarter of 2013, compared to net sales of $196 million in the first quarter of 2012. Separate accounts combined market appreciation was $333 million in the first quarter of 2013, compared to market appreciation of $854 million in the first quarter of 2012.


Financial Overview

                                                            Three Months Ended
                                                                 March 31,
                                                                                Change
                                             2013          2012         Amount         Percent
(in thousands, except margin)
Operating income                           $  22,115     $  31,053     $  (8,938 )           (29 )%
Operating margin                                31.2 %        36.4 %        (5.2 )%          (14 )%
Net income attributable to Calamos Asset
Management, Inc.                           $   3,234     $   7,039     $  (3,805 )           (54 )%

Operating income for the first quarter of 2013 of $22.1 million decreased by $8.9 million, or 29%, from the first quarter of 2012. Operating margin for the first quarter of 2013 decreased to 31.2% from 36.4% from the first quarter of 2012.

In order to grow Total Assets, 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 for understanding the impact of distribution activities on our margin.

The following table summarizes the net distribution fee margin for the first quarter ended March 31, 2013 and 2012:

                                       Three Months Ended
                                            March 31,

                                       2013          2012
(in thousands)
Distribution and underwriting fees   $  14,328     $  18,506
Distribution expenses                  (13,931 )     (17,481 )
Net distribution fees                $     397     $   1,025

Net distribution fee margin                  3 %           6 %

Net distribution fee margin varies by share class because each share class has different distribution and underwriting activities, which are described in our 2012 Annual Report on Form 10-K. Distribution fee revenues and the majority of distribution expenses vary with our average assets open-end funds, while deferred sales commissions included in distribution expenses, are typically amortized on a straight-line basis with adjustments made upon redemption of existing assets.

During the quarter, we changed the presentation of our consolidated statements of operations, classifying amortization of deferred sales commissions with distribution expenses. Amortization of deferred sales commissions has become immaterial, with the discontinuation of the sale of Class B shares, making the separate line presentation less meaningful to the financial users.


Revenues

Total revenues decreased by $14.3 million, or 17%, to $71.0 million for the
first quarter of 2013 from $85.3 million for the first quarter of 2012. 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
                                       2013         2012        Amount        Percent
(in thousands)
Investment management fees           $ 55,942     $ 65,987     $ (10,045 )         (15 )%
Distribution and underwriting fees     14,328       18,506        (4,178 )         (23 )
Other                                     683          783          (100 )         (13 )
Total revenues                       $ 70,953     $ 85,276     $ (14,323 )         (17 )%

Investment management fees decreased 15% in the first quarter of 2013 compared to the first quarter of 2012, which was primarily due to a $4.9 billion, or 14%, decrease in average Total Assets for the same periods. Investment management fees from open-end funds decreased to $33.7 million for the first quarter of 2013, from $41.3 million for the first quarter of 2012, driven by a $3.7 billion decrease in open-end fund average assets. Investment management fees from our closed-end funds increased to $12.8 million for the first quarter of 2013 from $12.4 million for the first quarter of 2012, due to a $207 million increase in closed-end fund average assets. Investment management fees from our separately managed accounts were $9.5 million for the first quarter of 2013, a decrease from $12.2 million for the first quarter of 2012. Investment management fees that we earned as a percentage of average Total Assets were 0.75% for the first quarter of 2013 compared to 0.76% for the first quarter of 2012.

Distribution and underwriting fees decreased by 23% in the first quarter of 2013 compared to the first quarter of 2012, due to a decrease of 18% in our average open-end fund assets for the same periods, across most share classes. The decrease in average open-end fund assets when compared to the prior year quarter is largely due to net redemptions in our equity, low-volatility equity and convertible funds.

Operating Expenses

Operating expenses decreased by $5.4 million for the first quarter of 2013,
reflecting decreases in distribution expenses, marketing and sales promotion
expenses, and general and administrative expenses, partially offset by a slight
increase in employee compensation and benefits expenses.

                                                    Three Months Ended
                                                        March 31,
                                                                       Change
                                       2013         2012        Amount       Percent
(in thousands)
Employee compensation and benefits   $ 22,565     $ 22,203     $    362             2 %
Distribution expenses                  13,931       17,481       (3,550 )         (20 )
Marketing and sales promotion           3,389        4,426       (1,037 )         (23 )
General and administrative              8,953       10,113       (1,160 )         (11 )
Total operating expenses             $ 48,838     $ 54,223     $ (5,385 )         (10 )%

Employee compensation and benefits expense increased by $362,000 for the first quarter of 2013, when compared to the first quarter of 2012, due to an increase in base salaries and related benefits, partially offset by lower equity compensation expenses. Salary expenses increased primarily due to increases in the number of associates we employ in our investment team. While continuing to focus on expense management in most areas of our firm, we have and will continue to add talent and resources to our investment team and investment infrastructure during 2013. Equity compensation expenses decreased in the first quarter, primarily as a result of a reversal of expenses due to forfeitures.

Distribution expenses decreased by $3.6 million for the first quarter of 2013, when compared to the first quarter of 2012. The decrease was primarily due to a reduction in average assets for open-end funds of 18% for the first quarter of 2013 across most share classes, as well as a decrease in amortization of deferred sales commissions of $695,000.


Marketing and sales promotion decreased by $1.0 million for the first quarter of 2013, when compared to the first quarter of 2012, largely the result of lower advertising expenses, reduced reimbursements of fund operating expenses that are above the expense cap, and lower 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 $1.2 million for the first quarter of 2013, when compared to the first quarter of 2012. Many offsetting factors gave rise to the net decrease in expense during the quarter; however, the main drivers to the decrease was the absence of client reimbursements related to trade correction expenses that were recorded in the first quarter of 2012, and a reduction in outsourcing of middle office function expenses.

