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.  Yes o     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 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):

 

 

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 29, 2007, the last business day of the registrant’s most recently completed second fiscal quarter, was $573.0 million.

 

At February 25, 2008, there were 20,101,150 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 May 23, 2008, as specifically described herein.

 

 

PART I

 

 

In this report, 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.

 

Unless the context otherwise requires:

 

“Calamos Advisors” refers to Calamos Advisors LLC, a Delaware limited liability company, 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 of the Offshore Funds; and

 

“Calamos Interests” refers to Calamos Family Partners and John P. Calamos, Sr., the Chairman of the Board, Chief Executive Officer and Co-Chief Investment Officer of the Corporation. Mr. Calamos also holds the controlling interest in Calamos Family Partners.

 

The other 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, to high net worth individuals, family offices and foundations. Calamos Property Management LLC is also a subsidiary of Calamos Holdings LLC and was established to provide real estate investment services.

 

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

 

For over 30 years, we have provided investment advisory services to institutions and individuals, managing $46.2 billion in client assets at December 31, 2007. We have consistently applied an investment philosophy and proprietary process centered on risk management across an expanding range of investment strategies, including equity, balanced, convertible, high yield, alternative, fixed income and money market investments. We believe this disciplined adherence to our investment philosophy and process has enabled us to deliver superior risk-adjusted returns over the long term, which we define as investment returns that are superior to performance benchmarks with an equal or lower level of assumed risk.

 

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 and

separate accounts, including alternative investments. We plan 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 client service and sales efforts have allowed us to grow our assets under management and revenues and have positioned us for continued growth. Our assets under management increased from $12.9 billion at December 31, 2002 to $46.2 billion at December 31, 2007. We manage our company, including staffing levels and the commitment of resources, to accommodate both current activities and expected long-term growth in various areas, including investment management, sales and client servicing.

 

The Class A common stock of Calamos Asset Management, Inc. trades on the NASDAQ Stock Market LLC under the symbol CLMS. We have paid a quarterly dividend each quarter since the first quarter of 2005.

 

Business Strategy

 

We are first and foremost an investment firm that strives to deliver superior risk-adjusted returns over the long term. Our business strategy is designed to ensure we maintain and build upon our investment focus. We apply a team approach to investment research and portfolio management, which allows us to significantly leverage our investment talent. Our franchise is built upon a consistent investment philosophy and process that has produced superior risk-adjusted investment performance over the long term and driven significant growth in assets under management.

 

Indeed, our goal is to continue to grow our business by diversifying 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, improving client responsiveness and positioning our business for expansion. In 2007, we continued to improve the caliber and scope of our capabilities in portfolio management, sales, marketing and other functions.

 

In executing our business strategy, managing historical growth and planning for future growth, we have been, and will continue to be, guided by the following principles:

 

Maintain Superior Investment Performance

 

We have developed proprietary research capabilities, including an expertise in valuing companies, taking into consideration their total capital structure. We have a resulting record of achieving high, risk-adjusted returns over the long term for the mutual funds and separate accounts that we manage. As of December 31, 2007, Lipper ranked our Growth Fund as the number 3 multi-cap growth fund for 10 years, our Market Neutral Income Fund as the number 1 equity market-neutral fund for 10 years and our Global Growth and Income Fund as the number 9 global multi-cap core fund for 10 years.⁽¹⁾ 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 expand our product offerings selectively and have closed, and expect to continue to close, products to new investments during periods when we do not believe satisfactory risk-adjusted returns can be achieved with additional client funds.

 

 

⁽¹⁾ Source: Lipper: As of 12/31/07: Growth Fund: #71 for 1 year and #65 for 5 years among 518 and 339 multi-cap growth funds, respectively; Market Neutral Income Fund: #25 for 1 year and #4 for 5 years among 63 and 17 equity market-neutral funds, respectively; Global Growth and Income Fund: #19 for 1 year and #15 for 5 years among 74 and 32 global multi-cap core funds, respectively. Lipper rankings of funds are based on net total return performance with dividends reinvested and do not take into account or reflect sales charges; if the rankings did reflect sales charges, the results might be less favorable. Each fund is ranked within a universe of funds similar in investment objective as determined by Lipper. All Lipper rankings of the open-end funds managed by Calamos Advisors cited in this report are for Class A shares of those funds. The other classes of shares of those funds may have different performance characteristics. The ratings and rankings included in this annual report on Form 10-K are subject to change without notice and are based on past performance, which may not be predictive of future results.

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

 

A guiding principle is to have our clients’ best interests in mind and to work diligently and professionally to outperform client expectations in performance and service. We strongly believe that the success of our company is a byproduct 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.

 

During the second, third and fourth quarters of 2007, Calamos Client Service was designated with a 5-Star performance rating for overall telephone quality by the National Quality Review (NQR). The NQR transaction and telephone service review processes are designed to evaluate the quality of client service and to produce a basis for continuous improvement. Under this system, 5-Star performance is defined as the statistical performance range for NQR’s top quartile companies. The performance range is computed annually using four quarters of data from NQR’s top quartile companies in that given year. Companies whose 4-quarter rolling averages for overall telephone quality are in the 5-Star performance range are noted as 5-Star performers on a quarterly basis.

 

Selectively Expand Our Investment Strategies

 

Since the introduction of our first convertible strategy in 1977, we have expanded our product offerings. In 1990, we introduced our first equity strategy and in subsequent years broadened our investment offerings to include high yield, large cap, total return, international, equity-oriented alternative, fixed income and money market investment strategies. Each expansion has been based on our core competency in investment research and portfolio management, which generally is based on internal expertise, but may from time to time require us to recruit investment talent in other areas, such as fixed income. In 2007, we introduced a global equity fund, a total return bond fund and a government money market fund. We will continue to expand our investment strategies selectively in areas where we judge we can produce attractive risk-adjusted returns over the long term, including alternative investment offerings. We believe that by doing so, we can enhance our ability to increase assets under management and revenues.

 

To ensure we are aligned with our clients, our policy has been to invest with our clients. At December 31, 2007, we had a total of $728 million invested in our investment strategies. We also view managing our corporate investment portfolio, which is part of our broader strategy to expand and diversify our business, as a way to produce a stable stream of income that in turn allows us to invest in and expand our company.

 

Expand Our Distribution Relationships

 

Our first institutional account mandate was initiated in 1981 for a pension fund account that remains a client today. 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 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 a) institutional investors, including private pension funds, public funds, endowment funds, banks and insurance companies; b) family offices, private foundations and high net worth investors; and c) 401(k) platforms, broker consultants, broker-dealers, financial planners and other channels for mutual funds and managed account products. In 2008, as part of our ongoing efforts to expand our distribution opportunities and client base, we plan to focus on the institutional market, retirement platforms and high net worth opportunities, and selectively increase the number of intermediaries that distribute Calamos products domestically and abroad.

 

Expand and Diversify Our Client Base

 

We are working to expand and diversify our client base, both inside and outside the United States. In the U.S., in addition to expanding our distribution relationships as described above, we see opportunities to expand our wealth management business, which dates back to 1977. In 2008, we expect to continue to expand our newly formed wealth management subsidiary and to develop a wealth management platform that, over time, will offer an array of investment products and value-added services. Further, we see growth opportunities by expanding fund offerings, including funds domiciled outside the United States to provide non U.S. investors with access to our professional

investment capabilities, by growing our managed account relationships and by adding global sales and investment expertise.

 

We believe that among the most important initiatives to grow our business is our expansion into the non-U.S. markets through the launch of Offshore Funds as we make our strategies available to European, Middle Eastern and Far Eastern investors. Utilizing the strategies of four of our strongest U.S. funds, we offer non-U.S. investors exposure to: Growth Fund, U.S. Opportunities Fund, Global Opportunities Fund, and Global Equity Fund. Calamos has seeded each fund with $50 million.

 

Capitalize on Our Recognized and Respected Brand

 

We believe that brand awareness can lead to asset growth and help expand our client base. Over the years, we have been recognized for producing superior long-term investment performance across a range of investment strategies. For example, Consumer Reports named the Calamos Global Growth and Income Fund one of its nine top global funds in January 2007. The Calamos Growth Fund was named as the Top Growth Fund since January 31, 1994 by Investor’s Business Daily in December 2007, and the Calamos International Growth Fund was ranked as one of the top 50 international funds for year-to-date performance by Investment News in December 2007. Our chief investment officers, John P. Calamos, Sr. and Nick P. Calamos, have written books on investments in convertible securities and are recognized experts on investing. They discussed their investment insights on CNBC and Bloomberg TV, among others. We believe that as a public company, we have been able to strengthen the Calamos brand and awareness of our investment philosophy.

 

Investment Philosophy, Management and Process

 

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 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 cope with 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.

 

We seek to provide our clients with superior risk-adjusted returns over the long term. 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 years of experience managing through many market cycles.

 

Investment Management

 

We employ a team approach to portfolio management. Our various investment teams are led by our chief investment officers, John P. Calamos, Sr. and Nick P. Calamos, and are generally comprised of senior strategy analysts, intermediate analysts and junior analysts. While day-to-day management of the portfolios is a team effort, the 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 system from early in their careers. Additionally, key members of the investment team participate in our incentive compensation plan. Through this plan, investment team members can share in the overall success of our company. As of year-end 2007, our investment management team included 75 members focused on portfolio management and research, trading, portfolio administration and developing analytical models. To accommodate the diversification and growth of our investment strategies, we intend to continue hiring investment professionals who can complement and add to our core competencies.

 

Investment Process

 

We believe that the financial markets operate in a manner that precludes using a single method of analysis, and that market fluctuations call for a more flexible approach. Our long-term investment strategy is based on an investment process that relies on qualitative research and analysis to determine a company’s economic enterprise value. Using this process, our investment management team is able to value all securities within a corporate capital structure.

 

The key steps in the qualitative component of our investment process are:

 

 

We also employ a variety of quantitative tools as part of our investment process to construct portfolios.

 

Moreover, in addition to our sizable allocation of staff and resources to technology, a separate research development team is dedicated solely to investment team needs and projects, reporting directly to our chief investment officers. We have consistently sought technological advantages to improve the investment process and continue to devote significant resources in this area.

Investment Strategies

 

The following table describes our investment strategies and corresponding assets under management at December 31, 2007 (in billions).

 

 

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 five types of investment products that fall into the categories of mutual funds and separate accounts.

 

Mutual Funds

 

Mutual funds are pools of funds collected from many investors and include open-end 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 Funds

 

At December 31, 2007, we had $27.4 billion of assets under management in open-end funds, representing approximately 59% 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, balanced, high yield, convertible, alternative, fixed income and money market strategies that we believe offer attractive risk-adjusted return potential. In 2007, we introduced a global equity fund, a government money market fund and a total return bond fund. Additionally, in 2007, we established Calamos Global Funds PLC, an Ireland-domiciled open-end umbrella company consisting of Undertakings for Collective Investment in Transferable Securities (UCITS), also referred to as Offshore Funds, which are registered in the Republic of Ireland. We include the Offshore Funds in open-end funds for reporting purposes. As of year-end 2007, we acted as the investment advisor to 13 open-end funds offered to customers primarily through financial intermediaries and to the Offshore Funds. We expect to continue to seek opportunities to expand and develop the investment strategies offered in our open-end fund products as market conditions change.

 

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, but with less risk than that of the broad market. 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. The following table provides the assets under management for each open-end fund managed as of December 31, 2007:

 

 

 

At December 31, 2007, 83% of the $26.4 billion of open-end fund assets we manage that have an overall Morningstar rating were rated “four stars” or “five stars” by Morningstar. These ratings are based on past performance, which may not be predictive of future results.⁽²⁾

 

Closed-End Funds

 

At December 31, 2007, we had $7.4 billion of assets under management in closed-end funds, representing approximately 16% 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, the 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.

 

In 2007, we launched the Calamos Global Dynamic Income Fund (NYSE:CHW) which raised nearly $1.2 billion from its initial public offering and preferred shares issuance. As market conditions warrant, we expect to expand our existing closed-end funds through secondary or rights offerings, or both, and to introduce new closed-end funds that we believe will offer attractive risk-adjusted return potential.

 

 

 

⁽²⁾ Overall Morningstar ratings of mutual funds reflect historical risk-adjusted performance as of a particular date and are subject to change every month and are calculated from a fund’s three-, five- and 10-year average annual returns, as available, in excess of 90-day T-bill returns with appropriate fee adjustments and a risk factor that reflects fund performance below 90-day T-bill returns. The top 10% of the funds in an investment category receive five stars, the next 22.5% receive four stars, the next 35% receive three stars, the next 22.5% receive two stars and the last 10% receive one star. Each share class of a fund is counted as a fraction of one fund within this scale and rated separately, which may cause slight variations in the distribution percentages. All overall Morningstar ratings of the open-end funds managed by Calamos Advisors cited in this report are for Class A shares of those funds. The other classes of shares of those funds may have different performance characteristics. The ratings and rankings included in this annual report on Form 10-K are subject to change without notice and are based on past performance, which may not be predictive of future results.

Each of our closed-end funds currently employs leverage in its capital structure by issuing preferred shares; however, while we continually assess our use of leverage, certain market conditions are not conducive to executing this strategy. 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. The dividends paid to preferred shareholders are generally based on short-term interest rates, while the proceeds from issuing preferred shares are invested by the funds in longer-term taxable securities.

 

Separate Accounts

 

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

 

Institutional Accounts

 

At December 31, 2007, we had $5.2 billion of assets under management in institutional accounts, representing approximately 11% of our total assets under management. Institutional accounts are separately managed accounts for certain investors, such as private pension funds, public funds and endowment funds, offered through consultants, broker-dealer intermediaries and directly by us. We have nearly 370 institutional accounts, including commingled funds and sub-advised relationships.

 

Our first institutional account mandate was initiated in 1981 for a pension fund account that remains a client today. 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. Currently, our convertible strategies remain closed to new accounts. In recent years, our consultant calling team and business development officers have targeted private pension funds, public funds, endowment funds, banks and insurance companies and focused on educating institutional prospects about our 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 high yield mandates, managed under both domestic and global objectives.

 

Managed Accounts

 

At December 31, 2007, we had $6.0 billion of assets under management in managed accounts, representing approximately 13% of our total assets under management. Our more than 22,000 managed accounts are individual portfolios of securities offered primarily through 17 national and regional broker-dealer platforms.

 

We first introduced a managed account 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 balanced, equity, and high yield investment strategies. Currently, our convertible strategies remain closed to new accounts.

 

Alternative Investments

 

At December 31, 2007, we had $140 million of assets under management in alternative investment products, representing less than 1% of our total assets under management. Alternative investment products include private investment vehicles, primarily hedge funds, offered directly by us to qualified individual and institutional investors.

