XNAS:CLMS Calamos Asset Management Inc Class A Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________
 
FORM 10-Q
________________
 
R
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
   
 
FOR THE QUARTERLY PERIOD ENDED: March 31, 2012
   
or
   
£
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

Commission File Number: 000-51003
________________
 
CALAMOS ASSET MANAGEMENT, INC.
(Exact Name of Registrant as Specified in its Charter)
________________
 
Delaware
32-0122554
(State or Other Jurisdiction of
(I.R.S. Employer
Incorporation or Organization)
Identification No.)
   
2020 Calamos Court, Naperville, Illinois
60563
(Address of Principal Executive Offices)
(Zip Code)

(630) 245-7200
(Registrant’s telephone number, including area code)
________________
 
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. R Yes £ No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). R Yes £ No

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.

Large accelerated filer £
Accelerated filer R
Non-accelerated filer £
Smaller reporting company £
 
(Do not check if a smaller reporting company)

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

At April 30, 2012, the company had 20,336,112 shares of Class A common stock and 100 shares of Class B common stock outstanding.

 
 
 

 

TABLE OF CONTENTS

PART I — FINANCIAL INFORMATION
 
Item 1. Financial Statements
3
Item 2. Management’s Discussion and Analysis of Financial
 
Condition and Results of Operations
18
Item 3. Quantitative and Qualitative Disclosures About Market Risk
29
Item 4. Controls and Procedures
29
PART II — OTHER INFORMATION
 
Item 1. Legal Proceedings
30
Item 6. Exhibits
31
SIGNATURES
32
   

 

 
2

 

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

CALAMOS ASSET MANAGEMENT, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(in thousands, except share data)

   
March 31,
2012
   
December 31,
2011
 
   
(unaudited)
       
ASSETS
           
Current assets:
           
Cash and cash equivalents
  $ 98,084     $ 102,166  
Receivables:
               
Affiliates and affiliated funds
    20,586       18,492  
Customers
    11,248       10,035  
Investment securities
    331,982       318,496  
Derivative assets
    69       1,018  
Partnership investments, net
    36,463       33,056  
Prepaid expenses
    3,948       2,964  
Deferred tax assets, net
    8,216       8,811  
Other current assets
    1,294       934  
Total current assets
    511,890       495,972  
Non-current assets:
               
Deferred tax assets, net
    54,001       56,707  
Deferred sales commissions
    4,695       5,444  
Property and equipment, net of accumulated depreciation ($54,253 at March 31, 2012 and $52,833 at December 31, 2011)
    21,665       22,865  
Other non-current assets
    758       870  
Total non-current assets
    81,119       85,886  
Total assets
  $ 593,009     $ 581,858  
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
LIABILITIES
               
Current liabilities:
               
Distribution fees payable
  $ 15,836     $ 15,860  
Accrued compensation and benefits
    8,427       23,681  
Interest payable
    1,240       2,729  
Derivative liabilities
    2,604       3,844  
Accrued expenses and other current liabilities
    6,048       5,631  
Total current liabilities
    34,155       51,745  
Long-term liabilities:
               
Long-term debt
    92,115       92,115  
Deferred rent
    9,400       9,423  
Dividend payables on restricted stock units
    763       781  
Total long-term liabilities
    102,278       102,319  
Total liabilities
    136,433       154,064  
STOCKHOLDERS’ EQUITY
               
Class A common stock, $0.01 par value; authorized 600,000,000 shares; 24,336,112 shares issued and 20,336,112 shares outstanding at March 31, 2012; 24,126,757 shares issued and 20,126,757 shares outstanding at December 31, 2011
    243       241  
Class B common stock, $0.01 par value; authorized 1,000 shares; 100 shares issued and outstanding at March 31, 2012 and December 31, 2011
    0       0  
Additional paid-in capital
    214,990       214,102  
Retained earnings
    73,055       67,991  
Accumulated other comprehensive loss
    (139 )     (527 )
Treasury stock at cost; 4,000,000 shares at March 31, 2012 and December 31, 2011
    (95,215 )     (95,215 )
Calamos Asset Management, Inc. stockholders’ equity
    192,934       186,592  
Non-controlling interest in Calamos Investments LLC (Calamos Interests)
    250,001       229,168  
Non-controlling interest in partnership investments
    13,641       12,034  
Total non-controlling interest
    263,642       241,202  
Total stockholders’ equity
    456,576       427,794  
Total liabilities and stockholders’ equity
  $ 593,009     $ 581,858  

See accompanying notes to consolidated financial statements.

 
3

 


CALAMOS ASSET MANAGEMENT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended March 31, 2012 and 2011
(in thousands, except share data)
(unaudited)

 
 
2012
   
2011
 
REVENUES
           
Investment management fees
  $ 65,987     $ 67,608  
Distribution and underwriting fees
    18,506       22,112  
Other
    783       828  
Total revenues
    85,276       90,548  
EXPENSES
               
Employee compensation and benefits
    22,203       20,632  
Distribution expenses
    16,072       18,233  
Amortization of deferred sales commissions
    1,409       1,748  
Marketing and sales promotion
    4,426       3,439  
General and administrative
    10,113       9,181  
Total operating expenses
    54,223       53,233  
Operating income
    31,053       37,315  
NON-OPERATING INCOME (LOSS)
               
Net interest expense
    (1,416 )     (1,895 )
Investment and other income (loss)
    23,070       (1,627 )
Total non-operating income (loss)
    21,654       (3,522 )
Income before income tax provision
    52,707       33,793  
Income tax provision
    4,284       2,907  
Net income
    48,423       30,886  
Net income attributable to non-controlling interest in Calamos Investments LLC (Calamos Interests)
    (39,778 )     (26,249 )
Net income attributable to non-controlling interest in partnership investments
    (1,606 )     (5 )
Net income attributable to Calamos Asset Management, Inc.
  $ 7,039     $ 4,632  
Earnings per share:
               
Basic
  $ 0.35     $ 0.23  
Diluted
  $ 0.34     $ 0.23  
Weighted average shares outstanding:
               
Basic
    20,233,205       20,035,394  
Diluted
    20,650,379       20,478,456  
Cash dividends per share
  $ 0.095     $ 0.095  

See accompanying notes to consolidated financial statements.


 
4

 


CALAMOS ASSET MANAGEMENT, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Three Months Ended March 31, 2012 and 2011
(in thousands)
(unaudited)

       
   
2012
   
2011
 
             
Net Income
  $ 48,423     $ 30,886  
Other comprehensive income, before tax provision
               
Unrealized gains on available-for-sale securities:
               
Changes in unrealized gains
    23,387       15,544  
Reclassification adjustment for gains included in net income
    (20,574 )     (1,665 )
Other comprehensive income, before tax provision
    2,813       13,879  
Income tax provision related to other comprehensive income
    228       1,148  
Other comprehensive income, after tax provision
    2,585       12,731  
Comprehensive income
    51,008       43,617  
                 
Comprehensive income attributable to non-controlling interest in Calamos Investments LLC (Calamos Interests)
    (41,985 )     (37,096 )
Comprehensive income attributable to non-controlling interest in partnership investment
    (1,606 )     (5 )
Comprehensive income attributable to Calamos Asset Management, Inc.
  $ 7,417     $ 6,516  

See accompanying notes to consolidated financial statements.