Non-operating Activities, Net of Non-controlling Interest in Partnership Investments

Non-operating income, net of non-controlling interest in partnerships decreased by $19.0 million for the first quarter of 2013, when compared to the first quarter of 2012. The decrease in the first quarter of 2013 was due to a decrease in investment income of $19.9 million when compared to the first quarter of 2012. The decrease in investment income was driven by a decrease in realized gains generated from tax harvesting activities partially offset by a decrease in realized option losses.

The following table summarizes our non-operating activities, net of non-controlling interest in partnership investments for the first quarter ended March 31, 2013 and 2012:

                                                              Three Months Ended
                                                                   March 31,
                                                       2013          2012         Change
(in thousands)
Interest income                                      $      87     $      88     $      (1 )
Interest expense                                        (1,506 )      (1,504 )          (2 )
Net interest expense                                    (1,419 )      (1,416 )          (3 )

Investment income                                        2,282        22,198       (19,916 )
Dividend income                                            894           785           109
Miscellaneous other income                                  43            87           (44 )
Investment and other income                              3,219        23,070       (19,851 )
Non-operating income                                     1,800        21,654       (19,854 )
Net income attributable to non-controlling
interest in partnership investments                       (708 )      (1,606 )         898
Non-operating income, net of non-controlling
interest in partnership investments                  $   1,092     $  20,048     $ (18,956 )


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 statements 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 first quarter ended March 31, 2013:

                                                                        Three Months Ended
                                                                          March 31, 2013

                                                                                Change in
                                                       Non-Operating        Accumulated Other
                                                        Income, net        Comprehensive Income       Total
(in thousands)
Funds and common stock                               $           1,786     $              6,327     $   8,113
Partnership investments                                          2,175                        -         2,175
Equity option contracts                                         (1,679 )                      -        (1,679 )
Investment income                                                2,282                    6,327         8,609
Dividend income                                                    894                                    894
Non-controlling interest in partnership
investments                                                       (708 )                                 (708 )
Investment portfolio results                         $           2,468                              $   8,795
Less: Non-controlling interest in Calamos
Investments LLC                                                                          (4,928 )
Deferred income taxes                                                                      (517 )
Change in accumulated other comprehensive income                           $                882

Our investment portfolio returned $8.8 million, or 2.3%, in the first quarter of 2013. These results primarily reflect realized and unrealized gains from investment securities and realized losses on option contracts used to hedge market value fluctuations in our 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 rate for the first quarter of 2013 was approximately 37.6%, compared to 37.4% for the first quarter of 2012.

Net Income

Net income attributable to CAM was $3.2 million for the first quarter of 2013, compared to $7.0 million for the first quarter of 2012. Non-GAAP net income attributable to CAM was $5.1 million for the first quarter of 2013, compared to $6.3 million for the first quarter of 2012. See "Supplemental Non-GAAP Financial Measures" 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 its 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 its 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, 2013, and excluding the value of assets we own other than our 22.2% interest in Calamos Investments, such exchange would result in the Calamos Interests receiving 77.8% of CAM's then outstanding Class A common stock.

Following a complete exchange of the Calamos Interests' 77.8% 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 statements 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 the amortization of deferred taxes on intangible assets and to exclude CAM's non-operating income, 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,

(in thousands)                                       2013             2012
Net income attributable to CAM                   $      3,234     $      7,039
Adjustments:
Deferred tax amortization on intangible assets          1,979            1,979
Non-operating income, net of taxes                       (152 )         (2,766 )
Non-GAAP net income attributable to CAM          $      5,061     $      6,252
Diluted - Weighted average shares outstanding      20,836,996       20,650,379

Diluted earnings per share                       $       0.16     $       0.34
Non-GAAP diluted earnings per share              $       0.24     $       0.30

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, net of taxes.

Non-GAAP diluted earnings per share is calculated by dividing Non-GAAP net income attributable to CAM by 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 stock. We believe that adjusting this item from the calculation of the above non-GAAP items can be a useful measure in allowing investors to see our performance. Non-operating income is excluded from the above non-GAAP items as it can distort comparisons between periods. As noted above, we believe that measures excluding these items are useful in analyzing operating trends and allow for more comparability between periods, which may be useful to investors.

We believe that non-GAAP net income attributable to CAM and non-GAAP diluted earnings per share are useful measures of performance and may be useful to investors, because they provide measures of our core business activities adjusting for items that are non-cash and costs that may distort comparisons between periods. These measures are provided in addition to our net income attributable to CAM and diluted earnings per share calculated under GAAP, but are not substitutes for those calculations.


Liquidity and Capital Resources

We manage our liquidity position to ensure adequate resources are available to fund ongoing operations of the business, provide seed capital for new funds, maintain a strong investment-grade credit rating, provide conservative levels of capital for our regulated subsidiaries, fund our stock repurchase program and invest in other corporate strategic initiatives. Our principal sources of liquidity are cash flows from operating activities and our corporate investment portfolio, which is comprised of cash and cash equivalents, investment securities, derivatives and partnership investments. Investment securities are principally comprised of Company-managed Funds.

Our working capital requirements historically have been met through cash generated by operations. We believe cash generated from operations will be sufficient over the foreseeable future to meet our working capital requirements with respect to the foregoing activities, as well as to support future growth. Further, we expect that cash on hand and cash generated by operations will be sufficient to meet our liquidity needs.

The following table summarizes our principal sources of liquidity as of March 31, 2013 and December 31, 2012:

                                                     March 31,       December         Increase
. . .
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