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CLMS > SEC Filings for CLMS > Form 10-Q on 4-Nov-2013All Recent SEC Filings

Show all filings for CALAMOS ASSET MANAGEMENT, INC. /DE/

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


4-Nov-2013

Quarterly Report


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

We are a firm of 364 full-time associates that primarily provides investment advisory services to institutions and individuals, managing and servicing $27.5 billion in Total Assets as of September 30, 2013. Total Assets includes assets under management totaling $26.6 billion as well as model-based strategies totaling $844 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 September 30, 2013 and 2012.

                            September 30,
(in millions)             2013        2012
Funds
Open-end funds          $ 15,679    $ 20,213
Closed-end funds           6,019       5,544
Total Funds               21,698      25,757
Separate Accounts
Institutional accounts     3,900       6,193
Managed accounts           1,864       2,343
Total separate accounts    5,764       8,536
Total Assets            $ 27,462    $ 34,293

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

Third Quarter and Nine Months Ended September 30, 2013 Compared to Third Quarter and Nine Months Ended September 30, 2012

Total Assets

Total Assets decreased by $6.8 billion, or 20%, to $27.5 billion as of
September 30, 2013 from $34.3 billion as of September 30, 2012. Our Total Assets
consisted of 79% Funds and 21% separate accounts as of September 30, 2013 and
75% Funds and 25% separate accounts as of September 30, 2012.
                          Three Months Ended September 30,                   Nine Months Ended September 30,
                                                    Change                                             Change
                     2013         2012        Amount      Percent       2013         2012        Amount      Percent
(in millions)
Funds
Beginning Assets  $ 20,979     $ 25,469     $ (4,490 )      (18 )%   $ 23,329     $ 25,045     $ (1,716 )       (7 )%
Net redemptions       (612 )       (901 )        289        (32 )%     (3,564 )     (1,473 )     (2,091 )        *
Market
appreciation         1,331        1,189          142         12  %      1,933        2,185         (252 )      (12 )%
Ending Assets       21,698       25,757       (4,059 )      (16 )%     21,698       25,757       (4,059 )      (16 )%
Average Assets      21,485       25,655       (4,170 )      (16 )%     22,187       26,119       (3,932 )      (15 )%
Institutional
Accounts
Beginning Assets     3,823        5,650       (1,827 )      (32 )%      5,191        5,505         (314 )       (6 )%
Net sales
(redemptions)         (243 )        191         (434 )        *        (1,756 )        171       (1,927 )        *
Market
appreciation           320          352          (32 )       (9 )%        465          517          (52 )      (10 )%
Ending Assets        3,900        6,193       (2,293 )      (37 )%      3,900        6,193       (2,293 )      (37 )%
Average Assets       3,887        5,945       (2,058 )      (35 )%      4,352        5,973       (1,621 )      (27 )%
Managed Accounts
Beginning Assets     1,832        2,265         (433 )      (19 )%      2,060        2,227         (167 )       (7 )%
Net redemptions       (125 )        (29 )        (96 )        *          (472 )       (124 )       (348 )        *
Market
appreciation           157          107           50         47  %        276          240           36         15  %
Ending Assets        1,864        2,343         (479 )      (20 )%      1,864        2,343         (479 )      (20 )%
Average Assets       1,845        2,326         (481 )      (21 )%      1,966        2,352         (386 )      (16 )%
Total Assets
Beginning Assets    26,634       33,384       (6,750 )      (20 )%     30,580       32,777       (2,197 )       (7 )%
Net redemptions       (980 )       (739 )       (241 )       33  %     (5,792 )     (1,426 )     (4,366 )        *
Market
appreciation         1,808        1,648          160         10  %      2,674        2,942         (268 )       (9 )%
Ending Assets       27,462       34,293       (6,831 )      (20 )%     27,462       34,293       (6,831 )      (20 )%
Average Assets    $ 27,217     $ 33,926     $ (6,709 )      (20 )%   $ 28,505     $ 34,444     $ (5,939 )      (17 )%

* Not meaningful.