 
5

 

CALAMOS ASSET MANAGEMENT, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
Three Months Ended March 31, 2012
(in thousands)
(unaudited)

   
CALAMOS ASSET MANAGEMENT, INC. STOCKHOLDERS
   
Non-
controlling
interest in
Calamos
   
Non-
       
   
Common
Stock
   
Additional
Paid-in
Capital
   
Retained
Earnings
   
Accumulated
Other
Comprehensive
Loss
   
Treasury
Stock
   
Investments
LLC
(Calamos
Interests)
   
controlling
interest in
partnership
investments
   
Total
 
Balance at Dec. 31, 2011
  $ 241     $ 214,102     $ 67,991     $ (527 )   $ (95,215 )   $ 229,168     $ 12,034     $ 427,794  
Net income
                7,039                   39,778       1,606       48,423  
Changes in unrealized gains on available-for- sale securities, net of income taxes
                      3,235             18,245             21,480  
Reclassification adjustment for realized gains on available-for-sale securities included in income, net of income taxes
                      (2,857 )           (16,038 )           (18,895 )
Issuance of common stock (209,355 Class A common shares)
    2       (2 )                                    
Cumulative impact of changes in ownership of Calamos Investments LLC
          415       (5 )     10             (1,366 )     1       (945 )
Compensation expense recognized under stock incentive plans
          475                         1,687             2,162  
Dividend equivalent accrued under stock incentive plans
                (38 )                 (134 )           (172 )
Distribution to non-controlling interests
                                  (21,339 )           (21,339 )
Dividends declared
                (1,932 )                             (1,932 )
Balance at March 31, 2012
  $ 243     $ 214,990     $ 73,055     $ (139 )   $ (95,215 )   $ 250,001     $ 13,641     $ 456,576  

See accompanying notes to consolidated financial statements.

 
6

 

CALAMOS ASSET MANAGEMENT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 31, 2012 and 2011
(in thousands)
(unaudited)

 
 
2012
   
2011
 
Cash and cash equivalents at beginning of period
  $ 102,166     $ 82,870  
Cash flows from operating activities:
               
Net income
    48,423       30,886  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Amortization of deferred sales commissions
    1,409       1,748  
Other depreciation and amortization
    1,435       1,480  
Deferred rent, net
    (23 )     9  
Change in unrealized appreciation on CFS securities, derivative assets, derivative liabilities and partnership investments, net
    (3,059 )     (3,274 )
Net realized (gain) loss on sale of investment securities, derivative assets and derivative liabilities
    (17,502 )     5,769  
Deferred taxes
    2,990       1,565  
Stock based compensation
    2,162       1,880  
Employee taxes paid on vesting under stock incentive plans
    (862 )     (1,031 )
Increase in assets:
               
Receivables:
               
Affiliates and affiliated funds, net
    (2,094 )     (1,996 )
Customers
    (1,213 )     (844 )
Deferred sales commissions
    (660 )     (1,250 )
Other assets
    (1,247 )     (1,922 )
Increase (decrease) in liabilities:
               
Distribution fees payable
    (24 )     451  
Accrued compensation and benefits
    (15,254 )     (12,642 )
Accrued expenses and other liabilities
    (1,179 )     137  
Net cash provided by operating activities
    13,302       20,966  
Cash flows provided by (used in) investing activities:
               
Net additions to property and equipment
    (220 )     (626 )
Purchase of investment securities
    (260,288 )     (30,823 )
Proceeds from sale of investment securities
    276,516       12,106  
Net purchases of derivatives
    (8,400 )     (9,381 )
Net changes in partnership investments
    (1,638 )     18,571  
Net cash provided by (used in) investing activities
    5,970       (10,153 )
Cash flows used in financing activities:
               
Net proceeds from margin loans
    -       6,875  
Deferred tax (expense) benefit on vesting under stock incentive plans
    (83 )     4  
Distributions paid to non-controlling interests
    (21,339 )     (20,110 )
Cash dividends paid to common stockholders
    (1,932 )     (1,912 )
Net cash used in financing activities
    (23,354 )     (15,143 )
Net decrease in cash
    (4,082 )     (4,330 )
Cash and cash equivalents at end of period
  $ 98,084     $ 78,540  
Supplemental disclosure of cash flow information:
               
Cash paid for:
               
Income taxes, net
  $ 1,633     $ 1,266  
Interest
  $ 2,977     $ 2,977  

See accompanying notes to consolidated financial statements.

 
7

 

CALAMOS ASSET MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

(1) Organization and Description of Business

Calamos Asset Management, Inc. (CAM) is a holding company and as of March 31, 2012 owned 22% of Calamos Investments LLC (Calamos Investments). CAM, together with Calamos Investments and Calamos Investments’ subsidiaries (the Company), operates the investment advisory and distribution services businesses reported within these consolidated financial statements. CAM operates and controls all of the business and affairs of Calamos Investments and, as a result of this control, consolidates the financial results of Calamos Investments with its own financial results. The remaining 78% ownership interest in Calamos Investments is held by Calamos Family Partners, Inc. (CFP), a Delaware corporation, and John P. Calamos, Sr. the Chairman, Chief Executive Officer and Co-Chief Investment Officer of CAM. CFP and John P. Calamos, Sr. (collectively Calamos Interests), ownership interest, in accordance with applicable accounting guidance, is reflected and referred to within these consolidated financial statements as “non-controlling interests in Calamos Investments LLC”. As shown in the diagram below, CFP also owns all of CAM’s outstanding Class B common stock, which represents 97.5% of the combined voting power of all classes of CAM’s voting stock. The graphic below illustrates our organizational and ownership structure as of March 31, 2012:








_________________

(1)
Represents combined economic interest of Calamos Family Partners, Inc. and John P. Calamos, Sr. who is also a member of Calamos Investments LLC.
(2)
Represents combined economic interest of all public stockholders, including John P. Calamos, Sr., Nick Calamos and John P. Calamos, Jr.’s combined 7.93% ownership interest of Class A common stock. The calculation of ownership interest includes vested stock options.
(3)
As of May 2, 2012, Calamos International LLP name changed to Calamos Investments LLP.

 
8

 

CALAMOS ASSET MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(unaudited)

The Company primarily provides investment advisory services to individuals and institutional investors through a series of investment products that include open-end and closed-end funds (Funds), separate accounts, offshore funds and partnerships. The subsidiaries through which the Company provides these services include: Calamos Advisors LLC (CAL), a Delaware limited liability company and registered investment advisor; Calamos Financial Services LLC (CFS), a Delaware limited liability company and registered broker-dealer; Calamos Wealth Management LLC, a Delaware limited liability company and registered investment advisor; and Calamos Investments LLP, a United Kingdom limited liability partnership, registered investment advisor with the Financial Services Authority in the United Kingdom, and a global distributor of our offshore funds and Company products. For reporting purposes, our offshore funds are reported in open-end funds.

(2) Basis of Presentation

The consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (GAAP), which require the use of estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities. Management believes the accounting estimates are appropriate and reasonably stated; however, due to the inherent uncertainties in making estimates, actual amounts could differ from these estimates.

The consolidated financial statements as of March 31, 2012 and for the three months ended March 31, 2012 and 2011 have not been audited by the Company’s independent registered public accounting firm. In the opinion of management, these statements contain all adjustments, including those of a normal recurring nature, necessary for fair presentation of the financial condition and results of operations. The results for the interim periods presented are not necessarily indicative of the results to be obtained for a full fiscal year. This Form 10-Q filing should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.

The Company consolidates investments in which the Company’s ownership exceeds 50% or in which the Company operates and controls the business and affairs of the entity. As such, the consolidated financial statements include the financial statements of CAM, Calamos Investments and Calamos Investments’ wholly- and majority-owned subsidiaries, and as of December 31, 2011 Calamos International Growth Fund LP. All significant intercompany balances and transactions have been eliminated.

The Calamos Interests’ combined 78% and 78.1% interest in Calamos Investments as of March 31, 2012 and December 31, 2011, respectively, is represented as a non-controlling interest in Calamos Investments LLC in the Company’s consolidated financial statements. Non-controlling interest in Calamos Investments is derived by multiplying the historical equity of Calamos Investments by the Calamos Interests’ aggregate ownership percentage for the periods presented. Issuances and repurchases of CAM’s common stock results in changes in CAM’s ownership percentage and to the non-controlling interests’ ownership percentage of Calamos Investments with resulting changes reflected in the consolidated statements of changes in stockholders’ equity. Income is allocated based on the average ownership interest during the period in which the income is earned.

CAL is the general partner and controls the operations of Calamos International Growth Fund LP, thus the Company consolidated the results of the partnership into its consolidated financial results. The combined interests of this partnership not owned by the Company, is presented as non-controlling interest in partnership investments in the Company’s consolidated financial statements.

The assets and liabilities of Calamos International Growth Fund LP are presented on a net basis within partnership investments, net in the consolidated statements of financial condition, the net income is included in investment and other income in the consolidated statements of operations, and the change in partnership investments is included in the net changes in partnership investments in the consolidated statements of cash flows. Calamos International Growth Fund LP is presented on a net basis in order to provide more clarity to the financial position and results of the core operations of the Company. The underlying assets and liabilities that are being consolidated are described in Note 5.
 
 
The Company holds non-controlling interests in certain other partnership investments that are included in partnership investments, net in the consolidated statements of financial condition. These other partnership investments are accounted for under the equity method.

 
9

 


CALAMOS ASSET MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(unaudited)

(3) Investment Securities

As a registered broker-dealer, CFS is required to carry all investment securities it owns at fair value and record all changes in fair value in current earnings. As such, unrealized gains and losses on CFS securities, as well as realized gains and losses on all investment securities, are included in investment and other income (loss) in the consolidated statements of operations. The following table provides a summary of investment securities owned as of March 31, 2012 and December 31, 2011:


   
March 31, 2012
 
 (in thousands)
 
Cost
   
Unrealized
Gains
   
Unrealized
Losses
   
Fair Value
 
Available-for-sale securities:
                       
Funds
                       
Equity
  $ 192,890     $ 4,652     $ (2,310 )   $ 195,232  
Fixed income
    89,085       180       (1,775 )     87,490  
Low-volatility equity
    43,579       166       (24 )     43,721  
Other
    1,710       65       (229 )     1,546  
Total available-for-sale securities
  $ 327,264     $ 5,063     $ (4,338 )   $ 327,989  
CFS securities:
                               
Funds
                               
Equity
  $ 3,004     $ 852     $     $ 3,856  
Common Stock
    55       82             137  
Total CFS securities
  $ 3,059     $ 934     $     $ 3,993  
Total investment securities
                          $ 331,982  

 
 
December 31, 2011
 
(in thousands)
 
Cost
   
Unrealized
Gains
   
Unrealized
Losses
   
Fair Value
 
Available-for-sale securities:
                       
Funds
                       
Equity
  $ 179,459     $ 8,700     $ (15,046 )   $ 173,113  
Fixed income
    88,329       14       (4,566 )     83,777  
Low-volatility equity
    47,581       9,803       (671 )     56,713  
Other
    1,683       28       (350 )     1,361  
Total available-for-sale securities
  $ 317,052     $ 18,545     $ (20,633 )   $ 314,964  
CFS securities:
                               
Funds
                               
Equity
  $ 3,004     $ 399     $     $ 3,403  
Common Stock
    55       74             129  
Total CFS securities
  $ 3,059     $ 473     $     $ 3,532  
Total investment securities
                          $ 318,496  

Of the $331.8 million and $318.4 million investments in Funds at March 31, 2012 and December 31, 2011, respectively, $286.5 million and $276.1 million were invested in affiliated funds.

The aggregate fair value of available-for-sale investment securities that were in an unrealized loss position at March 31, 2012 and December 31, 2011 was $172.3 million and $252.2 million, respectively. As of March 31, 2012, the cumulative losses on securities that had been in a continuous loss position for 12 months or longer were immaterial.

At March 31, 2012 and December 31, 2011, the Company believes that the unrealized losses attributed to its fund investments are only temporary in nature, as these losses are a result of short-term declines in the net asset value of the funds. Further, the Company has the intent and ability to hold these securities for a period of time sufficient to allow for recovery of the market value.

 
10

 


CALAMOS ASSET MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(unaudited)

The table below summarizes information on available-for-sale securities as well as unrealized gains on CFS Securities for the three months ended March 31, 2012 and 2011:

 
 
Three Months Ended March 31,
 
(in thousands)
 
2012
   
2011
 
Available-for-sale securities:
           
Proceeds from sale
  $ 276,516     $ 12,106  
Gross realized gains on sales
    26,440       1,737  
CFS securities:
               
Unrealized gains
  $ 461     $ 603  

The table below summarizes the tax (provision) benefit on unrealized gains and gains reclassified out of accumulated other comprehensive income on available-for-sale securities for the three months ended March 31, 2012 and 2011:

   
Three Months Ended March 31, 2012
 
(in thousands)
 
Before-Tax Amount
   
Tax (Provision) Benefit
   
After-Tax
 Amount
 
Available-for-sale securities:
                 
Changes in unrealized gains
  $ 23,387     $ (1,907 )   $ 21,480  
Reclassification adjustment for realized gains included in income
    (20,574 )     1,679       (18,895 )
Other comprehensive income
  $ 2,813     $ (228 )   $ 2,585  

   
Three Months Ended March 31, 2011
 
(in thousands)
 
Before-Tax Amount
   
Tax (Provision) Benefit
   
After-Tax
 Amount
 
Available-for-sale securities:
                 
Changes in unrealized gains
  $ 15,544     $ (1,284 )   $ 14,260  
Reclassification adjustment for realized gains included in income
    (1,665 )     136       (1,529 )
Other comprehensive income
  $ 13,879     $ (1,148 )   $ 12,731  

 
11

 


CALAMOS ASSET MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(unaudited)

(4) Derivative Assets and Liabilities

In order to reduce the volatility equity markets have on the fair value of the Company’s corporate investment portfolio and to assist in compliance with its debt covenants, the Company uses exchange traded option contracts as an economic hedge of price changes in its investment securities portfolio. The Company's corporate investment portfolio consists of cash and cash equivalents, investment securities, partnership investments and derivative assets and liabilities. The equity price risk in the investment portfolio is hedged using exchange-traded option contracts that correlate most closely with the change in value of the portfolio being hedged. The use of these option contracts is part of a hedge overlay strategy to minimize downside risk in the hedged portfolio, while participating in a portion of the upside of a market rally. The Company may adjust its hedge position in response to movement and volatility in prices and changes in the composition of the hedged portfolio, but generally is not actively buying and selling contracts.

The fair value of option contracts is reported in derivative assets and derivative liabilities in the consolidated statements of financial condition. Net gains and losses on these contracts are reported in investment and other income (loss) in the consolidated statements of operations with net losses of $8.1 million and $6.1 million for the three months ended March 31, 2012 and 2011, respectively. The Company is using these derivatives for risk management purposes but has not designated the contracts as hedges for accounting purposes.

(5) Partnership Investments

Presented below are the underlying assets and liabilities of Calamos International Growth Fund LP that the Company reports on a net consolidated basis, as well as partnership investments that the Company accounts for under the equity method. These investments are presented collectively as partnership investments, net in its consolidated statements of financial condition as of March 31, 2012 and December 31, 2011.

 
(in thousands)
 
March 31,
2012
   
December 31,
2011
 
Consolidated partnership:
           
Securities owned
  $ 13,608     $ 11,471  
Cash and cash equivalents
    207       651  
Other current assets
    251       64  
Accrued expenses and other current liabilities
    (398 )     (127 )
Total
    13,668       12,059  
Equity method investment in partnerships
    22,795       20,997  
Partnership investments, net
  $ 36,463     $ 33,056  

 
12

 


CALAMOS ASSET MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(unaudited)

6) Fair Value Measurements

The Company utilizes a three-tier fair value hierarchy which prioritizes the inputs used in measuring fair value as follows: Level 1 — observable inputs such as quoted prices for identical assets and liabilities in active markets; Level 2 — inputs, other than the quoted prices in active markets, that are observable either directly or indirectly (including quoted prices of similar securities, interest rates, credit risk, etc.); and Level 3 — unobservable inputs in which there is little or no market data, and require the reporting entity to develop its own assumptions. For each period presented, the Company did not have any assets or liabilities measured at fair value using Level 3 measurements. Transfers between levels are measured at the end of the reporting period. The Company had no transfers between levels during the reporting periods.