 

Building upon our expertise in risk management, we introduced our first alternative investment product in 1988. In early 2007, we launched a market neutral opportunities fund for qualified investors; we also offer an equity-oriented alternative investment product. We believe that the combination of our investment team approach and analytical resources give us the ability to excel further in this arena, particularly in specialized and underserved market segments. Based on the investment opportunities we see, we may develop other alternative investment products under a variety of strategies.

Other Advisory Services

 

Wealth Management

 

At December 31, 2007, we had approximately 550 wealth management clients representing more than $830 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 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.

 

We support our wealth management clients with a dedicated team of relationship managers and client servicing staff. In addition, we have dedicated business development officers engaged in cultivating new business opportunities through a national network of high net worth professional advisors, family offices, private foundations and select referral platforms.

 

Investor Services

 

Calamos Financial Services offers investment guidance and account support to self-directed investors who hold more than $200 million of Calamos open-end funds. Our investor services center within our headquarters assists investors in answering questions about their accounts and Calamos investment products.

 

Distribution Relationships

 

We distribute the Calamos open-end funds, closed-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 they act in a consultative role to provide our clients with value-added services. In recent years, they have focused on 401(k) platforms, broker consultants, broker-dealers, financial planners and other channels for mutual funds and managed account products. We intend to grow our intermediary business through selective intermediary relationships, and we opportunistically seek to introduce new products that best deliver our investment strategies to investors through these distribution channels.

 

Client accounts held at our top ten financial intermediaries represented approximately 59% of our assets under management as of December 31, 2007.

 

Other Considerations

 

Technology and Intellectual Property

 

We consider technology to be a competitive advantage in the 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 separate research development team, which reports to our chief investment officers. 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 more than 22,400 accounts. Elsewhere, where competitive advantages do not exist, such as trade order processing and portfolio accounting, we look to leverage third-party applications 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.

 

Competition

 

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 materially adversely affect our business.

 

Regulatory Environment

 

Virtually all aspects of our businesses are subject to extensive regulation, both with respect to United States laws in connection with our domestic business lines and with respect to certain offshore jurisdictional laws, particularly in Europe, in connection with our international business lines. 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. Under these laws and regulations, 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, an Undertakings for Collective Investment in Transferable Securities, or UCITS, advised by Calamos Advisors is subject to the Irish Financial Services Regulatory Authority.

 

Calamos Advisors, Calamos Partners and Calamos Wealth Management 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, and the SEC’s regulations thereunder, as well as to 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. Applicable requirements relate to, among other things, 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 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. As discussed below, both the Investment Advisers Act and the Investment Company Act regulate the “assignment” of advisory contracts by the advisor. 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, Calamos Wealth Management or the registered funds advised by Calamos Advisors to comply with the requirements of the SEC could have a material adverse effect on us.

 

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, because our Class A Common Stock is listed on the

NASDAQ Stock Market LLC, we are subject to the rules of NASDAQ, including the corporate governance listing standards approved by the SEC.

 

In its capacity as a broker-dealer, Calamos Financial Services is subject to regulations that cover all aspects of its business, including sales practices, the capital structure of securities firms, 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 employers. Calamos Financial Services also is required to maintain certain minimum net capital and cash reserves for the benefit of its customers.

 

Under the rules and regulations of the SEC promulgated pursuant to the federal securities laws, Calamos Advisors, Calamos Partners, Calamos Financial Services and Calamos Wealth Management are subject to periodic examination by the SEC. Calamos Financial Services also is subject to periodic examination by the Financial Industry Regulatory Authority or FINRA.

 

Calamos Advisors is subject to the Employee Retirement Income Security Act of 1974, as amended, or ERISA, and to regulations promulgated thereunder, insofar as it is a “fiduciary” under 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. Our failure to comply with these requirements could have a material adverse effect on our business.

 

Employees

 

At December 31, 2007, we had approximately 430 full-time employees.

 

SEC Filings

 

Through our Internet website, we make available our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission. To retrieve any of this information, visit the Investor Relations section of our website at www.calamos.com.

 

 

Business Risks

 

We caution the reader that the following business risks and those risks described elsewhere in this report and our other SEC filings, could cause our actual results to differ materially from expectations stated in our forward-looking statements.

 

Risks Related to Our Industry

 

Changes in laws or regulations or in governmental policies 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. In the United States regulations exist primarily at the federal level, including regulation by the SEC under the Investment Company Act of 1940, as amended, and the Investment Advisers Act of 1940, as amended, by the Department of Labor under the Employee Retirement Income Security Act of 1974, as amended, or ERISA, as well as regulation by the Financial Industry Regulatory Authority, or FINRA and state regulators. Calamos Asset Management is not an investment company however the mutual funds managed by Calamos Advisors are registered with the SEC as investment companies under the Investment Company Act. The Investment Advisers Act imposes numerous obligations on investment advisors, including record-keeping, advertising and operating requirements, disclosure obligations and prohibitions on fraudulent activities. The Investment Company Act imposes similar obligations, as well as additional detailed operational requirements, on

registered investment companies and investment advisors. 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. They are not designed to protect our stockholders. Changes in laws or regulations or in governmental policies 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 these financial institutions have substantially greater resources than we do and may offer a broader range of financial products across more markets. Some operate in a different regulatory environment than we do which may give them certain competitive advantages in the investment products and portfolio structures that they offer. We compete with other providers of investment advisory services primarily based on the availability and objectives of the investment portfolios offered, investment performance, and the scope and quality of investment advice and other client services. Some institutions have proprietary products and distribution channels that make it more difficult for us to compete with them. We believe that competition within the investment management industry will increase as a result of consolidation and acquisition activity and because new competitors face few barriers to entry. Most of our investment portfolios have sales or redemption fees, which means that investors may be more willing to transfer assets to competing funds.

 

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. If we are required to lower our fees in order to remain competitive, our net income could be significantly reduced because some of our expenses are fixed, especially over shorter periods of time, and others may not decrease in proportion to the 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 business is highly competitive and has relatively low barriers to entry. To the extent we are forced to compete on the basis of price, we may not be able to maintain our current fee structure. Although our investment management fees vary from product to product, historically we have competed primarily on the performance of our products and service, and not on the level of our investment management fees relative to those of our competitors. In recent years, however, 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 be assured that we will succeed in providing investment returns and services that will allow us to maintain our current fee structure. Fee reductions on existing or future new 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, as required by law, 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, as required by law. These investment management agreements may be terminated for any number of reasons, including investment performance, advisory fee rates and financial market performance, or may not be renewed. If any of these agreements are terminated, we may not be

able to replace these 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 of mutual fund shares and increased redemptions of mutual fund shares. The redemption of investments in mutual funds managed by Calamos Advisors would adversely affect our revenues, which are substantially dependent upon the assets under management in our funds. If redemptions of investments in mutual funds caused our revenues to decline, it could have a material adverse effect on our earnings.

 

A decline in the prices of securities would 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 over time 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 assets under management and represented approximately 28% of our revenues for each year ended December 31, 2007, 2006 and 2005. Accordingly, a decline in the prices of securities generally may cause our revenues and net income to decline by either causing the value of our assets under management to decrease, which would result in lower investment advisory and Rule 12b-1 fees, or causing our clients to withdraw funds in favor of investments they perceive to offer greater opportunity or lower risk, which would also result in lower fees. The securities markets are highly volatile and securities prices may increase or decrease for many reasons beyond our control, including economic and political events and acts of terrorism. If a decline in securities prices caused our revenues to decline, it could have a material adverse effect on our earnings.

