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CLMS > SEC Filings for CLMS > Form 10-Q on 7-Aug-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/


7-Aug-2013

Quarterly Report


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

We are a firm of 362 full-time associates that primarily provides investment advisory services to institutions and individuals, managing and servicing $26.6 billion in Total Assets as of June 30, 2013. Total Assets includes assets under management totaling $25.8 billion as well as model-based strategies totaling $837 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 June 30, 2013 and 2012.

                              June 30,
(in millions)             2013        2012
Funds
Open-end funds          $ 15,151    $ 20,081
Closed-end funds           5,828       5,388
Total Funds               20,979      25,469
Separate Accounts
Institutional accounts     3,823       5,650
Managed accounts           1,832       2,265
Total separate accounts    5,655       7,915
Total Assets            $ 26,634    $ 33,384

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

Second Quarter and Six Months Ended June 30, 2013 Compared to Second Quarter and
Six Months Ended June 30, 2012

Total Assets

Total Assets decreased by $6.8 billion, or 20%, to $26.6 billion as of June 30,
2013 from $33.4 billion as of June 30, 2012. Our Total Assets consisted of 79%
Funds and 21% separate accounts as of June 30, 2013 and 76% Funds and 24%
separate accounts as of June 30, 2012.
                            Three Months Ended June 30,                         Six Months Ended June 30,
                                                    Change                                             Change
                     2013         2012        Amount      Percent       2013         2012        Amount      Percent
(in millions)
Funds
Beginning Total
Assets            $ 22,559     $ 27,435     $ (4,876 )      (18 )%   $ 23,329     $ 25,045     $ (1,716 )       (7 )%
Net redemptions     (1,308 )       (540 )       (768 )        *        (2,952 )       (572 )     (2,380 )        *
Market
appreciation
(depreciation)        (272 )     (1,426 )      1,154        (81 )%        602          996         (394 )      (40 )%
Ending Total
Assets              20,979       25,469       (4,490 )      (18 )%     20,979       25,469       (4,490 )      (18 )%
Average Total
Assets              21,933       26,008       (4,075 )      (16 )%     22,545       26,354       (3,809 )      (14 )%
Institutional
Accounts
Beginning Total
Assets               4,646        6,291       (1,645 )      (26 )%      5,191        5,505         (314 )       (6 )%
Net redemptions       (753 )       (261 )       (492 )        *        (1,513 )        (20 )     (1,493 )        *
Market
appreciation
(depreciation)         (70 )       (380 )        310        (82 )%        145          165          (20 )      (12 )%
Ending Total
Assets               3,823        5,650       (1,827 )      (32 )%      3,823        5,650       (1,827 )      (32 )%
Average Total
Assets               4,187        5,954       (1,767 )      (30 )%      4,541        5,943       (1,402 )      (24 )%
Managed Accounts
Beginning Total
Asset                2,059        2,491         (432 )      (17 )%      2,060        2,227         (167 )       (7 )%
Net redemptions       (228 )        (50 )       (178 )        *          (347 )        (95 )       (252 )        *
Market
appreciation
(depreciation)           1         (176 )        177          *           119          133          (14 )      (11 )%
Ending Total
Assets               1,832        2,265         (433 )      (19 )%      1,832        2,265         (433 )      (19 )%
Average Total
Assets               1,955        2,358         (403 )      (17 )%      2,016        2,354         (338 )      (14 )%
Total Assets
Beginning Total
Assets              29,264       36,217       (6,953 )      (19 )%     30,580       32,777       (2,197 )       (7 )%
Net redemptions     (2,289 )       (851 )     (1,438 )        *        (4,812 )       (687 )     (4,125 )        *
Market
appreciation
(depreciation)        (341 )     (1,982 )      1,641        (83 )%        866        1,294         (428 )      (33 )%
Ending Total
Assets              26,634       33,384       (6,750 )      (20 )%     26,634       33,384       (6,750 )      (20 )%
Average Total
Assets            $ 28,075     $ 34,320     $ (6,245 )      (18 )%   $ 29,102     $ 34,651     $ (5,549 )      (16 )%

* Not meaningful.

Net redemptions in our Funds were $1.3 billion in the second quarter of 2013, compared to net redemptions of $540 million in the second quarter of 2012. Net redemptions for the second quarter of 2013 were due largely to redemptions from our equity and lower-volatility equity funds. Net sales were strongest in our alternative funds, which had net sales of $178 million in the second quarter of 2013. Market depreciation in all of our Funds totaled $272 million in the second quarter of 2013, a favorable change of $1.2 billion from depreciation of $1.4 billion in the second quarter of 2012.


Net redemptions in our Funds were $3.0 billion for the first six months of 2013 and represent an unfavorable change of $2.4 billion from net redemptions of $572 million in the first six months of 2012. The increase in net redemptions for the first six months compared to the prior year was also primarily a result of net redemptions in our equity and lower-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 funds, which had net sales of $338 million in the first six months of 2013. Market appreciation in all of our Funds totaled $602 million in the first six months of 2013 and $1.0 billion in the first six months of 2012.

Separate accounts, which represent institutional and managed accounts, combined net redemptions were $981 million and $311 million in the second quarter of 2013 and 2012, respectively. Net redemptions in the first six months of 2013 and 2012 were $1.9 billion and $115 million, respectively. Separate accounts combined market depreciation was $69 million in the second quarter of 2013, compared to market depreciation of $556 million in the second quarter of 2012. Market appreciation was $264 million in the first six months of 2013, compared to market appreciation of $298 million in the first six months of 2012.

Financial Overview
                             Three Months Ended June 30,                          Six Months Ended June 30,
                                                    Change                                              Change
                     2013         2012         Amount      Percent       2013         2012         Amount      Percent
(in thousands,
except margin)
Operating income  $ 18,404     $ 28,937     $ (10,533 )      (36 )%   $ 40,519     $ 59,990     $ (19,471 )      (32 )%
Operating margin      27.6 %       35.0 %        (7.4 )%     (21 )%       29.4 %       35.7 %        (6.3 )%     (18 )%
Net income
attributable to
Calamos Asset
Management, Inc.  $  1,841     $  1,814     $      27          1  %   $  5,075     $  8,853     $  (3,778 )      (43 )%

Operating income for the second quarter of 2013 of $18.4 million decreased by $10.5 million, or 36%, from the second quarter of 2012. Operating margin for the second quarter of 2013 decreased to 27.6% from 35.0% from the second quarter of 2012. Operating income for the first six months of 2013 decreased by 32% to $40.5 million from $60.0 million for the same period a year ago. Operating margin was 29.4% for the first six months of 2013, a decline from 35.7% for the first six months 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 second quarter and six months ended June 30, 2013 and 2012:

                                      Three Months Ended          Six Months Ended
                                            June 30,                   June 30,
                                       2013          2012         2013         2012
(in thousands)
Distribution and underwriting fees $   13,378     $ 17,254     $ 27,706     $ 35,760
Distribution expenses                 (13,241 )    (16,554 )    (27,172 )    (34,035 )
Net distribution fees              $      137     $    700     $    534     $  1,725
Net distribution fee margin                 1 %          4 %          2 %          5 %

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 average open-end fund assets, 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 first quarter ended March 31, 2013, 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 $16.0 million, or 19%, to $66.7 million for the
second quarter of 2013 from $82.7 million for the second quarter of 2012. Total
revenues decreased by $30.3 million, or 18%, to $137.6 million for the first six
months of 2013 from $168.0 million for the first six months 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                                    Six Months Ended
                                       June 30,                                             June 30,
                                                    Change                                                Change
                     2013         2012        Amount       Percent       2013          2012         Amount       Percent
(in thousands)
Investment
management fees   $ 52,655     $ 64,661     $ (12,006 )      (19 )%   $ 108,597     $ 130,648     $ (22,051 )      (17 )%
Distribution and
underwriting fees   13,378       17,254        (3,876 )      (22 )%      27,706        35,760        (8,054 )      (23 )%
Other                  657          761          (104 )      (14 )%       1,340         1,544          (204 )      (13 )%
Total revenues    $ 66,690     $ 82,676     $ (15,986 )      (19 )%   $ 137,643     $ 167,952     $ (30,309 )      (18 )%

Investment management fees decreased 19% in the second quarter of 2013 compared to the second quarter of 2012, which was primarily due to a $6.2 billion, or 18%, decrease in average Total Assets for the same periods. Investment management fees from open-end funds decreased to $31.2 million for the second quarter of 2013, from $40.3 million for the second quarter of 2012, driven by a $4.5 billion decrease in average open-end fund assets. Investment management fees from our closed-end funds increased to $13.3 million for the second quarter of 2013 from $12.2 million for the second quarter of 2012, due to a $434 million increase in average closed-end fund assets. Investment management fees from our separately managed accounts were $8.2 million for the second quarter of 2013, a decrease from $12.1 million for the second quarter of 2012. Investment management fees that we earned as a percentage of average Total Assets were 0.75% for the second quarter of 2013 compared to 0.76% for the second quarter of 2012.

