UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-K

 

 

Commission File Number: 000-51003

Calamos Asset Management, Inc.

(Exact name of Registrant as specified in its charter)

 

 

Registrant’s telephone number, including area code:

630-245-7200

Securities registered pursuant to Section 12(b) of the Act:

 

 

Securities registered pursuant to Section 12(g) of the Act:

None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes o     No þ

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  o Yes     No þ

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes þ     No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes o     No o

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  þ

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

(Do not check if a smaller reporting company)

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes o     No þ

 

The aggregate market value of common stock held by non-affiliates (assuming that all directors and executive officers are affiliates) on June 30, 2010, the last business day of the registrant’s most recently completed second fiscal quarter, was $182.5 million.

 

At March 1, 2011, there were 20,124,701 shares of Class A common stock and 100 shares of Class B common stock outstanding.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Part III — Portions of the definitive proxy statement for our Annual Meeting of Shareholders on or about June 3, 2011, as specifically described herein.

 

 

PART I

 

 

Unless the context otherwise requires, references to “we,” “us,” “our” and “our company” refer to Calamos Asset Management, Inc., a Delaware corporation incorporated on July 23, 2004, and its consolidated subsidiaries, including Calamos Holdings LLC and the operating company subsidiaries of Calamos Holdings LLC.

 

“Calamos Advisors” refers to Calamos Advisors LLC, a Delaware limited liability company, an investment advisor registered with the U.S. Securities and Exchange Commission (SEC) and wholly-owned subsidiary of Calamos Holdings LLC. Calamos Advisors acts as an investment advisor in managing our separate accounts and mutual funds;

 

“Calamos Family Partners” refers to Calamos Family Partners, Inc., a Delaware corporation, and our predecessor holding company. Calamos Family Partners is a private firm owned by members of the Calamos family and owns all the outstanding shares of our Class B common stock;

 

“Calamos Global Funds” and “Offshore Funds” refer to Calamos Global Funds PLC, an Ireland-domiciled open-end umbrella company consisting of Undertakings for Collective Investment in Transferable Securities (UCITS), which are registered in the Republic of Ireland;

 

“Calamos Financial Services” refers to Calamos Financial Services LLC, a Delaware limited liability company and broker-dealer registered under the Securities Exchange Act of 1934, as amended, and a wholly-owned subsidiary of Calamos Holdings LLC. Calamos Financial Services acts as the sole distributor of our family of open-end mutual funds; and

 

“Calamos Interests” refers to Calamos Family Partners and John P. Calamos, Sr., our Chairman of the Board, chief executive officer and co-chief investment officer. Mr. Calamos also holds the controlling interest in Calamos Family Partners.

 

The other wholly-owned operating company subsidiaries of Calamos Holdings LLC are Calamos Partners LLC, a registered investment advisor that provides investment management services primarily related to alternative investment products, and Calamos Wealth Management LLC, a registered investment advisor that provides wealth management services, including asset allocation and investment advisory services, to high net worth individuals, family offices and private foundations. Calamos Property Management LLC is also a subsidiary of Calamos Holdings LLC and was established to provide real estate investment services. Calamos International LLP, ultimately a majority-owned subsidiary of Calamos Holdings LLC, is a registered investment advisor with the Financial Services Authority and distributor of the Offshore Funds and company products globally.

 

The assets under management and other financial data presented in this report with respect to the mutual funds that we manage include the Calamos Growth and Income Portfolio, which is a portfolio of the Calamos Advisors Trust, a registered open-end investment company. However, references to the terms “mutual funds” and “open-end funds” in this report do not otherwise include this portfolio.

 

Overview

 

Calamos Asset Management, Inc. is the sole manager of Calamos Holdings LLC, which owns and manages our operating companies. For more than 30 years, we have provided investment advisory services to institutions and individuals, managing $35.4 billion in client assets at December 31, 2010. Throughout our history, we have based our investment philosophy around a single belief; that the key to consistent, long-term success is achieving an optimal balance between enhancing return and managing risk. We have consistently applied our investment philosophy and a proprietary process centered on risk management across a range of U.S. and global investment strategies.

The graphic below illustrates our holding company structure and ownership as of December 31, 2010. Collectively we transact business under the group trade name Calamos Investments.

 

 

 

 

Our company began as a boutique investment manager, with an emphasis on strategies that sought to maximize the potential of convertible securities to manage risk and build wealth. Today, we offer strategies to fulfill a range of asset allocation goals. The breadth of our investment strategies represents a logical expansion of our core investment discipline and proprietary resources. Because our investment process begins with a comprehensive understanding of a company and the relative attractiveness of the securities within its capital structure, we have been able to selectively expand our capabilities across many strategies. Each portfolio benefits from the research and insights of our entire investment team and the accumulated knowledge we have amassed over the decades.

 

As more fully described in the Investment Strategies section below, our strategies include equity, low-volatility equity, convertible, alternative, enhanced fixed income, total return and fixed income. We believe a disciplined adherence to our investment philosophy and process has enabled us to deliver superior risk-adjusted returns over the long term.

 

We seek institutional and individual clients with long-term investment horizons. We make our range of investment strategies and services available to these clients, directly and through intermediaries, by offering an array of investment products designed to suit their investment needs, such as open-end funds, closed-end funds, institutional managed accounts and separate accounts. We plan to continue to introduce new investment strategies and supporting services that will provide the opportunity for attractive risk-adjusted returns.

 

We believe our investment performance, broad range of investment strategies, diverse product offerings, emphasis on sales and client service efforts have allowed us to help our clients create wealth over full market cycles, which, in turn, grew our assets under management and revenues throughout the years. Differentiated by a one-team,

one-process approach, ours is a culture of innovation, global perspective, and clear alignment with our clients’ interests. Over the decades, we have consistently demonstrated strength in developing strategies that capitalize on the opportunities of the changing investment landscape.

 

In 2010, we experienced notable growth in assets under management, driven primarily by market appreciation and investment performance. The year began with continued volatility in the equity markets, but ended with notable appreciation for the major indexes. The U.S. convertible market saw limited issuance driven by the low-interest rate environment and the spreads in the fixed-income market were suppressed. The global economy showed signs of recovery as trade levels rebounded to levels prior to the 2008 crisis. Our company experienced positive net flows in the fourth quarter of the year, reflecting industry trends into equities overall. We believe that our discipline and investment approach were key components to our strategies’ solid performance in 2010.

 

We provide additional information about Calamos Asset Management, Inc. in the Investor Relations section of our website at http://investors.calamos.com. This information includes corporate governance documents, press releases, investor presentations, SEC filings and assets under management reports, among others. We encourage you to visit and review our website.

 

Business Strategy

 

Our business strategy is designed to ensure we maintain focus on our investment philosophy and continue to seek ways to enhance it, given current conditions in the economy and markets. We apply a team approach to investment research and portfolio management, which allows us to significantly leverage our investment talent. While each of our strategies reflects distinct risk-reward parameters, all are managed according to our time-tested investment process and leverage the expertise of our fully integrated investment team.

 

Our goal is to continue to grow our business and diversify the assets we manage by investment strategy, product, service and type of client within our core competencies. We have selectively created complementary investment products over the years in order to take advantage of market opportunities for attractive risk-adjusted returns. Key to executing this strategy is our emphasis on building our capabilities in order to support growth, improve client responsiveness and position our business for long-term expansion. In 2010, we continued to improve the caliber and scope of our capabilities in portfolio management, marketing and other functions.

 

We have been, and will continue to be, guided by the following principles:

 

Maintain Superior Investment Performance

 

Our strategy is to maintain our performance by consistently applying our investment philosophy and process, while actively managing our strategies to maintain a stable balance of risk and reward over the full course of a market cycle. We are equally mindful of protecting our clients’ assets during changing market conditions. Accordingly, we have chosen to close, and may continue to close, products to new investments or discontinue products during periods when we do not believe satisfactory risk-adjusted returns can be achieved for our clients.

 

In 2010, we made the decision to limit purchases into the Calamos Convertible Fund, in order to seek to protect investor performance based upon our view of current and prospective market conditions in the U.S. convertible market. In addition, we made the decision to liquidate the Multi-Fund Blend, which was a fund of funds, allowing shareholders the ability to transfer assets separately into the three component funds or to redeem their shares outright. This decision was driven by issues of efficiency and scale for shareholders in that fund.

 

Focus on Clients, With an Emphasis on Serving Long-Term Investors

 

We believe that managing our clients’ assets is an honor and a responsibility. Client service is crucial to our ongoing success. In all our activities, our goal is to have our clients’ best interests in mind and to work diligently and professionally to exceed client expectations in performance and service. We strongly believe that the success of our company is a by-product of our success in helping clients achieve their investment objectives. In particular, we seek to attract, develop and maintain long-term client relationships by providing excellent client service, including educating investors about our investment philosophy and process.

Selectively Expand Our Investment Strategies

 

Since the introduction of our first convertible strategy in 1977, we have continued to strategically expand our product offerings. In 1988, we introduced our first low-volatility equity strategy and in 1990, developed our first equity strategy. In subsequent years, we broadened our investment offerings within our core competencies to include high yield, global, international, total return and enhanced fixed income investment strategies. Each expansion has leveraged our core competency in investment research and portfolio management, which is based on our expertise. More recently, our product introductions have included an emerging markets growth fund and four Ireland-domiciled UCITS Funds. We will continue to expand our investment strategies selectively in areas where we determine we can produce attractive risk-adjusted returns over the long term. In 2010, we launched the Calamos Discovery Growth Fund, a small-/mid-cap growth fund which we believe is a natural extension of our core competencies. Through such strategic expansion efforts, we believe we can enhance our ability to increase assets under management and revenues.

 

Expand Our Client Base

 

Over recent years, as part of our strategic initiatives, we have increased our focus on the institutional business through additions to staff in direct institutional sales, consultant relations, client relationship management and non-U.S. sales. These efforts have enhanced both our global business development as well as client service and retention efforts.

 

We distribute the Calamos open-end funds and managed accounts primarily through financial intermediaries. We have developed an extensive network of third-party financial intermediaries, and our products are structured to meet their needs and those of their clients. Our sales professionals are located across the United States and in Europe, and they act in a consultative role to provide our clients with insight. We intend to grow our intermediary business through selective relationships. The company also manages five closed-end funds which are traded on the New York Stock Exchange, and operates a wealth management division which serves high net worth individuals and select organizations. The development of these business segments is strategic and includes the continued delivery of a high level of client service and solid relative investment performance.

 

Capitalize on Our Recognized and Respected Brand

 

We believe that brand awareness is essential in expanding our client base and adding value. In 2010, we restructured our marketing team and increased its resources. This allowed us to better utilize integrated online and offline marketing campaigns targeted to specific client segments. Our focus is to continue to highlight the uniqueness of our investment process, our investment strategies, and our global investment research, and ultimately expand our position in the market as a global growth manager.

 

In 2010, many of our funds and strategies were recognized for producing solid long-term performance and risk management by companies such as Morningstar and Kiplinger’s Personal Finance. Furthermore, in November 2010, Calamos Asset Management was named one of the most trustworthy companies in America by Forbes (“The Most Trustworthy Companies in America,” November 8, 2010).

 

Our co-chief investment officers, John P. Calamos, Sr. and Nick P. Calamos, have written books on investments in convertible securities and are recognized investment experts. They frequently discussed their investment insights on networks such as CNBC, Bloomberg and Canada’s BNN throughout 2010 and were also featured in publications such as Fortune, Forbes, Financial Advisor, Crain’s Chicago Business and Fund Action, among others. John P. Calamos, Sr. also presented at multiple industry and financial services conferences this past year, and he was named one of the most influential people of 2010 in the industry by Mutual Fund Wire (“100 Most Influential People in the 40 Act Industry,” December 10, 2010). In addition, both John P. Calamos, Sr. and Nick P. Calamos hosted online webinars in 2010 to discuss our investment strategies in this increasingly popular format. We believe we have been able to strengthen the Calamos brand and awareness of our investment philosophy through all of these activities.

 

We also raised brand awareness through strategic sponsorships. In 2010, we sponsored the Milken Institute Global Conference. Nick P. Calamos participated in a panel discussion hosted by CNBC’s Maria Bartiromo during the highly esteemed conference, as well. The company also took part in numerous trade shows and other industry activities in 2010.

Investment Philosophy

 

We believe that a successful investment philosophy must be consistent and long-term oriented. Our investment philosophy is based on our views about the longer-term trends and economic conditions that affect financial markets. We assume there will always be unforeseen events that will continually test conventional wisdom. We believe we can achieve favorable investment results over extended periods of time based on our experience in many market environments, our continued study of economics and financial markets, and our application of a sound investment process that can manage the volatility and risk associated with financial markets. Because of this philosophy, our investment process is focused on risk management. The creation of wealth for our clients over the long term is not solely about producing returns, but about managing risk, which we define as the potential for loss and the variability of investment returns.

 

While seeking to achieve strong returns, we focus first on managing risk. We offer a variety of investment strategies that represent distinct balances, or profiles, of risk and reward. We believe that diversification is critical to managing risk and moderating the impact of volatile markets. Our objective is to maintain the consistency of each strategy’s risk and reward profile, whether managing a conservative or an aggressive strategy.

 

We make decisions on individual securities in the context of our perspective on macroeconomic themes in the U.S. and across the globe. While the market may not always follow the same pattern every economic cycle, history provides a valuable context for evaluating the risks and opportunities of the current investment environment. Our investment decision-makers have decades of experience managing through many market cycles.

 

Investment Management

 

Our investment management team is guided, above all else, by the long-term interests of our clients. This dedication to client service extends across our organization and informs the day-to-day decision making of every individual within the firm.

 

We employ a team approach to portfolio management and draw on the experience and expertise of 66 investment professionals focused on portfolio management, research, trading, portfolio administration and developing analytical models. Our investment team is comprised of our co-heads of research and investments, senior strategy/sector analysts, senior sector analysts, intermediate analysts and junior analysts. The team is led by our Co-Chief Investment Officers John P. Calamos, Sr. and Nick P. Calamos. While day-to-day management of the portfolios is a team effort, the co-heads of research and investments and senior strategy analysts, along with our co-chief investment officers, have primary and supervisory responsibility for the portfolios and work with team members to develop and execute the portfolio’s investment program. This team approach allows for valuable contributions from numerous analysts within our company and creates a synergy of expertise that can be applied across many different investment strategies. We also believe that pooling the expertise of our analysts provides for more consistent investment performance over the long term and provides for significant leverage of our investment talent. Members of our investment team participate in a career track system that helps institutionalize our investment process by immersing many analysts and other team members in our investment philosophy and process from early in their careers. Additionally, key members of the investment team participate in the long-term component of our incentive compensation plan. Through this plan, investment team members can share in the overall success of our company.

 

Investment Process

 

Our investment process combines our insights about economic conditions and broader investment themes with our analysis of individual securities. We use a proprietary, integrated research and monitoring process that leverages our years of experience and application, as well as long-standing principles and current academic research. Risk management is integrated fully throughout all aspects of our investment approach. Our process relies on qualitative research and also employs a variety of quantitative tools.

 

Our investment process incorporates top-down analysis of the global macroeconomic environment, sectors and (as appropriate) regions and countries. We also identify long-term secular themes that we believe will influence opportunities for decades to come. Our experience has shown that these secular themes provide a powerful tailwind to select companies, particularly during periods of slower economic growth and less hospitable business environments. Our top-down analysis is paired with our comprehensive security research. We first determine the

intrinsic value of a company, and then utilize quantitative and qualitative inputs to value the various securities within its capital structure. We believe the thorough understanding of a company from both a debt and equity security perspective allows us to gain a truer understanding of a company’s potential — and its risks. The key steps in this process are:

 

Assess Business Value.  We analyze businesses as would a buyer of the entire company, analyzing financial statements to determine an economic enterprise value.

 

Assess Security Value.  Once we understand the value of a business, our investment team focuses on individual security values within its capital structure.

 

Assess Investment Opportunities.  By understanding all aspects of a company’s capital structure, we seek to identify opportunities across asset classes (where applicable), as well as investment strategies.

 

Assess the Opportunity’s Role in the Portfolio.  Using risk management and portfolio construction techniques, we determine whether an individual security has a place in our investment portfolios and strategies.

 

Investment security selection results from the intersection of top-down and bottom-up analysis. These securities are vetted more extensively within the context of the overall portfolio. Continual monitoring and risk management analysis is intended to ensure that each portfolio maintains appropriate diversification and risk/reward characteristics.

 

Client Relationships

 

Our first institutional account mandate was initiated in 1981 for a pension fund account. In the late 1980s, we became one of the first participants in the broker-sponsored managed account business. In 2002, we launched the first of our five closed-end funds. As we have done in the past, we continue to strive to expand our presence in distribution channels that best deliver our strategies to long-term investors in order to grow our client base, assets under management and revenues. In recent years, we have placed greater emphasis on institutional investors, including private pension funds, public funds, endowment funds, banks and insurance companies; 401(k) platforms, broker consultants, broker-dealers, registered investment advisers, financial planners and other channels for mutual funds and managed account products; and family offices, private foundations and high net worth investors.

 

In 2010, as part of our ongoing efforts to expand our distribution opportunities and client base, we have maintained our focus on the institutional market and retirement platform opportunities, and selectively increased the number of intermediaries that distribute Calamos products globally.

 

Intermediary

 

In 2010, we continued to focus on our significant strategic partnerships with national and large regional broker-dealers domestically. Our efforts include focusing key resources and personnel on a targeted set of opportunities, including fee-based mutual fund platforms and separately managed accounts in the four major wire houses.

 

While maintaining our support of national broker-dealers, we have also continued to increase our marketing efforts in both the independent broker-dealer and registered investment adviser channels in the U.S. There has also been an initiative to increase our internal resources to support the external sales team. We enhanced our portfolio specialist support for intermediary businesses and made improvements to this client service channel in order to provide our intermediary partners with an “institutional” level of service.

 

Defined contribution plans continue to be a significant segment of the U.S. intermediary market and mutual fund sales. We view the defined contribution industry as a strong target market, given our focus on risk management and outperformance over full and multiple market cycles. To this end, we enhanced our efforts with the addition and redeployment of several associates to this segment of the market in 2010.

 

We believe certain maturing products, including international growth, global equity, and evolving world growth, provide opportunities for this channel. We also believe that our low-volatility equity strategies, both U.S. and global, will continue to serve the needs of the intermediary channel as volatility in the financial markets can be difficult to predict. We continue to align the incentives of our sales teams to emphasize client service and client retention.

 

Client accounts held at our top ten financial intermediaries represented approximately 58% of our assets under management as of December 31, 2010.

Institutional

 

In 2010, the institutional channel continued to become a larger part of our overall business as we grew our institutional client base and assets under management with positive net sales. The greatest interest was in our low-volatility strategies, particularly Global Opportunities. These strategies have fit the needs of many institutional investors in reducing volatility through their equity allocations. Low-volatility strategies have gained prominence with institutional investors and our long and successful track records in this space have allowed us to continue to enhance our institutional brand. In addition, we have seen significant interest build in our growth equity strategies, particularly International Growth, which attained its 5-year track record during the year. This milestone has provided additional support to the strong performance numbers of the strategy since its inception.

 

In 2011, we believe search activity within equity allocations is likely to increase, and believe our growth equity strategies stand to benefit. We also believe our suite of international, global and emerging market strategies are well-positioned for growth as U.S.-based institutional investors continue to reduce their home country bias. In addition, we have been very encouraged by the level of interest shown by non-U.S. clients in our investment strategies and expect this part of our business to grow in 2011.

 

Wealth Management

 

At December 31, 2010, we had approximately 600 wealth management clients representing approximately $876 million of assets under management, which are reported in their respective underlying investment products. We provide wealth management services, including asset allocation, to high net worth individuals, family offices and private foundations. Our wealth management group offers customized asset allocation advice under the guidance of our investment management team. Our individualized services include offering managed portfolios of mutual funds and separate accounts in both taxable and tax-deferred accounts; developing and executing multi-generational investment policies, asset management and income distribution plans; managing retirement, profit sharing and deferred compensation plans; providing asset allocation and investment management for foundations and endowments; and integrating alternative investments into a comprehensive financial plan. Additionally, our wealth strategy professionals are available to consult with clients on a wide variety of issues associated with the accumulation, preservation and transfer of family wealth.

 

Global

 

In 2007, we established Calamos Global Funds PLC, an Ireland-based UCITS platform. In 2009, the company established an office in London, where we serve international intermediary and institutional channels worldwide. We have enhanced home office support and service of the European sales team, clients and prospects. We continue to build the brand globally in both intermediary and institutional business channels, including efforts to increase investment mandates through large distributors, investment consultants and institutional clients, such as sovereign wealth funds, in Canada, Asia and Australia, in addition to Europe.

Investment Strategies

 

The following table describes our investment strategies and corresponding assets under management at December 31, 2010:

 

 

Investment Products

 

We market our investment strategies to our clients through a variety of products designed to suit their individual investment needs. We currently offer four types of investment products that fall into the categories of investment companies and separate accounts.

 

Investment Companies

 

Investment companies are pools of funds collected from many investors and include open-end mutual funds and closed-end funds registered under the Investment Company Act of 1940, as amended, as well as our Offshore Funds. We include the Offshore Funds in open-end funds for reporting purposes.

 

Open-End Mutual Funds

 

At December 31, 2010, we had $22.0 billion of assets under management in open-end funds, representing approximately 62% of our total assets under management. Open-end funds are continually offered and are not listed on an exchange. Open-end funds issue new shares for purchase, unless they are closed to new investors, and redeem shares from those 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.

 

We introduced our first open-end fund, the Calamos Convertible Fund, in 1985. We have since expanded our open-end fund products and services to invest in securities worldwide and to include equity, low-volatility equity, high yield, alternative, and fixed income strategies that we believe offer attractive risk-adjusted return potential. In recent years, much of our expansion efforts have been focused on global opportunities. In 2007, we introduced a global equity fund; and in 2008, we introduced an emerging markets growth fund. Additionally, in 2007, we established Calamos Global Funds PLC, an Ireland-domiciled UCITS, which are also referred to as Offshore Funds.

 

We believe that in order to protect investor performance it is necessary to make the decision to limit purchases to certain strategies, or even to close certain strategies as circumstances merit. In October 2008, we reopened our

convertible fund, which had been closed since 2003 based on our analysis of the supply and demand trends in the convertible market. In 2008, the broad sell-off in the convertible markets created what we believed to be unprecedented opportunities for long-term investors. The fund was very successful following its reopening, and experienced inflows which significantly increased the size of the fund. In 2010, we instituted a “soft close” of the Convertible Fund to limit inflows into this fund and to seek to protect our current investors and the investment performance of the fund given its increased size and the conditions in the U.S. convertible securities market. In addition, we made the decision to liquidate the Multi-Fund Blend Fund. This decision was driven by issues of efficiency and scale for shareholders in that fund.

 

In January 2011, the company instituted a “hard close” of the Convertible Fund with very limited exceptions on new purchases to further limit inflows and allow for the investment team’s continued execution of the fund’s investment strategy. At the same time, the company announced the “soft close” of the Market Neutral Income Fund, which limited some new purchases for the same reason.

 

As of year-end 2010, we acted as the investment advisor to 14 open-end funds and four Offshore Funds offered to customers primarily through financial intermediaries. We expanded the number of our Offshore Funds offered in 2011, adding an emerging markets product. We expect to continue to seek opportunities to expand and develop the investment strategies offered in our open-end fund products as we see opportunities and seek to meet investor demand.

 

Calamos Advisors manages the strategies of each of the open-end funds with the goal of achieving higher returns than their respective benchmarks over the long term. Some of the funds also aim to achieve a reduced risk profile, as well. To do so, our investment team focuses on maintaining each strategy’s distinct balance between risk and return throughout the full course of the market cycle.

Open-end Mutual Funds

 

 

 

 

Closed-End Funds

 

At December 31, 2010, we had $5.3 billion of assets under management in closed-end funds, representing approximately 15% of our total assets under management. Closed-end funds typically sell a finite number of shares to investors through underwritten public offerings, unlike open-end funds, which continually offer new shares to investors. After the public offerings, investors buy and sell those shares to other investors through an exchange or broker-dealer market.

 

We introduced our first closed-end fund, Calamos Convertible Opportunities and Income Fund (NYSE: CHI), in 2002. With this fund, we were among the first managers to combine different asset classes in a single closed-end offering, seeking to enhance returns and limit risk. We have since expanded our closed-end fund products and currently act as the investment advisor to five closed-end funds, each of which trades on the New York Stock Exchange.

Each of the Calamos closed-end funds employs leverage in its capital structure. With leverage, we seek to generate additional dividend potential for the common shareholders based on historical differences between short-term and long-term taxable interest rates. Leverage involves borrowing at shorter-term rates and investing the proceeds over a longer-term, which typically provides for higher returns. We continually assess our use of leverage because certain market conditions are not conducive to executing this strategy. We currently believe that leverage strategies are accretive to the common shareholders of our closed-end funds.

 

Calamos closed-end funds can be grouped into two broad categories: 1) enhanced fixed income — portfolios positioned to pursue high current income, from income and capital gains; and 2) total return — portfolios positioned to seek current income, with increased emphasis on capital appreciation. Funds in both groups seek to provide a competitive stream of monthly dividends and invest in a variety of asset classes.

 

Closed-end Funds

 

 

Separate Accounts

 

Separate accounts are individual portfolios of securities managed to meet clients’ unique needs and include institutional accounts and managed accounts.

 

Institutional Accounts

 

At December 31, 2010, we had $5.6 billion of assets under management in institutional accounts, representing approximately 16% of our total assets under management. Institutional accounts are separately managed accounts for certain investors, such as corporate pension funds, public funds, endowment funds and not-for-profit institutions, offered through consultants, broker-dealer intermediaries and directly by us. We have approximately 315 institutional accounts, including commingled funds and sub-advised relationships.

 

Our first institutional account mandate was initiated in 1981 for a pension fund account. Since initially offering convertible investment strategies to institutions, we have broadened our mandates to include a variety of investment strategies in other asset classes, such as equity and high yield. We reopened select convertible strategies to new investors in 2008, having identified significant opportunities that we believe are advantageous for both new and existing investors. We also see considerable opportunity for our global and U.S. low-volatility equity and equity strategies.

 

In recent years, our business development team has targeted institutional consultants and plan sponsors, and focused on educating institutional prospects about our investment process and performance. Our institutional marketing efforts center on identifying potential new investors, developing relationships with institutional consultants and providing ongoing client service to existing institutional accounts. We focus on growing our institutional business through equity and fixed income mandates, managed under both domestic and global objectives.

Institutional Accounts

 

 

 

 

Managed Accounts

 

At December 31, 2010, we had $2.5 billion of assets under management in managed accounts, representing approximately 7% of our total assets under management. Our nearly 7,500 managed accounts are individual portfolios of securities offered primarily through 12 national and regional broker-dealer platforms. We first introduced managed accounts through a broker-dealer sponsored platform in 1989. Since initially offering convertible investment strategies to our managed account customers, we have broadened our mandates to include equity, enhanced fixed income and low-volatility equity investment strategies.

 

Managed Accounts

 

 

During 2010, the company undertook an initiative to increase the account minimums for select convertible-based separately managed accounts. This program included smaller-sized accounts that had been closed since 2003. The minimum investment on these accounts was raised to $750,000 in order to seek to protect the investment performance for these accounts. This initiative resulted in some account liquidations, some transfers into Calamos mutual funds, while other account balances were increased to meet the new account minimums. The project was completed in 2010 and resulted in approximately $1.3 billion in net outflows in Managed Accounts.

 

Competitive Environment

 

We compete in all aspects of our business with a large number of investment management firms, commercial banks, broker-dealers and insurance companies. We compete principally on the basis of investment performance; quality of client service; brand recognition and business reputation; continuity of client relationships and assets under management; continuity of our selling arrangements with financial intermediaries; the range of products offered; the level of fees and commissions charged for services; the level of expenses paid to financial intermediaries for administration and distribution; and financial strength.

 

The following factors, among others, serve to increase our competitive risks: the financial strength and more comprehensive line of products and services provided by our competitors; consolidation within the investment management industry, which is increasing the size and strength of certain competitors; relatively few barriers to entry, which may increase the number of competitors; and the recruiting of our investment professionals and other employees from us. These and other factors could reduce our earnings and revenues and may have a materially adverse effect on our business.

Technology and Intellectual Property

 

We consider technology to be a competitive advantage in our investment process. Our investment approach demands tailored outputs for all aspects of the investment process, including risk management, security analysis and trade processing. As a result, our use of in-house developed and third-party technology and software enables customization of systems across our company. Our quantitative investment tools, including our proprietary Calamos Corporate System, or CCS, continue to be enhanced by our research development team, which reports to our chief operating officer — investments and information technology. Our internal investment-related systems are geared to the principles that guide our investment process, allowing for a more seamless integration of security analysis, trade processing, accounting and portfolio administration of our nearly 8,000 accounts at December 31, 2010. In other areas of our business, where competitive advantages do not exist, such as trade order processing and portfolio accounting, we look to leverage third-party applications or service providers for cost efficiency.

 

Trademarks, service marks and brand name recognition are important to our business. We have rights to the trade and service marks under which our products are offered in connection with financial analysis and consultation, financial portfolio management and financial investment. We have registered certain marks in the United States, France, Germany, Ireland, Switzerland and the United Kingdom, and will continue to do so as new marks are developed or acquired. We have taken, and will continue to take, action to protect our interest in these marks.

 

Regulatory Environment

 

Our domestic and global lines of business are subject to extensive regulation. In the United States regulations exist at both the federal and state level, as well as by self-regulatory organizations. These laws and regulations are primarily intended to protect investment advisory clients and shareholders of registered investment companies. Agencies that regulate investment advisors have broad administrative powers, including the power to limit, restrict or prohibit an investment advisor from carrying on its business in the event that it fails to comply with such laws and regulations. Possible sanctions that may be imposed include the suspension of individual employees, limitations on engaging in certain lines of business for specified periods of time, revocation of registrations, censures and fines. Calamos Global Funds PLC, a UCITS, advised by Calamos Advisors is subject to the Irish Financial Services Regulatory Authority.

 

Calamos Advisors, Calamos Partners LLC and Calamos Wealth Management LLC are registered as investment advisors with the Securities and Exchange Commission, or SEC. As registered advisors, they are subject to the requirements of the Investment Advisers Act, SEC regulations, and examination by the SEC’s staff. The Investment Advisers Act imposes substantive regulation on virtually all aspects of their business and its relationship with its clients. Requirements include fiduciary duties to clients, engaging in transactions with clients, maintaining an effective compliance program, performance fees, solicitation arrangements, conflicts of interest, advertising, and recordkeeping, reporting and disclosure requirements. Calamos Asset Management, Inc. is not an investment company; however, the mutual funds Calamos Advisors manages are registered with the SEC under the Investment Company Act. The Investment Company Act imposes additional obligations, including detailed operational requirements for both the funds and their advisor. Moreover, an investment advisor’s contract with a registered fund may be terminated by the fund on not more than 60 days’ notice, and is subject to annual renewal by the fund’s board after an initial two-year term. The SEC is authorized to institute proceedings and impose sanctions for violations of the Investment Advisers Act and the Investment Company Act, ranging from fines and censures to termination of an investment advisor’s registration. The failure of Calamos Advisors, Calamos Partners LLC, Calamos Wealth Management LLC or the registered funds advised by Calamos Advisors to comply with the requirements of the SEC could have a material adverse effect on us.

 

Calamos International LLP is a registered investment advisor with the Financial Services Authority, or FSA. The FSA’s rules govern Calamos International’s capital resource requirements, senior management arrangements, business conduct, client interaction and internal controls. Similar to United States regulations, violations of these rules may result in a range of disciplinary actions against the firm. Calamos International LLP must also comply with the Capital Requirements Directive, which sets forth regulatory capital requirements, and the Markets in Financial Instruments Directive rules, which regulate the investment services throughout the European Economic Area.

We are also subject to the federal and state laws affecting corporate governance, including the Sarbanes-Oxley Act of 2002 and rules promulgated by the SEC. In addition, Calamos Asset Management, Inc. is subject to the rules of NASDAQ, including the corporate governance listing standards approved by the SEC.

 

In addition to being subject to the oversight and regulations of the SEC, Calamos Financial Services as a broker-dealer is subject to periodic examination by the Financial Industry Regulatory Authority or FINRA. FINRA regulations cover all aspects of its business, including sales practices, the minimum net capital, recordkeeping and the conduct of directors, officers and employees. Violation of applicable regulations can result in the revocation of broker-dealer licenses, the imposition of censure or fines and the suspension or expulsion of a firm, its officers or employees.

 

Calamos Advisors and Calamos Wealth Management LLC are subject to the Employee Retirement Income Security Act of 1974, as amended, or ERISA, with respect to benefit plan clients. ERISA and applicable provisions of the Internal Revenue Code of 1986, as amended, impose certain duties on persons who are fiduciaries under ERISA, prohibit certain transactions involving ERISA plan clients and provide monetary penalties for violations of these prohibitions. Failure to comply with these requirements could have a material adverse effect on our business.

 

Employees

 

At December 31, 2010 and 2009, we had 318 and 316 full-time employees, respectively.

 

SEC Filings

 

Our SEC filings are available through the Investor Relations section of our website at http://investors.calamos.com. We encourage our readers to view our SEC filings as well as other important information, including corporate governance documents, press releases, investor presentations, assets under management reports and other documents, on our website.

 

Risks Related to Our Industry

 

A general or prolonged decline in the prices of securities may lead to a decline in our assets under management, revenues and earnings.

 

Substantially all of our revenues are determined by the amount of our assets under management. Under our investment advisory contracts with our clients, the investment management fee we receive is typically based on the market value of assets under management. In addition, we receive asset-based distribution and/or service fees with respect to the open-end funds managed by Calamos Advisors pursuant to distribution plans adopted under provisions of Rule 12b-1 under the Investment Company Act. Rule 12b-1 fees typically are based on the market value of our assets under management. Accordingly, a general or prolonged decline in the prices of securities usually has caused our revenues and net income to decline due to (i) the value of our assets under management decreasing, and\or (ii) clients withdrawing funds in favor of investments they perceive to offer greater opportunity or lower risk. The securities markets have recently been and may continue to be highly volatile and securities prices may increase or decrease for many reasons beyond our control, including economic and political events and acts of terrorism.

 

Changes in laws, regulations or governmental policies due to the state of the economy could limit the sources and amounts of our revenues, increase our costs of doing business, decrease our profitability and materially and adversely affect our business.

 

Our business is subject to extensive regulation which directly affects our cost of doing business. Industry regulations are designed to protect our clients and investors in our funds and other third parties who deal with us and to ensure the integrity of the financial markets. Most of the regulations to which we are subject are not designed to protect our stockholders. Due in part to the credit and investment banking crises of 2008 as well as high profile investment and trading scandals, the U.S. government and federal agencies have increased interest and oversight of the financial and investment industry. Additional laws and regulations to strengthen controls, such as the Dodd-Frank Act and proposed changes such as those to Rule 12b-1 could limit the sources and amounts of our revenues, increase our costs of doing business, decrease our profitability and materially and adversely affect our business. Further, our failure to comply with applicable laws or regulations could result in fines, censure, suspensions of personnel or other sanctions, including revocation of our registration as an investment advisor or broker-dealer.

 

The asset management business is intensely competitive.

 

We are subject to competition in all aspects of our business from asset management firms, mutual fund companies, commercial banks and thrift institutions, insurance companies, hedge funds, exchange traded funds, brokerage and investment banking firms, and other financial institutions including multinational firms and subsidiaries of diversified conglomerates.

 

Many of our competitors have substantially greater resources than us and may offer a broader range of financial products and services across more markets. Some financial institutions operate in a more favorable regulatory environment and have proprietary products and distribution channels which may provide certain competitive advantages to them and their investment products. We compete primarily based on the investment performance of the investment portfolios offered, the scope and quality of investment advice and client service. We believe that competition within the investment management industry has and will continue to increase as a result of the state of the economy, the failure of financial institutions and consolidation and acquisition activity. Most of our investment portfolios have sales or redemption fees, which means that investors may be more willing to invest assets in competing funds without such fees.

 

If current or potential customers decide to use one of our competitors, we could face a significant decline in market share, assets under management, revenues, and net income. Although we are moving to a more variable cost structure, some of our expenses remain fixed, especially over shorter periods of time, and other expenses may not decrease in proportion to any decrease in revenues.

To the extent we are forced to compete on the basis of price, we may not be able to maintain our current fee structure.

 

The investment management industry has relatively low barriers to entry and to the extent we are forced to compete on the basis of price, we may not be able to maintain our current fee structure. In recent years, there has been a trend toward lower fees in the investment management industry. In order to maintain our fee structure in a competitive environment, we must be able to continue to provide clients with investment returns and service that make investors willing to pay our fees. In addition, the board of trustees of each mutual fund managed by Calamos Advisors must make certain findings as to the reasonableness of its fees. We cannot guarantee investment returns and services that will allow us to maintain our current fee structure. Fee reductions on existing or future business could have an adverse effect on our revenues and results of operations.

 

We derive a substantial portion of our revenues from contracts that may be terminated on short notice.

 

We derive a substantial portion of our revenues from investment management agreements with mutual funds that are generally terminable by the funds’ board of trustees or a vote of the majority of the funds’ outstanding voting securities on not more than 60 days’ written notice. After an initial term, each fund’s investment management agreement must be approved and renewed annually by the independent members of such fund’s board of trustees and, in certain cases, by its stockholders. These investment management agreements may be terminated or not renewed for any number of reasons, including investment performance, advisory fee rates and financial market performance. Further, we may not be able to replace terminated or non-renewed agreements on favorable terms. The decrease in revenues that could result from any such termination could have a material adverse effect on our business.

 

Investors in the open-end funds can redeem their investments in these funds at any time without prior notice, which could adversely affect our earnings.

 

Open-end fund investors may redeem their investments in those funds at any time without prior notice. In a declining stock market, the pace of mutual fund redemptions could accelerate. Poor performance relative to other asset management firms tends to result in decreased purchases and increased redemptions of mutual fund shares. The redemption of investments in mutual funds managed by Calamos Advisors may adversely affect our revenues, which are substantially dependent upon the assets under management in our funds.

 

Risks Related to Our Business

 

The loss of key executives could have a material adverse effect on our business.

 

We are dependent on the efforts of our key executives; in particular: John P. Calamos, Sr., our chairman, chief executive officer and co-chief investment officer, and Nick P. Calamos, our president of investments and co-chief investment officer. These executives have been responsible for determining the strategic direction of our business, are integral to our brand and the positive business reputation we earned and, having overseen the management of all of our investment portfolios and the research teams responsible for each of our portfolio strategies, have been responsible for the historically strong long-term investment performance that allows us to compete successfully. Although we have employment agreements with John P. Calamos, Sr. and Nick P. Calamos, we cannot assure you that they will continue to act in their positions with us. We do not carry “key man” insurance on these key executives and the loss of the services of either executive may have a material adverse effect on our business.

 

Our ownership structure is not consistently understood and this may cause investor confusion and missed business opportunities.

 

Our ownership structure is not consistently understood within the financial community, including by current and potential investors and clients. Our market capitalization is often listed by reporting agents based only on common shares, which only reflects a percentage of the ownership of our business and does not give consideration to the Calamos Interests ownership in Calamos Holdings LLC. As of December 31, 2010, the Calamos Interests owned approximately 78.3% of Calamos Holdings LLC as well as all of our Class B common stock which represents more than 97.5% of the combined voting power of all classes of our voting stock. The total consolidated market capitalization of the business, therefore, is often significantly understated. Potential misperceptions by investors and potential clients as to the value of our business may result in missed business opportunities that could

have a negative effect on our operating results and stock price. For this reason, Calamos Asset Management, Inc. is evaluating ways to create a greater degree of clarity regarding our total market capitalization.

 

We depend on third-party distribution channels to market our investment products and access our client base.

 

The potential investor base for mutual funds and separate accounts is limited, and our ability to distribute mutual funds and access clients for separate accounts is highly dependent on access to the retail distribution systems and client bases of national and regional securities firms, banks, insurance companies, defined contribution plan administrators and other intermediaries, which generally offer competing internally and externally managed investment products. For open-end funds, such intermediaries are paid for their services to fund shareholders, in part, through Rule 12b-1 fees and/or upfront commission payments by us, for which we receive Rule 12b-1 payments in the future. Those future payments allow us to pay or help us recover payments to selling firms. Access to such distribution systems and client bases is substantially dependent upon our ability to charge Rule 12b-1 fees to our funds. Our institutional separate account business depends on referrals from consultants, financial planners and other professional advisors, as well as from our existing clients. We cannot assure you that these channels and client bases will continue to be accessible to us. The inability to have such access could have a material adverse effect on our assets under management and ultimately our earnings.

 

As of December 31, 2010, a majority of our assets under management were attributable to accounts that we accessed through third-party intermediaries. These intermediaries generally may terminate their relationships with us on short notice. While we continue to diversify and add new distribution channels for mutual funds and managed accounts and a significant portion of the growth in our assets under management in recent years has been accessed through intermediaries, there has been a consolidation of and elimination of some financial service companies in recent years. The loss of any of the distribution channels afforded by these intermediaries, and the inability to access clients through new distribution channels could decrease our assets under management and adversely affect our results of operations and growth potential. In addition, in the case of managed accounts offered through intermediaries to their customers, such intermediaries may reduce the fees that they remit to us as part of the arrangements they have with us. A substantial reduction in fees received from third-party intermediaries could have a material adverse effect on our business.

 

We derive a substantial portion of our revenues from a limited number of our products.

 

As of December 31, 2010, 25% of our assets under management were concentrated in the Calamos Growth Fund and 28% of our investment management fees were attributable to that fund. As a result, our operating results are particularly exposed to the performance of that fund and our ability to minimize redemptions from and maintain assets under management in that fund. If a significant amount of investments are withdrawn from the fund for any reason, our revenues would decline and our operating results would be adversely affected. Further, given the size and prominence of the Growth Fund within our company, the performance of the Growth Fund may also indirectly affect the net purchases and redemptions in our other products, which in turn may negatively affect our operating results.

 

We are dependent on Calamos Holdings LLC to distribute cash to us in amounts sufficient to pay our tax liabilities and other expenses.

 

Our ownership in Calamos Holdings LLC is our primary asset and we have limited independent means of generating revenues. Calamos Holdings LLC is treated as a partnership for U.S. federal income tax purposes and, as such, is not itself subject to U.S. federal income tax. Instead, its taxable income is allocated on a pro rata basis to its members. Accordingly, we incur income taxes on our proportionate share of any net taxable income of Calamos Holdings LLC, and also incur expenses related to our operations. As the sole manager, we caused and in the future intend to cause Calamos Holdings LLC to distribute cash to its members to the extent necessary to cover their tax liabilities, if any. To the extent we need funds to pay such taxes, or for any other purpose, and Calamos Holdings LLC is unable to provide such funds, it could have a material adverse effect on our business, financial condition or results of operations.

The inability for Calamos Holdings LLC to maintain compliance with its financial covenants could have a material adverse effect on our company.

 

Calamos Holdings LLC currently has $125 million of aggregate principal amount of senior unsecured notes outstanding. Note purchase agreements between Calamos Holdings LLC and its note holders govern the terms of the unsecured notes. Under these agreements, Calamos Holdings LLC must maintain certain consolidated net worth, leverage and interest coverage ratios. The note purchase agreements also contain other covenants that, among other provisions, restrict the ability of Calamos Holdings LLC’s subsidiaries to incur debt and restrict the ability of Calamos Holdings LLC or its subsidiaries to make distributions, create liens and to merge or to consolidate, or sell or convey all or substantially all of Calamos Holdings LLC’s assets. The inability of Calamos Holdings LLC to maintain compliance with any of its financial covenants could lead to an event of default and result in various remedies to the note holders including the acceleration of all the notes outstanding and the payment of a make whole amount. In such an event, our liquidity and results from operations would be negatively impacted.

 

Significant changes in market conditions and the economy may require a modification to our business plan.

 

Our revenues are primarily driven by assets under management and declines in the financial markets will directly and negatively affect our investment advisory fee revenues as well as our non-operating income and net income. As such, significant changes in market conditions and the economy may require a modification to our business plan. Modification to our business plan may include: the reopening or elimination of product offerings, programs or efforts, realignment of sales and marketing resources to adapt to changing market demand and the changing competitive landscape, and the implementation of expense control measures, inclusive of staff reductions, to streamline our infrastructure and reduce capital expenditures. Independent of market conditions, we also may modify our business plan, affecting our revenues and net income.

 

We intend to pay regular dividends to our stockholders, but our ability to do so is subject to the discretion of our board of directors and may be limited by our holding company structure and any applicable laws.

 

To date, we have paid a cash dividend each quarter and intend to continue to pay dividends on a quarterly basis. However, in the past we have reduced our dividend due to the effect of market conditions on our business. Our board of directors has and in the future may, in its discretion, increase or decrease the level of dividends. Further, our board of directors has discretion to discontinue the payment of dividends entirely. The ability of Calamos Holdings LLC to make distributions is subject to its: operating results, cash requirements, financial condition, and compliance with covenants and financial ratios related to existing or future indebtedness, as well as any applicable laws. If, as a consequence of these various limitations and restrictions, we are unable to generate sufficient distributions from our business, we may need to reduce or eliminate the payment of dividends on our shares.

 

A change of control of our company would automatically terminate our investment management agreements with our clients, unless our separate account clients consent and, in the case of fund clients, the funds’ boards of trustees and shareholders voted to continue the agreements. A change of control could also prevent us for a two-year period from increasing the investment advisory fees we are able to charge our mutual fund clients.

 

Under the Investment Company Act, an investment management agreement with a fund must provide for its automatic termination in the event of its assignment. The fund’s board and shareholders must vote to continue the agreement following its assignment, the cost of which ordinarily would be borne by us.

 

Under the Investment Advisers Act, a client’s investment management agreement may not be “assigned” by the investment advisor without the client’s consent. An investment management agreement is considered under both acts to be assigned to another party when a controlling block of the advisor’s securities is transferred. In our case, an assignment of our investment management agreements may occur if, among other things, we sell or issue a certain number of additional common shares in the future. We cannot be certain that our clients will consent to assignments of our investment management agreements or approve new agreements with us if a change of control occurs. Under the Investment Company Act, if a fund’s investment advisor engages in a transaction that results in the assignment of its investment management agreement with the fund, the advisor may not impose an “unfair burden” on that fund as a result of the transaction for a two-year period after the transaction is completed. The term “unfair burden” has

been interpreted to include certain increases in investment advisory fees. This restriction may discourage potential purchasers from acquiring a controlling interest in our company.

 

We require specialized technology to operate our business and would be adversely affected if this technology became inoperative or obsolete.

 

Our business is dependent on highly specialized technology to support our business functions, including: securities analysis, securities trading, portfolio management, customer service, accounting and internal financial processes and controls and regulatory compliance and reporting.

 

All of our technology systems may be vulnerable to disability or failures due to hacking, viruses, natural disasters, power failures, acts of war or terrorism, and other causes. Some of our software is licensed from and supported by outside vendors upon whom we rely to prevent operating system failure. A suspension or termination of these licenses or the related support, upgrades and maintenance could cause system delays or interruption. Also, our back office operations have been and our middle office operations are in the process of being outsourced to third-party service providers who rely on technology systems as well. If any of these systems fail and cannot be recovered in a timely way, we would be unable to fulfill critical business functions, which could lead to a loss of customers and harm to our reputation. Technological breakdowns could also interfere with our ability to comply with financial reporting and other regulatory requirements, exposing us to disciplinary action and to liability to our customers.

 

In addition, our continued success depends on our ability to adopt new or adapt existing technologies to meet client, industry and regulatory demands. We might be required to make significant capital expenditures to maintain competitive technology. If we are unable to upgrade our technology in a timely fashion, we might lose customers and fail to maintain regulatory compliance, which could affect our results of operations and severely damage our reputation.

 

Damage to our reputation could adversely affect our business.

 

We have developed our reputation through excellent client services, strong long-term risk-adjusted investment performance, comprehensive product offerings, superior distribution and a stalwart brand image. The Calamos name and brand are valuable assets and any damage to either could hamper our ability to attract and retain clients and employees, thereby having a material adverse effect on our revenues and net income. Risks to our reputation may range from regulatory issues to unsubstantiated accusations. Managing such matters may be expensive, time-consuming and difficult.

 

Improper disclosure of personal data could result in liability and harm our reputation.

 

We and our service providers store and process personal client information. It is possible that the security controls, training and other processes over personal data may not prevent the improper disclosure of client information. Such disclosure could harm our reputation as well and subject us to liability, resulting in increased costs or loss of revenue.

 

The disparity in the voting rights among the classes of shares may have a potential adverse effect on the price of our Class A common stock.

 

Shares of our Class A common stock and Class B common stock entitle the respective holders to identical rights, except that each share of our Class A common stock entitles its holder to one vote on all matters to be voted on by stockholders generally while each share of Class B common stock entitles its holder to a greater number of votes. The difference in voting rights could adversely affect the value of our Class A common stock to the extent that investors view, or any potential future purchaser of our company views, the superior voting rights of the Class B common stock to be detrimental to the value of the Class A common stock.

 

Future sales of our Class A common stock in the public market could lower our stock price, and any additional capital raised by us through the sale of equity or convertible securities may dilute our stockholders’ ownership in us.

 

We may sell additional shares of Class A common stock in subsequent public offerings or issue convertible debt securities. The Calamos Interests own approximately 78.3% of Calamos Holdings LLC and can exchange all or

portions of their ownership interests in Calamos Holdings LLC for shares of our Class A common stock. Subject to certain selling restrictions, the Calamos Interests could sell any or all of those shares. We cannot predict the size of future issuances of our Class A common stock or the effect, if any, on the market price of our Class A common stock. Sales or distributions of substantial amounts of our Class A common stock (including shares issued in connection with an acquisition), or the perception that such sales could occur, may cause the market price of our Class A common stock to decline.

 

Control by Calamos family members of a majority of the combined voting power of our common stock.

 

As of December 31, 2010, the Calamos Interests owned approximately 78.3% of Calamos Holdings LLC and all of our Class B common stock, representing more than 97.5% of the combined voting power of all classes of our voting stock. Pursuant to the terms of our second amended and restated certificate of incorporation, Calamos Family Partners, Inc. retains a majority of the combined voting power of our common stock until its ownership interest in Calamos Holdings LLC falls below 15%, at which time all outstanding shares of our Class B common stock automatically will convert into shares of our Class A common stock. Accordingly, as long as Calamos Family Partners, Inc. maintains the requisite ownership interests in our common stock and in Calamos Holdings LLC, it will continue to have the ability to elect all of the members of our board of directors and thereby control our management and affairs, including determinations with respect to acquisitions, dispositions, borrowings, issuances of common stock or other securities, and the declaration and payment of dividends on our common stock. In addition, it will continue to be able to determine the outcome of all matters requiring stockholder approval on a combined class vote basis, and will continue to be able to cause or prevent a change of control of our company or a change in the composition of our board of directors. The concentration of ownership could deprive Class A stockholders of an opportunity to receive a premium for their common stock as part of a sale of our company and might ultimately negatively affect the market price of our Class A common stock. Despite this control, each of our agreements entered into with Calamos Family Partners, Inc. and its affiliates since our initial public offering have been approved in accordance with the Conflict of Interests Policy contained in our second amended and restated certificate of incorporation.

 

Our investment income may be negatively affected by fluctuation in our corporate investment portfolio resulting in a material adverse effect on our company.

 

A substantial portion of our assets are invested in Calamos products which are subject to market risk. Prior to the use of derivatives, our non-operating investment income was more susceptible to a decline by the: realization of losses upon disposition of corporate investments (as occurred in 2008), market appreciation and\or depreciation of corporate investments and market conditions. Fluctuations in investment income are expected to occur in the future but to a lesser magnitude with the use of derivatives. Tangentially, our capital loss carryforwards resulting from losses generated from the sale of investment securities provide deferred tax assets, which are intangible assets with realization dependent on our ability to generate capital gains from securities owned within our corporate investment portfolio. If market conditions deteriorate and securities valuations are depressed for prolonged periods of time, the recoverability of these deferred tax assets may be adversely affected and become impaired. The occurrence of an impairment may require a material non-cash charge to our earnings.

 

Insurance coverage may be inadequate or not cover legal and regulatory proceedings.

 

In addition to civil litigation and arbitration, we are subject to regulatory inquiries and examinations which could result in substantial penalties and awards against us if the outcome is adverse. These types of proceedings have increased in the financial services industry and there does not appear to be any immediate reversal. We maintain insurance coverage in amounts and terms we believe appropriate for such matters although we cannot be certain that there will be adequate coverage, if at all; nor can we be certain that coverage will always be available. Finally, insurance premiums may rise for substantially the same coverage amounts and terms which will result in higher expenses and reduce our net income.

 

Expansion into international markets may increase operational, regulatory and other risks.

 

As we increase our international presence and expand our product offerings and international business activities, we face increased operational, regulatory, compliance, reputation and foreign exchange rate risks. The failure of the Company’s systems of internal control to properly mitigate such additional risks, or of our operating

infrastructure to support such international expansion could result in operational failures and regulatory fines or sanctions.

 

Our ability to operate our company effectively could be impaired if we are unable to attract and retain qualified personnel.

 

Our investment management business depends on the expertise of our personnel and their ability to work together as an effective team. Our future success depends, to a substantial degree, on our ability to attract and retain qualified personnel. Competition for employees with the necessary qualifications is intense and we may not be successful in our efforts to recruit and retain the required personnel. We cannot guarantee that our compensation methods will allow us to recruit and retain the required personnel we need. We may be required to increase compensation, which would decrease our net income. The inability to recruit and retain qualified personnel could affect our ability to provide an acceptable level of service to our existing or future clients, which could have a material adverse effect on our business.

 

Catastrophic and unpredictable events could have a material adverse effect on our business.

 

A terrorist attack, war, power failure, cyber-attack, natural disaster, significant adverse climate change or other catastrophic or unpredictable event could adversely affect our future revenues, expenses and earnings by: interrupting our normal business operations; sustaining employee casualties, including loss of our key executives; requiring substantial expenditures and expenses to repair, replace and restore normal business operations; and reducing investor confidence.

 

We have a disaster recovery plan to address catastrophic and unpredictable events but we cannot be assured that this plan will be sufficient in responding to or ameliorating the effects of all disaster scenarios. If our employees or vendors that we rely upon for support in a catastrophic event are unable to respond adequately or in a timely manner, we may lose clients resulting in a decrease in assets under management with a material adverse effect on revenues and net income.

 

Changes in tax laws and regulations as well as exposure to additional income tax liabilities could have a material adverse effect on our business.

 

We are subject to income taxes as well as non-income based taxes in both the United States and the United Kingdom. As such we are subject to ongoing tax audits and the tax authorities may disagree with certain positions taken and assess additional taxes. We regularly evaluate the likely outcomes of these audits in order to determine the appropriateness of our tax provision and the related valuations of our deferred income tax assets. However, there can be no guarantee that we will accurately predict the outcomes of these audits which could have a material adverse impact on our net income, financial condition or liquidity. Changes in tax laws or tax rulings could materially impact our effective tax rate and the related valuations of our deferred income tax assets. Calamos Holdings LLC made an election under section 754 of the Internal Revenue Code of 1986, as amended (a “section 754 election”). As a result of the section 754 election, Calamos Holdings LLC increased the company’s proportionate share of the tax basis of the assets of Calamos Holdings LLC to reflect the purchase price paid by the company for its interest in Calamos Holdings LLC. The Internal Revenue Service completed its audit of Calamos Holdings LLC for its 2004 through 2006 tax years and has proposed certain adjustments not related to the section 754 election. We anticipate that this audit and the 2004 through 2006 tax years will ultimately be closed without an adjustment to the 754 election.

 

 

None.

 

 

Our principal executive offices are located at 2020 Calamos Court, Naperville, Illinois 60563, where we occupy approximately 153,000 square feet of space under lease agreements with subsidiaries of Calamos Property Holdings LLC, which is owned by the stockholders of Calamos Family Partners, Inc. We have approximately 58,000 square feet of additional office space at different locations in Naperville, Illinois under separate lease agreements with subsidiaries of Calamos Property Holdings LLC.

 

As previously reported, the Company and Calamos Advisors LLC, an indirect subsidiary, were named as defendants in a class action complaint filed on July 15, 2010 (Christopher Brown et al. v John P. Calamos, Sr. et al., No. 10-CV-04422 (N.D. Ill.)) by a putative common shareholder of the Calamos Convertible Opportunities and Income Fund (CHI). This action was voluntarily dismissed by plaintiff in the U.S. District Court and re-filed in the Circuit Court of Cook County, Illinois on September 13, 2010 (Christopher Brown et al. v John P. Calamos, Sr. et al., Civil Action No. 10CH39590). Other defendants include CHI, current and former trustees of CHI, John P. Calamos, Sr., Weston W. Marsh, John E. Neal, William R. Rybak, Stephen B. Timbers, David D. Tripple, Joe F. Hanauer, and unspecified defendants John and Jane Does 1-100. The plaintiff alleges that the Company and Calamos Advisors aided and abetted the individual defendants’ alleged breaches of fiduciary duty and were unjustly enriched in connection with the redemption of auction rate preferred securities of CHI. As to the Company and Calamos Advisors, the plaintiff is seeking: (i) declaratory judgments that the Company and Calamos Advisors aided and abetted the individual defendants’ alleged breaches of fiduciary duty and were unjustly enriched; (ii) an injunction against the Company and Calamos Advisors serving as advisor or otherwise earning fees for services to CHI; (iii) an unspecified amount of monetary relief plus interest; (iv) an award of attorney’s fees and expenses; and (v) such other and further relief, including punitive damages, as may be available to the plaintiff and the class that plaintiff seeks to represent. On October 13, 2010, the defendants removed this action from the Circuit Court of Cook County, Illinois to the U.S. District Court for the Northern District of Illinois (Christopher Brown et al. v John P. Calamos, Sr. et al., No. 10-CV-06558 (N.D. Ill.)) and also moved to dismiss the complaint. The case is currently awaiting decision on plaintiff’s motion to remand it to the Circuit Court of Cook County.

 

The Company and Calamos Advisors LLC were named as defendants in a class action complaint filed on September 14, 2010 (Russell Bourrienne et al. v John P. Calamos, Sr. et al., No. 10-CV-5833 (N.D. Ill.)) by a putative common shareholder of the Calamos Convertible Opportunities and Income Fund (CHI). This action was voluntarily dismissed by plaintiff in the U.S. District Court and re-filed in Circuit Court of Cook County, Illinois on October 18, 2010 (Russell Bourrienne et al. v John P. Calamos, Sr. et al., No. 10CH45119 ). Other defendants include current and former trustees of CHI, John P. Calamos, Sr., Weston W. Marsh, John E. Neal, William R. Rybak, Stephen B. Timbers, David D. Tripple, Joe F. Hanauer and unspecified defendants John and Jane Does 1-100. The plaintiff alleges that the Company and Calamos Advisors aided and abetted the individual defendants’ alleged breaches of fiduciary duty and were unjustly enriched in connection with the redemption of auction rate preferred securities of CHI. As to the Company and Calamos Advisors, the plaintiff is seeking: (i) declaratory judgments that the Company and Calamos Advisors aided and abetted the individual defendants’ alleged breaches of fiduciary duty and were unjustly enriched; (ii) an injunction against serving as advisor or otherwise earning fees for services to CHI; (iii) an unspecified amount of monetary relief plus interest; (iv) an award of attorney’s fees and expenses; and (v) such other and further relief, including punitive damages, as may be available to the plaintiff and the class that plaintiff seeks to represent. On November 12, 2010, the defendants removed this action from the Circuit Court of Cook County, Illinois to the U.S. District Court for the Northern District of Illinois (Russell Bourrienne et al. v John P. Calamos, Sr. et al., No. 10-CV-07295 (N.D. Ill.)). Defendants have also moved to dismiss the complaint.

 

The Company and Calamos Advisors LLC were named as defendants in a class action complaint filed on August 13, 2010 (Rutgers Casualty Insurance Company et al. v John P. Calamos, Sr. et al., No. 10-CV-5106 (N.D. Ill.)) by a putative common shareholder of the Calamos Convertible and High Income Fund (CHY). This action was voluntarily dismissed by plaintiff in the U.S. District Court and re-filed in Circuit Court of Cook County, Illinois on December 22, 2010 (Rutgers Casualty Insurance Company et al. v John P. Calamos, Sr. et al., No. 10CH53998 ). Other defendants include CHY, current and former trustees of CHY, John P. Calamos, Sr., Nick P. Calamos, Weston W. Marsh, John E. Neal, William R. Rybak, Stephen B. Timbers, David D. Tripple, Joe F. Hanauer and unspecified defendants John and Jane Does 1-100. The plaintiff alleges that the Company and Calamos Advisors aided and abetted the individual defendants’ alleged breaches of fiduciary duty and were unjustly enriched in connection with the redemption of auction rate preferred securities of CHY. As to the Company and Calamos Advisors, the plaintiff is seeking: (i) declaratory judgments that the Company and Calamos Advisors aided and abetted the individual defendants’ alleged breaches of fiduciary duty and were unjustly enriched; (ii) an injunction against serving as advisor or otherwise earning fees for services to CHY; (iii) an unspecified amount of monetary relief plus interest; (iv) an award of attorney’s fees and expenses; and (v) such other and further relief, including

punitive damages, as may be available to the plaintiff and the class that plaintiff seeks to represent. On January 21, 2011, the defendants removed this action from the Circuit Court of Cook County, Illinois to the U.S. District Court for the Northern District of Illinois (Rutgers Casualty Insurance Company et al. v John P. Calamos, Sr. et al., No. 11-CV-00462 (N.D. Ill.)). Defendants have also moved to dismiss the complaint.

 

The Company and Calamos Advisors believe that these lawsuits are without merit and intend to defend themselves vigorously against these allegations.

 

In the normal course of business, we may be party to various legal proceedings from time to time. Currently, there are no other legal proceedings that management believes would have a materially adverse effect on our consolidated financial position or results of operations.

 

 

[Reserved]

PART II

 

 

Our Class A common stock ($0.01 par value) trades on the NASDAQ Global Select Market under the symbol “CLMS.” There is no public market for our Class B common stock ($0.01 par value).

 

The high and low trade price information for Class A common stock and dividends per share for each class of common stock for 2010 and 2009 were:

 

 

On March 1, 2011, there were approximately 61 holders of record of our outstanding Class A common stock and one holder of record of our outstanding Class B common stock. Shares of our Class A common stock are primarily held in “street name” through various brokers.

 

Calamos Asset Management, Inc. expects to declare and pay quarterly cash dividends during 2011.

 

Equity Compensation Plan Information
As of December 31, 2010

 

 

 

 

The following graph compares the percentage change in cumulative shareholder return on our company’s common stock with the Standard & Poor’s 500 Index and SNL Asset Manager Index since December 31, 2005 (assuming a $100 investment on December 31, 2005, and the reinvestment of any dividends).

 

Performance Graph

 

Total Return Performance

 

 

 

Other Information

 

Calamos Asset Management, Inc. (CAM) owns two groups of assets: a) CAM’s 21.7% ownership interest in Calamos Holdings LLC and b) assets other than its interest in Calamos Holdings LLC (Other Assets), comprised of cash equivalents, current income tax receivables and net deferred income tax assets with a combined book value of $122.4 million. Because CAM controls the operations of Calamos Holdings LLC, CAM presents the entire operations of Calamos Holdings LLC with its own in the consolidated financial statements. The Calamos Interests’ 78.3% ownership in Calamos Holdings LLC is presented as non-controlling interest in the consolidated financial statements. Prior to March 1, 2009, in addition to the approximately 20 million outstanding Class A common shares, we added 77 million shares to CAM’s diluted shares outstanding to reflect Calamos Interests’ 78.3% ownership in Calamos Holdings LLC. The diluted share count provided a reasonable proxy for the number of shares used in determining the market capitalization of the fully consolidated company.

 

Effective March 1, 2009, CAM de-unitized its ownership structure and as a result, Calamos Interests’ ownership in Calamos Holdings LLC is no longer reflected in the diluted share count presented in CAM’s financial statements. Therefore, the determination of the market capitalization of the fully consolidated business cannot be easily determined as the product of share price and weighted average number of shares. There is a divergence within the financial community on how to calculate CAM’s market capitalization with some basing it solely on the outstanding share count of CAM’s Class A common stock and others grossing-up CAM’s outstanding Class A shares by its 21.7% ownership in Calamos Holdings LLC. The following illustration and accompanying table highlight the uniqueness of CAM’s ownership structure in determining the fully consolidated market capitalization. This illustration is based on the closing price of CAM’s Class A common stock of $14.00 on December 31, 2010.

 

As previously stated, in addition to the approximate 21.7% ownership in Calamos Holdings LLC, CAM owns certain Other Assets. These assets include cash equivalents and current income tax receivables with a combined

book value of $46.7 million, which approximates fair value, as well as net deferred tax assets with a book value of $75.7 million. The most significant deferred tax asset relates to an election made under section 754 of the Internal Revenue Code following CAM’s initial public offering that expires in 2019 and allows CAM to reduce future income tax payments by approximately $8.0 million annually. The net present value of the net deferred tax assets would be approximately $48.0 million if a hypothetical 12% discount rate were applied over the remaining life of the assets. Using this assumption, Other Assets would collectively have a discounted present value of approximately $94.7 million, or $4.75 per share. Assuming CAM’s stock price fully reflects the Other Assets’ discounted present value of $4.75 per share, it can be inferred that CAM’s remaining stock price of $9.25 ($14.00 — $4.75) would be attributable to CAM’s 21.7% ownership interest in Calamos Holdings LLC.

 

With these assumptions, the market capitalization associated with CAM’s ownership in Calamos Holdings LLC can be estimated by multiplying the CAM’s share price attributable to Calamos Holdings LLC ($9.25) by the number of CAM’s Class A common shares outstanding (19.9 million) to yield an estimated market capitalization of $184.5 million as of December 31, 2010. This result, however, must be divided by CAM’s 21.7% ownership of Calamos Holdings LLC to determine the total implied market capitalization of Calamos Holdings LLC of $850.1 million. Adding the discounted present value of CAM’s Other Assets ($94.7 million) to the market capitalization of Calamos Holdings LLC indicates that the fully consolidated market capitalization of CAM would be approximately $944.8 million as of December 31, 2010.

 

The above example assumes that CAM’s stock price reflects the entire discounted present value of the Other Assets. If, however, no value were ascribed to the Other Assets, the fully consolidated market capitalization of CAM would be estimated at $1.3 billion as presented in the following table.

 

The following calculations summarize two ends of the spectrum in determining the fully consolidated market capitalization of CAM as described above: no recognition of value attributable to CAM’s Other Assets and full recognition of the discounted present value of the Other Assets.

 

 

Similarly, our Board of Directors may be required to determine the fair values of CAM’s assets. This requirement would be necessitated should the Calamos Interests choose to exchange their ownership interest in Calamos Holdings LLC for shares of CAM’s Class A common stock (the Exchange). Effective March 1, 2009, the Exchange provisions as set forth in CAM’s Schedule 14C filed with the Securities and Exchange Commission on January 12, 2009 require that the Exchange be based on a fair value approach. Assuming that our Board of Directors used the market price of CAM’s Class A share common stock as the basis for determining fair value, the

following table presents a likely range of the number of CAM shares of Class A common stock that the Calamos Interests would have received upon Exchange at December 31, 2010:

 

 

 

 

 

The selected financial data presented below has been derived in part from, and should be read in conjunction with, the consolidated financial statements and Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations included in this Form 10-K.

 

 

 

 

 

 

We provide investment advisory services to institutions and individuals, managing $35.4 billion in client assets at December 31, 2010 through a variety of investment products designed to suit their investment needs.

 

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 types of investment product types we offer in the mutual fund and separate account categories, at December 31, 2010, 2009 and 2008.

 

 

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:

 

 

Investment Products

 

Investment Companies

 

Investment companies include registered open-end mutual funds and registered closed-end funds.

 

Open-End Mutual 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 those 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 under management 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 mutual 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. Since 2007 our open-end funds have included our Dublin, Ireland- based Calamos Global Funds PLC, also referred to as Offshore Funds.

 

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 under management 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 4.5% 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 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:

 

 

Revenues

 

Our revenues are substantially comprised of investment management fees earned under contracts with the mutual funds and separate accounts managed by us. The distribution of assets under management among our investment products also will have 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:

 

 

 

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:

 

 

Investment Management Fees

 

Investment management fees that we receive from mutual 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 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 under management in specific share classes of the open-end funds. These fees fluctuate with both the level of average daily net assets under management 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 mutual 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:

 

 

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 mutual funds. This expense is influenced by new mutual 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 above, we pay commissions to selling firms upon the sale of Class B and C shares of open-end funds. As we pay these commissions, we create a deferred sales commission asset on our balance sheet. 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 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.

Because we discontinued the sale of Class B shares during 2009, the deferred sales commission assets related to these shares are no longer replenished by new sales. In conjunction with this decision, we evaluated the estimated remaining lives on the portion of the deferred sales commission assets related to Class B mutual fund shares and, as a result of this evaluation, extended the estimated remaining lives of these assets. The impact of this change in estimate reduced amortization expense beginning in the year ended December 31, 2009.

 

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 mutual 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 increase and decrease in relative proportion to the number of employees retained by us and the overall size and scale of our business operations. Given our continued efforts to make these costs more variable, such as outsourcing our middle and back-office functions, we expect to see an increase in professional services related expenses. This increase is likely to be offset by a decrease in fixed compensation expenses.

 

Impact of Distribution and Underwriting Activities

 

In order to gather assets under management, we engage in distribution and underwriting activities, principally with respect to our family of open-end mutual funds. Generally accepted accounting principles require that we present distribution fees earned by us as revenues and distribution fees paid to selling firms and the amortization of deferred sales commissions as expenses in the consolidated statements of operations. However, when analyzing our business, we consider the result of these distribution activities as a net amount of revenue as they are typically a result of a single open-end mutual fund share purchase. Hence, the result of presenting this information in accordance with generally accepted accounting principles is a reduction to our overall operating margin, as the margin on distribution activities is generally lower than the margins on our core investment management business. The following table summarizes the net distribution fee margin for the years ended December 31, 2010 and 2009:

 

 

Net distribution fee margin varies by share class because each share class has different distribution and underwriting activities, which are described below.

 

Class A shares represented $11.1 billion of our assets under management as of December 31, 2010. 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 $1.5 million for the year ended December 31, 2010. 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, 2010, we received Class A share Rule 12b-1 fees of $25.7 million. For the same period, we made Class A share Rule 12b-1 payments to selling firms of $24.7 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 $1.0 billion of our assets under management as of December 31, 2010. During the second quarter of 2009 we discontinued the sale of Class B open-end mutual 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 by increasing amortization expense. 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, 2010, we received Class B share contingent deferred sales charge payments of $1.5 million.

 

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, 2010, we received Class B share Rule 12b-1 fees of $10.7 million. For the same period, we made Class B share Rule 12b-1 payments to selling firms of $2.7 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. Further, the net distribution fee margin on Class B shares fluctuates due to the appreciation or depreciation of the underlying assets.

 

Class C shares represented $4.7 billion of our assets under management as of December 31, 2010. 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, 2010, we made commission payments to selling firms of $5.0 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, 2010, we received Class C share contingent deferred sales charge payments of $0.4 million.

 

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, 2010 we received Class C share 12b-1 fees of $44.6 million. For the same period, we made Class C share Rule 12b-1 payments to selling firms of $38.6 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 and as the percentage of assets older than 12 months grows.

 

Class I shares represented $4.9 billion of our assets under management as of December 31, 2010. 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 $34.4 million of our assets under management as of December 31, 2010. 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, 2010, 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 $349.1 million of our assets under management as of December 31, 2010. 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 recorded as distribution expenses. For the year ended December 31, 2010, the Offshore Fund distribution fees received and paid were immaterial.

 

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. For 2010, the Class B share margin is significantly greater than the Class A, Class C and Class R shares due to the reduction in amortization expense associated with the change in the estimated remaining lives of the Class B deferred sales commissions. The reduction in amortization contributed to the increased net distribution margin year over year. We expect this increase to be temporary as the age of the assets under management increases and as the Class C shares, with lower margins, continue to represent a larger percentage of our asset base.

 

Non-operating Income (Loss)

 

Non-operating income (loss) primarily represents net investment gains or 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 reported as components of non-operating income (loss).

 

Non-controlling Interest

 

Non-controlling Interest in Calamos Holdings LLC

 

As sole manager of Calamos Holdings LLC, we consolidate the financial results of Calamos Holdings LLC with our own results. Outstanding shares of our Class A common stock represent 21.7%, 21.5% and 21.3% of the ownership of Calamos Holdings LLC for the years ended December 31, 2010, 2009 and 2008, respectively. We reflect Calamos Family Partners, Inc. and John P. Calamos, Sr.’s collective ownership of 78.3%, 78.5% and 78.7% in Calamos Holdings LLC as of December 31, 2010, 2009 and 2008, respectively, as a non-controlling interest in our consolidated statements of financial condition, operations and changes in stockholders’ equity.

 

Non-controlling interest in Calamos Holdings LLC is derived by multiplying the historical equity of Calamos Holdings LLC by Calamos Family Partners, Inc. and John P. Calamos, Sr.’s collective ownership percentage for the periods presented. Issuances and repurchases of our Class A common stock may result in changes to Calamos Asset

Management, Inc.’s ownership percentage and to the non-controlling interests’ ownership percentage of Calamos Holdings LLC. The corresponding changes in ownership are reflected in the consolidated statements of changes in stockholders’ 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 (loss) before income tax provision (benefit), excluding Calamos Family Partners, Inc. and John P. Calamos, Sr.’s non-controlling interest, represent 21.7%, 21.5% and 21.3% of Calamos Holdings LLC’s net income for the years ended December 31, 2010, 2009 and 2008, respectively. Income (loss) before income tax provision (benefit) includes investment and dividend income earned on cash and cash equivalents and investments held solely by Calamos Asset Management, Inc. during the same period. This investment income is not reduced by any non-controlling interest; therefore, the resulting non-controlling interest as presented in the statement of operations differs slightly than their corresponding ownership percentage.

 

Non-controlling Interest in Partnership Investments and Offshore Funds

 

Calamos Partners LLC is the general partner of Calamos Market Neutral Opportunities Fund LP, a private investment partnership comprised of exchange traded investment securities. At December 31, 2010, we and our affiliates had 91.6% and 2.7% interests in Calamos Market Neutral Opportunities Fund LP (94.3% combined). At December 31, 2009, we and our affiliates had 91.5% and 2.8% interests in Calamos Market Neutral Opportunities Fund LP (94.3% combined). Calamos Partners LLC was also the general partner of Calamos Equity Opportunities Fund LP, a private investment partnership, until the partnership was liquidated during the second quarter of 2008. We consolidated the financial results of these partnerships into our results. The combined interests of the investments in these partnerships not owned by us are presented as non-controlling interest in partnership investments in our consolidated financial statements.

 

In the fourth quarter of 2007, we established Calamos Global Funds PLC, which is comprised of four Ireland-based offshore mutual funds. Until December 2008, we owned a majority of the Offshore Funds and consolidated its results into ours. However, we no longer own a majority of the Offshore Funds, and therefore, we no longer consolidate the financial results of the Offshore Funds into our results.

 

As we launch new products, we and our affiliates may invest in these entities, which may require the consolidation of these entities into our results as well. We expect the consolidation of these new entities to be temporary until new customers invest in the products and our resulting ownership percentage decreases.

 

Income Taxes

 

For the years ended December 31, 2010, 2009 and 2008, our effective tax rate was 37.3%, 37.8% and 37.3%, respectively. The 2008 tax rate does not give effect to the one-time charge to income resulting from the revaluation of our net deferred tax asset to reflect the decrease in our Illinois statutory tax rate.

 

Operating Results

 

Year Ended December 31, 2010 Compared to Year Ended December 31, 2009

 

Assets Under Management

 

Assets under management increased by $2.7 billion, or 8%, to $35.4 billion at December 31, 2010 from $32.7 billion at December 31, 2009. Average assets under management increased by $4.9 billion, or 18%, to $32.2 billion for the year ended December 31, 2010 from $27.4 billion for the year ended December 31, 2009. At

December 31, 2010 and 2009, our assets under management consisted of 77% and 75% mutual funds and 23% and 25% institutional and managed accounts, respectively.

 

 

 

 

The increase in security valuations positively impacted our mutual fund assets under management by $2.9 billion during 2010 and by $6.5 billion during 2009. Net sales in our mutual funds were basically flat in 2010 and represent an unfavorable change of $550 million from net purchases of $527 million in 2009. The decrease in net sales is almost entirely attributable to the slowing of net sales into our Convertible Fund during the year which remained positive but decreased by $1.7 billion. We attracted net sales from investors into 12 of our 14 open-end mutual funds during 2010, including each of our offshore funds. Inflows were strongest in our alternative, convertible and fixed income strategies, as well as our global strategies which recorded year-over-year increases in net sales of nearly $700 million. However, these inflows were not sufficient to overcome the net outflows sustained from our Growth Fund, which in light of its strong investment performance we believe is a reflection of investors’ negative sentiment toward domestic equity strategies throughout most of 2010.

 

Separate accounts, which represent managed accounts for both institutions and individuals, had combined net redemptions of $1.4 billion during 2010, compared to net redemptions of $638 million during the prior year. The net outflows from our managed accounts in 2010 were primarily due to $1.3 billion in net redemptions as a result of our decision in the first quarter of 2010 to increase the account minimums for our convertible-based strategies on separately-managed account platforms. This effort was completed in the second quarter of 2010, and we expect no further redemptions as a result of this strategic initiative. The managed account outflows were partially offset by net inflows of $154 million within our institutional accounts during 2010 which increased by $265 million when

compared to $111 million of outflows in the prior year. Institutional accounts generally have long and varying lead times before funding occurs which creates fluctuations in sales volumes and limits predictability of sales volumes. Separate accounts were favorably impacted by market appreciation of $1.2 billion during 2010, compared to market appreciation of $2.3 billion during 2009.

 

Financial Review

 

Revenues

 

Total revenues increased by $44.3 million, or 16%, to $326.0 million for the year ended December 31, 2010 from $281.7 million for the prior year. The increase was primarily due to higher investment management fees and distribution and underwriting fees.

 

 

Investment management fees for the year ended December 31, 2010 increased 19% as our average assets under management across all products increased by $4.9 billion, or 18%, during the year. Investment management fees from open-end funds increased by 23% to $151.0 million for the year ended December 31, 2010 from $123.0 million for the prior year, driven by a 24% increase in open-end fund average assets under management. Investment management fees from our closed-end funds increased by 17% to $45.1 million for the year ended December 31, 2010 from $38.5 million for the prior year period, due to a 16% increase in closed-end fund average assets under management. Investment management fees from our separately managed accounts increased by 7% to $42.2 million for the year ended December 31, 2010 from $39.3 million in the prior year, in line with the changes in average assets for these accounts. The investment management fee rate that we earned for the year ended December 31, 2010 was 0.74% and relatively constant when compared to the 2009 rate of 0.73%.

 

Despite the fact that our average open-end mutual fund assets increased by 24% when compared to the prior year, our distribution and underwriting fees increased by only 8%, or $6.3 million to $84.8 million for the year ended December 31, 2010. The improvement in fees is mostly attributed to a $7.6 million increase in asset-based distribution fees. However, that rate of growth in fees is limited by the composition of the mutual fund assets by share class. As more mutual fund investors have chosen to compensate their financial advisors through fee based models, we have seen an increase demand for and a shift in assets toward our Class I shares. Because we do not collect distribution fees from class I shares, our distribution revenue has decreased with this shift in assets. This shift in assets has had no adverse effect to the operating results of the company because our distribution expenses have decreased proportionately with the decrease in revenues.

 

When compared to the prior year, the increase in distribution and underwriting fees was further limited by a $1.2 billion decrease in redemption based fees, or contingent deferred sales charges. The fee rate that we earn on Class B share redemptions decreases as the average age of the Class B share increases and expires after 6 years. Because we have closed Class B shares to new purchases, the average age of the Class B shares will continue to increase over time and will result in a decrease in the contingent deferred sales charge rate that we receive.

 

Other revenue principally reflects asset-based portfolio accounting fees, which increased by nearly 20% to $2.8 million from the prior year. These fees will generally rise and fall with the changes in average mutual fund assets that we manage.

Operating Expenses

 

Operating expenses rose by 9% to $199.5 million for the year ended December 31, 2010 from $183.7 million for the prior year. This change reflects increases in employee compensation and benefits expenses, distribution expenses and marketing and sales promotion expenses that were partially offset by a decrease in amortization of deferred sales commissions.

 

 

Employee compensation and benefits expense increased by $7.9 million, or 12%, for the year ended December 31, 2010 when compared to 2009. The largest component of this change is attributable to an increase in annual performance-related incentive compensation accruals, as well as sales-based incentive compensation payments. Though we have not meaningfully increased the number of associates that we employ, we have reduced staffing levels of our middle- and back-office operations teams and have increased staffing levels within our sales and marketing teams to focus on expanding our distribution and marketing capabilities. These sales-oriented individuals are generally more highly compensated, leading to increases in salary expenses and sales-based incentive compensation.

 

Distribution expenses generally represent a pass-through to financial intermediaries of Rule 12b-1 distribution and service fees that we earn from the family of funds that we manage and distribute. These expenses are directly related to changes in average open-end fund assets under management of Class A, B and C shares and to the proportion of Class C share assets less than one year old. For the year ended December 31, 2010, distribution expenses increased by $7.0 million, or 12%, when compared to the prior year. This change is due to an increase in the average assets under management of Class A and Class C shares and an increase in the average Class C shares assets older than one year. Although the Rule 12b-1 fee rates we paid to broker-dealers and other intermediaries in 2010 did not change from the rates paid in the prior year, we experienced a material shift of average mutual fund assets to Class I shares, which do not include a distribution expense. As a result of this increase in Class I share mutual fund assets, distribution expenses did not grow at a rate commensurate with our average mutual fund assets under management.

 

Amortization of deferred sales commissions typically change with the level of new mutual fund sales of Class B and C share and with Class B share redemptions. During the second quarter of 2009, we discontinued the sales of Class B mutual fund shares, and as a result, the deferred sales commission assets are no longer replenished by new sales. In connection with this discontinuation of Class B shares sales, we adjusted the estimated lives of these assets, thus extending the period over which the remaining amortization expense will be recorded and reducing the periodic amortization expense recognized prospectively. We expect that amortization expense associated with Class B share deferred sales commissions will continue to decrease as the remaining Class B share assets convert to Class A shares over time.

 

The increase in marketing and sales promotion of $3.0 million for the year ended December 31, 2010, is largely the result of supplemental distribution payments to brokers, which are directly related to the changes in average assets under management of our open-end mutual funds. Throughout 2010, we increased spending to support a series of targeted marketing and advertising campaigns to build awareness about our investment strategies. We also enhanced our focus on e-business, magnifying our digital presence to support our sales and client service efforts.

 

For the year ended December 31, 2010, general and administrative expense increased by $1.0 million. Many offsetting factors gave rise to the net increase in expense during 2010. As expected, professional service fees continued their upward trend in support of our initiative to outsource our middle- and back-office operations

functions. This outsourcing initiative also required us to make a $0.7 million non-recurring, license-termination expense. We expect this trend to continue until this outsourcing initiative is completed. Additionally, in support of expanding our international distribution efforts, travel related expenses have modestly increased during 2010 as compared to 2009. The impact of these items has been tempered by a reduction in depreciation expenses of more than $2.0 million as certain equipment placed in service to accommodate our move into our headquarters has been fully depreciated.

 

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

 

Non-operating income (loss), net of non-controlling interest in partnership investments increased income by $21.6 million for the year ended December 31, 2010, compared to a reduction of $5.2 million for the prior year.

 

 

The decrease in our cash and cash equivalents, in conjunction with near-zero interest yields, led to our interest income decreasing by nearly 50% to $0.4 million for the year ended December 31, 2010. Interest expense remained flat year over year as our debt level remained constant.

 

Investment income for 2010 was $28.7 million compared to $1.9 million in the year ended December 31, 2009. The majority of investment income reflects realized gains on the sale of investment securities generated as a part of a tax harvesting strategy to better utilize tax loss carry-forwards that was implemented during 2010.

 

Net income attributable to non-controlling interest in partnership investments represents the portion of income attributable to the other partners’ ownership in the partnership that we refer to as non-controlling interests.

The following table provides a summary of the returns that we generated from our corporate investment portfolio. This table combines the investment income as reported in our statement 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 twelve months ended December 31, 2010:

 

 

Our investment portfolio returned $37.2 million, or 12.3%, for the full year 2010. These results primarily reflect realized and unrealized gains from investment securities, partially offset by net realized and unrealized gains and losses on equity option contracts used to hedge market value fluctuations in the corporate investment portfolio.

 

Income Tax Provision

 

Our effective tax rate was 37.3% for the year ended December 31, 2010 and is materially consistent with the 2009 rate.

 

Net Income

 

Net income was $19.9 million for 2010 compared to $12.4 million for 2009.

 

Year Ended December 31, 2009 Compared to Year Ended December 31, 2008

 

Assets Under Management

 

Assets under management increased by $8.7 billion, or 36%, to $32.7 billion at December 31, 2009 from $24.0 billion at December 31, 2008. Average assets under management decreased by $9.7 billion, or 26%, to $27.4 billion for the year ended December 31, 2009 from $37.1 billion for the year ended December 31, 2008. At

December 31, 2009 and 2008, our assets under management consisted of 75% and 73% mutual funds and 25% and 27% institutional and managed accounts, respectively.