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CLMS > SEC Filings for CLMS > Form 10-K on 14-Mar-2013All Recent SEC Filings

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

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


14-Mar-2013

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 $30.6 billion in client assets as of December 31, 2012 through a variety of investment products designed to suit their investment needs. In the third quarter we began reporting Total Assets. Total Assets includes assets under management totaling $29.7 billion as well as $925 million of assets in which we provide model portfolio design and oversight.

Total Assets

Our operating results fluctuate primarily due to changes in the total value and
composition of our Total Assets and with our ability to manage variable
expenses. The following table details our Total Assets, based on the four
investment product types we offer in the funds and separate account categories,
as of December 31, 2012, 2011 and 2010.

(in millions)               2012         2011         2010

Funds
Open-end funds            $ 17,829     $ 19,785     $ 22,049
Closed-end funds             5,500        5,260        5,303
Total funds                 23,329       25,045       27,352

Separate Accounts
Institutional accounts       5,191        5,505        5,559
Managed accounts             2,060        2,227        2,503
Total separate accounts      7,251        7,732        8,062

Total Assets              $ 30,580     $ 32,777     $ 35,414

In order to increase our Total Assets 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 Total Assets and our ability to continue to attract and retain clients will depend on a variety of factors, including, among others:

purchases 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 purchase and redeem shares from shareholders who sell. The share price for purchases 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 purchases 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. Fund flows into and out of such accounts, which we refer to as purchases and redemptions, affect our level of Total Assets. Total Assets 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. Managed accounts also include accounts for which we provide model portfolio design and oversight.


Revenues

Our revenues are substantially comprised of investment management fees earned under contracts with the funds and separate accounts managed by us. The distribution of Total Assets 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 Total Assets;

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 purchases 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 purchases 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 are generally computed quarterly, either in advance or in arrears, based on the average Total Assets or Total Assets 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.

Contingent deferred sales charges are earned on redemptions of Class B shares within six years of purchase and on redemptions of Class C shares within one year of purchase. Contingent deferred sales charges fluctuate primarily based on the length of the investment in Class B and Class C shares. Waivers of contingent deferred sales charges apply under certain circumstances.

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, amortization of deferred sales commissions, 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 and amortization of the deferred sales commissions 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.

Amortization of Deferred Sales Commissions

As discussed, we pay commissions to selling firms upon the sale of Class C shares and previously paid commissions on the sale of Class B shares of open-end funds. As we pay these commissions, we create a deferred sales commission asset on our consolidated statement of financial condition. We amortize these assets over either the average remaining lives of the assets or the period in which we receive related asset-based distribution and/or service fees pursuant to Rule 12b-1 plans. Amortization expenses generally offset the Rule 12b-1 fees we receive from the funds' shareholders over this same period. In addition, because Rule 12b-1 fees cease upon the redemption of the open-end fund shares, amortization expenses are accelerated when shares are redeemed, resulting in an increase in amortization expense and a reduction of the deferred sales commission asset.

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, 2012 and 2011:

(in thousands)                                 2012          2011

Distribution and underwriting fees           $  67,816     $  82,539
Distribution expenses                          (60,565 )     (68,981 )
Amortization of deferred sales commissions      (4,462 )      (6,529 )
Net distribution fees                        $   2,789     $   7,029

Net distribution fee margin                          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, some of which were closed to new investors during the year, and to a lesser extent, the composition of open-end funds moving to Class I shares, which do not have distribution fees. Net distribution fee margin has different distribution and underwriting activities, which are described below.

Class A shares represented $8.0 billion of our U.S. clients' Total Assets as of December 31, 2012. These shares provide for a front-end sales charge at the time of investment. The sales charge is equal to a maximum of 4.75% of the amount invested. We retain an underwriting fee representing a portion of this sales charge and pay any remaining amounts to the selling firm. We retained underwriting fees of $646,000 for the year ended December 31, 2012. We receive Rule 12b-1 distribution and service fees on Class A shares at a rate of 0.25% of Class A share assets under management and record these fees as distribution and underwriting fee revenue. These fees are generally offset by a 0.25% fee paid to third-party selling agents that is recorded as a distribution expense. For the year ended December 31, 2012, we received Class A share Rule 12b-1 fees of $22.9 million. For the same period, we made Class A share Rule 12b-1 payments to selling firms of $22.2 million.

The distribution fee margin that we earn on Class A shares is largely driven by the distribution fees that we earn as broker of record and by the portion of front-end sales charges that we retain, which fluctuate with both the total Class A share sales and the mix of Class A share sales with and without a sales charge. The percentage of Class A share sales made without a sales charge has been increasing. If this trend continues, we expect that our Class A share net distribution fee margin will decrease.

Class B shares represented $302.6 million of our U.S. clients' Total Assets as of December 31, 2012. During 2009 we discontinued the sale of Class B open-end funds. Prior to us closing this share class to new sales, investors in Class B shares did not pay a sales charge at the time of investment; instead, we paid an upfront commission equal to 4.0% of the amount invested directly to the selling firm when the investment was made. This advanced payment was capitalized as a deferred sales commission asset when paid and is amortized on a straight-line basis over eight years unless a redemption occurs. Upon redemption, we write-off the remaining asset to amortization of deferred sales commissions. If the investor redeems shares within the first six years of investment, we receive a contingent deferred sales charge of between 5.0% (during the first year) declining to 1.0% (during the sixth year) based upon the lesser of the redemption price or purchase price. For the year ended December 31, 2012, we received Class B share contingent deferred sales charge payments of $380,000.


We receive Rule 12b-1 fees on Class B shares at the rate of 1.0% of Class B share assets under management (consisting of a 0.75% distribution fee and a 0.25% service fee) and record these fees as distribution and underwriting fee revenue. We make Rule 12b-1 service fee payments to the selling firm at a rate of 0.25% of Class B share assets under management and record these payments as a distribution expense. We retain a 0.75% distribution fee to help us recover the upfront commissions that we paid to the selling firm. Rule 12b-1 payments continue for eight years, at which point Class B shares automatically convert into Class A shares. For the year ended December 31, 2012, we received Class B share Rule 12b-1 fees of $4.0 million. For the same period, we made Class B share Rule 12b-1 payments to selling firms of $1.1 million.

The net distribution fee margin that we earn on Class B shares is primarily the result of the difference between the annual 0.75% distribution fee revenue that we receive on the average Class B share assets under management and the amortization of the 4.0% upfront commission over the life of the asset. This differential creates a component of net distribution fee margin unique to Class B shares that will remain constant before giving consideration to redemption activity or market appreciation or depreciation. The net distribution fee margin on Class B shares fluctuates due to the appreciation or depreciation of the underlying assets.

Class C shares represented $3.4 billion of our U.S. clients' Total Assets as of December 31, 2012. Investors in Class C shares do not pay a sales charge at the time of investment; instead, we pay an upfront commission equal to 1.0% of the amount invested directly to the selling firm when the investment is made. This advanced payment is capitalized as a deferred sales commission asset when paid and is amortized on a straight-line basis over 12 months. For the year ended December 31, 2012, we made commission payments to selling firms of $1.6 million. If the investor redeems Class C shares within one year of investment, we receive from the proceeds of the sale a contingent deferred sales charge payment equal to 1.0% of the lesser of the redemption price or purchase price. For the year ended December 31, 2012, we received Class C share contingent deferred sales charge payments of $194,000.

We receive Rule 12b-1 fees on Class C shares at the rate of 1.0% of Class C share assets under management (consisting of a 0.75% distribution fee and a 0.25% service fee) and record these fees as distribution and underwriting fee revenue. We make Class C share Rule 12b-1 distribution and service fee payments to the selling firm beginning in the second year following the sale at the rate of 1.0% of Class C share assets under management and record these payments as a distribution expense. For the year ended December 31, 2012, we received Class C share Rule 12b-1 fees of $39.0 million. For the same period, we made Class C share Rule 12b-1 payments to selling firms of $36.5 million.

The first year's Rule 12b-1 fees help us to recoup the upfront commission we paid to the selling firm, resulting in a net distribution fee margin on Class C shares that is generally zero, before giving consideration to market appreciation or depreciation. However, during the first 12 months following the sale of Class C shares, this margin will fluctuate due to the appreciation or depreciation of Class C share assets. Appreciation or depreciation of the assets from the time of sale will result in a corresponding increase or decrease in the distribution fee revenues. We expect our distribution fee margin to increase as the underlying Class C share assets appreciate and to decrease as these assets depreciate.

Class I shares represented $5.5 billion of our U.S. clients' Total Assets as of December 31, 2012. These shares do not provide for a front-end sales charge or Rule 12b-1 fees and are generally offered to individual and institutional investors making initial investments of $1 million or more; therefore, no distribution fee margin exists for this share class.

Class R shares are available for purchase through certain tax-exempt retirement plans held in plan level or omnibus accounts and represented $73.4 million of our U.S. clients' Total Assets as of December 31, 2012. Investors in Class R shares do not pay a front-end sales charge at the time of investment. We receive Rule 12b-1 fees on Class R shares at a rate of 0.50% of Class R share assets under management and record these fees as distribution and underwriting fee revenue. These fees are generally offset by a 0.50% fee paid to third party selling agents that is recorded as a distribution expense. For the year ended December 31, 2012, the Class R share 12b-1 fees that we received and the Class R share Rule 12b-1 payments that we made to selling firms were insignificant.

Offshore Funds represented $557.9 million of our Total Assets as of December 31, 2012. Offshore Funds do not provide for a front-end sales charge or Rule 12b-1 fees. Offshore Funds are generally offered to individual and institutional investors that are domiciled or that have citizenship outside the U.S. These funds are comprised of various share classes with distribution fees that differ from the investment company share classes described above. Distribution fees received from the Offshore Funds vary by share class and may be negotiated with distribution partners. These fees received from the Offshore Funds are recorded as distribution and underwriting fee revenue while the payments made to third party selling firms are recorded as distribution expenses. For the year ended December 31, 2012, the Offshore Fund distribution fees received and paid were insignificant.


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, net of non-controlling interest in those partnerships. 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 LLC (Calamos Investments), we consolidate . . .

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