Net redemptions in our Funds were $612 million in the third quarter of 2013, compared to net redemptions of $901 million in the third quarter of 2012. Net redemptions for the third 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 $264 million in the third quarter of 2013. Market appreciation in all of our Funds totaled $1.3 billion in the third quarter of 2013, a favorable change of $142 million from appreciation of $1.2 billion in the third quarter of 2012.


Net redemptions in our Funds were $3.6 billion for the first nine months of 2013 and represent an unfavorable change of $2.1 billion from net redemptions of $1.5 billion in the first nine months of 2012. The increase in net redemptions for the first nine months compared to the prior year was primarily a result of net redemptions in our equity and lower-volatility equity funds. Net sales were strongest in our alternative funds, which had net sales of $602 million in the first nine months of 2013. Market appreciation in all of our Funds totaled $1.9 billion in the first nine months of 2013 and $2.2 billion in the first nine months of 2012.

Separate accounts, which represent institutional and managed accounts, combined net redemptions were $368 million in the third quarter of 2013, compared to net sales of $162 million in the third quarter of 2012. Net redemptions in the first nine months of 2013 were $2.2 billion, compared to net sales in the first nine months of 2012 of $47 million. Separate accounts combined market appreciation was $477 million in the third quarter of 2013, and $459 million in the third quarter of 2012. Market appreciation was $741 million and $757 million in the first nine months of 2013 and 2012, respectively.

Financial Overview
                          Three Months Ended September 30,                     Nine Months Ended September 30,
                                                    Change                                              Change
                     2013         2012         Amount      Percent       2013         2012         Amount      Percent
(in thousands,
except margin)
Operating income  $ 15,424     $ 31,733     $ (16,309 )      (51 )%   $ 55,943     $ 91,723     $ (35,780 )      (39 )%
Operating margin      23.7 %       38.8 %       (15.1 )%     (39 )%       27.6 %       36.7 %        (9.1 )%     (25 )%
Net income
attributable to
Calamos Asset
Management, Inc.  $  2,697     $  4,733     $  (2,036 )      (43 )%   $  7,772     $ 13,586     $  (5,814 )      (43 )%

Operating income for the third quarter of 2013 of $15.4 million decreased by $16.3 million, or 51%, from the third quarter of 2012. Operating margin for the third quarter of 2013 decreased to 23.7% from 38.8% from the third quarter of 2012. Operating income for the first nine months of 2013 decreased by 39% to $55.9 million from $91.7 million for the same period a year ago. Operating margin was 27.6% for the first nine months of 2013, a decline from 36.7% for the first nine months of 2012. The decrease in both operating income and operating margin is attributable to our decrease in investment management fees.

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 third quarter and nine months ended September 30, 2013 and 2012:

                                      Three Months Ended          Nine Months Ended
                                         September 30,               September 30,
                                       2013          2012         2013          2012
(in thousands)
Distribution and underwriting fees $   13,024     $ 16,684     $  40,730     $ 52,444
Distribution expenses                 (12,913 )    (15,957 )     (40,085 )    (49,992 )
Net distribution fees              $      111     $    727     $     645     $  2,452
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 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 $16.9 million, or 21%, to $65.0 million for the
third quarter of 2013 from $81.8 million for the third quarter of 2012. Total
revenues decreased by $47.2 million, or 19%, to $202.6 million for the first
nine months of 2013 from $249.8 million for the first nine 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                                   Nine Months Ended
                                    September 30,                                        September 30,
                                                    Change                                                Change
                     2013         2012        Amount       Percent       2013          2012         Amount       Percent
(in thousands)
Investment
management fees   $ 51,289     $ 64,402     $ (13,113 )      (20 )%   $ 159,886     $ 195,050     $ (35,164 )      (18 )%
Distribution and
underwriting fees   13,024       16,684        (3,660 )      (22 )%      40,730        52,444       (11,714 )      (22 )%
Other                  652          761          (109 )      (14 )%       1,992         2,305          (313 )      (14 )%
Total revenues    $ 64,965     $ 81,847     $ (16,882 )      (21 )%   $ 202,608     $ 249,799     $ (47,191 )      (19 )%

Investment management fees decreased 20% in the third quarter of 2013 compared to the third quarter of 2012, which was primarily due to a $6.7 billion, or 20%, decrease in average Total Assets for the same periods. Investment management fees from open-end funds decreased to $29.9 million for the third quarter of 2013, from $39.7 million for the third quarter of 2012, driven by a $4.7 billion decrease in average open-end fund assets. Investment management fees from our closed-end funds increased to $13.7 million for the third quarter of 2013 from $12.5 million for the third quarter of 2012, due to a $508 million increase in average closed-end fund assets. Investment management fees from our separately managed accounts were $7.6 million for the third quarter of 2013, a decrease from $12.2 million for the third quarter of 2012. Investment management fees that we earned as a percentage of average Total Assets were 0.75% for the third quarter of 2013 compared to 0.76% for the third quarter of 2012.

Investment management fees decreased 18% in the first nine months of 2013 compared to the first nine months of 2012, which was primarily due to a $5.9 billion, or 17%, decrease in average Total Assets for the same periods. Investment management fees from open-end funds decreased to $94.8 million for the first nine months of 2013, from $121.3 million for the first nine months of 2012, driven by a $4.3 billion decrease in average open-end fund assets. Investment management fees from our closed-end funds increased to $39.8 million for the first nine months of 2013 from $37.2 million for the first nine months of 2012, due to a $383 million increase in average closed-end fund assets. Investment management fees from our separately managed accounts were $25.3 million for the first nine months of 2013, a decrease from $36.5 million for the first nine months of 2012. Investment management fees that we earned as a percentage of average Total Assets were 0.75% for the first nine months of 2013 compared to 0.76% for the first nine months of 2012.

Distribution and underwriting fees decreased by 22% in the third quarter of 2013 compared to the third quarter of 2012, due to a decrease of 23% in average open-end fund assets for the same periods, across most share classes. Distribution and underwriting fees decreased by 22% in the first nine months of 2013 compared to the first nine months of 2012, due to a decrease of 21% 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 and lower-volatility equity funds.


Operating Expenses

Operating expenses decreased by $0.6 million and $11.4 million for the third
quarter and first nine 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                                  Nine Months Ended
                                        September 30,                                      September 30,
                                                        Change                                              Change
                          2013         2012       Amount     Percent       2013          2012         Amount      Percent
(in thousands)
Employee compensation
and benefits           $ 23,508     $ 19,781     $ 3,727        19  %   $  67,453     $  62,926     $   4,527         7  %
Distribution expenses    12,913       15,957      (3,044 )     (19 )%      40,085        49,992        (9,907 )     (20 )%
Marketing and sales
promotion                 4,208        4,608        (400 )      (9 )%      11,536        14,562        (3,026 )     (21 )%
General and
administrative            8,912        9,768        (856 )      (9 )%      27,591        30,596        (3,005 )     (10 )%
Total operating
expenses               $ 49,541     $ 50,114     $  (573 )      (1 )%   $ 146,665     $ 158,076     $ (11,411 )      (7 )%

Employee compensation and benefits expenses increased by $3.7 million and $4.5 million for the third quarter and first nine months of 2013, respectively, when compared to the third quarter and first nine months of 2012. The increase in the third quarter of 2013, is due to an increase in equity compensation expenses, the impact of the planned departure of a senior executive, and an increase in base salaries and related benefits, partially offset by a decrease in incentive compensation expenses. The increase in the first nine months of 2013, is due to an increase in base salaries and related benefits, an increase in equity compensation expenses and the impact of the planned departure of a senior executive partially offset by lower 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 during 2013. The increase in equity compensation expenses for the third 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 increase in equity compensation expenses for the nine months of 2013 is primarily a result of a reversal of expenses due to forfeitures in the third quarter of 2012 and new awards granted. The decreases in incentive compensation expenses for both periods are primarily a result of lower investment performance.

Distribution expenses decreased by $3.0 million and $9.9 million for the third quarter and first nine months of 2013, respectively, when compared to the third quarter and first nine months of 2012. The decreases were primarily due to a reduction in average assets for open-end funds of 23% and 21% for the third quarter and first nine months of 2013, respectively, which was across most share classes, as well as a decrease in amortization of deferred sales commissions of $227,000 and $1.5 million, for the respective periods.

Marketing and sales promotion decreased by $0.4 million and $3.0 million for the third quarter and first nine months of 2013, respectively, when compared to the third quarter and first nine 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 $0.9 million and $3.0 million for the third quarter and first nine months of 2013, respectively, when compared to the third quarter and first nine months of 2012. Many offsetting factors gave rise to the net decreases in expenses during the third quarter; however, the main drivers were a reduction in legal expenses and outsourcing of middle office function expenses. The main drivers to the decrease for the first nine 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 legal expenses.

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

Non-operating income, net of non-controlling interest in partnerships increased by $2.2 million and decreased by $13.5 million for the third quarter and first nine months of 2013, respectively, when compared to the third quarter and first nine months of 2012. The increase in the third quarter of 2013 was due to an increase in investment income of $2.4 million when compared to the third quarter of 2012, resulting from an increase in realized gains generated from tax harvesting activities and a decrease in losses on option contracts. The decrease in the first nine months of 2013 was due to a decrease in investment income of $13.7 million when compared to the first nine months of 2012. The decrease in investment income was driven by a decrease in realized gains generated from tax harvesting activities and an other-than-temporary and an other-than-temporary impairment charge of $4.4 million recorded in the second quarter of 2013 on


certain available-for-sale securities with unrealized losses held in the investment portfolio, offset by a decrease in 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, 2013 and 2012:

                                     Three Months Ended                      Nine Months Ended
                                         September 30,                          September 30,
                                2013         2012        Change        2013         2012        Change
(in thousands)
Interest income              $     49     $    107     $    (58 )   $    209     $    291     $     (82 )
Interest expense               (1,505 )     (1,503 )         (2 )     (4,516 )     (4,511 )          (5 )
Net interest expense           (1,456 )     (1,396 )        (60 )     (4,307 )     (4,220 )         (87 )

Investment income               5,603        3,187        2,416        9,086       22,811       (13,725 )
Dividend income                 1,020          877          143        2,755        2,453           302
Miscellaneous other income        163           88           75          287          244            43
Investment and other income     6,786        4,152        2,634       12,128       25,508       (13,380 )
Non-operating income            5,330        2,756        2,574        7,821       21,288       (13,467 )
Net (income) attributable to
non-controlling interest in
partnership investments        (1,454 )     (1,058 )       (396 )     (1,579 )     (1,572 )          (7 )
Non-operating income, net of
non-controlling interest in
partnership investments      $  3,876     $  1,698     $  2,178     $  6,242     $ 19,716     $ (13,474 )


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 third quarter and nine months ended September 30, 2013:

                                         Three Months Ended                                              Nine Months Ended
                                          September 30, 2013                                              September 30, 2013

                                            Change in Accumulated                                           Change in Accumulated
                       Non-Operating         Other Comprehensive                       Non-Operating         Other Comprehensive
                        Income, net                 Income               Total          Income, net                 Income               Total
(in thousands)
Funds and common
stock               $         3,262        $          20,704          $  23,966     $         6,558        $          15,512          $  22,070
Partnership
investments                   2,341                        -              2,341               4,380                        -              4,380
Equity option
contracts                         -                        -                  -              (1,852 )                      -             (1,852 )
Investment income             5,603                   20,704             26,307               9,086                   15,512             24,598
Dividend income               1,020                                       1,020               2,755                                       2,755
Non-controlling
interest in
partnership
investments                  (1,454 )                                    (1,454 )            (1,579 )                                    (1,579 )
Investment
portfolio results   $         5,169                                   $  25,873     $        10,262                                   $  25,774
Less:
Non-controlling
interest in Calamos
Investments LLC                                      (15,641 )                                                       (11,955 )
Deferred income
taxes                                                 (1,874 )                                                        (1,316 )
Change in
accumulated other
comprehensive
income                                     $           3,189                                               $           2,241

Our investment portfolio returned $25.9 million, or 6.3%, and returned $25.8 million, or 6.5%, in the third quarter and first nine months of 2013, respectively. These results primarily reflect unrealized and realized 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. CAM's effective income tax rate for the third quarter and first nine months of 2013 was approximately 37.4% and 44.0%, respectively, compared to . . .

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