 

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

 

A terrorist attack, war, power failure, cyber-attack, natural disaster 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 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.

 

Risks Related to Our Business

 

Control by Calamos family members of a majority of the combined voting power of our common stock may give rise to conflicts of interests.

 

As of December 31, 2007, the Calamos Interests owned approximately 79% of the membership units in Calamos Holdings LLC and all of our Class B common stock, representing more than 97% of the combined voting power of all classes of our voting stock. Pursuant to the terms of our amended and restated certificate of incorporation, Calamos Family Partners, Inc. retains a majority of the combined voting power of our common stock until the number of outstanding shares of our Class B common stock, plus the number of membership units in Calamos Holdings LLC and shares of our Class A common stock held by holders of our Class B common stock, falls below 15% of the total number of outstanding membership units in Calamos Holdings LLC, 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 Class B common stock and our Class A common stock and in membership units of Calamos Holdings LLC, they 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, they will continue to be able to determine the outcome of all matters requiring stockholder approval 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 and could preclude any unsolicited acquisition of our company. The concentration of ownership could deprive our 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. As a result of the control exercised by Calamos Family Partners, Inc., none of our agreements with them and other companies controlled by them are deemed to be negotiated on “arm’s length” terms. However, any such agreements since our initial public offering have been approved in accordance with the Conflict of Interests Policy contained in our amended and restated certificate of incorporation.

 

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

 

We are dependent on the efforts of John P. Calamos, Sr., our Chairman, Chief Executive Officer and Co-Chief Investment Officer, and Nick P. Calamos, our Senior Executive Vice President and Co-Chief Investment Officer, and other key executives. These executives have been responsible for determining the strategic direction of our business, are integral to our brand and the positive business reputation we enjoy 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 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. If we lose the services of any of these key executives, it may have a material adverse effect on our business.

 

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 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 earnings.

 

While we continue to diversify and add new distribution channels for mutual funds and managed accounts, a significant portion of the growth in our assets under management in recent years has been accessed through intermediaries. As of December 31, 2007, 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. 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 affect on our business.

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. In particular, we anticipate that it will be necessary for us to add investment professionals as we further diversify our investment products and strategies. 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. In particular, the use of equity compensation may be ineffective if the market price of our Class A common stock declines. The inability to recruit and retain qualified personnel could affect our ability to provide an acceptable level of service to our clients and funds and our ability to attract new clients and investors in our funds, each of which 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, 2007, 35% of our assets under management were concentrated in the Calamos Growth Fund, and 39% 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. 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 also may close funds and investment strategies to new investors, which could inhibit our growth and could lead to redemptions by existing investors, and could thereby cause a decrease in our revenues.

 

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

 

We are a holding company, and our membership units in Calamos Holdings LLC are our primary asset. 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 Calamos Asset Management, Inc., and the Calamos Interests. 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.

 

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 applicable provisions of Delaware law.

 

To date, we have paid a cash dividend each quarter and intend to continue to pay dividends on a quarterly basis. Our board of directors may, in its discretion, decrease the level of dividends or discontinue the payment of dividends entirely. The ability of Calamos Holdings LLC to make distributions is subject to its operating results, cash requirements and financial condition, the applicable laws of the State of Delaware (which may limit the amount of funds available for distribution to its members), its compliance with covenants and financial ratios related to existing or future indebtedness, including its existing senior unsecured notes, and its other agreements with third parties. If, as a consequence of these various limitations and restrictions, we are unable to generate sufficient distributions from our business, we may not be able to make or may have 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, and could 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 our technology became inoperative or obsolete.

 

We depend on highly specialized and, in many cases, proprietary technology to support our business functions, including, among other functions, 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 are 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. If our technology systems were to fail and we were unable to recover in a timely way, we would be unable to fulfill critical business functions, which could lead to a loss of customers and could harm our reputation. Technological breakdown 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, outstanding long-term risk-adjusted investment performance, comprehensive product offerings, superior distribution and a strong 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 and managing such matters may be expensive, time-consuming and difficult.

Risks Related to the Company

 

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. We also may issue additional shares of Class A common stock or convertible debt securities. As of December 31, 2007, we had 20,871,982 outstanding shares of Class A common stock.

 

In addition, members of the Calamos family and trusts for their benefit own, individually and/or through their combined ownership of Calamos Family Partners, Inc., 77,000,000 membership units in Calamos Holdings LLC. Our amended and restated certificate of incorporation provides for the exchange of membership units in Calamos Holdings LLC (other than those held by us) for shares of our Class A common stock. Subject to certain selling restrictions, Calamos family members and their trusts could from time to time and for any reason exchange their membership units in Calamos Holdings LLC for shares of our Class A common stock and sell any or all of those shares.

 

The Calamos Interests are party to a registration rights agreement with us. Under that agreement, the Calamos Interests have the right to require us to effect the registration of shares of our Class A common stock that the Calamos Interests could acquire upon conversion of their Class B common shares or exchange of their membership units in Calamos Holdings LLC.

 

We cannot predict the size of future issuances of our Class A common stock or the effect, if any, that future issuances and sales of shares of our Class A common stock, including by Calamos family members and their trusts, may have 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.

 

The Calamos family’s beneficial ownership of our Class B common stock, as well as anti-takeover provisions in our amended and restated certificate of incorporation and bylaws, could discourage a change of control that our stockholders may favor, which could negatively affect our stock price.

 

Members of the Calamos family and trusts for their benefit beneficially own all outstanding shares of our Class B common stock. As a result, Calamos family members are able to exercise control over all matters requiring the approval of our stockholders and would be able to prevent a change in control of our company. In addition, provisions in our amended and restated certificate of incorporation and bylaws may make it more difficult and expensive for a third party to acquire control of us even if a change of control would be beneficial to the interests of our stockholders. For example, our amended and restated certificate of incorporation authorizes the issuance of preferred stock that could be issued by our board of directors to thwart a takeover attempt. The market price of our Class A common stock could be adversely affected to the extent that the Calamos family’s control over us, as well as provisions of our amended and restated certificate of incorporation and bylaws, discourage potential takeover attempts that our stockholders may favor.

If the Internal Revenue Service disallows all or any portion of the tax amortization deduction allocated to the company in association with the section 754 election made by Calamos Holdings LLC, such action could have a material adverse effect on our business.

 

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. For federal income tax purposes, Calamos Holdings LLC is treated as a partnership and, based upon a third party valuation, its primary intangible assets include investment management contracts and distribution agreements. Based on an opinion of counsel, these types of customer-based intangibles should be amortizable intangibles for federal income tax purposes. Therefore, Calamos Holdings LLC allocated increased tax amortization deductions to the company, which reduced the company’s share of taxable income. However, if the Internal Revenue Service were to disallow all or any portion of the tax amortization deductions allocated to the company, based on the valuation or allocation or purchase price related to the section 754 election, such action could have a material adverse effect on our business.

 

 

None

 

 

Our principal executive offices are located at 2020 Calamos Court, Naperville, Illinois 60563, where we occupy approximately 150,000 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.

 

 

In the normal course of business, we may be subject to various legal proceedings from time to time. Currently, there are no material legal proceedings pending against us.

 

 

No matters were submitted to a vote of security holders, through the solicitation of proxies or otherwise, during the fourth quarter of the year ended December 31, 2007.

 

PART II

 

 

Our Class A common stock ($0.01 par value) trades on the NASDAQ Stock Market LLC 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 were:

 

 

On February 22, 2008, there were approximately 57 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 2008.

 

Equity Compensation Plan Information
As of December 31, 2007

 

 

 

 

In October 2007, the Board of Directors authorized the Company to repurchase up to 2 million shares of Class A common stock. The following table summarizes information with respect to purchases made by or on behalf of the company of shares of its common stock.

 

The following graph compares the percentage change in cumulative shareholder return on the company’s common stock with the Standard & Poor’s 500 Index and SNL Asset Manager Index since October 28, 2004 (assuming a $100 investment on October 28, 2004, and the reinvestment of any dividends).

 

Performance Graph

 

Total Return Performance

 

 

 

 

The following tables set forth our selected historical consolidated financial and other data, as well as financial and other data for our predecessor, Calamos Family Partners, Inc. as of the dates and for the periods indicated. The selected historical consolidated income statement data for the period January 1, 2004 to November 1, 2004 and for the year ended December 31, 2003, and the selected historical consolidated balance sheet data as of December 31, 2003, have been derived from the audited consolidated financial statements of Calamos Family Partners, Inc. (formerly known as Calamos Holdings, Inc.).

 

For all periods presented through November 1, 2004, Calamos Family Partners, Inc. operated as an S corporation and was not subject to U.S. federal and certain state income taxes. Beginning November 2, 2004, we have been subject to U.S. federal and certain state and local income taxes applicable to C corporations.

 

You should read the following selected historical consolidated financial and other data in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” the historical consolidated financial statements and related notes, all included elsewhere in this Annual Report on Form 10-K.

 

 

 

 

 

We provide investment advisory services to institutions and individuals, managing $46.2 billion in client assets at December 31, 2007 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. The following table details our assets under management, based on the five types of investment product types we offer in the mutual fund and separate account categories, at December 31, 2007, 2006 and 2005.

 

 

In order to increase our assets under management and expand our business, we must develop and market investment products that suit the individual 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 clients will depend on a variety of factors, including, among other things:

 

 

Investment Products

 

Mutual Funds

 

Mutual funds include registered open-end funds and registered closed-end funds.

 

Open-End Funds.  Open-end funds are continually offered and are not listed on an exchange. Open-end funds issue new shares for purchase and redeem shares from 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.

 

In 2007, we established Calamos Global Funds PLC, also referred to as Offshore Funds. We include the Offshore Funds in open-end funds for reporting purposes.

 

Closed-End Funds.  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 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 by issuing preferred securities, which increase 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, managed accounts for high net worth investors and alternative investments. 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 basis. Investment management fees that we earn on separate accounts for which we act as investment advisor are computed quarterly, either in advance or in arrears, based on the assets under management balance 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.

 

We may earn performance fees in addition to investment management fees. A performance fee structure would include both an asset-based fee and a fee based upon the performance of the portfolio. Historically, performance fees have not been a material source of revenues for us. However, in the future, as we offer products that have performance-based fees, including alternative products, we expect performance fees to become a more significant source of revenues.

 

Performance-based fees that we receive from consolidated investment partnerships are eliminated upon consolidation.

 

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 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 expense accrual and tax calculations. For the year ended December 31, 2007, we received $3.9 million in portfolio accounting fees. The fees were calculated based on the average daily assets of the open-end and closed-end funds.

 

Operating Expenses

 

Our operating expenses, which consist of employee compensation and benefits, distribution and underwriting expenses, amortization of deferred sales commissions, marketing and sales promotion expenses, and general and administrative expenses, may fluctuate due to a number of factors, including the following:

 

 

We have and will continue to monitor our level of expenses relative to business income and make adjustments as appropriate.

 

Employee Compensation and Benefits

 

Employee compensation and benefits expense includes salaries, incentive compensation, and related benefits costs. Employee compensation and benefits are benchmarked against industry compensation standards. In order to attract and retain qualified personnel, we must maintain competitive employee compensation and benefits. 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 and Underwriting Expense

 

Distribution and underwriting expense includes 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. With respect to open-end funds, 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 this asset over 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 a reduction of the deferred sales commission asset.

 

Other Operating Expenses

 

Other operating expenses include marketing and sales promotion expenses, and general and administrative expenses. Marketing and sales promotion expenses generally vary based on the type and level of marketing, educational, sales or other programs in operation and include closed-end fund marketing costs and ongoing and one-time payments to broker-dealers. In addition, as the open-end mutual funds that we manage have grown in size and recognition, 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 continue to increase to the extent our funds gain assets and further recognition. 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 are either paid over time based on the average daily net assets of such funds or are paid 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 and 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.

 

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 net the result of these distribution activities 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 the remainder of our business. The following table summarizes the net distribution fee margin for the years ended December 31, 2007 and 2006:

 

 

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 $16.8 billion of our assets under management as of December 31, 2007. 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 $2.3 million for the year ended December 31, 2007. 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, 2007, we received Class A share Rule 12b-1 fees of $42.5 million. For the same period, we made Class A share Rule 12b-1 payments to selling firms of $39.7 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. Recently, 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 $2.3 billion of our assets under management as of December 31, 2007. Investors in Class B shares do not pay a sales charge at the time of investment; instead, we pay an upfront commission equal to 4.0% 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 eight years. For the year ended December 31, 2007, we made Class B share commission payments to selling firms of $3.5 million. If the investor redeems shares within the first six years of investment, we receive a contingent deferred sales charge, often referred to as a CDSC, of between 5.0% (during the first year) declining to 1.0% (during the sixth year) of the lesser of the redemption price or purchase price. For the year ended December 31, 2007, we received Class B share CDSC payments of $6.6 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, 2007, we received Class B share Rule 12b-1 fees of $23.4 million. For the same period, we made Class B share Rule 12b-1 payments to selling firms of $5.8 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 eight-year 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 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. We expect our distribution fee margin to increase as the underlying Class B share assets appreciate and to decrease as these assets depreciate.

 

Class C shares represented $7.0 billion of our assets under management as of December 31, 2007. 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, 2007, we made commission payments to selling firms of $8.3 million. If the investor redeems Class C shares within one year of investment, we receive from the proceeds of the sale a CDSC equal to 1.0% of the lesser of the redemption price or purchase price. For the year ended December 31, 2007 we received Class C share CDSC payments of $0.9 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, 2007 we received Class C share 12b-1 fees of $68.1 million. For the same period, we made Class C share Rule 12b-1 payments to selling firms of $58.2 million.

 

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

Class I shares represented $1.1 billion of our assets under management as of December 31, 2007. These shares do not provide for a front-end sales charge nor Rule 12b-1 fees and are generally offered to individual and institutional investors making initial investments of $5 million or more; therefore, no distribution fee margin exists for this share class.

 

Class R shares were introduced in the first quarter of 2007 and represented $3.6 million of our assets under management as of December 31, 2007. 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, 2007, 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.

 

Class X shares were introduced in the fourth quarter of 2007 and represented $202 million of our assets under management as of December 31, 2007. 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 $10 million or more; therefore, no distribution fee margin exists for this share class. Currently, these shares are only available through our Calamos Global Funds that are available only to foreign investors.

 

The net distribution fee margin varies by share class so the mix of Class A, Class B, Class C and Class R share sales and assets affects the overall net distribution fee margin. The Class A share margin is significantly greater than the Class B, Class C and Class R margins. Finally, we expect that our net distribution fee margin will continue to negatively impact our operating margins.

 

Other Income (Expense), Net

 

Other income (expense), net represents net investment gains or losses from a portion of our investment portfolio and from the limited partnerships that we consolidate, net of minority interest in those partnerships, as well as capital gain distributions, dividends and net interest income or expense. As we continue to invest a significant portion of our operating cash inflow into income generating securities, we expect that the impact of other income (expense), net will continue to be more significant in future periods. For more information on our liquidity and capital resources, see “— Liquidity and Capital Resources.”

 

Minority Interest

 

Minority Interest in Calamos Holdings LLC

 

As sole manager of Calamos Holdings LLC, we consolidate the financial results of Calamos Holdings LLC with ours. In light of Calamos Family Partners, Inc. and John P. Calamos, Sr.’s collective ownership of approximately 79% and 77% in Calamos Holdings LLC as of December 31, 2007 and 2006, respectively, we reflect their ownership as a minority interest in our consolidated statements of financial condition and consolidated statements of operations. As a result, outstanding shares of our Class A common stock represent approximately 21% and 23% of the outstanding membership units of Calamos Holdings LLC for the years ended December 31, 2007 and 2006.

 

Minority interest in Calamos Holdings LLC is derived by multiplying the historical equity of Holdings 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 result in changes to Calamos Asset Management, Inc.’s ownership percentage and to the minority interests’ ownership percentage of Calamos Holdings LLC. The corresponding changes to stockholders’ equity are reflected in the consolidated statements of changes in stockholders’ equity.

 

Income is allocated to minority interests based on the average ownership interest during the period in which the income is earned. As a result, our income before income taxes, excluding Calamos Family Partners, Inc. and John P. Calamos, Sr.’s minority interest, represent approximately 22% and 23% of Calamos Holdings LLC’s net income for the years ended December 31, 2007 and 2006. Income before minority interest in Calamos Holdings LLC and income taxes 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

minority interest; therefore, the resulting minority interest is less than 79% and 77% for the years ended December 31, 2007 and 2006.

 

We expect that as we continue to generate and invest cash held solely by Calamos Asset Management, Inc. the minority interest will continue to decline as a percentage of income before minority interest in Calamos Holdings LLC and income taxes. Further, we expect that additional repurchases of our Class A common stock will result in an increase in minority interest.

 

Minority Interest in Partnership Investments

 

Calamos Partners LLC is the general partner of Calamos Equity Opportunities Fund LP and Calamos Market Neutral Opportunities Fund LP, private investment partnerships. At December 31, 2007, we and our affiliates had 44% and 54% interests in Calamos Equity Opportunities Fund LP, respectively (98% combined). At December 31, 2006, we and our affiliates had 41% and 54% interests in Calamos Equity Opportunities Fund LP, respectively (95% combined). Calamos Market Neutral Opportunities Fund LP was established during the first quarter of 2007 and, at December 31, 2007, we and our affiliates had 97% and 1% interests in this partnership, respectively (98% combined).

 

During 2007 and 2006, 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 minority interest in partnership investments in our financial statements.

 

As we launch new products, we as well as our affiliates may invest in these entities, and these products may be required to be consolidated into our results as well. Recently, we introduced Calamos Global Funds, which are fully consolidated with our results at December 31, 2007 as they are wholly owned by us. We expect the consolidation of the Offshore Funds to be temporary as new customers are introduced to the product and as our resulting ownership percentage decreases.

 

Income Taxes

 

For the years ended December 31, 2007, 2006 and 2005, our effective tax rate was 40.2%, 40.1% and 40.2%, respectively.

 

Dilutive Effect of Issuance of New Shares of Class A Common Stock

 

When we issue new shares of Class A common stock, including upon the exercise or conversion of options or restricted stock units granted pursuant to our incentive compensation plan, our existing Class A common stockholders will experience dilution with regard to their indirect ownership interest in the equity of Calamos Holdings LLC.

 

In accordance with our amended and restated certificate of incorporation and the amended and restated limited liability company agreement pursuant to which Calamos Holdings LLC is governed, the net cash proceeds received by us from any future issuance of shares of Class A common stock, including upon the exercise or conversion of options or restricted stock units granted under our incentive compensation plan, will be concurrently transferred to Calamos Holdings LLC in exchange for newly issued membership units equal in number to such number of shares of Class A common stock issued by us. As a result, the amount of dilution that existing Class A common stockholders will experience with regard to their equity interest in Calamos Holdings LLC resulting from the issuance of additional shares of our Class A common stock will not be adversely affected by our holding company structure.

Operating Results

 

Year Ended December 31, 2007 Compared to Year Ended December 31, 2006

 

Assets Under Management

 

Assets under management increased by $1.5 billion, or 3%, to $46.2 billion at December 31, 2007 from $44.7 billion at December 31, 2006. Average assets under management decreased by $911 million, or 2%, to $44.8 billion for the year ended December 31, 2007 from $45.7 billion for the year ended December 31, 2006. At December 31, 2007 and 2006, our assets under management consisted of 75% mutual funds and 25% separate accounts.

 

 

 

 

Mutual fund net redemptions were $2.5 billion in 2007, an unfavorable change of $2.8 billion from $288 million of net purchases in 2006. Market appreciation was $3.6 billion in 2007 and was $1.2 billion in 2006, contributing to the rise in assets under management for both years.

 

Our open-end funds had $3.5 billion of net redemptions during the first half of 2007 and $141 million of net redemptions during the last half of 2007. The net redemptions during the first six months of 2007 were primarily due to lower purchases and higher redemptions of our Growth Fund and our Growth and Income Fund. During 2007, we experienced net purchases in a number of our mutual funds, including our Market Neutral Income Fund, Global Growth and Income Fund and International Growth Fund. Net purchases were also positively impacted by the launch of the Global Equity Fund, the Government Money Market Fund, the Total Return Bond Fund and the Offshore Funds during 2007.

 

Our closed-end funds had net purchases of $1.2 billion during 2007, an increase of $1.1 billion from 2006, primarily due to the launch of the Calamos Global Dynamic Income Fund (CHW) during 2007.

 

Separate accounts had net redemptions of $1.2 billion and $1.1 billion in 2007 and 2006, respectively, primarily due to separate account outflows in our equity and convertible strategies. The net outflows during the period were primarily from our growth strategies, as well as convertible strategies, which remain closed to new investors. Separate account had net redemptions of $1.2 billion for the six months ended June 30, 2007 and net purchases of $67 million during the six months ended December 31, 2007. Market appreciation of $1.5 billion in 2007 contributed to the growth in assets under management for the period while market appreciation of $600 million in 2006 offset net redemptions.

One-Time Activities

 

Results of operations for 2007 were significantly impacted by two one-time marketing and sales promotion expenses, incurred in the second quarter of 2007, that management believes will benefit our long-term financial performance. First, we incurred a one-time expense of $19.5 million, or 11 cents per diluted share, by terminating our remaining two additional compensation agreements that required us to make recurring payments of approximately $2.6 million annually based on the assets of Calamos Convertible Opportunities and Income Fund and Calamos Strategic Total Return Fund. When evaluating whether or not to terminate the future payments made under distribution agreements, we compared the net present value of the future cash flows for on-going payments to the negotiated one-time payments. We expect that the termination of the agreements during the second quarter of 2007 will result in the reduction of future marketing and sales promotion expenses of approximately $650,000 per quarter, or $2.6 million annually, beginning in the quarter ended September 30, 2007. We expect the annual impact on net income will be approximately 1.5 cents per diluted share.

 

Second, we incurred a $6.9 million, or 4 cents per diluted share, one-time structuring fee related to CHW. Our decision to introduce a new closed-end fund is generally a function of the receptiveness of the capital markets, our investment strategies and capabilities, and the financial viability of a proposed product. If a new closed-end fund is introduced, we will negotiate with each underwriter the fees and services prior to the public offering. If any non-traditional fees are negotiated, the payments may: not extend to each underwriter that participates in the offering, vary among the underwriters receiving such a fee, and differ in form. Structuring fees are upfront non-traditional fees paid by us in excess of sales loads or underwriter’s commissions. When structuring fees are paid, we recognize a marketing and sales promotion expense at the time of the offering.

 

Management considers results adjusted for these one-time expenses, as presented below, to provide a better indication of the company’s operations. These adjusted items are considered “non-GAAP financial measures” as defined by Regulation S-K of the Securities and Exchange Commission. In evaluating operating performance, management considers operating expense, operating income and net income, each calculated in accordance with accounting principles generally accepted in the United States (GAAP), and each item on an as-adjusted basis, which constitute non-GAAP financial measures. Items presented on an as-adjusted basis exclude the impact of terminating the two closed-end fund additional compensation agreements and the CHW closed-end fund structuring fees during the second quarter of 2007. As these items are not expected to recur, management believes that excluding these items better enables it to evaluate the company’s operating performance relative to the prior periods. Management considers these non-GAAP financial measures when evaluating the performance of the company and believes the presentation of these amounts provides the reader with information necessary to analyze the company’s operations for the periods compared. Reconciliations of these measurements to their most directly comparable GAAP financial measures for the twelve months ended December 31, 2007 and 2006 are provided in the table below and should be carefully evaluated by the reader:

 

Results of Operations

 

Operating Income

 

Operating income was $173.1 million for 2007, compared to $231.0 million for 2006.

 

Operating income, as adjusted for the one-time marketing and sales promotion expenses, was $199.5 million for 2007, compared to $231.0 million for the year-earlier period.

 

Revenues

 

Total revenues decreased by $11.7 million, or 2%, to $473.5 million for the year ended December 31, 2007 from $485.2 million for the prior year. The decrease was primarily due to lower distribution and underwriting fees and investment management fees.

 

 

Compared to the prior year, investment management fees decreased 1% in 2007 primarily due to a $911 million decrease in average assets under management. The overall decline in investment management fees was due to a decrease in fees from open-end funds and separately managed accounts, partially offset by higher investment management fees from closed-end funds. Investment management fees from open-end funds decreased to $205.2 million for the year ended December 31, 2007 from $212.7 million for the prior year, primarily due to decreases in open-end fund average assets under management of $934 million for 2007 compared to the prior year. Investment management fees from our separately managed accounts decreased to $60.0 million from $64.2 million primarily due to an approximate $728 million decrease in average assets under management. These decreases were partially offset by higher investment management fees from our closed-end funds, which increased to $60.2 million for 2007 from $52.5 million for 2006 as a result of a $751 million increase in closed-end fund average assets under management mainly attributable to the assets raised from the launch of the Calamos Global Dynamic Income Fund (CHW) in 2007. Investment management fees, in total, as a percentage of assets under management were 0.73% and 0.72% for the years ended December 31, 2007 and 2006, respectively.

 

Distribution and underwriting fees decreased to $144.0 million for the year ended December 31, 2007 from $151.8 million for the year ended December 31, 2006. The decrease was primarily due to a $4.2 million decrease in distribution fees as a result of a 3% decrease in open-end fund average assets under management and a $3.7 million decrease in front-end sales charges on the sale of Class A shares of open-end funds, when compared to the prior year.

 

Operating Expenses

 

Operating expenses increased to $300.4 million for the year ended December 31, 2007 from $254.1 million for the prior year. This increase was largely due to two significant one-time marketing and sales promotion charges totaling $26.4 million that were incurred in the second quarter of 2007. Additionally, 2007 was impacted by higher employee compensation and benefits, and general and administrative expenses.

Operating expenses, as adjusted for the one-time marketing and sales promotion expenses, increased to $274.0 million for the year ended December 31, 2007 from $254.1 million for the prior year.

 

 

Employee compensation and benefits expense increased by $17.7 million for the year ended December 31, 2007 when compared to the prior year. This increase largely reflects the impact of staff additions to support the following initiatives: expand our wealth management and institutional sales capabilities; diversify our product offering by adding complementary fixed income and cash management strategies; and strengthen our information technology infrastructure. In addition, employee compensation and benefits expense increased by $2.3 million for the year ended December 31, 2007 due to the transition payments for two executive officers. In light of prevailing market volatility, we will be realigning our resources to focus on our key growth initiatives. For example, in February 2008 we took certain actions as part of our cost containment efforts which involved modest staff reductions and realignment of resources. In addition, our Chief Executive Officer and Co-Chief Investment Officer and our Senior Executive Vice President and Co-Chief Investment Officer, have temporarily reduced their base salaries for 2008 as part of these efforts.

 

Distribution and underwriting expense increased by $3.3 million for 2007 when compared to the prior year, primarily due to an increase of $5.5 million resulting from the growth in the Class C share assets older than one year. This increase was partially offset by a decrease of $2.2 million due to a decrease in average open-end fund assets under management. Class C share assets do not generate distribution expense in the first year following their sale because we retain the Rule 12b-1 fees during that first year to offset the upfront commissions that we pay. However, Class C share assets do generate a distribution expense in subsequent years, as we pay the Rule 12b-1 fees to the selling firms. Although the Rule 12b-1 fee rates we paid to broker-dealers and other intermediaries in 2007 did not change from the rates paid in the prior year, we expect distribution expense to vary with the change in open-end fund assets under management and with the age of the Class C share assets.

 

Amortization of deferred sales commissions decreased $5.7 million for the twelve months ended December 31, 2007 when compared to the prior-year period, due primarily to a decrease in Class C share sales during 2007. This decrease was partially offset by an increase in the amortization of deferred sales commissions on Class B shares due to an increase in redemptions.

 

Marketing and sales promotion expense increased by $25.2 million for the year ended December 31, 2007, when compared to the year ended December 31, 2006. This increase was mainly due to two one-time expenses totaling $26.4 million that we believe will continue to have a positive impact on our future results. During the second quarter of 2007, we incurred a one-time expense of $19.5 million by terminating our remaining two agreements that required annual payments based on the assets of two closed-end funds and a one-time $6.9 million structuring fee in connection with the CHW initial public offering. The year-to-date increase resulting from these one-time expenses was partially offset by a $1.4 million reduction in expense that resulted from terminating the remaining two closed-end fund agreements. Other factors that contributed to the increase in marketing and sales promotion expenses during 2007 included $0.5 million of higher costs incurred on our corporate branding initiative.

 

General and administrative expense increased by $5.8 million for the year ended December 31, 2007, when compared to the prior-year period, of which $3.4 million was attributable to occupancy, depreciation and business services related to: supporting additional staff and implementing our new trade order management and portfolio accounting systems to support our new fixed income strategies. Further, an increase of $1.4 million for the same

period was attributable to professional services, including our decision to outsource certain facility-related functions, which were historically reflected in employee compensation and benefits expense.

 

Other Income (Expense), Net

 

Other income (expense), net was $29.9 million for the year ended December 31, 2007, compared to $12.4 million for the prior year, and was comprised of the following:

 

 

Interest income increased $3.6 million for the twelve months ended December 31, 2007, when compared to the prior-year period, as a result of higher interest rates earned on our cash and cash equivalents balances. Interest expense increased $11.4 million for the year ended December 31, 2007 due to interest expense resulting from a private debt issuance of $375 million aggregate principal senior unsecured notes in July 2007.

 

Investment and other income (loss) is primarily comprised of capital gain distributions, including realized gains and losses on our investments, of dividend income earned on our investment portfolio and of unrealized gains and losses on securities that are owned by Calamos Financial Services LLC (CFS Securities) and of the consolidated partnerships that we own. Capital gain and dividend income increased $17.1 million for the year ended December 31, 2007, as compared to the prior year, mainly due to large capital gain and dividend distributions that occurred in the fourth quarter of 2007 as a result of our increasing investment portfolio and its strong performance. Unrealized appreciation increased $10.0 million for 2007, when compared to 2006, due to net unrealized appreciation in the market value of the CFS Securities and the consolidated partnership investments that we own.

 

Minority interest in partnership investments represents the corresponding minority interests’ portion of the changes in market value from our consolidated partnership investments.

 

Further, the unrealized gains and losses on a significant portion of our investment securities are not recorded to net income; rather, these unrealized gains and losses are recognized as changes to accumulated other comprehensive income, a component of stockholders’ equity. These unrealized gains and losses are only recognized in our consolidated statements of operations when they are realized, which occurs upon the sale of the securities and upon the receipt of capital gains distributions, which typically occur during the fourth quarter of the calendar year. For the years ended December 31, 2007 and 2006, net unrealized gains generated by our investment securities were $9.7 million and $10.1 million, respectively, of which $1.6 million and $1.4 million, net of minority interest and taxes, respectively, were recognized as increases to accumulated other comprehensive income.

 

Income Taxes

 

Our effective tax rate was 40.2% and 40.1% for the years ended December 31, 2007 and 2006.

 

Net Income

 

Net income was $27.7 million for 2007 compared to $34.0 million for 2006.

 

Net income, as adjusted for the one-time marketing and sales promotion expenses, was $31.3 million for 2007 compared to $34.0 million for the year-earlier period.

Year Ended December 31, 2006 Compared to Year Ended December 31, 2005

 

Assets Under Management

 

Assets under management increased by $920 million, or 2%, to $44.7 billion at December 31, 2006 from $43.8 billion at December 31, 2005. The average assets under management reached $46.6 billion for the six months ended June 30, 2006 and fell to $44.8 billion for the six months ended December 31, 2006. At December 31, 2006, our assets under management consisted of 75% mutual funds and 25% separate accounts, as compared to 74% mutual funds and 26% separate accounts at December 31, 2005.

 

 

 

 

Mutual fund net purchases were $288 million in 2006, a decrease of $3.1 billion from $3.4 billion in the prior year. Mutual fund net purchases were $2.0 billion for the six months ended June 30, 2006. During the six months ended December 31, 2006, we experienced net redemptions of approximately $1.7 billion. The outflows during the last half of 2006 were primarily due to lower purchases and higher redemptions of our Growth Fund, which comprises a significant percentage of our total assets under management. As is consistent with the broad market, growth equities were largely out of favor with investors during 2006, which along with the short-term underperformance of our Growth Fund, negatively affected both market appreciation and net purchases/redemptions. However, during 2006, we experienced net purchases in a number of our mutual funds, primarily our Market Neutral Income Fund, Growth and Income Fund, Global Growth and Income Fund and International Growth Fund.

 

Separate accounts had net redemptions of $1.1 billion in 2006 compared to net purchases of $212 million in 2005, mainly due to separate account outflows in our convertible strategies, which remain closed to new investors. Separate account net purchases were relatively flat for the six months ended June 30, 2006, while during the six months ended December 31, 2006, we experienced net redemptions of approximately $1.0 billion.

Revenues

 

Total revenues increased by $67.6 million, or 16%, to $485.2 million for the year ended December 31, 2006 from $417.6 million for the prior year. The increase was primarily due to higher investment management fees and distribution and underwriting fees.

 

 

Compared to the prior year, investment management fees increased 16% in 2006 primarily due to a $5.7 billion increase in average assets under management. The overall growth in investment management fees was due primarily to an increase in fees from mutual funds, which increased to $265.2 million in 2006 from $226.9 million in the prior year. Open-end fund investment management fees increased to $212.7 million for the year ended December 31, 2006 from $176.8 million for the prior year, primarily due to increases in open-end fund average assets under management of $4.7 billion for 2006 compared to the prior year. Investment management fees from our separately managed accounts increased to $64.2 million from $58.1 million primarily due to an approximate $700 million increase in average assets under management. Investment management fees, in total, as a percentage of assets under management were 0.72% and 0.71% for the years ended December 31, 2006 and 2005, respectively.

 

Distribution and underwriting fees increased to $151.8 million for the year ended December 31, 2006 from $129.3 million in the prior year, primarily due to increases in open-end fund average assets under management of $4.7 billion for 2006 compared to the prior year.

 

Operating Expenses

 

Operating expenses increased to $254.1 million for the year ended December 31, 2006 from $211.5 million for the prior year. This increase was mostly due to higher distribution and underwriting, employee compensation and benefits, and general and administrative expenses.

 

 

Employee compensation and benefits expense increased by $12.4 million for the year ended December 31, 2006 when compared to the prior year. The increase largely reflects the impact of expanding our institutional sales force, internalizing our mutual fund client services function and growing our information technology and administrative staff to support our growth. Current compensation expense levels are expected to increase due to merit increases for our existing staff but may vary due to compensation based on our performance.

 

Distribution and underwriting expense increased by $21.5 million for 2006 when compared to the prior year, primarily due to an increase of $13.7 million resulting from the growth in the Class C share assets older than one year and to an increase of $7.7 million resulting from the growth of Class A and Class B open-end fund average assets under management. Class C share assets do not generate distribution expense in the first year following their sale because we retain the Rule 12b-1 fees during that first year to offset the upfront commissions that we pay. However, Class C share assets do generate a distribution expense in subsequent years, as we pay the Rule 12b-1 fees

to the selling firms. Although the Rule 12b-1 fee rates we paid to broker-dealers and other intermediaries in 2006 did not change from the rates paid in the prior year, we expect distribution expense to vary with the change in open-end mutual fund assets under management.

 

Marketing and sales promotion expense increased to $15.6 million for the year ended December 31, 2006 from $14.7 million in the prior-year period. These expenses increased by $0.9 million in 2006, when compared to 2005, generally due to an increase in supplemental compensation payments. The increase in supplemental compensation payments is largely attributable to the $5.0 billion increase in average mutual fund assets under management. We expect that supplemental compensation payments will fluctuate with changes in mutual fund purchases and assets under management.

 

General and administrative expense increased by $6.4 million for the year ended December 31, 2006, when compared to the prior-year period primarily due to increases of $2.4 million in depreciation expense, $2.2 million in occupancy-related costs and $1.5 million in travel and entertainment costs for those same periods. The increases in depreciation expense and occupancy costs were primarily due to the full year impact of occupying our new headquarters and depreciating new assets placed in service in our facilities. The increases in travel and entertainment expenses were primarily due to our expanded sales efforts.

 

Other Income (Expense), Net

 

Other income (expense), net was $12.4 million for the year ended December 31, 2006, compared to $5.8 million for the prior year, and was comprised of the following: