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CLMS > SEC Filings for CLMS > Form 10-K on 14-Mar-2014All Recent SEC Filings

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

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


14-Mar-2014

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
We provide investment advisory services to institutions and individuals, managing $26.5 billion in client assets as of December 31, 2013 through a variety of investment products designed to suit their investment needs. Assets under management do not include assets under advisement of $834 million and $925 million as of December 31, 2013 and December 31, 2012, respectively, for which the Company provides model portfolio design and oversight.


Assets Under Management
Our operating results fluctuate primarily due to changes in the total value and
composition of our assets under management and with our ability to manage
variable expenses. The following table details our assets under management,
based on the four investment product types we offer in the funds and separate
account categories, as of December 31, 2013, 2012 and 2011.
(in millions)                   2013       2012       2011
Funds
Open-end funds                $ 16,128   $ 17,829   $ 19,785
Closed-end funds                 6,266      5,500      5,260
  Total funds                   22,394     23,329     25,045
Separate Accounts
Institutional accounts           3,081      5,191      5,505
Managed accounts                 1,068      1,135      2,227
  Total separate accounts        4,149      6,326      7,732
Total assets under management $ 26,543   $ 29,655   $ 32,777

In order to increase our assets under management and expand our business, we must develop and market investment products and strategies that suit the investment needs of our target clients - investors seeking superior, risk-adjusted returns over the long-term. The value and composition of our assets under management and our ability to continue to attract and retain clients will depend on a variety of factors, including, among others:
sales and redemptions of shares of the open-end funds and other investment products;

the amount of distributed and reinvested capital gains and income;

fluctuations in the global financial markets and the valuations of securities that result in appreciation or depreciation of assets;

the use of leverage within the closed-end funds;

our ability to educate our target clients about our investment philosophy and provide them with best-in-class service;

the relative investment performance and volatility of our investment products as compared to competing offerings and market indices;

competitive conditions in the asset management and broader financial services sectors;

investor sentiment and confidence; and

our introduction of new investment strategies and products, and our decision to close and re-open strategies when deemed in the best interests of our clients.

Investment Products
Funds
Funds include our open-end and closed-end funds, which are commingled investment vehicles registered under the Investment Company Act of 1940, as amended, ("Investment Company Act") as well as our Dublin, Ireland-domiciled Calamos Global Funds PLC, also referred to as offshore funds.
Open-End Funds. Open-end funds are continually offered and are not listed on an exchange. Open-end funds issue new shares for sale and redeem shares from shareholders who sell. The share price for sales and redemptions of open-end funds is determined by each fund's net asset value, which is calculated at the end of each business day. Assets in open-end funds vary as a result of both market appreciation and depreciation and the level of new sales or redemptions of shares of a fund. Investment management fees, including performance-based fees, are our principal source of revenue from open-end funds and are primarily derived from assets under management. We offer several share classes in each open-end fund to provide investors with alternatives to pay for commissions, distribution and service fees.
Closed-End Funds. Closed-end funds typically sell a finite number of shares to investors through underwritten public offerings. After the public offerings, investors buy closed-end fund shares from, and sell those shares to, other investors through an exchange or broker-dealer market. All of the closed-end funds that we manage currently use leverage which increases their total assets.


Assets in closed-end funds vary due to the amount of assets raised in underwritten public offerings, the amount of leverage utilized and market appreciation or depreciation. Our revenues from closed-end funds are derived from the investment management fees on the assets that we manage. In addition, in a typical underwritten public offering, investors are charged a commission by the selling firms. We do not receive or pay commissions in connection with sales of closed-end fund shares, although we may pay asset-based distribution and service fees, as well as one-time distribution and service fees to underwriters for underwriting public offerings of closed-end funds. Separate Accounts
Separate accounts include institutional accounts and managed accounts for high net worth investors. Flows into and out of such accounts, which we refer to as sales and redemptions, affect our level of assets under management. Assets under management from these accounts also vary as a result of market appreciation and depreciation. Our revenues from separate accounts are derived from investment management fees that we charge, including performance-based fees where applicable. Provided below is a brief differentiation of these accounts:
Institutional accounts are separately managed accounts for institutional investors, such as public and private pension funds, public funds, endowment funds and private investment funds. Institutional accounts also include sub-advised portfolios, such as registered investment companies, where we act as investment advisor but for which we have limited or no distribution responsibilities. Institutional accounts are typically offered directly by us through institutional consultants and through national and regional broker-dealers.

         Managed accounts are separately managed accounts for high net worth
          investors offered primarily through national and regional
          broker-dealers.

Revenues
Our revenues are substantially comprised of investment management fees earned under contracts with the funds and separate accounts managed by us and for which we provide model portfolio design and oversight. The distribution of assets under management among our investment products has an impact on our investment management fees, as some products carry different fees than others. Investment management fees may fluctuate based on a number of factors, including the following:
total value and composition of our assets under management;

the amount of capital gain and income distributions;

market appreciation or depreciation;

the use of leverage within our closed-end products;

         relative investment performance and volatility of our investment
          products and strategies compared to benchmarks and competitors;


         level of net sales and redemptions, which represent the sum of new
          client assets, additional funding from existing clients, withdrawals of
          assets from and termination of client accounts, and sales and
          redemptions of open-end fund shares;


         a determination by the independent trustees of the funds to terminate
          or significantly alter the funds' investment management agreements with
          us; and

increased competition.

Our revenues also are comprised of distribution and underwriting fees. Asset-based distribution and/or service fees received pursuant to Rule 12b-1 plans, discussed below, are a significant component of distribution and underwriting fees. Distribution and underwriting fees may fluctuate based on a number of factors, including the following:
total value of our assets under management;

total composition of our assets under management by share class;

market appreciation or depreciation; and

the level of sales and redemptions.


Investment Management Fees
Investment management fees that we receive from funds for which we act as investment advisor are computed monthly on an average daily net asset value basis. Investment management fees that we earn on separate accounts for which we act as investment advisor and for which we provide model portfolio design and oversight are generally computed quarterly, either in advance or in arrears, based on the average assets under management or assets under management at the beginning or end of the quarterly period. We recognize the revenues derived from these fees over the period during which we render investment advisory services. Distribution and Underwriting Fees
Distribution and underwriting fees include (1) asset-based distribution and/or service fees received pursuant to Rule 12b-1 plans, (2) front-end sales charges and (3) contingent deferred sales charges.
Rule 12b-1 distribution and/or service fees are asset-based fees that the open-end funds pay us over time pursuant to distribution plans adopted under provisions of Rule 12b-1 of the Investment Company Act. These fees are typically calculated as a percentage of average daily net assets in specific share classes of the open-end funds. These fees fluctuate with both the level of average daily net assets and the relative mix of assets among share classes. Rule 12b-1 fees are generally offset by distribution and service expenses paid during the period. as well as the amortization of deferred sales commissions that were previously paid by us to third parties.
We earn front-end sales charges on the sale of Class A shares of open-end funds, which provide for a sales charge at the time of investment. We retain a portion of the applicable sales charge and record as underwriting revenue only the portion that we retain. We retain the entire sales charge earned on accounts where Calamos Financial Services acts as the broker-dealer. Sales charges are waived on sales to shareholders or intermediaries that exceed specified minimum dollar amounts and other specified conditions. Sales charges fluctuate with both the level of Class A share sales and the mix of Class A shares offered with and without a sales charge.
Other Revenues
Other revenues consist primarily of portfolio accounting fees, which are contractual payments calculated as a percentage of combined assets of the funds for financial accounting services, such as establishing expense accruals and performing tax calculations. The fees were calculated based on the average daily assets of the open-end and closed-end funds. Operating Expenses
Our operating expenses consist of employee compensation and benefits, distribution expenses, marketing and sales promotion expenses, and general and administrative expenses. These expenses fluctuate due to a number of factors, including but not limited to, the following:

         variations in the level of total compensation expense due to, among
          other things, incentive compensation, changes in our employee count and
          mix and competitive factors;


         changes in distribution expense as a result of fluctuations in open-end
          fund sales and level of redemptions;


         market appreciation or depreciation of assets under management which
          will directly impact distribution expenses;


         the amount of Rule 12b-1 distribution and/or service fees that we
          receive, as well as our continued ability to receive those fees in the
          future, which would affect the amortization expenses associated with
          the receipt of these fees;


         changes in the level of our marketing and promotion expenses in
          response to market conditions, including our efforts to further
          penetrate and support new and existing distribution channels and
          clients; and


         expenses and capital costs, such as technology assets, professional
          services, depreciation, and research and development, incurred to
          maintain and enhance our administrative and operating services
          infrastructure.

We have and will continue to adjust the level of expenses relative to business income and continue to seek opportunities to implement a more variable cost structure.
Employee Compensation and Benefits
Employee compensation and benefits expense includes salaries, incentive compensation and related benefits costs. Employee compensation and benefits are benchmarked against the competitive market landscape, including industry compensation standards.


In order to attract and retain qualified personnel, we must maintain competitive employee compensation and benefits. In normal circumstances, we expect to experience a general rise in employee compensation and benefits expenses over the long-term.
We use a fair value method in recording compensation expense for restricted stock units and stock options granted under our incentive stock plan. Under the fair value method, compensation expense is measured at the grant date based on the estimated fair value of the award and is recognized as an expense over the vesting period. Fair value is determined on the date granted using the Black-Scholes option pricing model for the stock options and is determined by the market value of the underlying stock for restricted stock units. Distribution Expenses
Distribution expenses include payments that we make to broker-dealers and other intermediaries for selling, underwriting, servicing and administering open-end funds. This expense is influenced by new open-end funds sales, levels of redemptions and market appreciation or depreciation of assets under management in these products. This expense is comprised of Rule 12b-1 distribution and/or service fee payments to the selling firms. Other Operating Expenses
Other operating expenses include marketing and sales promotion expenses and general and administrative expenses. Marketing and sales promotion expenses generally vary based on the type and level of marketing, educational, sales or other programs in operation and include closed-end fund marketing costs and ongoing and one-time payments to broker-dealers. In addition, as the open-end funds that we manage have grown in size and recognition over time and in normal circumstances, we have become subject to supplemental compensation payments to third-party selling agents, which are a component of marketing and sales promotion expense. We expect supplemental compensation payments to fluctuate with changes in assets under management. In connection with closed-end funds, we make fee payments to certain underwriters for distribution, consulting and/or support services rendered during or after the offering period of each closed-end fund. These fees are based on contractual agreements with underwriting firms and may be paid over time based on the average daily net assets of such funds or at the close of the offering period based on the amount of assets raised during the offering.
General and administrative expenses primarily include occupancy-related costs, depreciation and professional and business services. These expenses generally fluctuate in relative proportion to the number of employees employed by us and the overall size and scale of our business operations. Impact of Distribution and Underwriting Activities In order to grow assets under management, we engage in distribution and underwriting activities, principally with respect to our family of open-end funds. When analyzing our business, we consider the result of these distribution activities on a net revenue basis as they are typically a result of a single open-end fund share purchase. Generally accepted accounting principles in the United States (GAAP) requires that we present these activities on a gross revenue basis, thus resulting in a reduction to our overall operating margin, as the margin on distribution activities is generally lower than the margins on the remainder of our business. While we do not adjust our margin for these activities on a net revenue basis, we believe the margin table below is useful to understanding the impact of distribution activities on our margin. The following table summarizes the net distribution fee margin for the years ended December 31, 2013, 2012 and 2011:

(in thousands)                        2013         2012         2011
Distribution and underwriting fees $ 54,068     $ 67,816     $ 82,539
Distribution expenses               (53,082 )    (65,027 )    (75,510 )
Net distribution fees              $    986     $  2,789     $  7,029
Net distribution fee margin               2 %          4 %          9 %

The net distribution fee margin varies by share class so the mix of sales and assets by share class affects the overall net distribution fee margin. The decline in the net distribution fee margin is primarily due to the decline in Class B and C share revenues and contingent deferred sales charge revenues, partially offset by a decline in distribution expenses and amortization of deferred sales commissions. The decline in both Class shares is due to net redemptions on certain open-end funds.
Class A shares represented $7.2 billion of our U.S. clients' assets under management as of December 31, 2013. These shares provide for a front-end sales charge at the time of investment. For the year ended December 31, 2013, we received Class A share fees of $18.2 million. For the same period, we made Class A share payments to selling firms of $18.0 million. Class B shares represented $176.2 million of our U.S. clients' assets under management as of December 31, 2013. For the year ended December


31, 2013, we received Class B share fees of $1.9 million. For the same period, we made Class B share payments to selling firms of $553,000. Class C shares represented $3.2 billion of our U.S. clients' assets under management as of December 31, 2013. For the year ended December 31, 2013, we received Class C share fees of $32.4 million. For the same period, we made Class C share payments to selling firms of $30.9 million.
Non-operating Income
Non-operating income primarily represents net investment gains and losses from a portion of our investment portfolio and from the limited partnerships that we consolidate. Capital gain distributions, dividends and net interest income or expense are also included in non-operating income. Non-controlling Interest
Non-controlling Interest in Calamos Investments LLC As sole manager of Calamos Investments, we consolidate the financial results of Calamos Investments with our own results. Outstanding shares of our Class A common stock represent 22.2%, 22.1% and 21.9% of the ownership of Calamos Investments as of December 31, 2013, 2012 and 2011, respectively. We reflect Calamos Family Partners, Inc. and John P. Calamos, Sr.'s collective ownership of 77.8%, 77.9% and 78.1% in Calamos Investments as of December 31, 2013, 2012 and 2011, respectively, as a non-controlling interest in our consolidated statements of financial condition, operations and changes in stockholders' equity. Non-controlling interest in Calamos Investments is derived by multiplying the historical equity of Calamos Investments by Calamos Family Partners, Inc. and John P. Calamos, Sr.'s collective ownership direct percentage for the periods presented. Issuances and repurchases by CAM of our Class A common stock may result in changes to CAM's ownership percentage and to the non-controlling interests' ownership percentage of Calamos Investments. The corresponding changes in ownership are reflected in the consolidated statements of changes in equity.

Income is allocated to non-controlling interests based on the average ownership interest during the period in which the income is earned. As a result, our income before income tax provision, excluding Calamos Family Partners, Inc. and John P. Calamos, Sr.'s non-controlling interest, represents 22.2%, 22.1% and 21.9% of Calamos Investments' net income for the years ended December 31, 2013, 2012 and 2011, respectively. Income before income tax provision includes interest and dividend income earned on cash and cash equivalents and certain expenses held solely by CAM during the same period. This investment income is not reduced by non-controlling interest; therefore, the resulting non-controlling interest as presented in the statement of operations differs slightly than their corresponding ownership percentage. Redeemable Non-controlling Interest in Partnership Investments Calamos Advisors, a subsidiary of Calamos Investments, is the general partner and controls the operations of Calamos International Growth Fund LP and indirectly is the general partner and controls the operations of Calamos Arista Strategic Fund LP, a U.S. feeder fund to Calamos Arista Strategic Master Fund LTD, a hedge fund in the Cayman Islands. In December 2013, the limited partners of Calamos International Growth Fund LP redeemed all of their interests in the fund. As a result, we deconsolidated Calamos International Growth Fund LP and accounted for this partnership investment using the equity method as of December 31, 2013. We will dissolve the partnership in early 2014. The Calamos Arista Strategic Mater Fund LTD is consolidated into our consolidated financial statements. The combined interests of these partnerships, not owned by us, are presented as redeemable non-controlling interest in partnership investments in temporary equity in our consolidated financial statements for the periods those partnerships were consolidated.
Income Taxes
For the years ended December 31, 2013, 2012 and 2011, our effective tax rate was 25.0%, 41.1% and 53.0%, respectively. The December 31, 2013 effective tax rate includes the impact of a net decrease in the deferred tax valuation allowance of $3.0 million as a result of capital gains realized from the corporate investment portfolio that is attributable to CAM prior to the expiration of a portion of the capital loss carryforwards. A partial reversal of the deferred tax valuation allowance decreased our effective tax rate in 2013 by 12.2%. As of December 31, 2013, the remaining balance in the valuation allowance totaled $2.1 million. The ultimate realization of this deferred tax asset is dependent upon the generation of sufficient capital gains prior to the expiration of capital loss carryforwards in 2014. The December 31, 2012 and 2011 effective tax rate included the impact of an increase in the deferred tax valuation allowance of $1.9 million and $5.2 million, respectively, to reduce our deferred income tax assets to the amount that was more likely than not to be realized. The establishment of the deferred tax valuation allowance increased our effective tax rate in 2012 and 2011 by 6.1% and 15.3%, respectively.


Operating Results
Year Ended December 31, 2013 Compared to Year Ended December 31, 2012
Assets Under Management
Assets under management decreased by $3.1 billion, or 10%, to $26.5 billion at
December 31, 2013 from $29.7 billion at December 31, 2012. Average assets under
management decreased by $6.0 billion, or 18%, to $27.4 billion for the year
ended December 31, 2013 from $33.4 billion for the year ended December 31, 2012.
As of December 31, 2013, assets under management consisted of 84% of funds and
16% of institutional and managed accounts. As of December 31, 2012, assets under
management consisted of 79% of funds and 21% of institutional and managed
accounts.
                                                                            Change
(in millions)                            2013           2012          Amount       Percent
Open-end Funds
Beginning assets under management    $   17,829     $   19,785     $   (1,956 )     (10)%
Sales                                     4,769          4,598            171         4
Redemptions                              (8,974 )       (8,053 )         (921 )       11
Market appreciation                       2,504          1,499          1,005         67
  Ending assets under management         16,128         17,829         (1,701 )      (10)
  Average assets under
management                               16,256         20,250         (3,994 )      (20)
Closed-end Funds
Beginning assets under management         5,500          5,260            240         5
Sales                                       308              3            305         *
Market appreciation                         458            237            221         93
  Ending assets under management          6,266          5,500            766         14
  Average assets under
management                                5,909          5,454            455         8
Institutional Accounts
Beginning assets under management         5,191          5,505           (314 )      (6)
Sales                                       290          1,462         (1,172 )      (80)
Redemptions                              (3,105 )       (2,224 )         (881 )       40
Market appreciation                         705            448            257         57
  Ending assets under management          3,081          5,191         (2,110 )      (41)
  Average assets under
management                                4,145          5,846         (1,701 )      (29)
Managed Accounts
Beginning assets under management         1,135          2,227         (1,092 )      (49)
Sales                                       129            229           (100 )      (44)
Redemptions                                (394 )       (1,510 )        1,116        (74)
Market appreciation                         198            189              9         5
  Ending assets under management          1,068          1,135            (67 )      (6)
  Average assets under
management                                1,072          1,815           (743 )      (41)
Total Assets Under Management
Beginning assets under management        29,655         32,777         (3,122 )      (10)
Sales                                     5,496          6,292           (796 )      (13)
Redemptions                             (12,473 )      (11,787 )         (686 )       6
Market appreciation                       3,865          2,373          1,492         63
  Ending assets under management         26,543         29,655         (3,112 )      (10)
  Average assets under
management                           $   27,382     $   33,365     $   (5,983 )     (18)%


________________


* Not meaningful Fund inflows in 2013 were primarily due to sales in our equity and alternative strategies, but were not sufficient to overcome the outflows sustained from redemptions in our equity and lower-volatility equity strategies. Net redemptions in our funds were $3.9


billion in 2013 and represent an unfavorable change of $445 million from redemptions of $3.5 billion in 2012. The increase in market values positively impacted our funds by $3.0 billion during 2013 compared to market appreciation of $1.7 billion during 2012.
Separate accounts, which represent managed accounts for both institutions and individuals, combined net redemptions were $3.1 billion during 2013, compared to net redemptions of $2.0 billion in 2012. The decrease during 2013 in our institutional accounts was due to net redemptions of $2.8 billion that were partially offset by appreciation of $705 million. Institutional net redemptions . . .

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