Investment management fees decreased 17% in the first six months of 2013 compared to the first six months of 2012, which was primarily due to a $5.5 billion, or 16%, decrease in average Total Assets for the same periods. Investment management fees from open-end funds decreased to $64.9 million for the first six months of 2013, from $81.7 million for the first six months of 2012, driven by a $4.1 billion decrease in average open-end fund assets. Investment management fees from our closed-end funds increased to $26.0 million for the first six months of 2013 from $24.7 million for the first six months of 2012, due to a $321 million increase in average closed-end fund assets. Investment management fees from our separately managed accounts were $17.7 million for the first six months of 2013, a decrease from $24.3 million for the first six months of 2012. Investment management fees that we earned as a percentage of average Total Assets were 0.75% for the first six months of 2013 compared to 0.76% for the first six months of 2012.

Distribution and underwriting fees decreased by 22% in the second quarter of 2013 compared to the second quarter of 2012, due to a decrease of 22% in average open-end fund assets for the same periods, across most share classes. Distribution and underwriting fees decreased by 23% in the first six months of 2013 compared to the first six months of 2012, due to a decrease of 20% in 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 is largely due to net redemptions in our equity, lower-volatility equity and convertible funds.


Operating Expenses

Operating expenses decreased by $5.5 million and $10.8 million for the second
quarter and first six months of 2013, respectively, reflecting decreases in
distribution expenses, marketing and sales promotion expenses, and general and
administrative expenses, partially offset by an increase in employee
compensation and benefits expenses.
                                     Three Months Ended                                  Six Months Ended
                                           June 30,                                           June 30,
                                                        Change                                              Change
                          2013         2012        Amount     Percent       2013         2012         Amount      Percent
(in thousands)
Employee compensation
and benefits           $ 21,380     $ 20,942     $    438         2  %   $ 43,945     $  43,145     $     800         2  %
Distribution expenses    13,241       16,554       (3,313 )     (20 )%     27,172        34,035        (6,863 )     (20 )%
Marketing and sales
promotion                 3,939        5,528       (1,589 )     (29 )%      7,328         9,954        (2,626 )     (26 )%
General and
administrative            9,726       10,715         (989 )      (9 )%     18,679        20,828        (2,149 )     (10 )%
Total operating
expenses               $ 48,286     $ 53,739     $ (5,453 )     (10 )%   $ 97,124     $ 107,962     $ (10,838 )     (10 )%

Employee compensation and benefits expenses increased by $438,000 and $800,000 for the second quarter and first six months of 2013, respectively, when compared to the second quarter and first six months of 2012. The increase in the second quarter of 2013, is due to an increase in base salaries and related benefits, and equity compensation expenses, partially offset by a decrease in incentive compensation expenses. The increase in the first six months of 2013, is due to an increase in base salaries and related benefits, partially offset by a decrease in equity compensation expenses and incentive 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. The increase in equity compensation expenses for the second quarter of 2013 is primarily a result of an increase in outstanding awards and a reversal of expenses due to forfeitures in the comparative 2012 period. The decrease in equity compensation expenses for the six months of 2013 is primarily a result of a reversal of expenses due to forfeitures in the first quarter of 2013. The decreases in incentive compensation expenses for both periods, are primarily a result of lower investment performance.

Distribution expenses decreased by $3.3 million and $6.9 million for the second quarter and first six months of 2013, respectively, when compared to the second quarter and first six months of 2012. The decreases were primarily due to a reduction in average assets for open-end funds of 22% and 20% for the second quarter and first six months of 2013, respectively, which was across most share classes, as well as a decrease in amortization of deferred sales commissions of $578,000 and $1.3 million, for the respective periods.

Marketing and sales promotion decreased by $1.6 million and $2.6 million for the second quarter and first six months of 2013, respectively, when compared to the second quarter and first six months 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 $1.0 million and $2.1 million for the second quarter and first six months of 2013, respectively, when compared to the second quarter and first six months of 2012. Many offsetting factors gave rise to the net decreases in expenses during the periods; however, the main drivers to the decrease for the second quarter were a reduction in travel expenses, outsourcing of middle office function expenses, and recruiting expenses. The main drivers to the decrease for the first six months of 2013 were a reduction in outsourcing of middle office function expenses, client reimbursements related to trade correction expenses that were recorded in the first quarter of 2012, and a decline in travel expenses.

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

Non-operating income (loss), net of non-controlling interest in partnerships increased by $3.3 million and decreased by $15.7 million for the second quarter and first six months of 2013, respectively, when compared to the second quarter and first six months of 2012. The increase in the second quarter of 2013 was due to an increase in investment income of $3.8 million when compared to the second quarter of 2012. The increase in investment income for the second quarter of 2013 was due to gains generated from tax harvesting activities during 2013. The second quarter investment income is reduced by an other-than-temporary impairment charge of $4.4 million recorded on certain available-for-sale securities with unrealized losses held in the investment portfolio. The decrease in the first six months of 2013 was due to a decrease in investment income of $16.1 million when compared to the first six months of 2012. The decrease in investment income was driven by a decrease in realized gains generated from tax harvesting activities.


The following table summarizes our non-operating activities, net of non-controlling interest in partnership investments for the second quarter and six months ended June 30, 2013 and 2012:

                                     Three Months Ended                       Six Months Ended
                                           June 30,                                June 30,
                                2013         2012        Change        2013         2012        Change
(in thousands)
Interest income              $     73     $     96     $    (23 )   $    160     $    184     $     (24 )
Interest expense               (1,505 )     (1,504 )         (1 )     (3,011 )     (3,008 )          (3 )
Net interest expense           (1,432 )     (1,408 )        (24 )     (2,851 )     (2,824 )         (27 )

Investment income (loss)        1,201       (2,574 )      3,775        3,483       19,624       (16,141 )
Dividend income                   841          791           50        1,735        1,576           159
Miscellaneous other income         81           69           12          124          156           (32 )
Investment and other income
(loss)                          2,123       (1,714 )      3,837        5,342       21,356       (16,014 )
Non-operating income (loss)       691       (3,122 )      3,813        2,491       18,532       (16,041 )
Net income (loss)
attributable to
non-controlling interest in
partnership investments           583        1,092         (509 )       (125 )       (514 )         389
Non-operating income (loss),
net of non-controlling
interest in partnership
investments                  $  1,274     $ (2,030 )   $  3,304     $  2,366     $ 18,018     $ (15,652 )

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 loss, a component of stockholders' equity, for the second quarter and six months ended June 30, 2013:

                                          Three Months Ended                                                Six Months Ended
                                             June 30, 2013                                                     June 30, 2013


                       Non-Operating         Change in Accumulated                       Non-Operating        Change in Accumulated
                        Income, net        Other Comprehensive Loss       Total           Income, net        Other Comprehensive Loss      Total
(in thousands)
Funds and common
stock               $         1,510        $          (11,519 )        $  (10,009 )   $         3,296        $          (5,192 )        $   (1,896 )
Partnership
investments                    (136 )                       -                (136 )             2,039                        -               2,039
Equity option
contracts                      (173 )                       -                (173 )            (1,852 )                      -              (1,852 )
Investment income
(loss)                        1,201                   (11,519 )           (10,318 )             3,483                   (5,192 )            (1,709 )
Dividend income                 841                                           841               1,735                                        1,735
Non-controlling
interest in
partnership
investments                     583                                           583                (125 )                                       (125 )
Investment
portfolio results   $         2,625                                    $   (8,894 )   $         5,093                                   $      (99 )
Less:
Non-controlling
interest in Calamos
Investments LLC                                         8,614                                                            3,686
Deferred income
taxes                                                   1,075                                                              558
Change in
accumulated other
comprehensive loss                         $           (1,830 )                                              $            (948 )


Our investment portfolio lost $8.9 million in the second quarter of 2013 and $99,000 in the first six months of 2013. These results primarily reflect unrealized losses 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 second quarter and first six months of 2013 was approximately 58.2% and 47.0%, respectively, compared to 69.6% and 48.6% for the second quarter and first six months of 2012.

. . .

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