Investments are presented in the consolidated financial statements at fair value in accordance with GAAP. Investments in open-end funds are stated at fair value based on end of day published net asset values of shares owned by the Company. Investments in securities traded on a national securities exchange are stated at the last reported sales price on the day of valuation. Other securities, including derivatives, traded in the over-the-counter market and listed securities for which no sale was reported on that date are stated at the last quoted bid price. However, short sales positions and call options written are reported at the last quoted asked price. Other securities for which quotations are not readily available are valued at fair value based on observable inputs such as market prices for similar instruments as validated by third party pricing agencies and the Company’s prime broker.

The following tables provide the hierarchy of inputs used to derive the fair value of the Company’s assets and liabilities measured at fair value on a recurring basis as of March 31, 2012 and December 31, 2011, respectively. Foreign currency contracts are presented on a net basis where the right of offset exists, and no impact of these positions exists for either period presented.

   
 
   
Fair Value Measurements Using
 
(in thousands)
Description
 
March 31,
2012
   
Quoted Prices
in Active
Markets for
Identical Assets
and Liabilities
(Level 1)
   
Significant
Other
Observable
Inputs
(Level 2)
 
Cash and cash equivalents
                 
Money market funds
  $ 2,235     $ 2,235     $  
Investment securities (Note 3)
                       
Funds
                       
Equity
    199,088       199,088        
Fixed income
    87,490       87,490        
Low-volatility equity
    43,721       43,721        
Other
    1,546       1,546        
Total Funds
    331,845       331,845        
Common stock
    137       137        
Investment securities
    331,982       331,982        
                         
Derivative assets (Note 4)
                       
Exchange-traded put option contracts
    69       69        
                         
Derivative liabilities (Note 4)
                 
Exchange-traded call option contracts
    (2,604 )     (2,604 )      
                         
Securities owned by the partnership (Note 5)
                       
Common stocks
    13,608       13,543       65  
Fixed income
    206             206  
      13,814       13,543       271  
Total
  $ 345,496     $ 345,225     $ 271  


 
13

 

CALAMOS ASSET MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(unaudited)


   
 
   
Fair Value Measurements Using
 
 (in thousands)
Description
 
December 31,
2011
   
Quoted Prices
in Active
Markets for
Identical Assets
and Liabilities
(Level 1)
   
Significant
Other
Observable
Inputs
(Level 2)
 
Cash and cash equivalents
                 
Money market funds
  $ 3,983     $ 3,983     $  
Investment securities (Note 3)
                       
Funds
                       
Equity
    176,516       176,516        
Fixed income
    83,777       83,777        
Low-volatility equity
    56,713       56,713        
Other
    1,361       1,361        
Total Funds
    318,367       318,367        
Common stock
    129       129        
Investment securities
    318,496       318,496        
                         
Derivative assets (Note 4)
                       
Exchange-traded put option contracts
    1,018       1,018        
                         
Derivative liabilities (Note 4)
                       
Exchange-traded call option contracts
    (3,844 )     (3,844 )      
                         
Securities owned by the partnership (Note 5)
                       
Common stocks
    11,471       11,261       210  
Fixed income
    626             626  
      12,097       11,261       836  
Securities sold but not yet purchased of the partnership (Note 5)
                       
Common stocks
    (72 )     (72 )      
Exchange-traded call option contracts
    (31 )     (31 )      
      (103 )     (103 )      
Total
  $ 331,647     $ 330,811     $ 836  

The fair value of long-term debt, not measured at fair value in the consolidated financial statements, was $109.2 and $109.6 million, respectively at March 31, 2012 and December 31, 2011. The carrying value was $92.1 million at March 31, 2012 and December 31, 2011. These fair value estimates are calculated using discounted cash flows based on the Company’s incremental borrowing rates for the debt and market inputs for similar bonds at the measurement date, and are Level 2 within the fair value hierarchy.

The carrying value of all other financial instruments approximates fair value due to the short maturities of these financial instruments.

(7) Loans Payable

The Company utilizes margin loans for the settlement of call options, as well as an additional source of liquidity. The interest rates that can be charged on margin loans range from 1.75% to 2.50% per annum, based on the Company’s average debt balance and brokerage firm’s lending rate. These loans are due on demand. The Company can borrow up to 70% of its marginable securities on deposit with its brokerage firm. The Company had no margin loan balances outstanding at March 31, 2012 and December 31, 2011.


 
14

 


CALAMOS ASSET MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(unaudited)

(8) Stock Based Compensation

Under the Company’s incentive compensation plan, certain employees of the Company receive stock based compensation comprised of stock options and restricted stock units (RSUs). Historically, RSUs have been settled with newly issued shares so that no cash was used by the Company to settle awards; however, the Company may also use treasury shares or issue new shares upon the exercise of stock options and upon conversion of RSUs. The Company’s Annual Report on Form 10-K for the year ended December 31, 2011 provides details of this plan and its provisions.

During the three months ended March 31, 2012, the Company granted 604,917 RSUs and there were 7,730 RSUs forfeited. During the same period, the Company granted no stock options and there were no stock options forfeited.

During the three months ended March 31, 2012, 277,486 RSUs vested with 68,131 units withheld for taxes and 209,355 RSUs converted into an equal number of shares of CAM’s Class A common stock. The total intrinsic value and the fair value of the converted shares was $2.7 million. The total tax benefit realized in connection with the vesting of the RSUs during the three months ended March 31, 2012 was $314,000, as the Company receives tax benefits based upon the portion of Calamos Investments’ income that it recognizes.

During the three months ended March 31, 2012 and 2011, compensation expense recorded in connection with the RSUs and stock options was $2.2 million and $1.9 million, respectively, of which $475,000 and $410,000, respectively, was credited as additional paid-in capital after giving effect to the non-controlling interests. The amount of deferred tax asset created was $179,000 and $152,000 during the three months ended March 31, 2012 and 2011, respectively. As of March 31, 2012, $20.0 million of total unrecognized compensation expense related to unvested stock option and RSU awards is expected to be recognized over a weighted-average period of 4.1 years.

(9) Non-operating Income (Loss)

Non-operating income (loss) was comprised of the following components for the three months ended March 31, 2012 and 2011:

 
 
 
Three Months Ended
March 31,
 
(in thousands)
 
2012
   
2011
 
Interest income
  $ 88     $ 69  
Interest expense
    (1,504 )     (1,964 )
Net interest expense
    (1,416 )     (1,895 )
Investment income (loss)
    22,198       (2,485 )
Dividend income
    785       821  
Miscellaneous other income
    87       37  
Investment and other income (loss)
    23,070       (1,627 )
Non-operating income (loss)
  $ 21,654     $ (3,522 )



 
15

 


CALAMOS ASSET MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(unaudited)

(10) Income Taxes

Calamos Investments is subject to certain income-based state taxes; therefore, income taxes reflect not only the portion attributed to CAM stockholders but also a portion of income taxes attributable to non-controlling interests.

 
 
 
Three Months Ended
March 31,
 
(in thousands)
 
2012
   
2011
 
Income tax provision
  $ 4,284     $ 2,907  
Income tax provision attributable to non-controlling interest in Calamos Investments
    (72 )     (153 )
Income tax provision attributable to CAM
    4,212       2,754  
Net income attributable to CAM
    7,039       4,632  
Income before taxes attributable to CAM
  $ 11,251     $ 7,386  
CAM’s effective income tax rate
    37.4 %     37.3 %

As of December 31, 2011, the Company’s capital loss carryforward was $27.6 million, of which $21.8 million will expire in 2013 and $5.8 million will expire in 2014, if not used before the expiration dates. As of March 31, 2012 and December 31, 2011, the Company’s valuation allowance on this deferred tax assets was $5.2 million.
 
 
(11) Earnings Per Share

The following table reflects the calculation of basic and diluted earnings per share:

 
 
 
Three Months Ended
March 31,
 
(in thousands, except per share data)
 
2012
   
2011
 
Earnings per share — basic
           
Earnings available to common shareholders
  $ 7,039     $ 4,632  
Weighted average shares outstanding — basic
    20,233       20,035  
Earnings per share — basic
  $ 0.35     $ 0.23  
Earnings per share — diluted
               
Earnings available to common shareholders
  $ 7,039     $ 4,632  
Weighted average shares outstanding — basic
    20,233       20,035  
Dilutive impact of restricted stock units
    417       443  
Weighted average shares outstanding — diluted
    20,650       20,478  
Earnings per share — diluted
  $ 0.34     $ 0.23  

When dilutive, diluted shares outstanding are calculated (a) assuming that Calamos Interests exchanged all of their ownership interest in Calamos Investments and their CAM Class B common stock for shares of CAM’s Class A common stock (the Exchange) and (b) including the effect of outstanding dilutive equity incentive compensation awards. As of March 31, 2012 and 2011, the impact of the Exchange was anti-dilutive and, therefore, excluded from the calculation of diluted earnings per share.

The Company uses the treasury stock method to reflect the dilutive effect of unvested RSUs and unexercised stock options on diluted earnings per share. Under the treasury stock method, if the average market price of common stock increases above the option’s exercise price, the proceeds that would be assumed to be realized from the exercise of the option would be used to acquire outstanding shares of common stock. However, the awards may be anti-dilutive even when the market price of the underlying stock exceeds the option’s exercise price. This result is possible because compensation cost attributed to future services and not yet recognized is included as a component of the assumed proceeds upon exercise. The dilutive effect of such options and RSUs would increase the weighted average number of shares used in the calculation of diluted earnings per share.

The Company amended its certificate of incorporation requiring that the Exchange be based on a fair value approach (details of the amendment are set forth in the Company’s Schedule 14C filed with the Securities and Exchange Commission on January 12, 2009). The amendment results in the same or fewer shares of Class A common stock being issued at the time of the Exchange.

 
16

 


CALAMOS ASSET MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(unaudited)

The shares issued upon Exchange as presented are estimated solely on the formula as described in the Schedule 14C that does not necessarily reflect all inputs used in a fair valuation. It is critical to note that this formula does not incorporate certain economic factors and as such, in the event of an actual Exchange, the majority of the Company’s independent directors may determine the fair market value of CAM’s net assets and its ownership in Calamos Investments. For example, premiums and/or discounts for control and marketability as well as a different discount rate for future cash flows may be applied. Therefore, the directors’ valuation may result in the actual number of shares being materially different from the shares presented. Further, based upon currently available information, the Company believes it is extremely remote that any Exchange would transpire without a fair market valuation of CAM’s net assets and an agreement by Calamos Interests to Exchange, based upon that fair market valuation.

The following table shows the number of shares which were excluded from the computation of diluted earnings per share as they were anti-dilutive:

 
 
 
Three Months Ended
March 31,
 
 
 
2012
   
2011
 
Exchange of Calamos Interests' ownership interest in Calamos Investments for shares of Class A common stock
    44,864,134       51,451,838  
Stock options
    2,345,063       2,368,245  
Total
    47,209,197       53,820,083  

The maximum number of shares of Class A common stock that could be issued to the Calamos Interests upon exchange is 71,930,841 as of March 31, 2012.

(12) Recently Issued Accounting Pronouncements

The Company has reviewed all newly issued accounting pronouncements that are applicable to its business and to the preparation of its consolidated financial statements, including those not yet required to be adopted. The Company does not believe any such pronouncements will have a material effect on the Company’s financial position or results of operations. Accounting guidance that either have become effective this year or will become effective in future years, with respect to the Company’s consolidated financial statements, are described below:

In December 2011, the Financial Accounting Standards Board (“FASB”) issued new guidance that requires an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. This guidance is effective for annual and interim periods beginning on or after January 1, 2013. An entity should provide the disclosures required by those amendments retrospectively for all comparative periods presented. The Company’s effective date is January 1, 2013. The adoption of this guidance is not expected to have a material impact on the Company’s financial position or results of operations.

In June 2011, the FASB issued new guidance that requires an entity to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. An entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. This update eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders' equity. The Company has elected the two separate but consecutive statements approach with the adoption of this guidance. This guidance is effective and is being adopted with the issuance of this report.

In May 2011, the FASB issued new guidance to clarify the application of existing fair value measurement requirements and to change particular principles or requirements for measuring fair value or for disclosing information about fair value measurements. This guidance is effective as of the issuance of this report and has been adopted by the Company. The adoption of this guidance has resulted in the Company reporting the level in the fair value hierarchy and the observable inputs required for the calculation of the fair value of the Company’s long-term debt.

 
17

 


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

We are a firm of 341 full-time associates that provides investment advisory services to institutions and individuals, managing $36.2 billion in assets as of March 31, 2012. Our operating results fluctuate primarily due to changes in the total value and composition of our assets under management. The value and composition of our assets under management are, and will continue to be, influenced by a variety of factors including: purchases and redemptions of shares of open-end funds; net inflows into and withdrawals from separate accounts that we manage; fluctuations in the financial markets around the world that result in appreciation or depreciation of assets under management; and the number and types of our investment strategies and products.

We market our investment strategies to our clients through a variety of products designed to suit their investment needs. We currently categorize the portfolios that we manage within four investment product types captured in our Funds and separate accounts. The following table lists our assets under management by product as of March 31, 2012 and 2011.

 
 
March 31,
 
(in millions)
 
2012
   
2011
 
Funds
           
Open-end funds
  $ 21,872     $ 23,575  
Closed-end funds
    5,563       5,506  
Total Funds
    27,435       29,081  
Separate Accounts
               
Institutional accounts
    6,291       6,179  
Managed accounts
    2,491       2,701  
Total separate accounts
    8,782       8,880  
Total Assets Under Management
  $ 36,217     $ 37,961  

Our revenues are substantially comprised of investment management fees earned under contracts with Funds and separate accounts that we manage. Our revenues are also comprised of distribution and underwriting fees, including asset-based distributions and/or service fees received pursuant to Rule 12b-1 plans. Investment management fees and distribution and underwriting fees may fluctuate based on a number of factors including: the total value and composition of our assets under management; market appreciation or depreciation on investment; the level of net inflows and outflows, which represent the sum of new and existing client funding, withdrawals and terminations; and purchases and redemptions of open-end fund shares. The mix of assets under management among our investment products impacts our revenues as our fee schedules vary by product.

Our largest operating expenses are typically related to: employee compensation and benefits expenses, which includes salaries, incentive compensation and related benefits costs; distribution expenses, which includes open-end funds distribution cost, including Rule 12b-1 payments; marketing and sales promotion expenses, which includes expenses necessary to market products offered by us; and amortization of deferred sales commissions for open-end funds. Operating expenses may fluctuate due to a number of factors including variations in staffing and compensation, changes in distribution expense as a result of fluctuations in open-end fund net sales and market appreciation or depreciation, and marketing-related expenses that include supplemental distribution payments.

 
18

 

Operating Results

Three Months Ended March 31, 2012 Compared to Three Months Ended March 31, 2011

Assets Under Management

Assets under management decreased by $1.7 billion, or 5%, to $36.2 billion as of March 31, 2012 from $38.0 billion as of March 31, 2011. Our assets under management consisted of 76% Funds and 24% separate accounts as of March 31, 2012 and 77% Funds and 23% separate accounts as of March 31, 2011.

 
 
Three Months Ended March 31,
   
Change
 
(in millions)
 
2012
   
2011
   
Amount
   
Percent
 
Funds
                       
Beginning assets under management
  $ 25,045     $ 27,352     $ (2,307 )     (8 )%
Net (redemptions) purchases
    (32 )     346       (378 )     *  
Market appreciation
    2,422       1,383       1,039       75  
Ending assets under management
    27,435       29,081       (1,646 )     (6 )
Average assets under management
    26,700       28,367       (1,667 )     (6 )
Institutional
                               
Beginning assets under management
    5,505       5,559       (54 )     (1 )
Net purchases
    241       254       (13 )     (5 )
Market appreciation
    545       366       179       49  
Ending assets under management
    6,291       6,179       112       2  
Average assets under management
    6,019       5,815       204       4  
Managed Accounts
                               
Beginning assets under management
    2,227       2,503       (276 )     (11 )
Net (redemptions) purchases
    (45 )     18       (63 )     *  
Market appreciation
    309       180       129       72  
Ending assets under management
    2,491       2,701       (210 )     (8 )
Average assets under management
    2,384       2,598       (214 )     (8 )
Total Assets Under Management
                               
Beginning assets under management
    32,777       35,414       (2,637 )     (7 )
Net inflows
    164       618       (454 )     (73 )
Market appreciation
    3,276       1,929       1,347       70  
Ending assets under management
    36,217       37,961       (1,744 )     (5 )
Average assets under management
  $ 35,103     $ 36,780     $ (1,677 )     (5 )%
____________

*
Not meaningful.

Net redemptions in our Funds were $32 million in the first quarter of 2012, compared to net purchases of $346 million in the first quarter of 2011. While we attracted net sales from investors into 10 of our 18 open-end funds during 2012, these inflows were not sufficient to overcome the net outflows sustained from the net redemptions in our Growth Fund and Convertible Fund. Net inflows were strongest in our global and international strategies, which had net sales of $409 million in the first quarter of 2012. Market appreciation in all of our Funds totaled $2.4 billion in the first quarter of 2012 an increase of $1.0 billion from appreciation of $1.4 billion in the first quarter of 2011.

Separate accounts, which represent institutional and managed accounts, combined net purchases were $196 million in the first quarter of 2012, compared to net purchases of $272 million in the first quarter of 2011. Separate accounts combined market appreciation was $854 million in the first quarter of 2012, an increase of $308 million from market appreciation of $546 million in the first quarter of 2011. Separate accounts net purchases were driven primarily from our growth in domestic institutional accounts in our international and global equity strategies. 

 
19

 


Financial Overview

   
Three Months Ended March 31,
   
Change
 
(in thousands, except margin)
 
2012
   
2011
   
Amount
   
Percent
 
Operating income
  $ 31,053     $ 37,315     $ (6,262 )     (17 )%
Operating margin
    36.4 %     41.2 %     (4.8 )%     (12 )%
Net income attributable to Calamos Asset Management, Inc.
  $ 7,039     $ 4,632     $ 2,407       52 %

Operating income of $31.1 million decreased by $6.3 million, or 17% from the first quarter of 2011. Operating margin for the current quarter decreased to 36.4% from 41.2% for the first quarter of 2011. In spite of the decline in operating results, net income attributable to Calamos Asset Management, Inc. (CAM) increased by $2.4 million or 52% as a result of realized gains on our investment portfolio and dividends, net of losses on derivatives, totaling $23.0 million, compared to net losses of $1.7 million during the prior period. Derivatives are used as an economic hedge to price changes in our corporate investment portfolio. Unlike the changes in the security prices for the investment securities being hedged, price changes in the derivatives impact current period earnings.

In order to grow assets under management, we engage in distribution and underwriting activities, principally with respect to our family of open-end funds. When analyzing our business, we consider the result of these distribution activities on a net revenue basis as they are typically a result of a single open-end fund share purchase. Generally accepted accounting principles in the United States (GAAP) requires that we present these activities on a gross revenue basis, thus resulting in a reduction to our overall operating margin, as the margin on distribution activities is generally lower than the margins on the remainder of our business. While we do not adjust our margin for these activities on a net revenue basis, we believe the margin table below is useful to understanding the impact of distribution activities on our margin.

The following table summarizes the net distribution fee margin for the years ended March 31, 2012 and 2011:


 
 
Three Months Ended March 31,
 
(in thousands)
 
2012
   
2011
 
Distribution and underwriting fees
  $ 18,506     $ 22,112  
Distribution expenses
    (16,072 )     (18,233 )
Amortization of deferred sales commissions
    (1,409 )     (1,748 )
Net distribution fees
  $ 1,025     $ 2,131  
Net distribution fee margin
    6 %     10 %

Net distribution fee margin varies by share class because each share class has different distribution and underwriting activities, which are described in our 2011 Annual Report on Form 10-K. Distribution fee revenues and expenses vary with our average assets under management while deferred sales commissions are typically amortized on a straight-line basis with adjustments made upon redemption of existing assets. As a result, in periods of declining assets under management, our distribution margin will be more severely impacted by amortization expense.

Revenues

Total revenues decreased by $5.3 million, or 6%, to $85.3 million for the first quarter of 2012 from $90.5 million for the first quarter of 2011. The decrease was primarily due to lower investment management fees and distribution and underwriting fees, as can be seen in the table below:

 
 
Three Months Ended March 31,
   
Change
 
(in thousands)
 
2012
   
2011
   
Amount
   
Percent
 
Investment management fees
  $ 65,987     $ 67,608     $ (1,621 )     (2 )%
Distribution and underwriting fees
    18,506       22,112       (3,606 )     (16 )
Other
    783       828       (45 )     (5 )
Total revenues
  $ 85,276     $ 90,548     $ (5,272 )     (6 )%

Investment management fees decreased 2% in the first quarter of 2012 compared to the first quarter of 2011 primarily due to a $1.7 billion, or 5%, decrease in average assets under management for the same periods. Investment management fees from open-end funds decreased to $41.3 million for the first quarter of 2012, from $43.4 million for the first quarter of 2011, driven by a $1.7 billion decrease in open-end fund average assets under management. Investment management fees from our closed-end funds increased to $12.4 million for the first quarter of 2012 from $12.1 million for the first quarter of 2011, due to a $70 million increase in closed-end fund average assets under management. Investment management fees from our separately managed accounts were $12.2 million for the first quarter of 2012 a slight increase from $12.1 million for the first quarter of 2011. Investment management fees that we earned as a percentage of average assets under management were 0.76% for the first quarter of 2012 compared to 0.75% for the first quarter of 2011.

 
20

 


Distribution and underwriting fees decreased by 16% in the first quarter of 2012 compared to the first quarter of 2011, partially due to a decrease of 8% in our average open-end fund assets for the same periods. The decrease in distribution and underwriting fees was also due to a shift in open-end fund assets from Class A, B and C shares to Class I shares. More open-end fund investors are choosing to compensate their financial advisors through fee based models, increasing the demand for and a shift in assets toward our Class I shares. Because we do not collect distribution fees from Class I shares, our distribution revenue has decreased with this shift in assets.

Operating Expenses

Operating expenses increased by $990,000 to $54.2 million in the first quarter 2012 from $53.2 million in the first quarter 2011 reflecting increased employee compensation, marketing and administrative expenses, and partially offset by a reduction in distribution and amortization of deferred sales expenses.

 
 
Three Months Ended March 31,
   
Change
 
(in thousands)
 
2012
   
2011
   
Amount
   
Percent
 
Employee compensation and benefits
  $ 22,203     $ 20,632     $ 1,571       8 %
Distribution expenses
    16,072       18,233       (2,161 )     (12 )
Amortization of deferred sales commissions
    1,409       1,748       (339 )     (19 )
Marketing and sales promotion
    4,426       3,439       987       29  
General and administrative
    10,113       9,181       932       10  
Total operating expenses
  $ 54,223     $ 53,233     $ 990       2 %

Employee compensation and benefits expenses increased by $1.6 million to $22.2 million for first quarter of 2012 when compared to the first quarter of 2011. This increase is mostly attributable to an increase in salary, payroll taxes, equity compensation and performance-based incentive compensation. These increases are due to increases in the number of associates we employ and our investment into more distribution and client focused personnel.

Distribution expenses decreased by $2.2 million, or 12%, to $16.1 million for the first quarter of 2012 when compared to the first quarter of 2011. The decrease was due to a reduction of 8% in average assets under management for open-end funds during the same periods, and a continued shift of average open-end fund assets to Class I shares which do not result in distribution expenses. This decrease was partially offset by an increase in distribution expense as a result of an increase in the average Class C shares assets older than one year. As Class C shares age pass one year, the associated distribution fees are paid to broker-dealers and other intermediaries. As such, increases in the average Class C share assets older than one year results in an increase in distribution expenses.

Amortization of deferred sales commissions decreased by $339,000 to $1.4 million for the first quarter of 2012 when compared to the first quarter of 2011, due to the increase in the average Class C share assets older than one. As mentioned earlier, once Class C shares age past one year they are no longer retained and amortized, but paid to broker-dealers and other intermediaries and recorded as distribution expenses. Hence, the aging of Class C shares reduces amortization of deferred sales commission, but increases distribution expenses.

Marketing and sales promotion increased by $987,000 to $4.4 million for the first quarter of 2012 when compared to the first quarter of 2011, largely the result of an increase in fund administrative “Cap” expenses, which are non-reimbursable expenses we pay to reduce the service fees to our fund investors, and an increase in marketing and sales promotion expenses due to our increase spending to build awareness about our investment strategies. These increases were partially offset by a decrease in supplemental distribution payments to distribution intermediaries. Supplemental distribution payments to are positively correlated with the levels of open-end fund assets that we manage.

General and administrative expenses increased by $932,000 to $10.1 million for the first quarter of 2012. Many offsetting factors gave rise to the net increase in expense during the quarter. However, the main drivers to the increase are client reimbursements related to trade correction expenses, software maintenance costs, partially offset by reduced outside professional services.

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

Non-operating income (loss), net of non-controlling interest in partnerships increased by $23.6 million to $20.0 million for the first quarter of 2012 when compared to the first quarter of 2011. The increase was due to an increase in investment income, net of losses on option contracts, of $24.7 million for the periods. Increase in investment income was a result of realized gains on our investments, as part of our tax harvesting strategy. Option contracts are used to hedge our corporate investment portfolio. The increase in non-operating income (loss), net of non-controlling interest in partnerships was also partially due to lower interest expense of $460,000 as a result of debt repayment during the second quarter of 2011. The following table summarizes our non-operating activities, net of non-controlling interest in partnership investments for the three months ended March 31, 2012 and 2011:

 
 
Three Months Ended March 31,
       
(in thousands)
 
2012
   
2011
   
Change
 
Interest income
  $ 88     $ 69     $ 19  
Interest expense
    (1,504 )     (1,964 )     460  
Net interest expense
    (1,416 )     (1,895 )     479  
                         
Investment income (loss)
    22,198       (2,485 )     24,683  
Dividend income
    785       821       (36 )
Miscellaneous other income
    87       37       50  
Investment and other income (loss)
    23,070       (1,627 )     24,697  
Non-operating income (loss)
    21,654       (3,522 )     25,176  
Net income attributable to non-controlling interest in partnership investments
    (1,606 )     (5 )     (1,601 )
Non-operating income (loss), net of non-controlling interest in partnerships
  $ 20,048     $ (3,527 )   $ 23,575  

The following table provides a summary of the returns that we generated from our corporate investment portfolio. This table combines the investment and dividend income as reported in our statement of operations with the change in fair value of our investment securities that are recorded in accumulated other comprehensive income, a component of stockholders' equity, for the three months ended March 31, 2012:

 
 
Three Months Ended March 31, 2012
 
 (in thousands)
 
Non-Operating
Income
   
Change in
Accumulated
Other
Comprehensive
Income
   
Total
 
Funds and common stock
  $ 26,901     $ 2,813     $ 29,714  
Partnership investments
    3,407             3,407  
Option contracts
    (8,110 )           (8,110 )
Investment income
    22,198       2,813       25,011  
Dividend income
    785               785  
Non-controlling interest in partnership investments
    (1,606 )             (1,606 )
Investment portfolio results
  $ 21,377             $ 24,190  
Less: Non-controlling
                       
interest in Calamos Investments LLC
            (2,197 )        
Deferred income taxes
            (228 )        
Change in accumulated other comprehensive income
          $ 388          

Our investment portfolio returned $24.2 million, or 7.3%, in the first quarter of 2012. These results primarily reflect realized and unrealized gains from investment securities, partially offset by net realized and unrealized gains and losses on option contracts used to hedge market value fluctuations in the corporate investment portfolio.

Income Tax Provision

Calamos Investments LLC (Calamos Investments) is subject to certain income-based state taxes; therefore, income taxes reflect not only the portion attributed to us but also income taxes attributable to non-controlling interests. Our effective income tax rates for the three month periods ended March 31, 2012 and 2011 were 37.4% and 37.3%, respectively.

 
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Net Income

Net income attributable to CAM was $7.0 million in the first quarter of 2012, compared to $4.6 million in the first quarter of 2011. Non-GAAP net income attributable to CAM was $6.3 million in the first quarter of 2012, compared to $7.1 million in the first quarter of 2011. See “Supplemental Non-GAAP Financial Measures” of the MD&A below for descriptions of non-GAAP financial measures and a reconciliation of non-GAAP financial measures to GAAP financial measures.

The Calamos Interests has reserved the right to exchange their interest in Calamos Investments for newly issued Class A common shares. At the time of exchange, the Calamos Interests would be granted Class A common shares with a value equal to the fair value of their ownership in Calamos Investments. The method for determining the number of shares the Calamos Interests receive upon exchange is described in Section 3 (c) (ii) of Article IV of the Second Amended and Restated Certificate of Incorporation of CAM. Based upon the number of outstanding shares of Class A common stock at March 31, 2012, and excluding the value of assets we own other than our 22% interest in Calamos Investments, such exchange would result in the Calamos Interests receiving 78% of CAM’s then outstanding Class A common stock.

Following a complete exchange of the Calamos Interests’ 78% ownership interest in Calamos Investments for newly issued Class A common stock, net income attributable to non-controlling interests in Calamos Investments would no longer be presented as a separate line item within our consolidated statement of operations because we would then own 100% of Calamos Investments.

Supplemental Non-GAAP Financial Measures

We provide investors with certain adjusted, non-GAAP financial measures including non-GAAP net income attributable to CAM and non-GAAP diluted earnings per share. These non-GAAP financial measures are provided to supplement our consolidated financial statements presented on a GAAP basis. These non-GAAP financial measures adjust GAAP financial measures to include the tax benefit from amortization of deferred taxes on intangible asset and to exclude CAM’s non-operating income (loss), net of taxes. We believe these adjustments are appropriate to enhance an overall understanding of our operating financial performance, as well as to facilitate comparisons with our historical earnings results. These adjustments to our GAAP results are made with the intent of providing investors a more complete understanding of our underlying earnings results and trends and our marketplace performance. In addition, these non-GAAP financial measures are among the primary indicators management uses as a basis of managing our business.

The presentation of this additional information is not meant to be considered in isolation or as a substitute for the directly comparable financial measures prepared in accordance with GAAP. Investors should review the reconciliations of the non-GAAP financial measures to their most directly comparable GAAP financial measures as provided in the table below:

   
Three Months Ended
March 31,
 
   
2012
   
2011
 
(in thousands, except per share data)
           
Net income attributable to CAM
  $ 7,039     $ 4,632  
Adjustments:
               
Deferred tax amortization on intangible assets
    1,979       1,979  
Non-operating (income) loss, net of taxes
    (2,766 )     483  
Non-GAAP net income attributable to CAM
  $ 6,252     $ 7,094  
                 
Diluted - Weighted average shares outstanding
    20,650,379       20,478,456  
                 
Diluted earnings per share
  $ 0.34     $ 0.23  
Non-GAAP diluted earnings per share
  $ 0.30     $ 0.35  
                 


 
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Non-GAAP net income attributable to CAM is calculated by adjusting the following items from GAAP net income attributable to CAM:

(i) amortization of deferred taxes on intangible assets associated with the election under section 754 of the Internal Revenue Code of 1986, as amended (Section 754 election); and

(ii) CAM’s non-operating income (loss), net of taxes.

Non-GAAP diluted earnings per share is calculated by dividing (i) Non-GAAP net income attributable to CAM by (ii) diluted weighted average shares outstanding.

The deferred tax assets from the Section 754 election allows for a quarterly reduction of $2.0 million in future income taxes owed by us through 2019, to the extent that a tax payable exists during the quarter. As a result, this cash savings will accrue solely for the benefit of the shareholders of CAM’s common stock. We believe that adjusting this item from the calculation of the above non-GAAP items can be a useful measure in allowing investors to see our performance. Non-operating expenses are excluded from the above non-GAAP items as they can distort comparisons between periods. As noted above, we believe that measures excluding these items are useful in analyzing operating trends and allows for more comparability between periods, which may be useful to investors.

We believe that non-GAAP net income attributable to CAM and non-GAAP diluted earnings per share are useful measures of performance and may be useful to investors, because they provide measures of our core business activities adjusting for items that are non-cash and costs that may distort comparisons between periods. These measures are provided in addition to our net income attributable to CAM and diluted earnings per share calculated under GAAP, but are not substitutes for those calculations.

Liquidity and Capital Resources

We manage our liquidity position to ensure adequate resources are available to fund ongoing operations of the business, provide seed capital for new funds, maintain a strong investment-grade credit rating, provide conservative levels of capital for our regulated subsidiaries and invest in other corporate strategic initiatives. Our principal sources of liquidity are cash flows from operating activities and our corporate investment portfolio, which is comprised of cash and cash equivalents, investment securities, derivatives and partnership investments. Investment securities are principally comprised of Company-managed Funds.

Our working capital requirements historically have been met through cash generated by operations. We believe cash generated from operations will be sufficient over the foreseeable future to meet our working capital requirements with respect to the foregoing activities, as well as to support future growth. Further, we expect that cash on hand and cash generated by operations will be sufficient to meet our liquidity needs.

The following table summarizes our principal sources of liquidity as of March 31, 2012 and December 31, 2011:

 
(in thousands)
 
March 31, 2012
   
December 31, 2011
   
Increase
(Decrease)
 
Cash and cash equivalents
  $ 98,084     $ 102,166     $ (4,082 )
Investment securities
    331,982       318,496       13,486  
Derivatives, net
    (2,535 )     (2,826 )     291  
Partnership investments, net of non-controlling interests
    22,822       21,022       1,800  
Total corporate investment portfolio
  $ 450,353     $ 438,858     $ 11,495  

We utilize a hedging strategy using exchange traded equity option contracts as an economic hedge to reduce downside risk and price volatility of the total portfolio value as well as to support compliance with the financial ratios associated with our long-term debt. This strategy allows us the flexibility to continue to provide seed capital for the development of new products when necessary, while seeking to help reduce risk and to maintain a solid credit rating.

Calamos Investments is the borrower of our $92.1 million in long-term debt. Calamos Investments was in compliance with all financial covenants at March 31, 2012 and December 31, 2011. Calamos Investments currently has an investment-grade BBB+ rating from Standard & Poor’s.

 
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The following is a summary of our covenant compliance as of March 31, 2012 with the defined terms and covenants having the same meanings set forth under our amended note purchase agreements:

Covenant
 
Results as of
March 31, 2012
 
EBITDA/interest expense — not less than 3.0
    23.99  
Debt/EBITDA — not more than 2.75
    0.62  
Investment coverage ratio — not less than 1.175
    4.22  
Net worth — not less than $160 million
 
$321 million
 

The following tables summarize key data relating to our liquidity and capital resources:

(in thousands)
 
March 31,
2012
   
December 31,
2011
 
Statements of financial condition data:
           
Cash and cash equivalents
  $ 98,084     $ 102,166  
Receivables
    31,834       28,527  
Investment securities and derivatives, net
    329,447       315,670  
Partnership investments, net of non-controlling interest
    22,822       21,022  
Deferred tax assets, net
    62,217       65,518  
Deferred sales commissions
    4,695       5,444  
Long-term debt, including current portion
    92,115       92,115  

The deferred tax assets above include an annual reduction of $7.9 million in future income taxes owed by us through 2019. This reduction results from our election under Section 754 of the Internal Revenue Code, whereby we stepped up the tax basis in certain intangible assets to their fair market value. These assets are amortized over fifteen years on CAM’s tax return. As a result, this cash savings will accrue solely for the benefit of the shareholders of CAM’s common stock.

Cash flows for the three months ended March 31, 2012 and 2011 are shown below:

   
March 31,
 
(in thousands)
 
2012
   
2011
 
Cash flow data:
           
Net cash provided by operating activities
  $ 13,302     $ 20,966  
Net cash provided by (used in) investing activities
    5,970       (10,153 )
Net cash used in financing activities
    (23,354 )     (15,143 )

Net cash provided by operating activities totaled $13.3 million for the three months ended March 31, 2012. These net cash flows are primarily attributable to investment management and distribution and underwriting fees generated by core business activities, partially offset by staff, distribution, and other operating expenses.

Net cash provided in investing activities totaled $6.0 million for the three months ended March 31, 2012. The net cash provided in investing activities primarily represents the liquidation of one of our sponsored funds resulting in net cash inflows of $17.0 million, partially offset by net purchases of derivatives of $8.4 million, which are used as economic hedges against the equity price risk in our investment portfolio. The remaining sales and re-purchases of investing activities resulted in little change in cash provided by investing activities. These sales and re-purchases of investments were the result of us realizing gains on our investment securities as a result of our tax harvesting strategy.

Net cash used in financing activities totaled $23.4 million for the three months ended March 31, 2012, largely representing pro rata distributions from Calamos Investments paid to non-controlling interests in the amount of $21.3 million and dividends paid to CAM’s common shareholders in the amount of $1.9 million. Pro rata distributions from Calamos Investments were also paid to CAM in the amount of $6.2 million. These distributions are not reflected in the net cash flows used in financing activities; however they increase the cash available exclusively to the CAM’s common shareholders. We expect cash flows from financing activities to change with tax distributions based on the levels of income that we generate.

 
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Recently Issued Accounting Pronouncements

The Company has reviewed all newly issued accounting pronouncements that are applicable to its business and to the preparation of its consolidated financial statements, including those not yet required to be adopted. The Company does not believe any such pronouncements will have a material effect on the Company’s financial position or results of operations. Accounting guidance that either have become effective this year or will become effective in future years, with respect to the Company’s consolidated financial statements, are described below: