Filed pursuant to Rule 497(h)
under the Securities Act of 1933
File No. 333-129102
PROSPECTUS
$59,000,000
CALAMOS GLOBAL TOTAL RETURN FUND
PREFERRED SHARES
2,360 SHARES, SERIES T
LIQUIDATION PREFERENCE $25,000 PER SHARE
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Investment Objective. Calamos Global Total Return Fund (the "Fund") is a
recently organized, diversified, closed-end management investment company. The
Fund's investment objective is to provide total return through a combination of
capital appreciation and current income.
Portfolio Contents. Under normal circumstances, the Fund will invest
primarily in a portfolio of common and preferred stocks, convertible securities
and income producing securities such as investment grade and below investment
grade (high yield/high risk) debt securities. The Fund, under normal
circumstances, will invest at least 50% of its managed assets in equity
securities (including securities that are convertible into equity securities).
The Fund may invest up to 100% of its managed assets in securities of foreign
issuers, including debt and equity securities of corporate issuers and debt
securities of government issuers, in developed and emerging markets. Under
normal circumstances, the Fund will invest at least 30% of its managed assets in
securities of foreign issuers. The Fund will invest in the securities of issuers
of several different countries throughout the world, in addition to the United
States. The Fund may also seek to generate income from option premiums by
writing (selling) options (with an aggregate notional value of up to 33% of the
value of the Fund's managed assets). "Managed assets" means the total assets of
the Fund (including any assets attributable to any leverage that may be
outstanding) minus the sum of accrued liabilities (other than debt representing
financial leverage). For this purpose the liquidation preference on any
preferred shares will not constitute a liability. Below investment grade (high
yield/high risk) securities are rated Ba or lower by Moody's Investors Service,
Inc. ("Moody's") or BB or lower by Standard & Poor's, a division of The
McGraw-Hill Companies, Inc. ("S&P") or are unrated securities of comparable
quality as determined by the Fund's investment adviser. Below investment grade
securities are commonly referred to as "junk bonds" and are considered
speculative with respect to the issuer's capacity to pay interest and repay
principal. They involve greater risk of loss, are subject to greater price
volatility and are less liquid, especially during periods of economic
uncertainty or change, than higher rated securities. There can be no assurance
that the Fund will achieve its investment objective.
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INVESTING IN THE FUND'S PREFERRED SHARES INVOLVES RISKS. SEE "RISK FACTORS"
BEGINNING ON PAGE 24.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
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PER SHARE TOTAL
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Public Offering Price $25,000 $59,000,000
Sales Load $ 250 $ 590,000
Proceeds, before expenses, to the Fund(1) $24,750 $58,410,000
(1) Total expenses of issuance and distribution, excluding sales load, are
estimated to be $316,326.
The underwriters are offering the Preferred Shares subject to various
conditions. The Preferred Shares will be ready for delivery in book-entry form
only, through the facilities of The Depository Trust Company on or about January
6, 2006.
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CITIGROUP
January 4, 2006
(continued from previous page)
Preferred Shares. The Fund is offering 2,360 shares of Series T Preferred
Shares. The shares are referred to in this prospectus as "Preferred Shares." The
Preferred Shares have a liquidation preference of $25,000 per share, plus any
accumulated, unpaid dividends. The Preferred Shares also have priority over the
Fund's common shares as to distribution of assets as described in this
prospectus. It is a condition of closing this offering that the Preferred Shares
be offered with a rating of "AAA" from Fitch Ratings ("Fitch") and "AAA" from
S&P.
The dividend rate for the initial dividend period will be 4.05% for Series
T Preferred Shares. The initial dividend period is from the date of issuance
through January 17, 2006, an initial dividend period of 12 days. For subsequent
dividend periods, Preferred Shares pay dividends based on a rate set at auction,
usually held weekly. Dividends on the Preferred Shares will be cumulative.
Prospective purchasers should carefully review the auction procedures described
in this prospectus and should note: (1) a buy order (called a "bid order") or
sell order is a commitment to buy or sell Preferred Shares based on the results
of an auction; (2) auctions will be conducted by telephone; and (3) purchases
and sales will be settled on the next business day after the auction.
The Preferred Shares are redeemable, in whole or in part, at the option of
the Fund on the second business day prior to any date dividends are paid on the
Preferred Shares, and will be subject to mandatory redemption in certain
circumstances at a redemption price of $25,000 per share, plus accumulated,
unpaid dividends to the date of redemption, plus a premium in certain
circumstances.
The Preferred Shares will not be listed on an exchange. You may only buy or
sell Preferred Shares through an order placed at an auction with or through a
broker-dealer that has entered into an agreement with the auction agent and the
Fund or in a secondary market maintained by certain broker-dealers. These
broker-dealers are not required to maintain this market, and it may not provide
you with liquidity.
The Preferred Shares do not represent a deposit or obligation of, and are
not guaranteed or endorsed by, any bank or other insured depository institution
and are not federally insured by the Federal Deposit Insurance Corporation, the
Federal Reserve Board or any other government agency.
You should read this prospectus, which contains important information about
the Fund, before deciding whether to invest in the Preferred Shares, and retain
it for future reference. A statement of additional information, dated January 4,
2006, containing additional information about the Fund, has been filed with the
Securities and Exchange Commission (the "Commission") and is incorporated by
reference in its entirety into this prospectus. You may request a free copy of
the statement of additional information, the table of contents of which is on
page 57 of this prospectus, or the Fund's annual and semi-annual report by
calling 1-800-582-6959 or by writing to the Fund. The Fund's annual and
semi-annual reports are also available on its website at www.calamos.com, which
will also provide a link to the Commission's website described below where the
Fund's Statement of Additional Information may be obtained, as described below.
You can review and copy documents the Fund has filed at the Commission's Public
Reference Room in Washington, D.C. Call 1-202-551-8090 for information. The
Commission charges a fee for copies. You can get the same information free from
the Commission's EDGAR database on the Internet (http://www.sec.gov). You may
also e-mail requests for these documents to publicinfo@sec.gov or make a request
in writing to the Commission's Public Reference Section, Washington, D.C.
20549-0213.
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN OR INCORPORATED BY
REFERENCE IN THIS PROSPECTUS. WE HAVE NOT, AND THE UNDERWRITERS HAVE NOT,
AUTHORIZED ANY OTHER PERSON TO PROVIDE YOU WITH DIFFERENT INFORMATION. IF ANYONE
PROVIDES YOU WITH DIFFERENT OR INCONSISTENT INFORMATION, YOU SHOULD NOT RELY ON
IT. WE ARE NOT, AND THE UNDERWRITERS ARE NOT, MAKING AN OFFER TO SELL THESE
SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED.
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TABLE OF CONTENTS
PAGE
----
Prospectus Summary.......................................... 1
Financial Highlights........................................ 13
The Fund.................................................... 14
Use Of Proceeds............................................. 14
Capitalization (Unaudited).................................. 15
Portfolio Composition....................................... 15
The Fund's Investments...................................... 16
Leverage.................................................... 22
Interest Rate Transactions.................................. 23
Risk Factors................................................ 24
Management of the Fund...................................... 33
Description of Preferred Shares............................. 36
The Auction................................................. 46
Description of Borrowings................................... 50
Description of Common Shares................................ 50
U.S. Federal Income Tax Matters............................. 51
Certain Provisions of the Agreement and Declaration of Trust
and By-Laws............................................... 53
Custodian, Auction Agent, Transfer Agent, Dividend Paying
Agent and Registrar....................................... 54
Underwriting................................................ 55
Legal Opinions.............................................. 56
Available Information....................................... 56
Table of Contents for The Statement of Additional
Information............................................... 57
i
PROSPECTUS SUMMARY
This is only a summary. This summary does not contain all of the
information that you should consider before investing in the Fund's Preferred
Shares. You should review the more detailed information contained in this
prospectus and in the Statement of Additional Information, especially the
information set forth under the heading "Risk Factors."
THE FUND...................... Calamos Global Total Return Fund is a recently
organized, diversified, closed-end management
investment company. Throughout the prospectus,
we refer to Calamos Global Total Return Fund as
the "Fund" or as "we," "us," or "our." See "The
Fund." The Fund's common shares are traded on
the New York Stock Exchange under the symbol
"CGO." As of December 14, 2005, the Fund had
8,006,981 common shares outstanding and net
assets of $119,045,237. The Fund's principal
offices are located at 2020 Calamos Court,
Naperville, Illinois 60563.
THE OFFERING.................. We are offering 2,360 Series T Preferred
Shares, each at a purchase price of $25,000 per
share. The Preferred Shares are offered through
Citigroup Global Markets Inc.
The Preferred Shares entitle their holders to
receive cash dividends at an annual rate that
may vary for the successive dividend periods
for the Preferred Shares. In general, except as
described under " --Dividends and Dividend
Periods" below and "Description of Preferred
Shares -- Dividends and Dividend Periods," the
dividend period for the Series T Preferred
Shares will be seven days. The auction agent
will determine the dividend rate for a
particular period by an auction conducted on
the business day immediately prior to the start
of that dividend period. See "The Auction."
Generally, investors in Preferred Shares will
not receive certificates representing ownership
of their shares. The securities depository (The
Depository Trust Company or any successor) or
its nominee for the account of the investor's
broker-dealer will maintain record ownership of
Preferred Shares in book-entry form. An
investor's broker-dealer, in turn, will
maintain records of that investor's beneficial
ownership of Preferred Shares.
INVESTMENT OBJECTIVE.......... The Fund's investment objective is to provide
total return through a combination of capital
appreciation and current income. There can be
no assurance that the Fund will achieve its
investment objective. See "The Fund's
Investments -- Investment Objective."
INVESTMENT POLICIES........... Principal Investments Under normal
circumstances, the Fund will invest primarily
in a portfolio of common and preferred stocks,
convertible securities and income producing
securities such as investment grade and below
investment grade (high yield/high risk) debt
securities. The Fund, under normal
circumstances, will invest at least 50% of its
managed assets in equity securities (including
securities that are convertible into equity
securities). The Fund may invest up to 100% of
its managed assets in securities of foreign
issuers, including debt and equity securities
of corporate issuers and debt securities of
government issuers, in developed and emerging
markets. Under
1
normal circumstances, the Fund will invest at
least 30% of its managed assets in securities
of foreign issuers. The Fund will invest in the
securities of issuers of several different
countries throughout the world, in addition to
the United States.
Calamos Advisors LLC, the Fund's investment
adviser ("Calamos"), will dynamically allocate
the Fund's investments among multiple asset
classes (rather than maintaining a fixed or
static allocation), seeking to obtain an
appropriate balance of risk and reward through
all market cycles using multiple strategies and
combining them to seek to achieve favorable
risk adjusted returns. See "The Fund's
Investments -- Principal Investment
Strategies."
The Fund will attempt to keep a consistent
balance between risk and reward over the course
of different market cycles, through various
combinations of stocks, bonds, and/or
convertible securities, to achieve what Calamos
believes to be an appropriate blend for the
then current market. As the market environment
changes, portfolio securities may change in an
attempt to achieve a relatively consistent risk
level over time. At some points in a market
cycle, one type of security may make up a
substantial portion of the Fund's portfolio,
while at other times certain securities may
have minimal or no representation, depending on
market conditions. See "The Fund's
Investments -- Principal Investment
Strategies."
The Fund may also seek to generate income from
option premiums by writing (selling) options
(with an aggregate notional value of up to 33%
of the value of the Fund's managed assets). The
Fund will opportunistically employ a strategy
of writing options. The extent of option
writing activity will depend upon market
conditions and Calamos' ongoing assessment of
the attractiveness of writing options on the
Fund's equity holdings. See "The Fund's
Investments -- Principal Investment
Strategies."
Equity Securities. Equity securities include
common and preferred stocks, warrants, rights,
and depository receipts. Under normal
circumstances, the Fund will invest at least
50% of its managed assets in equity securities
(including securities that are convertible into
equity securities). The Fund may invest in
preferred stocks and convertible securities of
any rating, including below investment grade.
See "-- High Yield Securities" below. An
investment in the equity securities of a
company represents a proportionate ownership
interest in that company. Therefore, the Fund
participates in the financial success or
failure of any company in which it has an
equity interest.
High Yield Securities. The Fund may invest in
high yield securities for either current income
or capital appreciation or both. These
securities are rated below investment grade
(i.e., rated Ba or lower by Moody's or BB or
lower by S&P) or are unrated securities of
comparable quality as determined by Calamos.
The Fund may invest in high yield securities of
any rating. Debt securities rated below
investment grade are
2
commonly referred to as "junk bonds" and are
considered speculative with respect to the
issuer's capacity to pay interest and repay
principal. They involve greater risk of loss,
are subject to greater price volatility and are
less liquid, especially during periods of
economic uncertainty or change, than higher
rated debt securities.
Foreign Securities. The Fund may invest up to
100% of its managed assets in securities of
foreign issuers, including debt and equity
securities of corporate issuers and debt
securities of government issuers, in developed
and emerging markets. Under normal
circumstances, the Fund will invest at least
30% of its managed assets in securities of
foreign issuers; however, the Fund anticipates
that ordinarily Calamos' investment process
will result in the Fund investing at least 40%
of its managed assets in securities of foreign
issuers. The Fund will invest in the securities
of issuers of several different countries
throughout the world, in addition to the United
States. A foreign issuer is a company organized
under the laws of a foreign country.
Convertible Securities. The Fund may invest in
convertible securities. A convertible security
is a debt security or preferred stock that is
exchangeable for an equity security (typically
of the same issuer) at a predetermined price
(the "conversion price") or a security that
mandatorily converts to an equity security at a
predetermined time. Depending upon the
relationship of the conversion price to the
market value of the underlying security, a
convertible security may trade more like an
equity security than a debt instrument. The
Fund may invest in convertible securities of
any rating. Securities that are convertible
into equity securities are considered equity
securities for purposes of the Fund's policy to
invest at least 50% of its managed assets in
equity securities. See "The Fund's
Investments -- Principal Investment
Strategies -- Convertible Securities."
Synthetic Convertible Instruments. Calamos may
also establish a "synthetic" convertible
instrument by combining separate securities
that possess economic characteristics similar
to a convertible security, i.e., an income
component and the right or obligation to
convert to an equity security ("convertible
component"). The income component is achieved
by investing in non-convertible, fixed-income
securities such as bonds, preferred stocks,
money market instruments and other instruments
that provide an income component. The
convertible component is achieved by investing
in warrants or options to buy common stock at a
certain exercise price, or options on a stock
index. The Fund may also purchase synthetic
convertible instruments created by other
parties, typically investment banks, including
convertible structured notes. Different
companies may issue the income and convertible
components, which may be purchased separately,
and at different times. The Fund's holdings of
synthetic convertible instruments are
considered equity securities for purposes of
the Fund's policy to invest at least 50% of its
managed assets in equity securities. If the
Fund purchases a
3
synthetic convertible instrument, a component
of which is an option, such option will not be
considered an option for the purpose of the
Fund's limitations on options described below.
See "The Fund's Investments -- Principal
Investment Strategies -- Synthetic Convertible
Instruments."
Options. The Fund may also seek to generate
income from option premiums by writing
(selling) options (with an aggregate notional
value of up to 33% of the value of the Fund's
managed assets). The Fund may write (sell) call
options (i) on a portion of the equity
securities (including securities that are
convertible into equity securities) in the
Fund's portfolio and (ii) on broad-based
securities indices (such as the S&P 500 or MSCI
EAFE) or certain ETFs (exchange traded funds)
that trade like common stocks but seek to
replicate such market indices. See "The Fund's
Investments -- Principal Investment
Strategies -- Options."
Rule 144A Securities. The Fund may invest
without limit in securities that have not been
registered for public sale, but that are
eligible for purchase and sale by certain
qualified institutional buyers ("Rule 144A
Securities"). Calamos, under the supervision of
the Board of Trustees, will determine whether
Rule 144A Securities are illiquid (that is, not
readily marketable) and thus subject to the
Fund's limit on investing no more than 15% of
its managed assets in illiquid securities. See
"The Fund's Investments -- Principal Investment
Strategies -- Rule 144A Securities."
Zero Coupon Securities. The securities in
which the Fund invests may include zero coupon
securities, which are debt obligations that are
issued or purchased at a significant discount
from face value. The discount approximates the
total amount of interest the security will
accrue and compound over the period until
maturity or the particular interest payment
date at a rate of interest reflecting the
market rate of the security at the time of
issuance. Zero coupon securities do not require
the periodic payment of interest. These
investments benefit the issuer by mitigating
its need for cash to meet debt service, but
generally require a higher rate of return to
attract investors who are willing to defer
receipt of cash. These investments may
experience greater volatility in market value
than U.S. government or other securities that
make regular payments of interest. The Fund
accrues income on these investments for tax and
accounting purposes, which is distributable to
shareholders and which, because no cash is
received at the time of accrual, may require
the liquidation of other portfolio securities
to satisfy the Fund's distribution obligations,
in which case the Fund will forego the
opportunity to purchase additional income
producing assets with the liquidation proceeds.
Zero coupon U.S. government securities include
STRIPS and CUBES, which are issued by the U.S.
Treasury as component parts of U.S. Treasury
bonds and represent scheduled interest and
principal payments on the bonds.
Other Securities. The Fund may invest in other
securities of various types. Normally, the Fund
invests substantially all of its assets to meet
its investment objective. For temporary
defensive
4
purposes, the Fund may depart from its
principal investment strategies and invest part
or all of its assets in securities with
remaining maturities of less than one year,
cash equivalents, or may hold cash. During such
periods, the Fund may not be able to achieve
its investment objective. See "The Fund's
Investments -- Principal Investment
Strategies."
USE OF LEVERAGE BY THE FUND... The Fund may, but is not required to, use
leverage for investment purposes. In addition
to issuing Preferred Shares, the Fund may
borrow money or issue debt securities such as
commercial paper or notes. Throughout the
prospectus, borrowing money and issuing debt
securities may be collectively referred to as
"Borrowings." Any Borrowings will have
seniority over Preferred Shares, and payments
to holders of Preferred Shares in liquidation
or otherwise will be subject to the prior
payment of any Borrowings. As a non-fundamental
policy, financial leverage (the total of
Preferred Shares or other preferred shares and
any Borrowings) may not exceed 38% of the
Fund's total assets. However, the Board of
Trustees reserves the right to issue preferred
shares and Borrowings to the extent permitted
by the Investment Company Act of 1940 (the
"1940 Act"). Since Calamos' management fee is
based upon a percentage of the Fund's managed
assets, which include assets attributable to
any outstanding leverage, the investment
management fee will be higher if the Fund is
leveraged and Calamos will have an incentive to
leverage the Fund. Calamos intends to leverage
the Fund only when it believes that the
potential return on such additional investments
is likely to exceed the costs incurred in
connection with the leverage. See "Leverage."
INTEREST RATE TRANSACTIONS.... In order to seek to reduce the interest rate
risk inherent in the Fund's underlying
investments and capital structure, the Fund, if
market conditions are deemed favorable, may
enter into interest rate swap or cap
transactions to attempt to protect itself from
increasing dividend or interest expenses on its
leverage. The use of interest rate swaps and
caps is a highly specialized activity that
involves investment techniques and risks
different from those associated with ordinary
portfolio security transactions.
In an interest rate swap, the Fund would agree
to pay to the other party to the interest rate
swap (which is known as the "counterparty") a
fixed rate payment in exchange for the
counterparty agreeing to pay to the Fund a
payment at a variable rate that is expected to
approximate the rate on any variable rate
payment obligation on the Fund's leverage. The
payment obligations would be based on the
notional amount of the swap. The Fund's payment
obligations under the swap are general
unsecured obligations of the Fund and are
ranked senior to distributions applicable to
the common shares and the Preferred Shares.
In an interest rate cap, the Fund would pay a
premium to the counterparty to the interest
rate cap and, to the extent that a specified
variable rate index exceeds a predetermined
fixed rate, would receive from the counterparty
payments of the difference based on the
notional amount of such cap. If the
counterparty to an interest rate swap or cap
defaults, the Fund would be obligated
5
to make the payments that it had intended to
avoid. Depending on the state of interest rates
in general, this default could negatively
impact the Fund's ability to make dividend
payments on the Preferred Shares.
In addition, at the time an interest rate swap
or cap transaction reaches its scheduled
termination date, there is a risk that the Fund
would not be able to obtain a replacement
transaction or that the terms of the
replacement would not be as favorable as on the
expiring transaction. If this occurs, it could
have a negative impact on the Fund's ability to
make dividend payments on the Preferred Shares
or interest payments on Borrowings. If the Fund
fails to meet an asset coverage ratio required
by law or if the Fund does not meet a rating
agency guideline in a timely manner, the Fund
may be required to redeem some or all of the
Preferred Shares. See "Redemption" below.
Similarly, the Fund could be required to prepay
the principal amount of Borrowings, if any.
Such redemption or prepayment would likely
result in the Fund seeking to terminate early
all or a portion of any swap or cap
transaction. Early termination of a swap could
result in a termination payment by or to the
Fund. A termination payment by the Fund would
result in a reduction in common share net
earnings. Early termination of a cap could
result in a termination payment to the Fund.
The Fund intends to maintain in a segregated
account with its custodian, cash or liquid
securities having a value at least equal to the
Fund's net payment obligations under any swap
transaction, marked-to-market daily. Under
certain circumstances, the Fund may be required
to pledge the assets in such segregated account
to the counter-party. The Fund will not enter
into interest rate swap or cap transactions
having a notional amount that exceeds the
outstanding amount of the Fund's leverage. See
"Interest Rate Transactions" for additional
information.
INVESTMENT ADVISER............ Calamos is the Fund's investment adviser.
Calamos is responsible on a day-to-day basis
for investment of the Fund's portfolio in
accordance with its investment objective and
policies. Calamos makes all investment
decisions for the Fund and places purchase and
sale orders for the Fund's portfolio
securities. As of November 30, 2005, Calamos
managed approximately $43.2 billion in assets
of individuals and institutions. Calamos is an
indirect subsidiary of Calamos Asset
Management, Inc., whose voting shares are
majority-owned by Calamos Family Partners,
Inc., which is controlled by John P. Calamos,
Sr. and the Calamos family.
The Fund pays Calamos an annual fee, payable
monthly, for its investment management services
equal to 1.00% of the Fund's average weekly
managed assets. See "Management of the Fund."
PORTFOLIO MANAGERS............ John P. Calamos, Sr., Nick P. Calamos and John
P. Calamos, Jr. are responsible for managing
the Fund's portfolio. During the past five
years, John P. Calamos, Sr. has been a
Chairman, CEO and Co-Chief Investment Officer
of Calamos; Nick P. Calamos has been a Senior
Executive Vice President and Co-Chief
Investment Officer of Calamos; and John P.
Calamos, Jr. has been an Executive Vice
President of Calamos.
6
FUND ACCOUNTING............... State Street Bank and Trust Company ("State
Street") and Calamos will provide fund
accounting and financial accounting services to
the Fund.
RISK FACTORS SUMMARY.......... Risk is inherent in all investing. Therefore,
before investing in the Preferred Shares you
should consider certain risks carefully. The
primary risks of investing in the Preferred
Shares are:
- the Fund will not be permitted to declare
dividends or other distributions with respect
to your Preferred Shares or redeem your
Preferred Shares unless the Fund meets
certain asset coverage requirements;
- if you try to sell your Preferred Shares
between auctions you may not be able to sell
any or all of your shares or you may not be
able to sell them for $25,000 per share or
$25,000 per share plus accumulated dividends.
If the Fund has designated a special dividend
period, changes in interest rates could
affect the price you would receive if you
sold your shares in the secondary market. You
may transfer shares outside of an auction
only to or through a broker-dealer that has
entered into an agreement with the auction
agent and the Fund or other person as the
Fund permits;
- if an auction fails you may not be able to
sell some or all of your shares;
- because of the nature of the market for
Preferred Shares, you may receive less than
the price you paid for your shares if you
sell them outside of the auction, especially
when market interest rates are rising;
- a rating agency could downgrade the rating
assigned to the Preferred Shares, which could
affect liquidity;
- the Fund may be forced to redeem your shares
to meet regulatory or rating agency
requirements or may voluntarily redeem your
shares in certain circumstances at a time
when it is not advantageous;
- in certain circumstances, the Fund may not
earn sufficient income from its investments
to pay dividends;
- the Preferred Shares will be junior to any
Borrowings;
- any Borrowing may constitute a substantial
lien and burden on the Preferred Shares by
reason of its priority claim against the
income of the Fund and against the net assets
of the Fund in liquidation;
- if the Fund leverages through Borrowings, the
Fund may not be permitted to declare
dividends or other distributions with respect
to the Preferred Shares or purchase Preferred
Shares unless at the time thereof the Fund
meets certain asset coverage requirements and
the payments of principal and of interest on
any such Borrowings are not in default;
- the value of the Fund's investment portfolio
may decline, reducing the asset coverage for
the Preferred Shares. See "Risk
Factors -- General Risks of Investing in the
Fund" for a discussion of the general risks
of the Fund's investment portfolio; and
7
- certain events have a disruptive effect on
the securities markets, such as terrorist
attacks (including the terrorist attacks in
the United States on September 11, 2001), war
and other geopolitical events, earthquakes,
storms and other disasters. The Fund cannot
predict the effects of similar events in the
future on the markets or economy of the U.S.
or other countries. Similar disruptions of
the financial markets could impact interest
rates, auctions, secondary trading, ratings,
credit risk, inflation and other factors
relating to securities or other financial
interests.
The underwriter has advised the Fund that the
underwriter and various other Broker-Dealers
and other firms that participate in the auction
rate securities market received letters from
the staff of the Commission in the spring of
2004. The letters requested that each of these
firms voluntarily conduct an investigation
regarding its respective practices and
procedures in that market. Pursuant to these
requests, the underwriter conducted its own
voluntary review and reported its findings to
the Commission staff. At the Commission staff's
request, the underwriter is engaging in
discussions with the Commission staff
concerning its inquiry. Neither the underwriter
nor the Fund can predict the ultimate outcome
of the inquiry or how that outcome will affect
the market for auction rate securities or the
auctions.
In addition to the risks associated with
investing in the Preferred Shares, an investor
in the Preferred Shares will also be subject to
the general risks associated with the Fund's
investment policies, including the risks
associated with equity securities, convertible
securities, high yield securities, foreign
securities and options. For additional
information about the risks of investing in
Preferred Shares and in the Fund, see "Risk
Factors."
TRADING MARKET................ The Preferred Shares will not be listed on an
exchange. Instead, you may buy or sell the
Preferred Shares at an auction that normally is
held every seven days by submitting orders to a
broker-dealer that has entered into an
agreement with the auction agent and the Fund
(a "Broker-Dealer"), or to a broker-dealer that
has entered into a separate agreement with a
Broker-Dealer. In addition to the auctions,
Broker-Dealers and other broker-dealers may
maintain a secondary trading market in
Preferred Shares outside of auctions, but may
discontinue this activity at any time. There is
no assurance that a secondary market will be
created or, if created, that it will provide
shareholders with liquidity or that the trading
price in any secondary market would be $25,000.
You may transfer shares outside of auctions
only to or through a Broker-Dealer or a
broker-dealer that has entered into a separate
agreement with a Broker-Dealer.
The table below shows the first auction date
for the Preferred Shares and the day of the
week on which each subsequent auction, if any,
will normally be held. The first auction date
for the Preferred Shares will be the business
day before the dividend payment date for the
initial dividend period. The start date for
subsequent dividend periods will normally be
the business day
8
following the auction date unless the
then-current dividend period is a special
dividend period or the first day of the
subsequent dividend period is not a business
day.
SUBSEQUENT
SERIES FIRST AUCTION DATE AUCTION DAY
--------------------- ---------------------- -----------
T January 17, 2006 Tuesday
DIVIDENDS AND DIVIDEND
PERIODS....................... The table below shows the initial dividend
rate, the initial dividend payment date and the
day of the week upon which subsequent
dividends, if any, will be paid for the
Preferred Shares and the number of days for the
initial dividend period on the Preferred Shares
offered in this prospectus. For subsequent
dividend periods, the Preferred Shares will pay
dividends based on a rate set at auctions,
normally held every seven days. In most
instances, dividends are payable on the first
business day following the end of the dividend
period. The rate set at auctions will not
exceed the maximum rate. See "Description of
Preferred Shares -- Dividends and Dividend
Periods."
INITIAL DATE OF DIVIDEND PAYMENT DATE SUBSEQUENT NUMBER OF DAYS
DIVIDEND ACCUMULATION FOR DIVIDEND OF INITIAL
RATE AT INITIAL RATE INITIAL DIVIDEND PERIOD PAYMENT DAY DIVIDEND PERIOD
--------------------- --------------- ------------------------ ------------------- ---------------
4.05% January 6, 2006 January 18, 2006 Wednesday 12
Dividends on the Preferred Shares will be
cumulative from the date the shares are first
issued and will be paid out of legally
available funds.
The Fund may, subject to certain conditions,
designate special dividend periods of more than
seven days. A requested special dividend period
will not be effective unless sufficient
clearing bids were made in the auction
immediately preceding the special dividend
period. In addition, full cumulative dividends,
any amounts due with respect to mandatory
redemptions and any additional dividends
payable prior to such date must be paid in
full. In addition, the Fund does not intend to
designate a special dividend period if such
designation would adversely affect Fitch's or
S&P's or any substitute rating agency's
then-current rating on the Preferred Shares.
The dividend payment date for special dividend
periods will be set out in the notice
designating a special dividend period. See
"Description of Preferred Shares -- Dividends
and Dividend Periods -- Designation of Special
Dividend Periods" and "The Auction."
DETERMINATION OF MAXIMUM
RATE.......................... Except during a default period, the applicable
rate for any dividend period for Preferred
Shares will not be more than the maximum rate.
The maximum rate for the Preferred Shares will
depend on the credit rating assigned to such
Preferred Shares and on the duration of the
dividend period. The maximum rate will be the
applicable percentage of the reference rate.
The reference rate is the applicable LIBOR rate
(for a dividend period of fewer than 365 days)
or the applicable Treasury index rate (for a
dividend period of 365 days or more). The
applicable percentage is further subject to
upward but not downward
9
adjustment at the discretion of the Board of
Trustees after consultation with the
Broker-Dealers.
There is no minimum rate in respect of any
dividend period. See "Description of Preferred
Shares -- Dividends and Dividend Periods."
RATINGS....................... The Fund will issue Preferred Shares only if
such shares have received a credit quality
rating of "AAA" from Fitch and "AAA" from S&P.
These ratings are an assessment of the capacity
and willingness of an issuer to pay preferred
stock obligations. The ratings are not a
recommendation to purchase, hold or sell those
shares inasmuch as the ratings do not comment
as to market price or suitability for a
particular investor. The ratings described
above also do not address the likelihood that
an owner of Preferred Shares will be able to
sell such shares in an auction or otherwise.
The ratings are based on current information
furnished to Fitch and S&P by the Fund and
Calamos and information obtained from other
sources. The ratings may be changed, suspended
or withdrawn in the rating agencies' discretion
as a result of changes in, or the
unavailability of, such information. See
"Description of Preferred Shares -- Rating
Agency Guidelines."
ASSET MAINTENANCE............. Under the Fund's Statement of Preferences for
Preferred Shares (the "Statement"), which
establishes and fixes the rights and
preferences of the shares of each series of
Preferred Shares, the Fund must maintain:
- asset coverage of the Preferred Shares as
required by the rating agency or agencies
rating the Preferred Shares; and
- asset coverage of at least 200% with respect
to senior securities that are stock,
including the Preferred Shares.
In the event that the Fund does not maintain or
cure failures to maintain these coverage tests,
some or all of the Preferred Shares will be
subject to mandatory redemption. See
"Description of Preferred
Shares -- Redemption." Based on the composition
of the Fund's portfolio as of December 14,
2005, the asset coverage of the Preferred
Shares as measured pursuant to the 1940 Act
would be approximately 300% if the Fund were to
issue all of the Preferred Shares offered in
this Prospectus, representing approximately 33%
of the Fund's managed assets.
RESTRICTIONS ON DIVIDENDS,
REDEMPTION AND OTHER
PAYMENTS...................... If the Fund issues any Borrowings that
constitute senior securities representing
indebtedness (as defined in the 1940 Act),
under the 1940 Act, the Fund would not be
permitted to declare any dividend on Preferred
Shares unless, after giving effect to such
dividend, asset coverage with respect to the
Fund's Borrowings that constitute senior
securities representing indebtedness, if any,
is at least 200%. In addition, the Fund would
not be permitted to declare any distribution on
or purchase or redeem Preferred Shares unless,
after giving effect to such distribution,
purchase or redemption, asset coverage with
respect to the Fund's Borrowings that
constitute senior securities representing
indebtedness, if any, is at least 300%.
Dividends or
10
other distributions on or redemptions or
purchases of Preferred Shares may also be
prohibited (i) at any time when an event of
default under any Borrowings has occurred and
is continuing; or (ii) after giving effect to
such distribution or redemption, the Fund would
not have eligible portfolio holdings with an
aggregated discounted value at least equal to
any asset coverage requirements associated
under such Borrowings; or (iii) the Fund has
not redeemed the full amount of Borrowings, if
any, required to be redeemed by any provision
for mandatory redemption. See "Description of
Preferred Shares -- Restrictions on Dividend,
Redemption and Other Payments."
REDEMPTION.................... The Fund may be required to redeem shares if,
for example, the Fund does not meet an asset
coverage ratio required by law or does not
correct a failure to meet a rating agency
guideline in a timely manner. The Fund
voluntarily may redeem Preferred Shares under
certain conditions. See "Description of
Preferred Shares -- Redemption" and
"Description of Preferred Shares -- Rating
Agency Guidelines."
LIQUIDATION PREFERENCE........ The liquidation preference for the Preferred
Shares will be $25,000 per share plus
accumulated but unpaid dividends, if any,
whether or not declared. See "Description of
Preferred Shares -- Liquidation."
VOTING RIGHTS................. Except as otherwise indicated, holders of
Preferred Shares have one vote per share. The
holders of preferred shares, including
Preferred Shares, voting as a separate class,
have the right to elect at least two trustees
of the Fund at all times. The Board of Trustees
will determine to which class or classes the
Trustees elected by the holders of Preferred
Shares will be assigned. The holders of the
Preferred Shares will only be entitled to elect
the Trustees so designated, when their term
will have expired. Such Trustees appointed by
the holders of Preferred Shares will be
allocated as evenly as possible among the
classes of Trustees. Holders of preferred
shares, including Preferred Shares, also have
the right to elect a majority of the trustees
in the event that two years' dividends on the
preferred shares are unpaid. In each case, the
remaining trustees will be elected by holders
of common shares and preferred shares,
including Preferred Shares, voting together as
a single class. The holders of preferred
shares, including Preferred Shares, will vote
as a separate class or classes on certain other
matters as required under the Fund's Agreement
and Declaration of Trust, the 1940 Act and
Delaware law. See "Description of Preferred
Shares -- Voting Rights," and "Certain
Provisions in the Agreement and Declaration of
Trust and By-Laws."
FEDERAL INCOME TAXES.......... Distributions with respect to the Preferred
Shares will generally be subject to U.S.
federal income taxation. A portion of such
distributions may qualify for the dividends
received deduction available to corporate
holders or for treatment as "qualified dividend
income" available to individual and other
noncorporate holders. The Internal Revenue
Service ("IRS") currently requires that a
regulated investment company, which has two or
more classes of stock, allocate to each such
class proportionate amounts of each type of its
income (such as ordinary income
11
and capital gain) based upon the percentage of
total dividends distributed to each class for
the tax year. Accordingly, the Fund intends
each year to allocate ordinary income
dividends, capital gain dividends, dividends
qualifying for the dividends received deduction
and "qualified dividend income," if any,
between its common shares and the Preferred
Shares in proportion to the total dividends
paid to each class during or with respect to
such year. See "U.S. Federal Income Tax
Matters."
CUSTODIAN, AUCTION AGENT,
TRANSFER AGENT, DIVIDEND
PAYING AGENT AND REGISTRAR.... The Bank of New York serves as custodian of the
Fund's securities and cash. The Bank of New
York also serves as auction agent with respect
to the Preferred Shares, and transfer agent,
dividend paying agent and registrar for the
Fund's common shares and the Preferred Shares.
12
FINANCIAL HIGHLIGHTS
Information contained in the table below shows the audited operating
performance of the Fund from the commencement of the Fund's operations on
October 27, 2005 through October 31, 2005 and the unaudited operating
performance of the Fund for the period from November 1, 2005 through November
30, 2005. Since the Fund was recently organized and commenced operations on
October 27, 2005, the table covers one month of operations, during which a
substantial portion of the Fund's portfolio was held in temporary investments
pending investment in securities that meet the Fund's investment objective and
policies. Accordingly, the information presented may not provide a meaningful
picture of the Fund's future operating performance.
NOVEMBER 1, 2005 OCTOBER 27, 2005*
THROUGH THROUGH
NOVEMBER 30, 2005 OCTOBER 31, 2005
----------------- -----------------
(UNAUDITED) (AUDITED)
Net asset value, beginning of period.................. $ 14.29 $ 14.32(a)
-------- --------
Offering costs........................................ -- (0.03)
Income from investment operations:
Net investment income (loss)........................ 0.04 --(b)
Net realized and unrealized gain (loss) from
investments, written options and foreign currency
transactions..................................... 0.17 --
-------- --------
Total from investment operations...................... 0.21 --
-------- --------
Net asset value, end of period........................ $ 14.50 $ 14.29
Market value, end of period........................... $ 13.35 $ 15.00
TOTAL INVESTMENT RETURN BASED ON(c):
Net asset value..................................... 1.47% (0.24)%
Market value........................................ (11.00)% 0.00%
RATIOS TO AVERAGE NET ASSETS APPLICABLE TO COMMON
SHAREHOLDERS/SUPPLEMENTARY DATA:
Net assets applicable to common shareholders, end of
period (000's omitted).............................. $116,064 $114,439
Ratios to average net assets applicable to common
shareholders:
Net expenses(d)..................................... 1.21% 1.33%
Gross expenses prior to reimbursement of expenses by
the advisor(d)................................... 1.21% 3.37%
Net investment income (loss)(d)..................... 3.41% (1.33)%
Portfolio turnover rate............................... 4% --
Average commission rate paid.......................... $ 0.0255
---------------
* Commencement of operations.
(a) Net of sales load and organizational fees of $0.705 per share.
(b) Amount equated to less than $0.005 per common share.
(c) Total investment return is calculated assuming a purchase of common stock on
the opening of the first day and a sale on the closing of the last day of
the period reported. Dividends and distributions are assumed, for purposes
of this calculation, to be reinvested at prices obtained under the Fund's
dividend reinvestment plan. Total return is not annualized for periods less
than one year. Brokerage commissions are not reflected.
(d) Annualized for periods less than one year.
The information above represents the unaudited operation performance for a
common share outstanding, total investment return, ratios to average net assets
and other supplemental data for the
13
periods indicated. This information has been determined based upon financial
information provided in the financial statements and market value data for the
Fund's common shares.
THE FUND
Calamos Global Total Return Fund is a recently organized, diversified,
closed-end management investment company. The Fund was organized under the laws
of the state of Delaware on March 30, 2004, and has registered under the 1940
Act. On October 31, 2005, the Fund issued an aggregate of 8,000,000 common
shares of beneficial interest, no par value, pursuant to the initial public
offering and commenced its investment operations. The Fund granted the
underwriters an option to purchase up to 1,021,536 additional common shares at
the public offering price less the sales load. The Fund did not issue any common
shares of beneficial interest in connection with the over-allotment option. The
Fund's common shares are traded on the New York Stock Exchange under the symbol
"CGO." The Fund's principal office is located at 2020 Calamos Court, Naperville,
Illinois 60563, and its telephone number is 1-800-582-6959.
The following provides information about the Fund's authorized and
outstanding shares as of November 30, 2005.
AMOUNT HELD BY
AMOUNT THE FUND OR FOR ITS AMOUNT
TITLE OF CLASS AUTHORIZED ACCOUNT OUTSTANDING
-------------- ----------- ------------------- -----------
(UNAUDITED)
Common....................................... Unlimited 0 8,006,981
Preferred.................................... Unlimited 0 0
Series T................................... 0 0
USE OF PROCEEDS
The Fund estimates the net proceeds of the offering of Preferred Shares
after payment of sales load and offering expenses, will be approximately
$58,093,674. The Fund will invest the net proceeds of the offering in accordance
with the Fund's investment objective and policies as stated below. It is
presently anticipated that the Fund will invest substantially all of the net
proceeds in securities that meet the investment objective and policies within
three months after completion of this offering. Pending such investment, the
Fund anticipates that all or a portion of the proceeds will be invested in U.S.
government securities or high-grade, short-term money market instruments. If
necessary, the Fund may also purchase, as temporary investments, securities of
other open- or closed-end investment companies that invest primarily in the
types of securities in which the Fund may invest directly. See "The Fund's
Investments."
14
CAPITALIZATION (UNAUDITED)
The following table sets forth the capitalization of the Fund as of
December 14, 2005, and as adjusted, to give effect to the issuance of all the
Preferred Shares offered hereby (including estimated offering expenses and sales
load of $906,326). The sales load and offering expenses of the Preferred Shares
will be effectively borne by common shareholders.
AS ADJUSTED
ACTUAL PREFERRED SHARES
------------ ----------------
SHAREHOLDERS' EQUITY
Preferred Shares, no par value per share, $25,000 stated
value per share, at liquidation value; unlimited
shares authorized (no shares issued; no shares issued;
and 2,360 shares issued, respectively)................ $ -- $ 59,000,000
Common shares, no par value per share, unlimited shares
authorized, 8,006,981 shares outstanding*............. 114,438,930 113,532,604
Undistributed net investment income..................... 515,160 515,160
Accumulated net realized gain (loss) on investments..... 118,246 118,246
Net unrealized appreciation (depreciation) on
investments........................................... 3,972,901 3,972,901
------------ ------------
NET ASSETS.............................................. $119,045,237 $177,138,911
============ ============
---------------
* None of these outstanding shares are held by or for the account of the Fund.
PORTFOLIO COMPOSITION
As of November 30, 2005, approximately 38% of the market value of the
Fund's portfolio was invested in equities and approximately 49% of the market
value was invested in convertible securities and high yield debt securities and
approximately 13% of the market value of the Fund's portfolio was invested in
short-term investment grade debt securities. In addition, as of November 30,
2005, approximately 38% of the market value of the Fund's portfolio was invested
in securities of foreign issuers. The following table sets forth certain
information with respect to the composition of the Fund's investment portfolio
as of November 30, 2005, based on the highest rating assigned each investment by
either Moody's or S&P.
CREDIT RATING VALUE (000) PERCENT
------------------------------------------------------------ ----------- -------
Aaa/AAA..................................................... $ --
Aa/AA....................................................... 1,886 1%
A/A......................................................... 5,341 4%
Baa/BBB..................................................... 4,237 3%
Ba/BB....................................................... 8,270 7%
B/B......................................................... 32,949 26%
Caa/CCC..................................................... 4,405 3%
Ca/CC....................................................... -- 0%
C/C......................................................... -- 0%
Unrated+.................................................... 5,269 4%
Equities.................................................... 47,475 38%
Short-Term.................................................. 16,236 13%
-------- ----
Total..................................................... $126,068 100%
======== ====
---------------
+ Refers to securities that have not been rated by Moody's or S&P.
15
THE FUND'S INVESTMENTS
INVESTMENT OBJECTIVE
The Fund's investment objective is to provide total return through a
combination of capital appreciation and current income. The Fund's investment
objective may be changed by its Board of Trustees without a shareholder vote,
except that the Fund will give shareholders at least 60 days' notice of any
change to the Fund's investment objective. The Fund makes no assurance that it
will realize its objective. An investment in the Fund may be speculative in that
it involves a high degree of risk and should not constitute a complete
investment program. See "Risk Factors."
PRINCIPAL INVESTMENT STRATEGIES
Under normal circumstances, the Fund will invest primarily in a portfolio
of common and preferred stocks, convertible securities and income producing
securities such as investment grade and below investment grade (high yield/high
risk) debt securities. The Fund, under normal circumstances, will invest at
least 50% of its managed assets in equity securities (including securities that
are convertible into equity securities). The Fund may invest up to 100% of its
managed assets in securities of foreign issuers, including debt and equity
securities of corporate issuers and debt securities of government issuers, in
developed and emerging markets. Under normal circumstances, the Fund will invest
at least 30% of its managed assets in securities of foreign issuers. The Fund
will invest in the securities of issuers of several different countries
throughout the world, in addition to the United States.
Calamos will dynamically allocate the Fund's investments among multiple
asset classes (rather than maintaining a fixed or static allocation), seeking to
obtain an appropriate balance of risk and reward through all market cycles using
multiple strategies and combining them to seek to achieve favorable risk
adjusted returns.
The Fund will attempt to keep a consistent balance between risk and reward
over the course of different market cycles, through various combinations of
stocks, bonds, and/or convertible securities, to achieve what Calamos believes
to be an appropriate blend for the then current market. As the market
environment changes, portfolio securities may change in an attempt to achieve a
relatively consistent risk level over time. At some points in a market cycle,
one type of security may make up a substantial portion of the Fund's portfolio,
while at other times certain securities may have minimal or no representation,
depending on market conditions.
The Fund may also seek to generate income from option premiums by writing
(selling) options (with an aggregate notional value of up to 33% of the value of
the Fund's managed assets). The Fund will opportunistically employ a strategy of
writing options. The extent of option writing activity will depend upon market
conditions and Calamos' ongoing assessment of the attractiveness of writing
options on the Fund's equity holdings.
EQUITY SECURITIES. Equity securities include common and preferred stocks,
warrants, rights, and depository receipts. Under normal circumstances, the Fund
will invest at least 50% of its managed assets in equity securities (including
securities that are convertible into equity securities). The Fund may invest in
preferred stocks and convertible securities of any rating, including below
investment grade. See "-- High Yield Securities" below. An investment in the
equity securities of a company represents a proportionate ownership interest in
that company. Therefore, the Fund participates in the financial success or
failure of any company in which it has an equity interest.
HIGH YIELD SECURITIES. The Fund may invest in high yield securities for
either current income or capital appreciation or both. The high yield securities
in which the Fund invests are rated below investment grade (i.e., rated Ba or
lower by Moody's or BB or lower by S&Ps) or are unrated but determined by
Calamos to be of comparable quality. The Fund may invest in high yield
securities of any rating. Non-convertible debt securities rated below investment
grade are commonly referred to as "junk bonds" and are considered speculative
with respect to the issuer's capacity to pay interest and repay
16
principal. Below investment grade non-convertible debt securities involve
greater risk of loss, are subject to greater price volatility and are less
liquid, especially during periods of economic uncertainty or change, than higher
rated debt securities.
OTHER INCOME SECURITIES. The Fund may also invest in investment grade
income securities. The Fund's investments in investment grade income securities
may have fixed or variable principal payments and all types of interest rate and
dividend payment and reset terms, including fixed rate, adjustable rate, zero
coupon, contingent, deferred, payment in kind and auction rate features.
FOREIGN SECURITIES. The Fund may invest up to 100% of its managed assets
in securities of foreign issuers, including debt and equity securities of
corporate issuers and debt securities of government issuers, in developed and
emerging markets. Under normal circumstances, the Fund will invest at least 30%
of its managed assets in securities of foreign issuers; however, the Fund
anticipates that ordinarily Calamos' investment process will result in the Fund
investing at least 40% of its managed assets in securities of foreign issuers.
The Fund will invest in the securities of issuers of several different countries
throughout the world, in addition to the United States. A foreign issuer is a
company organized under the laws of a foreign country.
CONVERTIBLE SECURITIES. The Fund may invest in convertible securities. A
convertible security is a debt security or preferred stock that is exchangeable
for an equity security (typically of the same issuer) at a predetermined price
(the "conversion price") or a security that mandatorily converts to an equity
security at a predetermined time. Depending upon the relationship of the
conversion price to the market value of the underlying security, a convertible
security may trade more like an equity security than a debt instrument. The Fund
may invest in convertible securities of any rating including below investment
grade. See "-- High Yield Securities" above. Securities that are convertible
into equity securities are considered equity securities for purposes of the
Fund's policy to invest at least 50% of its managed assets in equity securities.
SYNTHETIC CONVERTIBLE INSTRUMENTS. Calamos may also establish a
"synthetic" convertible instrument by combining separate securities that possess
economic characteristics similar to a convertible security, i.e., an income
component and the right or obligation to convert to an equity security
("convertible component"). The income component is achieved by investing in
non-convertible, fixed-income securities such as bonds, preferred stocks, money
market instruments and other instruments that provide an income component. The
convertible component is achieved by investing in warrants or options to buy
common stock at a certain exercise price, or options on a stock index. In
establishing a synthetic instrument, Calamos may also pool a basket of
fixed-income securities and a basket of warrants or options that produce the
economic characteristics similar to a convertible security. Within each basket
of fixed-income securities and warrants or options, different companies may
issue the fixed-income and convertible components, which may be purchased
separately and at different times.
The Fund may also purchase synthetic convertible instruments created by
other parties, typically investment banks, including convertible structured
notes. Convertible structured notes are fixed income debentures linked to
equity. Convertible structured notes have the attributes of a convertible
security; however, the investment bank that issued the convertible note assumes
the credit risk associated with the investment, rather than the issuer of the
underlying common stock into which the note is convertible. Purchasing synthetic
convertible instruments may offer more flexibility than purchasing a convertible
security. Different companies may issue the fixed-income and convertible
components, which may be purchased separately and at different times. The Fund's
holdings of synthetic convertible instruments are considered equity securities
for purposes of the Fund's policy to invest at least 50% of its managed assets
in equity securities. If the Fund purchases a synthetic convertible instrument,
a component of which is an option, such option will not be considered an option
for the purpose of the Fund's limitations on options described below.
OPTIONS. STRATEGY. The Fund may seek to generate income from option
premiums by writing (selling) options (with an aggregate notional value of up to
33% of the value of the Fund's managed assets). The Fund may write (sell) call
options (i) on a portion of the equity securities (including
17
securities that are convertible into equity securities) in the Fund's portfolio
and (ii) on broad-based securities indices (such as the S&P 500 or MSCI EAFE) or
certain ETFs (exchange traded funds) that trade like common stocks but seek to
replicate such market indices.
In addition, to seek to offset some of the risk of a large potential
decline in the event the overall stock market has a sizeable short-term or
intermediate-term decline, the Fund may also, to a limited extent, purchase put
options (with an aggregate notional value of not more than 5% of the value of
the Fund's managed assets) on broad-based securities indices (such as the S&P
500 or MSCI EAFE) or certain ETFs (exchange-traded funds) that trade like common
stocks but seek to replicate such market indices.
OPTIONS IN GENERAL. A call option, upon payment of a premium, gives the
purchaser of the option the right to buy, and the seller the obligation to sell,
the underlying security, index or other instrument at the exercise price. A put
option gives the purchaser of the option, upon payment of a premium, the right
to sell, and the seller the obligation to buy, the underlying security, index,
or other instrument at the exercise price.
The Fund is authorized to purchase and sell exchange listed options and
over-the-counter options ("OTC options"). Exchange listed options are issued by
a regulated intermediary such as the OCC, which guarantees the performance of
the obligations of the parties to such options. In addition, the Fund may
purchase instruments structured by broker-dealers or investment banks that
package or possess economic characteristics of options. The discussion below
uses the OCC as an example, but is also applicable to other financial
intermediaries.
With certain exceptions, OCC issued and exchange listed options generally
settle by physical delivery of the underlying security, although in the future
cash settlement may become available. Index options are cash settled for the net
amount, if any, by which the option is "in-the-money" (i.e., where the value of
the underlying instrument exceeds, in the case of a call option, or is less
than, in the case of a put option, the exercise price of the option) at the time
the option is exercised. Frequently, rather than taking or making delivery of
the underlying instrument through the process of exercising the option, listed
options are closed by entering into offsetting purchase or sale transactions
that do not result in ownership of the new option.
OTC options are purchased from or sold to securities dealers, financial
institutions or other parties ("Counterparties") through direct bilateral
agreement with the Counterparty. In contrast to exchange listed options, which
generally have standardized terms and performance mechanics, all the terms of an
OTC option, including such terms as method of settlement, term, exercise price,
premium, guarantees and security, are set by negotiation of the parties. The
Fund may sell OTC options (other than OTC currency options) that are subject to
a buy-back provision permitting the Fund to require the Counterparty to sell the
option back to the Fund at a formula price within seven days. The Fund expects
generally to enter into OTC options that have cash settlement provisions,
although it is not required to do so. The staff of the Commission currently
takes the position that OTC options purchased by a fund, and portfolio
securities "covering" the amount of a fund's obligation pursuant to an OTC
option sold by it (or the amount of assets equal to the formula price for the
repurchase of the option, if any, less the amount by which the option is in the
money) are illiquid. OTC options purchased by the Fund and any portfolio
securities used to cover obligations pursuant to such options are not considered
illiquid by Calamos for the purposes of the Fund's limitation on investments in
illiquid securities.
The Fund may also purchase and sell options on securities indices and other
financial indices. Options on securities indices and other financial indices are
similar to options on a security or other instrument except that, rather than
settling by physical delivery of the underlying instrument, they settle by cash
settlement, i.e., an option on an index gives the holder the right to receive,
upon exercise of the option, an amount of cash if the closing level of the index
upon which the option is based exceeds, in the case of a call, or is less than,
in the case of a put, the exercise price of the option (except if, in the case
of an OTC option, physical delivery is specified). This amount of cash is equal
to the excess of the closing price of the index over the exercise price of the
option, which also may be multiplied by a formula value. The seller of the
option is obligated, in return for the premium received, to make delivery of
this amount. The gain or loss on an option on an index depends on price
movements in the instruments making upon the
18
market, market segment, industry or other composite on which the underlying
index is based, rather than price movements in individual securities, as is the
case with respect to options on securities.
The Fund will write call options and put options only if they are
"covered." For example, a call option written by the Fund will require the Fund
to hold the securities subject to the call (or securities convertible into the
needed securities without additional consideration) or to segregate cash or
liquid assets sufficient to purchase and deliver the securities if the call is
exercised. A call option sold by the Fund on an index will require the Fund to
own portfolio securities that correlate with the index or to segregate cash or
liquid assets equal to the excess of the index value over the exercise price on
a current basis. A put option written by the Fund requires the Fund to segregate
cash or liquid assets equal to the exercise price.
OTC options entered into by the Fund will generally provide for cash
settlement. As a result, when the Fund sells these instruments it will only
segregate an amount of cash or liquid assets equal to its accrued net
obligations, as there is no requirement for payment or delivery of amounts in
excess of the net amount. These amounts will equal 100% of the exercise price in
the case of a non cash-settled put, the same as an OCC guaranteed listed option
sold by the Fund, or the in-the-money amount plus any sell-back formula amount
in the case of a cash-settled put or call. In addition, when the Fund sells a
call option on an index at a time when the in-the-money amount exceeds the
exercise price, the Fund will segregate, until the option expires or is closed
out, cash or cash equivalents equal in value to such excess. OTC options other
than those above may also settle with physical delivery, or with an election of
either physical delivery or cash settlement and the Fund will segregate an
amount of cash or liquid assets equal to the full value of the option. OTC
options settling with physical delivery, or with an election of either physical
delivery or cash settlement, will be treated the same as other options settling
with physical delivery.
If an option written by the Fund expires, the Fund, for federal income tax
purposes, will generally realize a capital gain equal to the premium received at
the time the option was written. If an option purchased by the Fund expires, the
Fund realizes a capital loss equal to the premium paid.
The Fund will generally realize a capital gain from a closing purchase
transaction if the cost of the closing option is less than the premium received
from writing the option, or, if it is more, the Fund will generally realize a
capital loss. If the premium received from a closing sale transaction is more
than the premium paid to purchase the option, the Fund will generally realize a
capital gain or, if it is less, the Fund will generally realize a capital loss.
The principal factors affecting the market value of a put or a call option
include supply and demand, interest rates, the current market price of the
underlying security or index in relation to the exercise price of the option,
the volatility of the underlying security or index, and the time remaining until
the expiration date.
A put option purchased by the Fund is an asset of the Fund, valued
initially at the premium paid for the option. The premium received for an option
written by the Fund is recorded as a deferred credit. The value of an option
purchased or written is marked-to-market daily and is valued at the closing
price on the exchange on which it is traded or, if not traded on an exchange or
no closing price is available, at the mean between the last bid and asked
prices.
RULE 144A SECURITIES. The Fund may invest without limit in Rule 144A
Securities. Calamos, under the supervision of the Board of Trustees, will
determine whether Rule 144A Securities are illiquid (that is, not readily
marketable) and thus subject to the Fund's limit on investing no more than 15%
of its managed assets in illiquid securities. A determination of whether a Rule
144A Security is liquid or not is a question of fact. In making this
determination, Calamos will consider the trading markets for the specific
security, taking into account the unregistered nature of a Rule 144A Security.
In addition, Calamos could consider the (1) frequency of trades and quotes, (2)
number of dealers and potential purchasers, (3) dealer undertakings to make a
market and (4) nature of a security and of marketplace trades (e.g., the time
needed to dispose of the security, the method of soliciting offers and the
mechanics of transfer). The liquidity of Rule 144A Securities will be monitored
and, if as a result of changed conditions, it is determined that a Rule 144A
Security is no longer liquid, the Fund's holdings of illiquid securities would
be reviewed to determine what, if any, steps are required to assure that the
Fund does not invest more
19
than 15% of its managed assets in illiquid securities. Investing in Rule 144A
Securities could have the effect of increasing the amount of the portfolio's
assets invested in illiquid securities if qualified institutional buyers are
unwilling to purchase such securities.
U.S. GOVERNMENT SECURITIES. U.S. government securities in which the Fund
invests include debt obligations of varying maturities issued by the U.S.
Treasury or issued or guaranteed by an agency or instrumentality of the U.S.
government, including the Federal Housing Administration, Federal Financing
Bank, Farmers Home Administration, Export-Import Bank of the United States,
Small Business Administration, Government National Mortgage Association, General
Services Administration, Central Bank for Cooperatives, Federal Farm Credit
Banks, Federal Home Loan Banks, Federal Home Loan Mortgage Corporation, Federal
National Mortgage Association ("FNMA"), Maritime Administration, Tennessee
Valley Authority, District of Columbia Armory Board, Student Loan Marketing
Association, Resolution Fund Corporation and various institutions that
previously were or currently are part of the Farm Credit System (which has been
undergoing reorganization since 1987). Some U.S. government securities, such as
U.S. Treasury bills, Treasury notes and Treasury bonds, which differ only in
their interest rates, maturities and times of issuance, are supported by the
full faith and credit of the United States. Others are supported by: (i) the
right of the issuer to borrow from the U.S. Treasury, such as securities of the
Federal Home Loan Banks; (ii) the discretionary authority of the U.S. government
to purchase the agency's obligations, such as securities of the FNMA; or (iii)
only the credit of the issuer. No assurance can be given that the U.S.
government will provide financial support in the future to U.S. government
agencies, authorities or instrumentalities that are not supported by the full
faith and credit of the United States. Securities guaranteed as to principal and
interest by the U.S. government, its agencies, authorities or instrumentalities
include: (i) securities for which the payment of principal and interest is
backed by an irrevocable letter of credit issued by the U.S. government or any
of its agencies, authorities or instrumentalities; and (ii) participations in
loans made to non-U.S. governments or other entities that are so guaranteed. The
secondary market for certain of these participations is limited and, therefore,
may be regarded as illiquid.
ZERO COUPON SECURITIES. The securities in which the Fund invests may
include zero coupon securities, which are debt obligations that are issued or
purchased at a significant discount from face value. The discount approximates
the total amount of interest the security will accrue and compound over the
period until maturity or the particular interest payment date at a rate of
interest reflecting the market rate of the security at the time of issuance.
Zero coupon securities do not require the periodic payment of interest. These
investments benefit the issuer by mitigating its need for cash to meet debt
service, but generally require a higher rate of return to attract investors who
are willing to defer receipt of cash. These investments may experience greater
volatility in market value than U.S. government or other securities that make
regular payments of interest. The Fund accrues interest income on these
investments for federal income tax and accounting purposes, which is
distributable to shareholders and which, because no cash is received at the time
of accrual, may require the liquidation of other portfolio securities to satisfy
the Fund's distribution obligations, in which case the Fund will forgo the
opportunity to purchase additional income producing assets with the liquidation
proceeds. Zero coupon U.S. government securities include STRIPS and CUBES, which
are issued by the U.S. Treasury as component parts of U.S. Treasury bonds and
represent scheduled interest and principal payments on the bonds.
OTHER INVESTMENT COMPANIES. The Fund may invest in the securities of other
investment companies to the extent that such investments are consistent with the
Fund's investment objective and policies and are permissible under the 1940 Act.
Under the 1940 Act, the Fund may not acquire the securities of other domestic or
non-U.S. investment companies if, as a result, (1) more than 10% of the Fund's
total assets would be invested in securities of other investment companies, (2)
such purchase would result in more than 3% of the total outstanding voting
securities of any one investment company being held by the Fund, or (3) more
than 5% of the Fund's total assets would be invested in any one investment
company. These limitations do not apply to the purchase of shares of any
investment company in connection with a merger, consolidation, reorganization or
acquisition of substantially all the assets of another investment company.
20
The Fund, as a holder of the securities of other investment companies, will
bear its pro rata portion of the other investment companies' expenses, including
advisory fees. These expenses are in addition to the direct expenses of the
Fund's own operations.
TEMPORARY DEFENSIVE INVESTMENTS. In response to adverse market, economic
or political conditions, the Fund may take temporary defensive positions and may
invest up to 100% of its total assets in securities issued or guaranteed by the
U.S. government or its instrumentalities or agencies, certificates of deposit,
bankers' acceptances and other bank obligations, commercial paper rated in the
highest category by a nationally recognized statistical rating organization
(NRSRO) or other fixed income securities deemed by Calamos to be consistent with
a defensive posture, or may hold cash. The yield on such securities may be lower
than the yield on lower rated fixed income securities. During such periods, the
Fund may not be able to achieve its investment objective.
REPURCHASE AGREEMENTS. The Fund may enter into repurchase agreements with
broker-dealers, member banks of the Federal Reserve System and other financial
institutions. Repurchase agreements are arrangements under which the Fund
purchases securities and the seller agrees to repurchase the securities within a
specific time and at a specific price. The repurchase price is generally higher
than the Fund's purchase price, with the difference being income to the Fund.
The counterparty's obligations under the repurchase agreement are collateralized
with U.S. Treasury and/or agency obligations with a market value of not less
than 100% of the obligations, valued daily. Collateral is held by the Fund's
custodian in a segregated, safekeeping account for the benefit of the Fund.
Repurchase agreements afford the Fund an opportunity to earn income on
temporarily available cash at low risk. In the event of commencement of
bankruptcy or insolvency proceedings with respect to the seller of the security
before repurchase of the security under a repurchase agreement, the Fund may
encounter delay and incur costs before being able to sell the security. Such a
delay may involve loss of interest or a decline in price of the security. If a
court characterizes a repurchase transaction as a loan and the Fund has not
perfected a security interest in the security, the Fund may be required to
return the security to the seller's estate and be treated as an unsecured
creditor of the seller. As an unsecured creditor, the Fund would be at risk of
losing some or all of the principal and interest involved in the transaction.
LENDING OF PORTFOLIO SECURITIES. The Fund may lend portfolio securities to
registered broker-dealers or other institutional investors deemed by Calamos to
be of good standing under agreements which require that the loans be secured
continuously by collateral in cash, cash equivalents or U.S. Treasury bills
maintained on a current basis at an amount at least equal to the market value of
the securities loaned. The Fund continues to receive the equivalent of the
interest or dividends paid by the issuer on the securities loaned as well as the
benefit of an increase and the detriment of any decrease in the market value of
the securities loaned and would also receive compensation based on investment of
the collateral. The Fund would not, however, have the right to vote any
securities having voting rights during the existence of the loan, but could call
the loan in anticipation of an important vote to be taken among holders of the
securities or of the giving or withholding of consent on a material matter
affecting the investment.
As with other extensions of credit, there are risks of delay in recovery or
even loss of rights in the collateral should the borrower of the securities fail
financially. At no time would the value of the securities loaned exceed 33 1/3%
of the value of the Fund's total assets.
PORTFOLIO TURNOVER. Although the Fund does not purchase securities with a
view to rapid turnover, there are no limitations on the length of time that
portfolio securities must be held. Portfolio turnover can occur for a number of
reasons, including calls for redemption, general conditions in the securities
markets, more favorable investment opportunities in other securities, or other
factors relating to the desirability of holding or changing a portfolio
investment. The portfolio turnover rates may vary greatly from year to year. A
high rate of portfolio turnover in the Fund would result in increased
transaction expense, which must be borne by the Fund. High portfolio turnover
may also result in the realization of capital gains or losses and, to the extent
net short-term capital gains are realized, any distributions resulting from such
gains will be considered ordinary income for federal income tax purposes.
21
LEVERAGE
The Fund may issue preferred shares, including Preferred Shares, or borrow
or issue debt securities to increase its assets available for investment. The
Fund is authorized to issue preferred shares, borrow money or issue debt
securities. The Preferred Shares will have a liquidation preference of $25,000
per share plus an amount equal to accumulated but unpaid dividends. As a
non-fundamental policy, such preferred shares, including Preferred Shares, or
Borrowings may not exceed 38% of the Fund's total assets. However, the Board of
Trustees reserves the right to issue preferred shares or borrow to the extent
permitted by the 1940 Act. Before issuing any additional preferred shares to
increase its assets available for investment, the Fund must have received
confirmation from Fitch and S&P or any substitute rating agency that the
proposed issuance will not adversely affect such rating agency's then-current
rating on the Preferred Shares. The Fund generally will not issue preferred
shares or borrow unless Calamos expects that the Fund will achieve a greater
return on such leverage than the additional costs the Fund incurs as a result of
such leverage. The Fund also may borrow money as a temporary measure for
extraordinary or emergency purposes, including the payment of dividends and the
settlement of securities transactions that otherwise might require untimely
dispositions of the Fund's holdings. When the Fund leverages its assets, the
fees paid to Calamos for investment management services will be higher than if
the Fund did not borrow because Calamos's fees are calculated based on the
Fund's managed assets, which include the proceeds of the issuance of preferred
shares or any outstanding Borrowings. Consequently, the Fund and Calamos may
have conflicting interests in determining whether to leverage the Fund's assets.
The Fund's use of leverage is premised upon the expectation that the Fund's
preferred share dividends or borrowing costs will be lower than the return the
Fund achieves on its investments with the proceeds of the issuance of preferred
shares or Borrowings. Such difference in return may result from the Fund's
higher credit rating or the short-term nature of its borrowings compared to the
long-term nature of its investments. Since the total assets of the Fund
(including the assets obtained from leverage) may be invested in the higher
yielding portfolio investments or portfolio investments with the potential for
capital appreciation, the holders of common shares will be the beneficiaries of
any such incremental return. Should the differential between the underlying
assets and cost of leverage narrow, the incremental return "pick up" will be
reduced. Furthermore, if long-term interest rates rise or the Fund otherwise
incurs losses on its investments, the Fund's net asset value attributable to its
common shares will reflect the decline in the value of portfolio holdings
resulting therefrom.
To the extent the income or capital appreciation derived from securities
purchased with funds received from leverage exceeds the cost of leverage, the
Fund's return to common shareholders will be greater than if leverage had not
been used. Conversely, if the income or capital appreciation from the securities
purchased with such funds is not sufficient to cover the cost of leverage or if
the Fund incurs capital losses, the return of the Fund to common shareholders
will be less than if leverage had not been used. Calamos may determine to
maintain the Fund's leveraged position if it expects that the long-term benefits
to the Fund's common shareholders of maintaining the leveraged position will
outweigh the current reduced return. Capital raised through the issuance of
preferred shares or Borrowings will be subject to dividend payments or interest
costs that may or may not exceed the income and appreciation on the assets
purchased. The Fund also may be required to maintain minimum average balances in
connection with Borrowings or to pay a commitment or other fee to maintain a
line of credit; either of these requirements would increase the cost of
borrowing over the stated interest rate.
Under the 1940 Act, the Fund is not permitted to issue preferred shares
unless immediately after such issuance the net asset value of the Fund's
portfolio is at least 200% of the liquidation value of the outstanding preferred
shares (i.e., such liquidation value may not exceed 50% of the value of the
Fund's managed assets). In addition, the Fund is not permitted to declare any
cash dividend or other distribution on its common shares unless, at the time of
such declaration, the net asset value of the Fund's portfolio (determined after
deducting the amount of such dividend or distribution) is at least 200% of such
liquidation value. In the event preferred shares are issued, the Fund intends,
to the extent possible, to purchase or redeem preferred shares from time to time
to maintain coverage of any preferred shares of at least 200%. Under the 1940
Act, the Fund is not permitted to incur indebtedness unless immediately after
22
such borrowing the Fund has an asset coverage of at least 300% of the aggregate
outstanding principal balance of indebtedness (i.e., such indebtedness may not
exceed 33 1/3% of the value of the Fund's managed assets). Additionally, under
the 1940 Act, the Fund may not declare any dividend or other distribution upon
any class of its shares, or purchase any such shares, unless the aggregate
indebtedness of the Fund has, at the time of the declaration of any such
dividend or distribution or at the time of any such purchase, an asset coverage
of at least 300% after deducting the amount of such dividend, distribution, or
purchase price, as the case may be.
The Fund may be subject to certain restrictions on investments imposed by
guidelines of one or more NRSROs that may issue ratings for the preferred shares
or debt instruments issued by the Fund. These guidelines may impose asset
coverage or portfolio composition requirements that are more stringent than
those imposed by the 1940 Act. Certain types of borrowings may result in the
Fund being subject to covenants in credit agreements, including those relating
to asset coverage, borrowing base and portfolio composition requirements and
additional covenants. The Fund may also be required to pledge its assets to the
lenders in connection with certain types of borrowing. Calamos does not
anticipate that these covenants or restrictions will adversely affect its
ability to manage the Fund's portfolio in accordance with the Fund's investment
objective and policies. Due to these covenants or restrictions, the Fund may be
forced to liquidate investments at times and at prices that are not favorable to
the Fund, or the Fund may be forced to forgo investments that Calamos otherwise
views as favorable.
If and the extent to which the Fund employs leverage will depend on many
factors, the most important of which are investment outlook, market conditions
and interest rates.
INTEREST RATE TRANSACTIONS
In order to seek to reduce the interest rate risk inherent in the Fund's
underlying investments and capital structure, the Fund, if market conditions are
deemed favorable, may enter into interest rate swap or cap transactions.
Interest rate swaps involve the Fund's agreement with the swap counterparty to
pay a fixed rate payment in exchange for the counterparty agreeing to pay the
Fund a payment at a variable rate that is expected to approximate the rate of
any variable rate payment obligation on Preferred Shares or any variable rate
borrowing. The payment obligations would be based on the notional amount of the
swap. The Fund's payment obligations under the swap are general unsecured
obligations of the Fund and are ranked senior to distributions under the common
shares and Preferred Shares.
The Fund may use an interest rate cap that would require it to pay a
premium to the cap counterparty and would entitle it, to the extent that a
specified variable rate index exceeds a predetermined fixed rate, to receive
from the counterparty payment of the difference based on the notional amount of
such cap. The Fund would use interest rate swaps or caps only with the intent to
reduce or eliminate the risk that an increase in short-term interest rates could
have on common share net earnings as a result of leverage.
The Fund will usually enter into swaps or caps on a net basis; that is, the
two payment streams will be netted out in a cash settlement on the payment date
or dates specified in the instrument, with the Fund receiving or paying, as the
case may be, only the net amount of the two payments. The Fund intends to
maintain in a segregated account with its custodian cash or liquid securities
having a value at least equal to the Fund's net payment obligations under any
swap transaction, marked-to-market daily.
The use of interest rate swaps and caps is a highly specialized activity
that involves investment techniques and risks different from those associated
with ordinary portfolio security transactions. Depending on the state of
interest rates in general, the Fund's use of interest rate swaps or caps could
enhance or harm the overall performance of the common shares. To the extent that
there is a decline in interest rates for maturities equal to the remaining
maturity on the Fund's fixed rate payment obligation under the interest rate
swap or equal to the remaining term of the interest rate cap, the value of the
swap or cap (which initially has a value of zero) could decline, and could
result in a decline in the net asset value of the common shares. If, on the
other hand, such rates were to increase, the value of the swap or
23
cap could increase, and thereby increase the net asset value of the common
shares. As interest rate swaps or caps approach their maturity, their positive
or negative value due to interest rate changes will approach zero.
Buying interest rate caps could enhance the performance of the common
shares by providing a maximum leverage expense. Buying interest rate caps could
also decrease the net earnings of the common shares in the event that the
premium paid by the Fund to the counterparty exceeds the additional amount the
Fund would have been required to pay had it not entered into the cap agreement.
The Fund has no current intention of selling an interest rate cap. The Fund will
not enter into interest rate swap or cap transactions in an aggregate notional
amount that exceeds the outstanding amount of the Fund's leverage.
Interest rate swaps and caps do not involve the delivery of securities or
other underlying assets or principal. Accordingly, the risk of loss with respect
to interest rate swaps is limited to the net amount of interest payments that
the Fund is contractually obligated to make. If the counterparty defaults, the
Fund would not be able to use the anticipated net receipts under the swap or cap
to offset the dividend payments on Preferred Shares or interest payments on
Borrowings. Depending on whether the Fund would be entitled to receive net
payments from the counterparty on the swap or cap, which in turn would depend on
the general state of short-term interest rates at that point in time, such a
default could negatively impact the performance of the common shares.
Although this will not guarantee that the counterparty does not default,
the Fund will not enter into an interest rate swap or cap transaction with any
counterparty that Calamos believes does not have the financial resources to
honor its obligation under the interest rate swap or cap transaction. Further,
Calamos will continually monitor the financial stability of a counterparty to an
interest rate swap or cap transaction in an effort to proactively protect the
Fund's investments.
In addition, at the time the interest rate swap or cap transaction reaches
its scheduled termination date, there is a risk that the Fund will not be able
to obtain a replacement transaction or that the terms of the replacement will
not be as favorable as on the expiring transaction. If this occurs, it could
have a negative impact on the performance of the common shares.
The Fund may choose or be required to redeem some or all Preferred Shares
or prepay any Borrowings. This redemption or prepayment would likely result in
the Fund seeking to terminate early all or a portion of any swap or cap
transaction. Such early termination of a swap could result in a termination
payment by or to the Fund. A termination payment by the Fund would result in a
reduction in common share net earnings. An early termination of a cap could
result in a termination payment to the Fund.
RISK FACTORS
Risk is inherent in all investing. Investing in any investment company
security involves risk, including the risk that you may receive little or no
return on your investment or that you may lose part or all of your investment.
Therefore, before investing you should consider carefully the following risks
that you assume when you invest in Preferred Shares.
RISKS OF INVESTING IN PREFERRED SHARES
INTEREST RATE RISK. The Fund issues Preferred Shares, which pay dividends
based on short-term interest rates. The Fund purchases convertible securities,
high yield securities and other securities that pay dividends that are based on
the performance of the issuing companies, and/or that pay interest, based on
longer term yields. These dividends and interest payments are typically,
although not always, higher than short-term interest rates. Such dividends and
interest payments, as well as long-term and short-term interest rates,
fluctuate. If short-term interest rates rise, dividend rates on the Preferred
Shares may rise so that the amount of dividends paid to shareholders of
Preferred Shares exceeds the income from the portfolio securities. Because
income from the Fund's entire investment portfolio (not just the portion of the
portfolio purchased with the proceeds of the Preferred Shares offering) is
available to pay dividends on the Preferred Shares, dividend rates on the
Preferred Shares would need to greatly exceed the Fund's net
24
portfolio income before the Fund's ability to pay dividends on the Preferred
Shares would be jeopardized. If long-term interest rates rise, this could
negatively impact the value of the Fund's investment portfolio, reducing the
amount of assets serving as asset coverage for the Preferred Shares. Market
interest rates currently are at historically low levels.
AUCTION RISK. You may not be able to sell your Preferred Shares at an
auction if the auction fails; that is, if there are more Preferred Shares
offered for sale than there are buyers for those shares. Also, if you place a
bid order to retain Preferred Shares at an auction only at a specified rate, and
that specific rate exceeds the rate set at the auction, you will not retain your
Preferred Shares. If you submit a hold order for Preferred Shares (orders to
retain Preferred Shares without specifying a minimum rate) and the auction sets
a below-market rate, you may receive a below-market rate of return on your
Preferred Shares.
As noted above, if there are more Preferred Shares offered for sale than
there are buyers for those Preferred Shares in any auction, the auction will
fail and you may not be able to sell some or all of your Preferred Shares at
that time. The relative buying and selling interest of market participants in
your Preferred Shares and in the auction rate securities market as a whole will
vary over time, and such variations may be affected by, among other things, news
relating to the Fund, the attractiveness of alternative investments, the
perceived risk of owning the security (whether related to credit, liquidity or
any other risk), the tax treatment accorded the instruments, the accounting
treatment accorded Preferred Shares, including recent clarifications of U.S.
generally accepted accounting principles relating to the treatment of auction
rate securities, reactions to regulatory actions or press reports, financial
reporting cycles and market sentiment generally. Shifts of demand in response to
any one or simultaneous particular events cannot be predicted and may be
short-lived or exist for longer periods.
A Broker-Dealer may submit orders in auctions for its own account. Any
Broker-Dealer submitting an order for its own account in any auction will have
an advantage over other bidders in that it would have knowledge of other orders
placed through it in that auction (but it would not have knowledge of orders
submitted by other Broker-Dealers, if any). As a result of the Broker-Dealer
bidding, the auction clearing rate may be higher or lower than the rate that
would have prevailed if the Broker-Dealer had not bid. A Broker-Dealer may also
bid in order to prevent what would otherwise be a failed auction, or an auction
clearing at a rate that the Broker-Dealer believes does not reflect the market
for such securities at the time of the auction. Broker-Dealers may, but are not
obligated to, advise holders of the Preferred Shares that the rate that will
apply in an "all hold" auction is often a lower rate than would apply if holders
submit bids, and such advice, if given, may facilitate the submission of bids by
existing holders that would avoid the occurrence of an "all hold" auction. A
Broker-Dealer may, but is not obligated to, encourage additional or revised
investor bidding in order to prevent an "all hold" auction.
Finally, the dividend periods for the Preferred Shares may be changed by
the Fund, subject to certain conditions with notice to the holders of Preferred
Shares, which could also affect the liquidity of your investment. See
"Description of Preferred Shares" and "The Auction -- Auction Procedures."
The underwriter has advised the Fund that the underwriter and various other
Broker-Dealers and other firms that participate in the auction rate securities
market received letters from the staff of the Commission in the spring of 2004.
The letters requested that each of these firms voluntarily conduct an
investigation regarding its respective practices and procedures in that market.
Pursuant to these requests, the underwriter conducted its own voluntary review
and reported its findings to the Commission staff. At the Commission staff's
request, the underwriter is engaging in discussions with the Commission staff
concerning its inquiry. Neither the underwriter nor the Fund can predict the
ultimate outcome of the inquiry or how that outcome will affect the market for
auction rate securities or the auctions.
SECONDARY MARKET RISK. If you try to sell your Preferred Shares between
auctions, you may not be able to sell any or all of your shares, or you may not
be able to sell them for $25,000 per share or $25,000 per share plus accumulated
dividends. If the Fund has designated a special dividend period (a dividend
period other than 7 days), changes in interest rates could affect the price you
would receive if you sold your shares in the secondary market. Broker-Dealers
that maintain a secondary trading market for
25
Preferred Shares are not required to maintain that market, and the Fund is not
required to redeem shares either if an auction or an attempted secondary market
sale fails because of a lack of buyers. Preferred Shares are not listed on a
stock exchange or quoted on the Nasdaq stock market. You may transfer shares
outside of auctions only to or through a Broker-Dealer that has entered into an
agreement with the Fund's auction agent, The Bank of New York, and the Fund or
such other persons as the Fund permits. If you sell your Preferred Shares to a
broker-dealer between auctions, you may receive less than the price you paid for
them, especially if market interest rates have risen since the last auction.
Accumulated Preferred Shares dividends, however, should at least partially
compensate for the increased market interest rates.
RATINGS AND ASSET COVERAGE RISK. Although it is expected that Fitch will
assign a rating of "AAA" to the Preferred Shares and S&P will assign a rating of
"AAA" to the Preferred Shares, such ratings do not eliminate or necessarily
mitigate the risks of investing in Preferred Shares. Fitch or S&P could
downgrade its rating of the Preferred Shares or withdraw its rating of the
Preferred Shares at any time, which may make your shares less liquid at an
auction or in the secondary market. If Fitch or S&P downgrades the Preferred
Shares, the Fund may alter its portfolio or redeem Preferred Shares in an effort
to improve the rating, although there is no assurance that it will be able to do
so to the extent necessary to restore the prior rating. If the Fund fails to
satisfy the asset coverage ratios discussed under "Description of Preferred
Shares -- Rating Agency Guidelines," the Fund will be required to redeem a
sufficient number of Preferred Shares in order to return to compliance with the
asset coverage ratios. The Fund may be required to redeem Preferred Shares at a
time when it is not advantageous for the Fund to make such redemption or to
liquidate portfolio securities in order to have available cash for such
redemption. The Fund may voluntarily redeem Preferred Shares under certain
circumstances in order to meet asset maintenance tests. Although a sale of
substantially all the assets of the Fund or the merger of the Fund into another
entity would require the approval of the holders of the Preferred Shares voting
as a separate class as discussed under "Description of the Preferred
Shares -- Voting Rights," a sale of substantially all of the assets of the Fund
or the merger of the Fund with or into another entity would not be treated as a
liquidation of the Fund nor require that the Fund redeem the Preferred Shares,
in whole or in part, provided that the Fund continued to comply with the asset
coverage ratios discussed under "Description of Preferred Shares -- Rating
Agency Guidelines." See "Description of Preferred Shares -- Rating Agency
Guidelines" for a description of the asset maintenance tests the Fund must meet.
INFLATION RISK. Inflation is the reduction in the purchasing power of
money resulting from the increase in the price of goods and services. Inflation
risk is the risk that the inflation adjusted (or "real") value of your Preferred
Shares investment or the income from that investment will be worth less in the
future. As inflation occurs, the real value of the Preferred Shares and
distributions declines. In an inflationary period, however, it is expected that,
through the auction process, Preferred Shares dividend rates would increase,
tending to offset this risk.
INCOME RISK. The Fund's income is based primarily on the income it earns
from its investments, which vary widely over the short- and long-term. If the
Fund's income drops, over time the Fund's ability to make dividend payments with
respect to the Preferred Shares may be impaired. See "-- General Risks of
Investing in the Fund" below for the general risks affecting the Fund.
DECLINE IN NET ASSET VALUE RISK. A material decline in the Fund's net
asset value may impair the Fund's ability to maintain required levels of asset
coverage. For a description of risks affecting the Fund, see "-- General Risks
of Investing in the Fund" below.
PAYMENT RESTRICTIONS. The Fund is prohibited from declaring, paying or
making any dividends or distributions on Preferred Shares unless it satisfies
certain conditions. See "Description of Preferred Shares -- Restrictions on
Dividend, Redemption and Other Payments." The Fund is also prohibited from
declaring, paying or making any dividends or distributions on common shares
unless it satisfies certain conditions. These prohibitions on the payment of
dividends or distributions might impair the Fund's ability to maintain its
qualification as a regulated investment company for federal income tax purposes.
The Fund intends, however, to redeem Preferred Shares if necessary to comply
with the asset coverage requirements. There can be no assurance, however, that
such redemptions can be effected in time to permit the Fund to
26
distribute its income as required to maintain its qualification as a regulated
investment company under the Code. See "U.S. Federal Income Tax Matters" below
and in the Statement of Additional Information.
LEVERAGE RISK. The Fund uses financial leverage for investment purposes.
In addition to issuing Preferred Shares, the Fund may make further use of
financial leverage through borrowing, including the issuance of commercial paper
or notes. As a non-fundamental policy, financial leverage (including Preferred
Shares and Borrowings) may not exceed 38% of the Funds' total assets. The Fund
may also borrow funds (a) in connection with a loan made by a bank or other
party that is privately arranged and not intended to be publicly distributed or
(b) In addition to financial leverage, in an amount equal to up to 5% of its
total assets for temporary purposes only.
If the Fund issues any senior securities representing indebtedness (as
defined in the 1940 Act), under the requirements of the 1940 Act, the value of
the Fund's total assets, less all liabilities and indebtedness of the Fund not
represented by such senior securities, must be at least equal, immediately after
any such senior securities representing indebtedness, to 300% of the aggregate
value of such senior securities. Upon the issuance of Preferred Shares, the
value of the Fund's total assets, less all liabilities and indebtedness of the
Fund not represented by senior securities must be at least equal, immediately
after the issuance of the Preferred Shares, to 200% of the aggregate value of
any senior securities and the Preferred Shares.
If the Fund seeks an investment grade rating from one or more nationally
recognized statistical rating organizations for any commercial paper and notes
(which the Fund expects to do if it issues any such commercial paper or notes),
asset coverage or portfolio composition provisions in addition to and more
stringent than those required by the 1940 Act may be imposed in connection with
the issuance of such a rating. In addition, restrictions may be imposed on
certain investment practices in which the Fund may otherwise engage. Any lender
with respect to Borrowings by the Fund may require additional asset coverage and
portfolio composition provisions as well as restrictions on the Fund's
investment practices.
The money borrowed pursuant to any Borrowings may constitute a substantial
lien and burden on the Preferred Shares by reason of their prior claim against
the income of the Fund and against the net assets of the Fund in liquidation.
The Fund may not be permitted to declare dividends or other distributions,
including with respect to Preferred Shares or purchase or redeem shares,
including Preferred Shares unless (i) at the time thereof the Fund meets certain
asset coverage requirements and (ii) there is no event of default under any
Borrowings, that is continuing. See "Description of Preferred
Shares -- Restrictions on Dividend, Redemption and Other Payments." In the event
of a default under any Borrowings, the lenders may have the right to cause a
liquidation of the collateral (i.e., sell portfolio securities) and if any such
default is not cured, the lenders may be able to control the liquidation as
well.
The Fund reserves the right at any time, if it believes that market
conditions are appropriate, to increase its level of debt or other senior
securities to maintain or increase the Fund's current level of leverage to the
extent permitted by the 1940 Act and existing agreements between the Fund and
third parties. However, as a non-fundamental policy, financial leverage (the
total of Preferred Shares or other preferred shares and any Borrowings) may not
exceed 38% of the Fund's total assets.
Because the investment management fee paid to Calamos will be calculated on
the basis of managed assets, the fee will be higher when leverage is utilized,
giving Calamos an incentive to utilize leverage.
GENERAL RISKS OF INVESTING IN THE FUND
LIMITED OPERATING HISTORY. The Fund is a recently organized closed-end
management investment company with a limited operating history.
EQUITY SECURITIES. Equity investments are subject to greater fluctuations
in market value than other asset classes as a result of such factors as the
issuer's business performance, investor perceptions, stock market trends and
general economic conditions. Equity securities are subordinated to bonds and
other debt instruments in a company's capital structure in terms of priority to
corporate income and liquidation payments. The Fund may invest in preferred
stocks and convertible securities of any rating, including below investment
grade.
27
HIGH YIELD SECURITIES. The Fund may invest in high yield securities of any
rating. Investment in high yield securities involves substantial risk of loss.
Below investment grade non-convertible debt securities or comparable unrated
securities are commonly referred to as "junk bonds" and are considered
predominantly speculative with respect to the issuer's ability to pay interest
and principal and are susceptible to default or decline in market value due to
adverse economic and business developments. The market values for high yield
securities tend to be very volatile, and these securities are less liquid than
investment grade debt securities. For these reasons, your investment in the Fund
is subject to the following specific risks:
- increased price sensitivity to changing interest rates and to a
deteriorating economic environment;
- greater risk of loss due to default or declining credit quality;
- adverse company specific events are more likely to render the issuer
unable to make interest and/or principal payments; and
- if a negative perception of the high yield market develops, the price and
liquidity of high yield securities may be depressed. This negative
perception could last for a significant period of time.
Adverse changes in economic conditions are more likely to lead to a
weakened capacity of a high yield issuer to make principal payments and interest
payments than an investment grade issuer. The principal amount of high yield
securities outstanding has proliferated in the past decade as an increasing
number of issuers have used high yield securities for corporate financing. An
economic downturn could severely affect the ability of highly leveraged issuers
to service their debt obligations or to repay their obligations upon maturity.
Similarly, downturns in profitability in specific industries could adversely
affect the ability of high yield issuers in those industries to meet their
obligations. The market values of lower quality debt securities tend to reflect
individual developments of the issuer to a greater extent than do higher quality
securities, which react primarily to fluctuations in the general level of
interest rates. Factors having an adverse impact on the market value of lower
quality securities may have an adverse effect on the Fund's net asset value and
the market value of its common shares. In addition, the Fund may incur
additional expenses to the extent it is required to seek recovery upon a default
in payment of principal or interest on its portfolio holdings. In certain
circumstances, the Fund may be required to foreclose on an issuer's assets and
take possession of its property or operations. In such circumstances, the Fund
would incur additional costs in disposing of such assets and potential
liabilities from operating any business acquired.
The secondary market for high yield securities may not be as liquid as the
secondary market for more highly rated securities, a factor that may have an
adverse effect on the Fund's ability to dispose of a particular security. There
are fewer dealers in the market for high yield securities than for investment
grade obligations. The prices quoted by different dealers may vary significantly
and the spread between the bid and asked price is generally much larger than for
higher quality instruments. Under adverse market or economic conditions, the
secondary market for high yield securities could contract further, independent
of any specific adverse changes in the condition of a particular issuer, and
these instruments may become illiquid. As a result, the Fund could find it more
difficult to sell these securities or may be able to sell the securities only at
prices lower than if such securities were widely traded. Prices realized upon
the sale of such lower rated or unrated securities, under these circumstances,
may be less than the prices used in calculating the Fund's net asset value.
Since investors generally perceive that there are greater risks associated
with lower quality debt securities of the type in which the Fund may invest a
portion of its assets, the yields and prices of such securities may tend to
fluctuate more than those for higher rated securities. In the lower quality
segments of the debt securities market, changes in perceptions of issuers'
creditworthiness tend to occur more frequently and in a more pronounced manner
than do changes in higher quality segments of the debt securities market,
resulting in greater yield and price volatility.
Securities rated below investment grade are speculative with respect to the
capacity to pay interest and repay principal in accordance with the terms of
such securities. A rating of C from Moody's means that the issue so rated can be
regarded as having extremely poor prospects of ever attaining any real
28
investment standing. S&P assigns a rating of C to issues that are currently
highly vulnerable to nonpayment, and the C rating may be used to cover a
situation in which a bankruptcy petition has been filed or similar action taken,
but payments on the obligation are being continued (a C rating is also assigned
to a preferred stock issue in arrears on dividends or sinking fund payments, but
that is currently paying). See the statement of additional information for a
description of Moody's and S&P ratings.
If the Fund invests in high yield securities that are rated C or below, the
Fund will incur significant risk in addition to the risks associated with
investments in high yield securities discussed above. Distressed securities
frequently do not produce income while they are outstanding. The Fund may
purchase distressed securities that are in default or the issuers of which are
in bankruptcy. The Fund may be required to bear certain extraordinary expenses
in order to protect and recover its investment. The Fund also will be subject to
significant uncertainty as to when and in what manner and for what value the
obligations evidenced by the distressed securities will eventually be satisfied.
FOREIGN SECURITIES. Investments in non-U.S. issuers may involve unique
risks compared to investing in securities of U.S. issuers. These risks are more
pronounced to the extent that the Fund invests a significant portion of its
non-U.S. investments in one region or in the securities of emerging market
issuers. These risks may include:
- less information about non-U.S. issuers or markets may be available due
to less rigorous disclosure or accounting standards or regulatory
practices;
- many non-U.S. markets are smaller, less liquid and more volatile and
therefore, in a changing market, Calamos may not be able to sell the
Fund's portfolio securities at times, in amounts and at prices it
considers reasonable;
- the economies of non-U.S. countries may grow at slower rates than
expected or may experience a downturn or recession;
- economic, political and social developments may adversely affect the
securities markets, including expropriation and nationalization;
- the difficulty in obtaining or enforcing a court judgment in non-U.S.
countries;
- restrictions on foreign investments in non-U.S. jurisdictions;
- difficulties in effecting the repatriation of capital invested in
non-U.S. countries;
- withholding and other non-U.S. taxes may decrease the Fund's return; and
- dividend income the Fund receives from foreign securities may not be
eligible for the special federal income tax treatment applicable to
qualified dividend income.
There may be less publicly available information about non-U.S. markets and
issuers than is available with respect to U.S. securities and issuers. Non-U.S.
companies generally are not subject to accounting, auditing and financial
reporting standards, practices and requirements comparable to those applicable
to U.S. companies. The trading markets for most non-U.S. securities are
generally less liquid and subject to greater price volatility than the markets
for comparable securities in the United States. The markets for securities in
certain emerging markets are in the earliest stages of their development. Even
the markets for relatively widely traded securities in certain non-U.S. markets,
including emerging market countries, may not be able to absorb, without price
disruptions, a significant increase in trading volume or trades of a size
customarily undertaken by institutional investors in the United States.
Additionally, market making and arbitrage activities are generally less
extensive in such markets, which may contribute to increased volatility and
reduced liquidity.
Economies and social and political conditions in individual countries may
differ unfavorably from the United States. Non-U.S. economies may have less
favorable rates of growth of gross domestic product, rates of inflation,
currency valuation, capital reinvestment, resource self-sufficiency and balance
of payments positions. Many countries have experienced substantial, and in some
cases extremely high, rates
29
of inflation for many years. Inflation and rapid fluctuations in inflation rates
have had, and may continue to have, very negative effects on the economies and
securities markets of certain emerging market countries. Unanticipated political
or social developments may also affect the values of the Fund's investments and
the availability to the Fund of additional investments in such countries.
CURRENCY RISK. The value of the securities denominated or quoted in
foreign currencies may be adversely affected by fluctuations in the relative
currency exchange rates and by exchange control regulations. The Fund's
investment performance may be negatively affected by a devaluation of a currency
in which the Fund's investments are denominated or quoted. Further, the Fund's
investment performance may be significantly affected, either positively or
negatively, by currency exchange rates because the U.S. dollar value of
securities denominated or quoted in another currency will increase or decrease
in response to changes in the value of such currency in relation to the U.S.
dollar.
INTEREST RATE RISK. Fixed income securities, including high yield
securities, are subject to certain common risks, including the following:
- If interest rates go up, the value of debt securities in the Fund's
portfolio generally will decline.
- During periods of declining interest rates, the issuer of a security may
exercise its option to prepay principal earlier than scheduled, forcing
the Fund to reinvest in lower yielding securities. This is known as call
or prepayment risk. Debt securities frequently have call features that
allow the issuer to repurchase the security prior to its stated maturity.
An issuer may redeem an obligation if the issuer can refinance the debt
at a lower cost due to declining interest rates or an improvement in the
credit standing of the issuer.
- During periods of rising interest rates, the average life of certain
types of securities may be extended because of slower than expected
principal payments. This may lock in a below market interest rate,
increase the security's duration (the estimated period until the security
is paid in full) and reduce the value of the security. This is known as
extension risk.
- Rising interest rates could result in an increase in the cost of the
Funds' leverage and could adversely affect the ability of the Fund to
meet asset coverage requirements with respect to leverage.
DEFAULT RISK. Default risk refers to the risk that a company that issues a
debt security will be unable to fulfill its obligations to repay principal and
interest. The lower a debt security is rated, the greater its default risk.
ILLIQUID INVESTMENTS. The Fund may invest up to 15% of its managed assets
in securities that, at the time of investment, are illiquid (determined using
the Commission's standard applicable to investment companies, i.e., securities
that can not be disposed of within 7 days in the ordinary course of business at
approximately the value at which the Fund has valued the securities). The Fund
may also invest without limit in Rule 144A Securities. Calamos, under the
supervision of the Board of Trustees, will determine whether securities
purchased under Rule 144A are illiquid (that is, not readily marketable) and
thus subject to the Fund's limit on investing no more than 15% of its managed
assets in illiquid securities. Investments in Rule 144A Securities could have
the effect of increasing the amount of the Fund's assets invested in illiquid
securities if qualified institutional buyers are unwilling to purchase these
Rule 144A Securities. Illiquid securities may be difficult to dispose of at a
fair price at the times when the Fund believes it is desirable to do so.
Investment of the Fund's assets in illiquid securities may restrict the Fund's
ability to take advantage of market opportunities. The market price of illiquid
securities generally is more volatile than that of more liquid securities, which
may adversely affect the price that the Fund pays for or recovers upon the sale
of illiquid securities. Illiquid securities are also more difficult to value and
Calamos' judgment may play a greater role in the valuation process. The risks
associated with illiquid securities may be particularly acute in situations in
which the Fund's operations require cash and could result in the Fund borrowing
to meet its short-term needs or incurring losses on the sale of illiquid
securities.
30
CONVERTIBLE SECURITIES. Convertible securities generally offer lower
interest or dividend yields than non-convertible securities of similar quality.
The market values of convertible securities tend to decline as interest rates
increase and, conversely, to increase as interest rates decline. However, the
convertible security's market value tends to reflect the market price of the
common stock of the issuing company when that stock price is greater than the
convertible security's "conversion price." The conversion price is defined as
the predetermined price at which the convertible security could be exchanged for
the associated stock. As the market price of the underlying common stock
declines, the price of the convertible security tends to be influenced more by
the yield of the convertible security. Thus, it may not decline in price to the
same extent as the underlying common stock. In the event of a liquidation of the
issuing company, holders of convertible securities would be paid before the
company's common stockholders. Consequently, the issuer's convertible securities
generally entail less risk than its common stock.
SYNTHETIC CONVERTIBLE INSTRUMENTS. The value of a synthetic convertible
instrument may respond differently to market fluctuations than a convertible
security because a synthetic convertible instrument is composed of two or more
separate securities, each with its own market value. In addition, if the value
of the underlying common stock or the level of the index involved in the
convertible component falls below the exercise price of the warrant or option,
the warrant or option may lose all value. Synthetic convertible instruments
created by other parties have the same attributes of a convertible security,
however, the issuer of the synthetic convertible instrument assumes the credit
risk associated with the investment, rather than the issuer of the underlying
equity security into which the instrument is convertible. Therefore, the Fund is
subject to the credit risk associated with the party creating the synthetic
convertible instrument.
INTEREST RATE TRANSACTIONS RISK. The Fund may enter into an interest rate
swap or cap transaction to attempt to protect itself from increasing dividend or
interest expenses on its preferred shares, debt securities or other borrowings
resulting from increasing short-term interest rates. A decline in interest rates
may result in a decline in the value of the swap or cap, which may result in a
decline in the net asset value of the Fund.
Depending on the state of interest rates in general, the Fund's use of
interest rate swap or cap transactions could enhance or harm the overall
performance of the common shares. To the extent there is a decline in interest
rates, the value of the interest rate swap or cap could decline, and could
result in a decline in the net asset value of the common shares. In addition, if
the counterparty to an interest rate swap or cap defaults, the Fund would not be
able to use the anticipated net receipts under the swap or cap to offset the
dividend or interest payments on the Fund's leverage.
Depending on whether the Fund would be entitled to receive net payments
from the counterparty on the swap or cap, which in turn would depend on the
general state of short-term interest rates at that point in time, such a default
could negatively impact the performance of the common shares. In addition, at
the time an interest rate swap or cap transaction reaches its scheduled
termination date, there is a risk that the Fund would not be able to obtain a
replacement transaction or that the terms of the replacement would not be as
favorable as on the expiring transaction. If either of these events occurs, it
could have a negative impact on the performance of the common shares. If the
Fund fails to maintain a required 200% asset coverage of the liquidation value
of the outstanding preferred shares or if the Fund loses its expected rating on
its preferred shares or fails to maintain other covenants with respect to its
preferred shares, the Fund may be required to redeem some or all of the
preferred shares. Similarly, the Fund could be required to prepay the principal
amount of any debt securities or other borrowings. Such redemption or prepayment
would likely result in the Fund seeking to terminate early all or a portion of
any swap or cap transaction. Early termination of a swap could result in a
termination payment by or to the Fund. Early termination of a cap could result
in a termination payment to the Fund. The Fund intends to maintain in a
segregated account with its custodian cash or liquid securities having a value
at least equal to the Fund's net payment obligations under any swap transaction,
marked-to-market daily.
RISKS ASSOCIATED WITH OPTIONS. There are several risks associated with
transactions in options. For example, there are significant differences between
the securities and options markets that could result in an imperfect correlation
among these markets, causing a given transaction not to achieve its objectives.
A
31
decision as to whether, when and how to use options involves the exercise of
skill and judgment, and even a well-conceived transaction may be unsuccessful to
some degree because of market behavior or unexpected events. The ability of the
Fund to utilize options successfully will depend on Calamos' ability to predict
pertinent market movements, which cannot be assured.
The Fund's ability to close out its position as a purchaser or seller of an
OCC or exchange listed put or call option is dependent, in part, upon the
liquidity of the option market. Among the possible reasons for the absence of a
liquid option market are: (i) insufficient trading interest in certain options;
(ii) restrictions on transactions imposed by an exchange; (iii) trading halts,
suspensions or other restrictions imposed with respect to particular classes or
series of options or underlying securities, including reaching daily price
limits; (iv) interruption of the normal operations of the OCC or an exchange;
(v) inadequacy of the facilities of an exchange or OCC to handle current trading
volume; or (vi) a decision by one or more exchanges to discontinue the trading
of options (or a particular class or series of options), in which event the
relevant market for that option on that exchange would cease to exist, although
outstanding options on that exchange would generally continue to be exercisable
in accordance with their terms. If the Fund were unable to close out an option
that it has purchased on a security, it would have to exercise the option in
order to realize any profit or the option would expire and become worthless. If
the Fund were unable to close out a covered call option that it had written on a
security, it would not be able to sell the underlying security until the option
expired. As the writer of a covered call option on a security, the Fund
foregoes, during the option's life, the opportunity to profit from increases in
the market value of the security covering the call option above the sum of the
premium and the exercise price of the call.
The hours of trading for listed options may not coincide with the hours
during which the underlying financial instruments are traded. To the extent that
the option markets close before the markets for the underlying financial
instruments, significant price and rate movements can take place in the
underlying markets that cannot be reflected in the option markets until the next
trading day.
Unless the parties provide for it, there is no central clearing or guaranty
function in an OTC option. As a result, if the counterparty fails to make or
take delivery of the security or other instrument underlying an OTC option it
has entered into with the Fund or fails to make a cash settlement payment due in
accordance with the terms of that option, the Fund will lose any premium it paid
for the option as well as any anticipated benefit of the transaction.
Accordingly, Calamos must assess the creditworthiness of each such counterparty
or any guarantor or credit enhancement of the counterparty's credit to determine
the likelihood that the terms of the OTC option will be satisfied. The Fund will
engage in OTC option transactions only with U.S. government securities dealers
recognized by the Federal Reserve Bank of New York as "primary dealers" or
broker/dealers, domestic or foreign banks or other financial institutions that
have received (or the guarantors of the obligation of which have received) a
short-term credit rating of A-1 from S&P or P-1 from Moody's or an equivalent
rating from any NRSRO or, in the case of OTC currency transactions, are
determined to be of equivalent credit quality by Calamos. The staff of the
Commission currently takes the position that OTC options purchased by a fund,
and portfolio securities "covering" the amount of a fund's obligation pursuant
to an OTC option sold by it (or the amount of assets equal to the formula price
for the repurchase of the option, if any, less the amount by which the option is
in the money) are illiquid.
The Fund may sell options on individual securities and securities indices.
All calls sold by the Fund must be "covered." Even though the Fund will receive
the option premium to help protect it against loss, a call option sold by the
Fund exposes the Fund during the term of the option to possible loss of
opportunity to realize appreciation in the market price of the underlying
security or instrument in excess of the exercise or strike price and may require
the Fund to hold a security or instrument that it might otherwise have sold. The
Fund may purchase and sell put options on individual securities and securities
indices. In selling put options, there is a risk that the Fund may be required
to buy the underlying security at a disadvantageous price above the market
price.
32
TAX RISK. The Fund may invest in certain securities, such as interest rate
swap and cap transactions and certain convertible and high yield securities, for
which the federal income tax treatment may not be clear or may be subject to
recharacterization by the Internal Revenue Service ("IRS"). It could be more
difficult for the Fund to comply with certain tax requirements applicable to
regulated investment companies if the tax characterization of the Fund's
investments or the tax treatment of the income from such investments were
successfully challenged by the IRS. See "U.S. Federal Income Tax Matters."
Certain of the Fund's investment practices are subject to special and
complex federal income tax provisions that may, among other things, (i)
disallow, suspend or otherwise limit the allowance of certain losses or
deductions, (ii) convert tax-advantaged, long-term capital gains and qualified
dividend income into higher taxed short-term capital gain or ordinary income,
(iii) convert an ordinary loss or a deduction into a capital loss (the
deductibility of which is more limited), (iv) cause the Fund to recognize income
or gain without a corresponding receipt of cash, (v) adversely affect the timing
as to when a purchase or sale of stock or securities is deemed to occur, and
(vi) adversely alter the characterization of certain complex financial
transactions. The Fund will monitor its transactions and may make certain tax
elections where applicable in order to mitigate the effect of these provisions,
if possible.
MANAGEMENT RISK. Calamos' judgment about the attractiveness, relative
value or potential appreciation of a particular sector, security or investment
strategy may prove to be incorrect.
ANTITAKEOVER PROVISIONS. The Fund's Agreement and Declaration of Trust and
By-Laws include provisions that could limit the ability of other entities or
persons to acquire control of the Fund or to change the composition of its Board
of Trustees. Such provisions could limit the ability of shareholders to sell
their shares at a premium over prevailing market prices by discouraging a third
party from seeking to obtain control of the Fund. These provisions include
staggered terms of office for the Trustees, advance notice requirements for
shareholder proposals, and super-majority voting requirements for certain
transactions with affiliates, converting the Fund to an open-end investment
company or a merger, asset sale or similar transaction. Holders of preferred
shares will have voting rights in addition to and separate from the voting
rights of common shareholders with respect to certain of these matters. See
"Description of Shares -- Preferred Shares" and "Certain Provisions of the
Agreement and Declaration of Trust and By-Laws." The holders of preferred
shares, on the one hand, and the holders of the common shares, on the other, may
have interests that conflict in these situations.
MARKET DISRUPTION RISK. Certain events have a disruptive effect on the
securities markets, such as terrorist attacks (including the terrorist attacks
in the United States on September 11, 2001), war and other geopolitical events,
earthquakes, storms and other disasters. The Fund cannot predict the effects of
similar events in the future on the markets or economy of the U.S. or other
countries.
MANAGEMENT OF THE FUND
TRUSTEES AND OFFICERS
The Fund's Board of Trustees provides broad supervision over the affairs of
the Fund. The officers of the Fund are responsible for the Fund's operations.
Currently, there are seven Trustees of the Fund, three of whom are "interested
persons" of the Fund (as defined in the 1940 Act) and four of whom are not
"interested persons." The names and business addresses of the trustees and
officers of the Fund and their principal occupations and other affiliations
during the past five years are set forth under "Management of the Fund" in the
Statement of Additional Information.
INVESTMENT ADVISER
The Fund's investments are managed by Calamos, 2020 Calamos Court,
Naperville, IL. On November 30, 2005 Calamos managed approximately $43.2 billion
in assets of individuals and institutions. Calamos is an indirect subsidiary of
Calamos Asset Management, Inc., whose voting shares are majority-owned by
Calamos Family Partners, Inc., which is controlled by John P. Calamos, Sr. and
the Calamos
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family. Calamos Asset Management, Inc. is publicly traded on the NASDAQ exchange
under the ticker symbol "CLMS".
INVESTMENT MANAGEMENT AGREEMENT
Subject to the overall authority of the Board of Trustees, Calamos
regularly provides the Fund with investment research, advice and supervision and
furnishes continuously an investment program for the Fund. In addition, Calamos
furnishes for use of the Fund such office space and facilities as the Fund may
require for its reasonable needs, supervises the Fund's business and affairs and
provides the following other services on behalf of the Fund and not provided by
persons not a party to the investment management agreement: (a) preparing or
assisting in the preparation of reports to and meeting materials for the
Trustees; (b) supervising, negotiating contractual arrangements with, to the
extent appropriate, and monitoring the performance of, accounting agents,
custodians, depositories, transfer agents and pricing agents, accountants,
attorneys, printers, underwriters, brokers and dealers, insurers and other
persons in any capacity deemed to be necessary or desirable to Fund operations;
(c) assisting in the preparation and making of filings with the Commission and
other regulatory and self-regulatory organizations, including, but not limited
to, preliminary and definitive proxy materials, amendments to the Fund's
registration statement on Form N-2 and semi-annual reports on Form N-SAR and
Form N-CSR; (d) overseeing the tabulation of proxies by the Fund's transfer
agent; (e) assisting in the preparation and filing of the Fund's federal, state
and local tax returns; (f) assisting in the preparation and filing of the Fund's
federal excise tax return pursuant to Section 4982 of the Code; (g) providing
assistance with investor and public relations matters; (h) monitoring the
valuation of portfolio securities and the calculation of net asset value; (i)
monitoring the registration of shares of beneficial interest of the Fund under
applicable federal and state securities laws; (j) maintaining or causing to be
maintained for the Fund all books, records and reports and any other information
required under the 1940 Act, to the extent that such books, records and reports
and other information are not maintained by the Fund's custodian or other agents
of the Fund; (k) assisting in establishing the accounting policies of the Fund;
(l) assisting in the resolution of accounting issues that may arise with respect
to the Fund's operations and consulting with the Fund's independent accountants,
legal counsel and the Fund's other agents as necessary in connection therewith;
(m) reviewing the Fund's bills; (n) assisting the Fund in determining the amount
of dividends and distributions available to be paid by the Fund to its
shareholders, preparing and arranging for the printing of dividend notices to
shareholders, and providing the transfer and dividend paying agent, the
custodian, and the accounting agent with such information as is required for
such parties to effect the payment of dividends and distributions; and (o)
otherwise assisting the Fund as it may reasonably request in the conduct of the
Fund's business, subject to the direction and control of the Trustees.
Under the investment management agreement, the Fund will pay to Calamos a
fee based on the average weekly managed assets that is computed weekly and paid
on a monthly basis. The fee paid by the Fund is at the annual rate of 1.00% of
managed assets. Because the fees paid to Calamos are determined on the basis of
the Fund's managed assets, Calamos' interest in determining whether to leverage
the Fund may conflict with the interests of the Fund and its common
shareholders. The Board of Trustees must approve the issuance of debt securities
and/or Preferred Shares.
Under the terms of its investment management agreement, except for the
services and facilities provided by Calamos as set forth therein, the Fund shall
assume and pay all expenses for all other Fund operations and activities and
shall reimburse Calamos for any such expenses incurred by Calamos. The expenses
borne by the Fund shall include, without limitation: (a) organization expenses
of the Fund (including out-of-pocket expenses, but not including Calamos'
overhead or employee costs); (b) fees payable to Calamos; (c) legal expenses;
(d) auditing and accounting expenses; (e) maintenance of books and records that
are required to be maintained by the Fund's custodian or other agents of the
Fund; (f) telephone, telex, facsimile, postage and other communications
expenses; (g) taxes and governmental fees; (h) fees, dues and expenses incurred
by the Fund in connection with membership in investment company trade
organizations and the expense of attendance at professional meetings of such
organizations; (i) fees and expenses of accounting agents, custodians,
sub-custodians, transfer agents, dividend disbursing
34
agents and registrars; (j) payment for portfolio pricing or valuation services
to pricing agents, accountants, bankers and other specialists, if any; (k)
expenses of preparing share certificates; (l) expenses in connection with the
issuance, offering, distribution, sale, redemption or repurchase of securities
issued by the Fund; (m) expenses relating to investor and public relations
provided by parties other than Calamos; (n) expenses and fees of registering or
qualifying shares of beneficial interest of the Fund for sale; (o) interest
charges, bond premiums and other insurance expenses; (p) freight, insurance and
other charges in connection with the shipment of the Fund's portfolio
securities; (q) the compensation and all expenses (specifically including travel
expenses relating to Fund business) of Trustees, officers and employees of the
Fund who are not affiliated persons of Calamos; (r) brokerage commissions or
other costs of acquiring or disposing of any portfolio securities of the Fund;
(s) expenses of printing and distributing reports, notices and dividends to
shareholders; (t) expenses of preparing and setting in type, printing and
mailing prospectuses and statements of additional information of the Fund and
supplements thereto; (u) costs of stationery; (v) any litigation expenses; (w)
indemnification of Trustees and officers of the Fund; (x) costs of shareholders'
and other meetings; (y) interest on borrowed money, if any; and (z) the fees and
other expenses of listing the Fund's shares on the New York Stock Exchange or
any other national stock exchange.
PORTFOLIO MANAGERS
John P. Calamos, Sr., Nick P. Calamos and John P. Calamos, Jr. are
responsible for managing the Fund's portfolio. During the past five years, John
P. Calamos, Sr. has been a Chairman, CEO and Co-Chief Investment Officer of
Calamos; Nick P. Calamos has been a Senior Executive Vice President and Co-Chief
Investment Officer of Calamos; and John P. Calamos, Jr. has been an Executive
Vice President of Calamos. For over 20 years, the Calamos management team has
managed money for their clients in convertible, high yield and global
strategies. Furthermore, Calamos has extensive experience investing in foreign
markets through its convertible securities and high yield securities strategies.
Such experience has included investments in established as well as emerging
foreign markets. The Fund's statement of additional information provides
additional information about the portfolio managers, including other accounts
they manage, their ownership of the Fund and their compensation.
FUND ACCOUNTING
Under the arrangements with State Street to provide fund accounting
services, State Street provides certain administrative and accounting services
to the Fund and such other funds advised by Calamos that may be part of those
arrangements (the Fund and such other funds are collectively referred to as the
"Calamos Funds") as described more fully in the statement of additional
information. For the services rendered to the Calamos Funds, State Street
receives fees based on the combined managed assets of the Calamos Funds
("Combined Assets"). Each fund of the Calamos Funds pays its pro-rata share of
the fees payable to State Street described below based on relative managed
assets of each fund. State Street receives a fee at the annual rate of .0175%
for the first $1.5 billion of Combined Assets, .0150% for the next $1.5 billion
of Combined Assets, .0125% for the next $1.5 billion of Combined Assets, .010%
for the next $1.5 billion of Combined Assets, .0075% for the next $1.5 billion
of Combined Assets and .00375% for the Combined Assets in excess of $7.5
billion.
In addition, Calamos will also provide certain other financial accounting
services to the Calamos Funds described more fully in the statement of
additional information. For providing those services, Calamos will receive a fee
at the annual rate of .0175% on the first $1 billion of Combined Assets; .0150%
on the next $1 billion of Combined Assets; and .0110% on Combined Assets above
$2 billion ("financial accounting service fee"). Each fund of the Calamos Funds
will pay its pro-rata share of the financial accounting service fee to Calamos
based on relative managed assets of each fund.
35
DESCRIPTION OF PREFERRED SHARES
The following is a brief description of the terms of the Preferred Shares.
For the complete terms of the Preferred Shares, please refer to the detailed
description of the Preferred Shares in the Statement of Preferences of Auction
Rate Cumulative Preferred Shares (the "Statement") attached as Appendix A to the
Statement of Additional Information. Where appropriate, terms used in
"Description of Preferred Shares" and in "The Auction" below will have the same
meanings as those terms in the Statement.
GENERAL
The Fund's Agreement and Declaration of Trust authorizes the issuance of
preferred shares, no par value per share, in one or more classes or series with
rights as determined by the Board of Trustees without the approval of common
shareholders. The Statement currently authorizes the issuance of 2,360 Preferred
Shares, Series T. All Preferred Shares will have a liquidation preference of
$25,000 per share, plus an amount equal to accumulated but unpaid dividends
(whether or not earned or declared).
The Preferred Shares of each series will rank on parity with any other
series of Preferred Shares and any other series of preferred shares of the Fund
as to the payment of dividends and the distribution of assets upon liquidation.
Each Preferred Share carries one vote on matters on which Preferred Shares can
be voted. The Preferred Shares, when issued by the Fund and paid for pursuant to
the terms of this prospectus, will be fully paid and non-assessable and will
have no preemptive, exchange or conversion rights. Any Preferred Shares
repurchased or redeemed by the Fund will be classified as authorized and
unissued Preferred Shares. The Board of Trustees may by resolution classify or
reclassify any authorized and unissued Preferred Shares from time to time by
setting or changing the preferences, rights, voting powers, restrictions,
limitations as to dividends, qualifications or terms or conditions of redemption
of such shares. The Preferred Shares will not be subject to any sinking fund,
but will be subject to mandatory redemption under certain circumstances
described below.
DIVIDENDS AND DIVIDEND PERIODS
The following is a general description of dividends and dividend periods
for the Preferred Shares.
DIVIDEND PERIODS. The initial dividend period for the Preferred Shares is
12 days and the initial dividend rate is 4.05%.
Any subsequent dividend periods of Series T Preferred Shares will generally
be seven days. The Fund, subject to certain conditions, may change the length of
subsequent dividend periods by designating them as special dividend periods. See
"-- Designation of Special Dividend Periods" below.
DIVIDEND PAYMENT DATES. Dividends on the Preferred Shares will be payable,
when, as and if declared by the Board of Trustees, out of legally available
funds in accordance with the Agreement and Declaration of Trust, the Statement
and applicable law. The initial dividend payment date and the day of the week
upon which subsequent dividends, if any, will be paid for the Preferred Shares
is January 18, 2006 and Wednesday, respectively.
Dividend periods generally will begin on the first business day after an
auction. If dividends are payable on a day that is not a business day, then
dividends will generally be payable on the next day if such day is a business
day, or as otherwise specified in the Statement. In addition, the Fund may
specify different dividend payment dates for any special dividend period of more
than seven days, provided that such dates shall be set forth in the notice of
special dividend period relating to such special dividend period.
Dividends will be paid through the Depository Trust Company ("DTC") on each
dividend payment date. The dividend payment date will normally be (A) the first
business day after the dividend period ends with respect to a dividend period of
one year or less; provided, however, if the dividend period is more than 91 days
then on the 91st, 181st and 271st days within such period, if applicable, and on
the business day following the last day of such dividend period; and (B) with
respect to any dividend period of more
36
than one year; on a quarterly basis on each January 1, April 1, July 1 and
October 1 within such dividend period and on the business day following the last
day of such dividend period. DTC, in accordance with its current procedures, is
expected to distribute dividends received from the auction agent in same-day
funds on each dividend payment date to agent members (members of DTC that will
act on behalf of existing or potential holders of Preferred Shares). These agent
members are in turn expected to distribute such dividends to the persons for
whom they are acting as agents. However, each of the current Broker-Dealers has
indicated to the Fund that dividend payments will be available in same-day funds
on each dividend payment date to customers that use a Broker-Dealer or a
Broker-Dealer's designee as agent member.
CALCULATION OF DIVIDEND PAYMENT. The Fund computes the dividends per share
payable on each series of Preferred Shares by multiplying the applicable rate in
effect by a fraction. For each dividend period of less than one (1) year, the
numerator of this fraction will normally be the number of days in the dividend
period and the denominator will normally be 360. This rate is then multiplied by
$25,000 to arrive at the dividends per share. For each dividend period of one
(1) year or more, the dividends per share payable is computed as described
above, except that it will be determined on the basis of a year consisting of
twelve 30-day months.
Dividends on Preferred Shares will accumulate from the date of their
original issue, which is January 6, 2006. For each dividend payment period after
the initial dividend period, the dividend will be the dividend rate determined
at auction. The dividend rate that results from an auction will not be greater
than the maximum rate described below. Prior to each auction, Broker-Dealers
will notify holders of the term of the next succeeding dividend period as soon
as practicable after the Broker-Dealers have been so advised by the Fund. After
each auction, on the auction date, Broker-Dealers will notify holders of the
applicable rate for the next succeeding dividend period and as of the auction
date of the next succeeding auction.
Except during a Default Period as described below, the applicable rate
resulting from an auction will not be greater than the maximum rate. The maximum
rate will be the applicable percentage of the reference rate. The "Reference
Rate" will be the applicable LIBOR Rate (as defined below) (for a dividend
period of fewer than 365 days) or the applicable Treasury Index Rate (as defined
below) (for a dividend period of 365 days or more). The applicable percentage
for any standard dividend period will generally be determined based on the
credit ratings assigned to the Preferred Shares by Fitch and S&P on the auction
date for such period (as set forth in the table below). If Fitch and/or S&P
shall not make such rating available, the rate shall be determined by reference
to equivalent ratings issued by any other rating agency.
FITCH AND/OR S&P CREDIT RATING APPLICABLE PERCENTAGE
------------------------------ ---------------------
AA- or higher 150%
A- to A+ 200%
BBB- to BBB+ 250%
Below BBB- 275%
The "LIBOR Rate" is the applicable London Inter-Bank Offered Rate for
deposits in U.S. dollars for the period most closely approximating the
applicable dividend period for a series of Preferred Shares.
The "Treasury Index Rate" is the average yield to maturity for certain U.S.
Treasury securities having substantially the same length to maturity as the
applicable dividend period for a series of Preferred Shares.
The Board of Trustees may amend the maximum rate to increase the percentage
amount by which the reference rate described above is multiplied to determine
the maximum rate shown without the vote or consent of the holders of Preferred
Shares, or any shareholder of the Fund, but only with confirmation from each
rating agency then rating the Preferred Shares that such action will not impair
such agency's then-current rating of the Preferred Shares, and after
consultation with the Broker-Dealers, provided that immediately following any
such increase the Fund could meet the Preferred Shares Basic Maintenance Amount
test discussed below under "-- Rating Agency Guidelines."
37
The maximum rate for the Preferred Shares will apply automatically
following an auction for such Preferred Shares in which sufficient clearing bids
have not been made (other than because all Preferred Shares were subject to
submitted hold orders) or following the failure to hold an auction for any
reason on the auction date scheduled to occur (except for circumstances in which
the dividend rate is the Default Rate, as described below).
Prior to each auction, Broker-Dealers will notify holders of the term of
the next succeeding dividend period as soon as practicable after the
Broker-Dealers have been so advised by the Fund. After each auction, on the
auction date, Broker-Dealers will notify holders of the applicable rate for the
next succeeding dividend period and of the auction date of the next succeeding
auction.
On each dividend payment date, the Fund is required to deposit with the
paying agent sufficient funds for the payment of declared dividends. The failure
to make such deposit will not result in the cancellation of any auction. The
Fund does not intend to establish any reserves for the payment of dividends.
DEFAULT PERIOD. Subject to the applicable cure provisions, a "Default
Period" with respect to a particular series will commence on any date the Fund
fails to deposit irrevocably in trust in same-day funds, with the paying agent
by 12:00 noon, New York City time, (A) the full amount of any declared dividend
on that series payable on the dividend payment date (a "Dividend Default") or
(B) the full amount of any redemption price (the "Redemption Price") payable on
the date fixed for redemption (the "Redemption Date") (a "Redemption Default"
and together with a Dividend Default, hereinafter referred to as "Default").
Subject to the applicable cure provisions, a Default Period with respect to
a Dividend Default or a Redemption Default shall end on the business day on
which, by 12:00 noon, New York City time, all unpaid dividends and any unpaid
Redemption Price shall have been deposited irrevocably in trust in same-day
funds with the paying agent. In the case of a Dividend Default, the applicable
rate for each dividend period commencing during a Default Period will be equal
to the default rate described below, and each subsequent dividend period
commencing after the beginning of a Default Period shall be a standard dividend
period; provided, however, that the commencement of a Default Period will not by
itself cause the commencement of a new dividend period. No Auction shall be held
during a Default Period applicable to that series.
No Default Period with respect to a Dividend Default or Redemption Default
shall be deemed to commence if the amount of any dividend or any Redemption
Price due (if such default is not solely due to the willful failure of the Fund)
is deposited irrevocably in trust, in same-day funds with the paying agent by
12:00 noon, New York City time within three business days after the applicable
dividend payment date or Redemption Date, together with an amount equal to the
default rate applied to the amount of such non-payment based on the actual
number of days comprising such period divided by 360 for each series. The
default rate shall be equal to the Reference Rate multiplied by three (3).
RESTRICTIONS ON DIVIDEND, REDEMPTION AND OTHER PAYMENTS. Under the 1940
Act, the Fund may not (i) declare any dividend with respect to the Preferred
Shares if, at the time of such declaration (and after giving effect thereto),
asset coverage with respect to the Fund's Borrowings that are senior securities
representing indebtedness (as defined in the 1940 Act) would be less than 200%
(or such other percentage as may in the future be specified in or under the 1940
Act as the minimum asset coverage for senior securities representing
indebtedness of a closed-end investment company as a condition of declaring
dividends on its preferred shares) or (ii) declare any other distribution on the
Preferred Shares or purchase or redeem Preferred Shares if at the time of the
declaration (and after giving effect thereto), asset coverage with respect to
the Fund's senior securities representing indebtedness would be less than 300%
(or such other percentage as may in the future be specified in or under the 1940
Act as the minimum asset coverage for senior securities representing
indebtedness of a closed-end investment company as a condition of declaring
distributions, purchases or redemptions of its shares of beneficial interest).
"Senior securities representing indebtedness" generally means any bond,
debenture, note or similar obligation or instrument constituting a security
(other than shares of beneficial interest) and evidencing indebtedness and could
include the Fund's obligations under any Borrowings. For purposes of
38
determining asset coverage for senior securities representing indebtedness in
connection with the payment of dividends or other distributions on or purchases
or redemptions of stock, the term "senior security" does not include any
promissory note or other evidence of indebtedness issued in consideration of any
loan, extension or renewal thereof, made by a bank or other person and privately
arranged, and not intended to be publicly distributed. The term "senior
security" also does not include any such promissory note or other evidence of
indebtedness in any case where such a loan is for temporary purposes only and in
an amount not exceeding 5% of the value of the total assets of the Fund at the
time when the loan is made; a loan is presumed under the 1940 Act to be for
temporary purposes if it is repaid within 60 days and is not extended or
renewed; otherwise it is presumed not to be for temporary purposes. For purposes
of determining whether the 200% and 300% asset coverage requirements described
above apply in connection with dividends or distributions on or purchases or
redemptions of Preferred Shares, such asset coverages may be calculated on the
basis of values calculated as of a time within 48 hours (not including Sundays
or holidays) next preceding the time of the applicable determination.
In addition, a declaration of a dividend or other distribution on, or
purchase or redemption of, Preferred Shares may be prohibited (i) at any time
when an event of default under any Borrowings has occurred and is continuing; or
(ii) if, after giving effect to such declaration, the Fund would not have
eligible portfolio holdings with an aggregated discounted value at least equal
to any asset coverage requirements associated with such Borrowings; or (iii) the
Fund has not redeemed the full amount of Borrowings, if any, required to be
redeemed by any provision for mandatory redemption.
While any of the Preferred Shares are outstanding, the Fund generally may
not declare, pay or set apart for payment, any dividend or other distribution in
respect of its common shares (other than in additional common shares or rights
to purchase common shares) or repurchase any of its common shares (except by
conversion into or exchange for shares of the Fund ranking junior to the
Preferred Shares as to the payment of dividends and the distribution of assets
upon liquidation) unless each of the following conditions has been satisfied:
- In the case of Fitch's coverage requirements, immediately after such
transaction, the aggregate discounted value (i.e., the aggregate value of
the Fund's portfolio discounted according to Fitch criteria) would be
equal to or greater than the Preferred Shares Basic Maintenance Amount
(as defined in the Prospectus under "Rating Agency Guidelines" below);
- In the case of S&P's coverage requirements, immediately after such
transaction, the aggregate discounted value (i.e., the aggregate value of
the Fund's portfolio discounted according to S&P criteria) would be equal
to or greater than the Preferred Shares Basic Maintenance Amount;
- Immediately after such transaction, the 1940 Act Preferred Shares Asset
Coverage (as defined in this Prospectus under "Rating Agency Guidelines"
below) is met;
- Full cumulative dividends on the Preferred Shares due on or prior to the
date of the transaction have been declared and paid in full or have been
declared and sufficient funds for the payment thereof deposited with the
auction agent; and
- The Fund has redeemed the full number of Preferred Shares required to be
redeemed by any provision for mandatory redemption contained in the
Statement.
The Fund generally will not declare, pay or set apart for payment any
dividend on any shares of the Fund ranking, as to the payment of dividends, on a
parity with Preferred Shares unless the Fund has declared and paid or
contemporaneously declares and pays full cumulative dividends on the Preferred
Shares through its most recent dividend payment date. However, if the Fund has
not paid dividends in full on the Preferred Shares through the most recent
dividend payment date or upon any shares of the Fund ranking, as to the payment
of dividends, on a parity with Preferred Shares through their most recent
respective dividend payment dates, the amount of dividends shall be declared pro
rata so that the amount of dividends declared per share on Preferred Shares and
such other class or series of shares will in all cases bear to each other the
same ratio that accumulated dividends per share on the Preferred Shares and such
other class or series of shares bear to each other.
39
DESIGNATION OF SPECIAL DIVIDEND PERIODS. The Fund may, in certain
situations, declare a special dividend period. Prior to declaring a special
dividend period, the Fund will give notice (a "notice of special dividend
period") to the auction agent and to each Broker-Dealer. The notice of special
dividend period will state that the next succeeding dividend period for the
Preferred Shares will be a number of days as specified in such notice of special
dividend period. The Fund may not designate a special dividend period unless
sufficient clearing bids were made in the most recent auction. In addition, full
cumulative dividends, any amounts due with respect to mandatory redemptions and
any additional dividends payable prior to such date must be paid in full or
deposited with the auction agent. In addition, the Fund does not intend to
designate a special dividend period if such designation would adversely affect
Fitch's or S&P's or any substitute rating agency's then-current rating on the
Preferred Shares. The Fund also must have portfolio securities with a discounted
value at least equal to the Preferred Share Maintenance Amount. A notice of
special dividend period also will specify whether the Preferred Shares will be
subject to optional redemption during such special dividend period and, if so,
the redemption premium, if any, required to be paid by the Fund in connection
with such optional redemption.
If the Fund proposes to designate any special dividend period, not fewer
than seven business days (or two business days in the event the duration of the
dividend period prior to such special dividend period is fewer than eight days)
nor more than 30 business days prior to the first day of such special dividend
period, notice of special dividend period shall be (i) made by press release and
(ii) communicated by the Fund by telephonic or other means to the auction agent
and each Broker-Dealer and the rating agency and confirmed in writing promptly
thereafter. Each such notice of special dividend period shall state (A) that the
Fund proposes to exercise its option to designate a succeeding special dividend
period, specifying the first and last days thereof and the maximum rate for such
special dividend period and (B) that the Fund will by 3:00 P.M., New York City
time, on the second business day next preceding the first day of such special
dividend period, notify the auction agent, who will promptly notify the
Broker-Dealers, of either (x) its determination, subject to certain conditions,
to proceed with such special dividend period, subject to the terms of any
specific redemption provisions, or (y) its determination not to proceed with
such special dividend period, in which latter event the succeeding dividend
period shall be a standard dividend period. No later than 3:00 P.M., New York
City time, on the second business day next preceding the first day of any
proposed special dividend period, the Fund shall deliver to the auction agent,
who will promptly deliver to the Broker-Dealers and existing holders, either:
(i) a notice of special dividend period stating (A) that the Fund has
determined to designate the next succeeding dividend period as a special
dividend period, specifying the first and last days thereof and (B) the
terms of any specific redemption provisions; or
(ii) a notice of special dividend period stating that the Fund has
determined not to exercise its option to designate a special dividend
period.
If the Fund fails to deliver either such notice of special dividend period
to the auction agent by 3:00 P.M., New York City time, on the second business
day next preceding the first day of such proposed special dividend period, the
Fund shall be deemed to have delivered a notice to the auction agent with
respect to such dividend period to the effect set forth in clause (ii) above,
thereby resulting in a standard dividend period.
In addition, the Board of Trustees may amend the dividend periods of one or
more series of Preferred Shares on a permanent basis.
VOTING RIGHTS
Except as noted below, the Fund's common shares and Preferred Shares have
equal voting rights of one vote per share and vote together as a single class.
In elections of trustees, the holders of Preferred Shares, as a separate class,
vote to elect two trustees. The Board of Trustees will determine to which class
or classes the trustees elected by the holders of Preferred Shares will be
assigned. The holders of the Preferred Shares shall only be entitled to elect
the trustees so designated when their term shall have expired. Such trustees
appointed by the holders of Preferred Shares will be allocated as evenly as
possible
40
among the classes of trustees. The holders of the common shares and holders of
Preferred Shares vote together as a single class to elect the remaining
trustees. In addition, during any period in which the Fund has not paid
dividends on the Preferred Shares in an amount equal to two full years dividends
("Voting Period"), the holders of Preferred Shares, voting as a single class,
are entitled to elect (in addition to the two trustees set forth above) the
smallest number of additional trustees as is necessary to ensure that a majority
of the trustees has been elected by the holders of Preferred Shares. The holders
of Preferred Shares will continue to have these rights until all dividends in
arrears have been paid or otherwise provided for.
In an instance when the Fund has not paid dividends as set forth in the
immediately preceding paragraph, the terms of office of all persons who are
trustees of the Fund at the time of the commencement of a Voting Period will
continue, notwithstanding the election by the holders of the Preferred Shares of
the number of trustees that such holders are entitled to elect. The persons
elected by the holders of the Preferred Shares, together with the incumbent
trustees, will constitute the duly elected trustees of the Fund. When all
dividends in arrears on the Preferred Shares have been paid or provided for, the
terms of office of the additional trustees elected by the holders of the
Preferred Shares will terminate.
So long as any of the Preferred Shares are outstanding, the Fund will not,
without the affirmative vote of the holders of a majority of the outstanding
Preferred Shares, (i) institute any proceedings to be adjudicated bankrupt or
insolvent, or consent to the institution of bankruptcy or insolvency proceedings
against it, or file a petition seeking or consenting to reorganization or relief
under any applicable federal or state law relating to bankruptcy or insolvency,
or consent to the appointment of a receiver, liquidator, assignee, trustee,
sequestrator (or other similar official) of the Fund or a substantial part of
its property, or make any assignment for the benefit of creditors, or, except as
may be required by applicable law, admit in writing its inability to pay its
debts generally as they become due or take any corporate action in furtherance
of any such action; (ii) create, incur or suffer to exist, or agree to create,
incur or suffer to exist, or consent to cause or permit in the future (upon the
happening of a contingency or otherwise) the creation, incurrence or existence
of any material lien, mortgage, pledge, charge, security interest, security
agreement, conditional sale or trust receipt or other material encumbrance of
any kind upon any of the Fund's assets as a whole, except (A) liens the validity
of which are being contested in good faith by appropriate proceedings, (B) liens
for taxes that are not then due and payable or that can be paid thereafter
without penalty, (C) liens, pledges, charges, security interests, security
agreements or other encumbrances arising in connection with any indebtedness
senior to the Preferred Shares, or arising in connection with any futures
contracts or options thereon, interest rate swap or cap transactions, forward
rate transactions, put or call options or other similar transactions, (D) liens,
pledges, charges, security interests, security agreements or other encumbrances
arising in connection with any indebtedness permitted under clause (iii) below
and (E) liens to secure payment for services rendered including, without
limitation, services rendered by the Fund's paying agent and the auction agent;
or (iii) create, authorize, issue, incur or suffer to exist any indebtedness for
borrowed money or any direct or indirect guarantee of such indebtedness for
borrowed money, except the Fund may borrow as may be permitted by the Fund's
investment restrictions; provided, however, that transfers of assets by the Fund
subject to an obligation to repurchase will not be deemed to be indebtedness for
purposes of this provision to the extent that after any such transaction the
Fund has eligible assets with an aggregate discounted value at least equal to
the Preferred Shares Basic Maintenance Amount as of the immediately preceding
valuation date.
In addition, the affirmative vote of the holders of a majority, as defined
in the 1940 Act, of the outstanding Preferred Shares is required to approve any
plan of reorganization (as such term is used in the 1940 Act) adversely
affecting such shares or any action requiring a vote of security holders of the
Fund under Section 13(a) of the 1940 Act, including, among other things, changes
in the Fund's fundamental investment restrictions described under "Investment
Restrictions" in the Statement of Additional Information and changes in the
Fund's subclassification as a closed-end investment company. The affirmative
vote of the holders of a majority, as defined in the 1940 Act, of the
outstanding Preferred Shares of any series, voting separately from any other
series, shall be required with respect to any matter
41
that materially and adversely affects the rights, preferences, or powers of that
series in a manner different from that of other series or classes of the Fund's
shares of beneficial interest. For purposes of the foregoing, no matter will be
deemed to adversely affect any rights, preference or power unless such matter
(i) alters or abolishes any preferential right of such series; (ii) creates,
alters or abolishes any right in respect of redemption of such series; or (iii)
creates or alters (other than to abolish) any restriction on transfer applicable
to such series. The vote of holders of any series described in this paragraph
will in each case be in addition to a separate vote of the requisite percentage
of common shares and/or preferred shares necessary to authorize the action in
question.
The common shares and the Preferred Shares also will vote separately to the
extent otherwise required under Delaware law or the 1940 Act as in effect from
time to time. The class votes of holders of Preferred Shares described above
will in each case be in addition to any separate vote of the requisite
percentage of common shares and Preferred Shares, voting together as a single
class, necessary to authorize the action in question.
For purpose of any right of the holders of Preferred Shares to vote on any
matter, whether the right is created by the Agreement and Declaration of Trust,
by statute or otherwise, a holder of a Preferred Share is not entitled to vote
and the Preferred Shares will not be deemed to be outstanding for the purpose of
voting or determining the number of Preferred Shares required to constitute a
quorum, if prior to or concurrently with a determination of the Preferred Shares
entitled to vote or of Preferred Shares deemed outstanding for quorum purposes,
as the case may be, a notice of redemption was given in respect of those
Preferred Shares and sufficient deposit securities for the redemption of those
Preferred Shares were deposited.
RATING AGENCY GUIDELINES
The Fund is required under Fitch and S&P guidelines to maintain assets
having in the aggregate a discounted value at least equal to the Preferred
Shares Basic Maintenance Amount (as defined below). Fitch and S&P have each
established separate guidelines for determining discounted value. To the extent
any particular portfolio holding does not satisfy the applicable rating agency's
guidelines, all or a portion of such holding's value will not be included in the
calculation of discounted value (as defined by the rating agency). The Fitch and
S&P guidelines also impose certain diversification requirements on the Fund's
overall portfolio. The "Preferred Shares Basic Maintenance Amount" means as of
any valuation date the dollar amount equal to:
(i) the sum of (A) the product of the number of Preferred Shares
outstanding on such date multiplied by $25,000 (plus the product of the
number of shares of any other series of preferred shares outstanding on
such date multiplied by the liquidation preference of such shares), plus
any redemption premium applicable to the Preferred Shares (or other
preferred shares) then subject to redemption; (B) the aggregate amount of
dividends that will have accumulated at the respective applicable rates
(whether or not earned or declared) to (but not including) the first
respective dividend payment dates for Preferred Shares outstanding that
follow such valuation date (plus the aggregate amount of dividends, whether
or not earned or declared, that will have accumulated in respect of other
outstanding preferred shares to, but not including, the first respective
dividend payment dates for such other shares that follow such valuation
date); (C) the aggregate amount of dividends that would accumulate on
shares of each series of Preferred Shares outstanding from such first
respective dividend payment date therefore through the 42nd day after such
valuation date, at the maximum rate (calculated as if such valuation date
were the auction date for the dividend period commencing on such dividend
payment date) for a standard dividend period of shares of such series to
commence on such dividend payment date, assuming, solely for purposes of
the foregoing, that if on such valuation date the Fund shall have delivered
a notice of special dividend period to the auction agent pursuant to
Section 4(b) of Part I of the Statement with respect to shares of such
series, such maximum rate shall be the maximum rate for the special
dividend period of shares of such series to commence on such dividend
payment date (except that (1) if such valuation date occurs at a time when
a failure to deposit (or, in the case of preferred shares other than
Preferred Shares, a failure
42
similar to a failure to deposit) has occurred that has not been cured, the
dividend for purposes of calculation would accumulate at the current
dividend rate then applicable to the shares in respect of which such
failure has occurred and (2) for those days during the period described in
this subparagraph (C) in respect of which the applicable rate in effect
immediately prior to such dividend payment date will remain in effect (or,
in the case of preferred shares other than Preferred Shares, in respect of
which the dividend rate or rates in effect immediately prior to such
respective dividend payment dates will remain in effect), the dividend for
purposes of calculation would accumulate at such applicable rate (or other
rate or rates, as the case may be in respect of those days); (D) the amount
of anticipated expenses of the Fund for the 90 days subsequent to such
valuation date; (E) the amount of any indebtedness or obligations of the
Fund senior in right of payments to the Preferred Shares; and (F) any
current liabilities as of such valuation date to the extent not reflected
in any of (i)(A) through (i)(E) (including, without limitation, any
payables for portfolio securities purchased as of such valuation date and
any liabilities incurred for the purpose of clearing securities
transactions) less (ii) the value (i.e., the face value of cash, short-term
municipal obligations and short-term securities that are the direct
obligation of the U.S. government, provided in each case that such
securities mature on or prior to the date upon which any of (i)(A) though
(i)(F) became payable, otherwise the S&P discounted value) of any of the
Fund's assets irrevocably deposited by the Fund for the payment of any of
(i)(A) through (i)(F).
The Fund also is required under rating agency guidelines to maintain, with
respect to the Preferred Shares, as of the last business day of each month in
which Preferred Shares are outstanding, asset coverage of at least 200% with
respect to senior securities that are shares of the Fund, including the
Preferred Shares (or such other asset coverage as may in the future be specified
in or under the 1940 Act as the minimum asset coverage for senior securities
that are shares of a closed-end investment company as a condition of declaring
dividends on its Common Shares) ("1940 Act Preferred Shares Asset Coverage").
Fitch and S&P have agreed that the auditors must certify annually the asset
coverage test on a date randomly selected by the auditors. Based on the Fund's
assets and liabilities as of December 14, 2005, and assuming the issuance of all
Preferred Shares offered hereby and the use of the proceeds as intended, the
1940 Act Preferred Shares Asset Coverage with respect to Preferred Shares would
be computed as follows:
Value of Fund assets less liabilities not constituting senior securities
-------------------------------------------------------------------------------- $177,138,911
= ------------ = 300%
Senior securities representing indebtedness plus liquidation value of $ 59,000,000
the Preferred Shares
If the Fund does not timely cure a failure to maintain (1) a discounted
value of its portfolio equal to the Preferred Shares Basic Maintenance Amount or
(2) the 1940 Act Preferred Shares Asset Coverage, in each case in accordance
with the requirements of the rating agency or agencies then rating the Preferred
Shares, the Fund will be required to redeem Preferred Shares as described below
under "-- Redemption."
The Fund may, but is not required to, adopt any modifications to the
guidelines that may hereafter be established by Fitch and S&P. Failure to adopt
any such modifications, however, may result in a change or a withdrawal of the
ratings altogether. In addition, any rating agency providing a rating for the
Preferred Shares may, at any time, change or withdraw any such rating. The Board
of Trustees may, without shareholder approval, amend, alter, add to or repeal
any or all of the definitions and related provisions that have been adopted by
the Fund pursuant to the rating agency guidelines in the event the Fund receives
written confirmation from Fitch or S&P, or both, as appropriate, that any such
change would not impair the ratings then assigned by Fitch and S&P to the
Preferred Shares.
The Board of Trustees may amend the definition of standard dividend period
to change the dividend period with respect to one or more series without the
vote or consent of the holders of the Preferred Shares.
As described by Fitch and S&P, the Preferred Shares rating is an assessment
of the capacity and willingness of the Fund to pay Preferred Shares'
obligations. The ratings on the Preferred Shares are not recommendations to
purchase, hold or sell the Preferred Shares, inasmuch as the ratings do not
comment
43
as to market price or suitability for a particular investor. The rating agency
guidelines also do not address the likelihood that an owner of the Preferred
Shares will be able to sell such shares in an auction or otherwise. The ratings
are based on current information furnished to Fitch and S&P by the Fund and
Calamos and information obtained from other sources. The ratings may be changed,
suspended or withdrawn as a result of changes in, or the unavailability of, such
information.
The rating agency guidelines will apply to the Preferred Shares only so
long as such rating agency is rating these shares. The Fund will pay fees to
Fitch and S&P for rating the Preferred Shares.
The Fund shall deliver to the auction agent and each rating agency a
certificate which sets forth a determination regarding the Preferred Shares
Basic Maintenance Amount (a "Preferred Shares Basic Maintenance Certificate") as
of (A) within seven business days after the Date of Original Issue, (B) the last
valuation date of each month, (C) any date requested by any rating agency, (D) a
business day on or before any asset coverage cure date relating to the Fund's
cure of a failure to meet the Preferred Shares Basic Maintenance Amount test,
(E) any day that common shares or Preferred Shares are redeemed, and (F) any day
the Fitch eligible assets have an aggregate discounted value less than or equal
to 110% of the Preferred Shares Basic Maintenance Amount. Such Preferred Shares
Basic Maintenance Certificate shall be delivered in the case of (A) above on or
before the seventh business day after the date of original issue and in the case
of (B)-(F) above on or before the seventh business day after the relevant
valuation date or asset coverage cure date.
The Fund shall deliver to the auction agent and each rating agency a
certificate which sets forth a determination regarding the 1940 Act Preferred
Shares Asset Coverage (a "1940 Act Preferred Shares Asset Coverage Certificate")
(i) as of the date of original issue, and (ii) as of (A) the last valuation date
of each quarter thereafter, and (B) as of a business day on or before any asset
coverage cure date relating to the failure to meet the 1940 Act Preferred Shares
Asset Coverage. Such 1940 Act Preferred Shares Asset Coverage Certificate shall
be delivered in the case of clause (i) on or before the seventh business day
after the date of original issue and in the case of clause (ii) on or before the
seventh business day after the relevant valuation date or the asset coverage
cure date. The certificates required by the Statement may be combined into a
single certificate.
Within ten business days of the date of original issue, the Fund shall
deliver to the Auction Agent and each Rating Agency a letter prepared by the
Fund's independent auditors (an "Auditor's Certificate") regarding the accuracy
of the calculations made by the Fund in the Preferred Shares Basic Maintenance
Certificate and the 1940 Act Preferred Shares Asset Coverage Certificate
required to be delivered by the Fund on or before the seventh business day after
the date of original issue. Within ten business days after delivery of the
Preferred Shares Basic Maintenance Certificate and the 1940 Act Preferred Shares
Asset Coverage Certificate relating to the last valuation date of each fiscal
year of the Fund, the Fund will deliver to the auction agent and each rating
agency an Auditor's Certificate regarding the accuracy of the calculations made
by the Fund in such certificates. In addition, the Fund will deliver to the
persons specified in the preceding sentence an Auditor's Certificate regarding
the accuracy of the calculations made by the Fund on each Preferred Shares Basic
Maintenance Certificate and 1940 Act Preferred Shares Asset Coverage Certificate
delivered in relation to an asset coverage cure date within ten days after the
relevant asset coverage cure date. If an Auditor's Certificate shows that an
error was made in any such report, the calculation or determination made by the
Fund's independent auditors will be conclusive and binding on the Fund.
REDEMPTION
MANDATORY REDEMPTION. If the Fund does not timely cure a failure to (1)
maintain a discounted value of its portfolio equal to the Preferred Shares Basic
Maintenance Amount, (2) maintain the 1940 Act Preferred Shares Asset Coverage,
or (3) file a required certificate related to asset coverage on time, the
Preferred Shares will be subject to mandatory redemption out of funds legally
available therefor in accordance with the Statement and applicable law, at the
redemption price of $25,000 per share plus an amount equal to accumulated but
unpaid dividends thereon (whether or not earned or declared) to (but
44
not including) the date fixed for redemption and in certain cases a redemption
premium. Any such redemption will be limited to the number of Preferred Shares
necessary to restore the required discounted value or the 1940 Act Preferred
Shares Asset Coverage, as the case may be.
In determining the number of Preferred Shares required to be redeemed in
accordance with the foregoing, the Fund will allocate the number of shares
required to be redeemed to satisfy the Preferred Shares Basic Maintenance Amount
or the 1940 Act Preferred Shares Asset Coverage, as the case may be, prorata
among the Preferred Shares of the Fund and any other preferred shares of the
Fund, subject to redemption or retirement. If fewer than all outstanding shares
of any series are, as a result, to be redeemed, the Fund may redeem such shares
prorata, by lot or other method that it deems fair and equitable.
OPTIONAL REDEMPTION. After the initial dividend period, to the extent
permitted under the 1940 Act and Delaware law, the Fund may, at its option,
redeem, in whole or in part, Preferred Shares having a dividend period of one
year or less on the business day after the last day of such dividend period upon
not less than 15 calendar days and not more than 40 calendar days prior notice.
The redemption price per share will be $25,000 per share, plus an amount equal
to accumulated but unpaid dividends thereon (whether or not earned or declared)
to the date fixed for redemption. Preferred Shares having a dividend period of
more than one year are redeemable at the option of the Fund, in whole or in
part, on any business day prior to the end of the relevant dividend period upon
not less than 15 calendar days and not more than 40 calendar days prior notice,
subject to any specific redemption provisions, which may include the payment of
redemption premiums to the extent required under any applicable specific
redemption provisions. The Fund will not make any optional redemption unless (i)
the Fund has available certain deposit securities with maturities or tender
dates not later than the day preceding the applicable redemption date and having
a value not less than the amount (including any applicable premium) due to
holders of the Preferred Shares by reason of the redemption of the Preferred
Shares on such date fixed for the redemption and (ii) the Fund has eligible
assets with an aggregate discounted value at least equal to the Preferred Shares
Basic Maintenance Amount immediately subsequent to such redemption.
Notwithstanding the foregoing, Preferred Shares may not be redeemed at the
option of the Fund unless all dividends in arrears on the outstanding Preferred
Shares, and any other outstanding preferred shares, have been or are being
contemporaneously paid or set aside for payment. This would not prevent the
lawful purchase or exchange offer for Preferred Shares made on the same terms to
holders of all outstanding preferred shares.
LIQUIDATION
Subject to the rights of holders of any series or class or classes of
shares ranking on a parity with Preferred Shares with respect to the
distribution of assets upon liquidation of the Fund, upon a liquidation,
dissolution or winding up of the affairs of the Fund, whether voluntary or
involuntary, the holders of Preferred Shares then outstanding will be entitled
to receive and to be paid out of the assets of the Fund available for
distribution to its shareholders, after claims of creditors but before any
payment or distribution is made on the common shares or any other shares of
beneficial interest of the Fund ranking junior to the Preferred Shares, an
amount equal to the liquidation preference with respect to such shares ($25,000
per share), plus an amount equal to all unpaid dividends thereon (whether or not
declared by the Fund, but excluding the interest thereon) accrued to and
including the date fixed for such distribution in connection with the
liquidation of the Fund. After the payment to the holders of Preferred Shares of
the full preferential amounts provided for as described herein, the holders of
Preferred Shares as such will have no right or claim to any of the remaining
assets of the Fund.
If, upon any such liquidation, dissolution or winding up of the affairs of
the Fund, whether voluntary or involuntary, the assets of the Fund available for
distribution among the holders of all outstanding Preferred Shares, including
each series, shall be insufficient to permit the payment in full to such holders
of the amounts to which they are entitled, then such available assets shall be
distributed among the holders of all outstanding Preferred Shares, including
each series, ratably in any such distribution of assets
45
according to the respective amounts which would be payable on all such shares if
all amounts thereon were paid in full. Unless and until payment in full has been
made to the holders of all outstanding Preferred Shares, including each series,
of the liquidation distributions to which they are entitled, no dividends or
distributions will be made to holders of common shares or any shares of
beneficial interest of the Fund ranking junior to the Preferred Shares as to
liquidation.
Neither the consolidation nor merger of the Fund with or into any other
business entity, nor the sale, lease, exchange or transfer by the Fund of all or
substantially all of its property and assets, shall be deemed to be a
liquidation, dissolution or winding up of the Fund for purposes of the foregoing
paragraph.
THE AUCTION
GENERAL
The Statement provides that, except as otherwise described in this
prospectus, the applicable rate for the Preferred Shares for each dividend
period after the initial dividend period will be the rate that results from an
auction conducted as set forth in the Statement and summarized below. In such an
auction, persons determine to hold or offer to sell or, based on dividend rates
bid by them, offer to purchase or sell Preferred Shares. See the Statement
included in the Statement of Additional Information for a more complete
description of the auction process.
AUCTION AGENCY AGREEMENT. The Fund will enter into an auction agency
agreement with the auction agent (currently, The Bank of New York) which
provides, among other things, that the auction agent will follow the auction
procedures to determine the applicable rate for Preferred Shares, so long as the
applicable rate for Preferred Shares is to be based on the results of an
auction.
The auction agent may terminate the auction agency agreement upon notice to
the Fund no earlier than 45 days after the delivery of such notice. If the
auction agent should resign, the Fund will use its best efforts to enter into an
agreement with a successor auction agent containing substantially the same terms
and conditions as the auction agency agreement. The Fund may remove the auction
agent provided that, prior to such removal, the Fund has entered into such an
agreement with a successor auction agent.
BROKER-DEALER AGREEMENTS. Each auction requires the participation of one
or more Broker-Dealers. The auction agent will enter into agreements with
several Broker-Dealers selected by the Fund, which provide for the participation
of those Broker-Dealers in auctions for Preferred Shares.
The auction agent will pay to each Broker-Dealer after each auction from
funds provided by the Fund, a service charge at the annual rate of 1/4 of 1% of
the liquidation preference ($25,000 per share) of the Preferred Shares held by
that Broker-Dealer's customer upon settlement in an auction. The Fund may
request that the auction agent terminate one or more Broker-Dealer agreements at
any time upon five days' notice, provided that at least one Broker-Dealer
agreement is in effect after termination of the agreement.
AUCTION PROCEDURES
Prior to the submission deadline on each auction date for the Preferred
Shares, each customer of a Broker-Dealer who is listed on the records of that
Broker-Dealer (or, if applicable, the auction agent) as a beneficial owner of
Preferred Shares may submit the following types of orders with respect to shares
of such series of Preferred Shares to that Broker-Dealer:
1. Hold Order -- indicating its desire to hold Preferred Shares without
regard to the applicable rate for the next dividend period.
2. Bid -- indicating its desire to sell shares of such series at $25,000
per share if the applicable rate for shares of such series for the next dividend
period is less than the rate or spread specified in the bid.
46
3. Sell Order -- indicating its desire to sell shares of such series at
$25,000 per share without regard to the applicable rate for shares of such
series for the next dividend period.
A beneficial owner of Preferred Shares may submit different types of orders
to its Broker-Dealer with respect to Preferred Shares then held by the
beneficial owner. A beneficial owner that submits a bid to its Broker-Dealer
having a rate higher than the maximum rate on the auction date will be treated
as having submitted a sell order to its Broker-Dealer. A beneficial owner that
fails to submit an order to its Broker-Dealer will ordinarily be deemed to have
submitted a hold order to its Broker-Dealer. However, if a beneficial owner
fails to submit an order for some or all of its shares to its Broker-Dealer for
an auction relating to a dividend period of more than 91 days, such beneficial
owner will be deemed to have submitted a sell order for such shares to its
Broker-Dealer. A sell order constitutes an irrevocable offer to sell the
Preferred Shares subject to the sell order. A beneficial owner that offers to
become the beneficial owner of additional Preferred Shares is, for the purposes
of such offer, a potential holder as discussed below.
A potential holder is either a customer of a Broker-Dealer that is not a
beneficial owner of Preferred Shares but that wishes to purchase shares of such
series or that is a beneficial owner of shares of such series that wishes to
purchase additional shares of such series. A potential holder may submit bids to
its Broker-Dealer in which it offers to purchase shares of such series at
$25,000 per share if the applicable rate for the next dividend period is not
less than the specified rate in such bid. A bid placed by a potential holder
specifying a rate higher than the maximum rate for shares of such series on the
auction date will not be accepted.
The Broker-Dealers in turn will submit the orders of their respective
customers who are beneficial owners and potential holders to the auction agent.
They will designate themselves (unless otherwise permitted by the Fund) as
existing holders of shares subject to orders submitted or deemed submitted to
them by beneficial owners. They will designate themselves as potential holders
of shares subject to orders submitted to them by potential beneficial owners.
However, neither the Fund nor the auction agent will be responsible for a
Broker-Dealer's failure to comply with these procedures. Any order placed with
the auction agent by a Broker-Dealer as or on behalf of an existing holder or a
potential holder will be treated the same way as an order placed with a
Broker-Dealer by a beneficial owner or potential holder. Similarly, any failure
by a Broker-Dealer to submit to the auction agent an order for any Preferred
Shares held by it or customers who are beneficial owners will be treated as a
beneficial owner's failure to submit to its Broker-Dealer an order in respect of
Preferred Shares held by it. A Broker-Dealer may also submit orders to the
auction agent for its own account as an existing holder or potential holder,
provided it is not an affiliate of the Fund.
There are sufficient clearing bids in an auction if the number of shares
subject to bids submitted or deemed submitted to the auction agent by
Broker-Dealers for potential holders with rates or spreads equal to or lower
than the maximum rate is at least equal to the number of shares of such series
subject to sell orders and the number of shares of such series subject to bids
specifying rates or spreads higher than the maximum rate for such series
submitted or deemed submitted to the auction agent by Broker-Dealers for
existing holders of such series. If there are sufficient clearing bids, the
applicable rate for shares of such series for the next succeeding dividend
period thereof will be the lowest rate specified in the submitted bids which,
taking into account such rate and all lower rates bid by Broker-Dealers as or on
behalf of existing holders and potential holders, would result in existing
holders and potential holders owning the shares of such series available for
purchase in the auction.
If there are not sufficient clearing bids for such series, the applicable
rate for the next dividend period will be the maximum rate on the auction date.
However, if the Fund has declared a special dividend period and there are not
sufficient clearing bids, the election of a special dividend period will not be
effective and the applicable rate for the next dividend period will be the same
as during the current dividend period. If there are not sufficient clearing
bids, beneficial owners of Preferred Shares that have submitted or are deemed to
have submitted sell orders may not be able to sell in the auction all shares
subject to such sell orders. If all of the outstanding Preferred Shares are the
subject of submitted hold
47
orders, then the dividend period following the auction will automatically be the
same length as the preceding dividend period and the applicable rate for the
next dividend period will be the all hold rate. The all hold rate is 80% of the
applicable Reference Rate.
The auction procedures include a pro rata allocation of shares for purchase
and sale which may result in an existing holder continuing to hold or selling,
or a potential holder purchasing, a number of Preferred Shares that is different
than the number of shares specified in its order. To the extent the allocation
procedures have that result, Broker-Dealers that have designated themselves as
existing holders or potential holders in respect of customer orders will be
required to make appropriate prorata allocations among their respective
customers.
Settlement of purchases and sales will be made on the next business day
(which is also a dividend payment date) after the auction date through DTC.
Purchasers will make payment through their agent members in same-day funds to
DTC against delivery to their respective agent members. DTC will make payment to
the sellers' agent members in accordance with DTC's normal procedures, which now
provide for payment against delivery by their agent members in same-day funds.
The auctions for Series T Preferred Shares will normally be held every
seven days. Each subsequent dividend period will normally begin on the following
business day.
If an auction date is not a business day because the New York Stock
Exchange is closed for business for more than three consecutive business days
due to an act of God, natural disaster, act of war, civil or military
disturbance, act of terrorism, sabotage, riots or a loss or malfunction of
utilities or communications services, or the auction agent is not able to
conduct an auction in accordance with the auction procedures for any reason,
then the applicable rate for the next dividend period will be the applicable
rate determined on the previous auction date.
If a dividend payment date is not a business day because the New York Stock
Exchange is closed for business for more than three consecutive business days
due to an act of God, natural disaster, act of war, civil or military
disturbance, act of terrorism, sabotage, riots or a loss or malfunction of
utilities or communications services, or the dividend payable on such date can
not be paid for any such reason, then:
- the dividend payment date for the affected dividend period will be the
next business day on which the Fund and its paying agent, if any, can pay
the dividend;
- the affected dividend period will end on the day it otherwise would have
ended; and
- the next dividend period will begin and end on the dates on which it
otherwise would have begun and ended.
48
The following is a simplified example of how a typical auction works.
Assume that the Fund has 1,000 outstanding Preferred Shares and three existing
holders. The three existing holders and three potential holders submit orders
through Broker-Dealers at the auction:
Existing Holder A Owns 500 shares, wants to sell all Bid order of 4.1% rate
500 shares if auction rate is less for 500 shares
than 4.1%
Existing Holder B Owns 300 shares, wants to hold Hold order -- will
take the auction rate
Existing Holder C Owns 200 shares, wants to sell all Bid order of 3.9% rate
200 shares if auction rate is less for 200 shares
than 3.9%
Potential Holder D Wants to buy 200 shares Places order to buy at
or above 4.0%
Potential Holder E Wants to buy 300 shares Places order to buy at
or above 3.9%
Potential Holder F Wants to buy 200 shares Places order to buy at
or above 4.1%
The lowest dividend rate that will result in all 1,000 Preferred Shares
continuing to be held is 4.0% (the offer by D). Therefore, the dividend rate
will be 4.0%. Existing holders B and C will continue to own their shares.
Existing holder A will sell its shares because A's dividend rate bid was higher
than the dividend rate. Potential holder D will buy 200 shares and potential
holder E will buy 300 shares because their bid rates were at or below the
dividend rate. Potential holder F will not buy any shares because its bid rate
was above the dividend rate.
SECONDARY MARKET TRADING AND TRANSFER OF PREFERRED SHARES
The underwriters are not required to make a market in the Preferred Shares.
The Broker-Dealers (including the underwriters) may maintain a secondary trading
market for outside of auctions, but they are not required to do so. There can be
no assurance that a secondary trading market for Preferred Shares will develop
or, if it does develop, that it will provide owners with liquidity of
investment. Preferred Shares will not be registered on any stock exchange or on
the Nasdaq market.
Investors who purchase Preferred Shares in an auction for a special
dividend period should note that because the dividend rate on such shares will
be fixed for the length of that dividend period, the value of such shares may
fluctuate in response to the changes in interest rates, and may be more or less
than their original cost if sold on the open market in advance of the next
auction thereof, depending on market conditions.
A beneficial owner or an existing holder may sell, transfer or otherwise
dispose of Preferred Shares only in whole shares and only:
- pursuant to a bid or sell order placed with the auction agent in
accordance with the auction procedures;
- to a Broker-Dealer; or
- to such other persons as may be permitted by the Fund; provided, however,
that (x) if you hold your Preferred Shares in the name of a
Broker-Dealer, a sale or transfer of your Preferred Shares to that
Broker-Dealer, or to another customer of that Broker-Dealer, will not be
considered a sale or transfer for purposes of the foregoing if that
Broker-Dealer remains the existing holder of the Preferred Shares
immediately after the transaction and (y) in the case of all transfers,
other than through an auction, the Broker-Dealer (or other person, if the
Fund permits) receiving the transfer will advise the auction agent of the
transfer.
Further description of the auction procedures can be found in the
Statement.
49
DESCRIPTION OF BORROWINGS
The Agreement and Declaration of Trust authorizes the Fund, without prior
approval of holders of common and preferred shares, including Preferred Shares,
to borrow money. In this connection, the Fund may issue notes or other evidence
of indebtedness (including bank borrowings or commercial paper) and may secure
any such borrowings by mortgaging, pledging or otherwise subjecting as security
the Fund's assets. In connection with such Borrowings, the Fund may be required
to maintain minimum average balances with the lender or to pay a commitment or
other fee to maintain a line of credit. Any such requirements will increase the
cost of borrowing over the stated interest rate.
LIMITATIONS. Under the requirements of the 1940 Act, the Fund, immediately
after issuing any Borrowings that are senior securities representing
indebtedness (as defined in the 1940 Act), must have an asset coverage of at
least 300%. With respect to any such Borrowings, asset coverage means the ratio
which the value of the total assets of the Fund, less all liabilities and
indebtedness not represented by senior securities, bears to the aggregate amount
of any such Borrowings that are senior securities representing indebtedness,
issued by the Fund. Certain types of Borrowings may also result in the Fund
being subject to covenants in credit agreements relating to asset coverages or
portfolio composition or otherwise. In addition, the Fund may be subject to
certain restrictions imposed by guidelines of one or more rating agencies which
may issue ratings for commercial paper or notes issued by the Fund. Such
restrictions may be more stringent than those imposed by the 1940 Act.
DISTRIBUTION PREFERENCE. The rights of lenders to the Fund to receive
interest on and repayment of principal of any such Borrowings will be senior to
those of the Preferred Shares shareholders, and the terms of any such Borrowings
may contain provisions which limit certain activities of the Fund, including the
payment of dividends to Preferred Shares shareholders in certain circumstances.
VOTING RIGHTS. The 1940 Act does (in certain circumstances) grant to the
lenders to the Fund certain voting rights in the event of default in the payment
of interest on or repayment of principal. In the event that such provisions
would impair the Fund's status as a regulated investment company under the Code,
the Fund, subject to its ability to liquidate its relatively illiquid portfolio,
intends to repay the Borrowings. Any Borrowings will likely be ranked senior or
equal to all other existing and future borrowings of the Fund, including
Preferred Shares.
The discussion above describes the Board of Trustees' present intention
with respect to a possible offering of Borrowings. If the Board of Trustees
determines to authorize any of the foregoing, the terms may be the same as, or
different from, the terms described above, subject to applicable law and the
Fund's Declaration of Trust.
DESCRIPTION OF COMMON SHARES
The Fund is authorized to issue an unlimited number of common shares,
without par value. The Board of Trustees is authorized, however, to classify and
reclassify any unissued shares into one or more additional classes or series of
shares. The Board of Trustees may establish such series or class, including
preferred shares, from time to time by setting or changing in any one or more
respects the designations, preferences, conversion or other rights, voting
powers, restrictions, limitations as to dividends, qualifications or terms or
conditions of redemption of such shares and pursuant to such classification or
reclassification to increase or decrease the number of authorized shares of any
existing class or series. The Board of Trustees, without shareholder approval,
is authorized to amend the Agreement and Declaration of Trust and By-laws to
reflect the terms of any such class or series.
Common shares, when issued and outstanding, will be fully paid and
non-assessable. Common shareholders are entitled to share prorata in the net
assets of the Fund available for distribution to common shareholders upon
liquidation of the Fund. Common shareholders are entitled to one vote for each
share held.
50
So long as any Preferred Shares of the Fund are outstanding, holders of
common shares will not be entitled to receive any net income of or other
distributions from the Fund unless all accumulated dividends on Preferred Shares
have been paid, and unless asset coverage (as defined in the 1940 Act) with
respect to Preferred Shares would be at least 200% after giving effect to such
distributions.
The common shares are listed on the New York Stock Exchange under the
ticker symbol "CGO".
U.S. FEDERAL INCOME TAX MATTERS
The following is a description of certain U.S. federal income tax
consequences to a shareholder that acquires, holds and/or disposes of Preferred
Shares of the Fund. The discussion reflects applicable tax laws of the United
States as of the date of this prospectus, which tax laws may be changed or
subject to new interpretations by the courts or the IRS, possibly with
retroactive effect. No attempt is made to present a detailed explanation of U.S.
federal income tax concerns affecting the Fund and its shareholders, and the
discussion set forth herein does not constitute tax advice. In addition, no
attempt is made to present state, local or foreign tax concerns or tax concerns
applicable to an investor with a special tax status such as a financial
institutional or non-U.S. investors. INVESTORS ARE URGED TO CONSULT THEIR OWN
TAX ADVISORS TO DETERMINE THE TAX CONSEQUENCES TO THEM BEFORE INVESTING IN THE
FUND.
The Fund intends to elect to be treated, and to qualify each year, as a
"regulated investment company" under Subchapter M of the Internal Revenue Code
of 1986, as amended (the "Code"), so that it will not pay U.S. federal income
tax on income and capital gains timely distributed to shareholders. If the Fund
qualifies as a regulated investment company and distributes to its shareholders
at least 90% of the sum of (i) its "investment company taxable income" as that
term is defined in the Code (which includes, among other things, dividends,
taxable interest, the excess of any net short-term capital gains over net
long-term capital losses and certain net foreign exchange gains as reduced by
certain deductible expenses) without regard to the deduction for dividends paid
and (ii) the excess of its gross tax-exempt interest, if any, over certain
disallowed deductions, the Fund will be relieved of U.S. federal income tax on
any income of the Fund, including long-term capital gains, distributed to
shareholders. However, if the Fund retains any investment company taxable income
or "net capital gain" (i.e., the excess of net long-term capital gain over net
short-term capital loss), it will be subject to U.S. federal income tax at
regular corporate rates (currently at the maximum effective rate of 35%) on the
amount retained. The Fund intends to distribute at least annually all or
substantially all of its investment company taxable income, net tax-exempt
interest, and net capital gain.
Under the Code, the Fund will generally be subject to a nondeductible 4%
federal excise tax on the portion of its undistributed ordinary income and
capital gains if it fails to meet certain distribution requirements with respect
to each calendar year. The Fund intends to make distributions in a timely manner
and accordingly does not expect to be subject to this excise tax.
If for any taxable year the Fund does not qualify as a regulated investment
company for U.S. federal income tax purposes, it would be treated in the same
manner as an ordinary corporation subject to U.S. federal income tax and
distributions to its shareholders would not be deducted by the Fund in computing
its taxable income. In such event, the Fund's distributions, to the extent
derived from the Fund's current or accumulated earnings and profits, would
generally constitute ordinary dividends, which would generally be eligible for
the dividends received deduction available to corporate shareholders and for
treatment as "qualified dividend income" eligible for reduced rates of federal
income taxation in taxable years beginning on or before December 31, 2008 for
individual and other non-corporate shareholders.
It is anticipated that Preferred Shares will constitute stock of the Fund,
and thus distributions with respect to Preferred Shares (other than capital gain
distributions and distributions in redemption of Preferred Shares subject to
Section 302(b) of the Code) will generally constitute dividends to the extent of
the Fund's current or accumulated earnings and profits, as calculated for
federal income tax purposes. Such dividends generally will be taxable as
ordinary income to holders and a portion of such dividends, if
51
any, may qualify for the dividends received deduction available to corporations
under Section 243 of the Code and the reduced rate of taxation that applies to
"qualified dividend income" received by individual and other noncorporate
shareholders under Section 1(h)(11) of the Code. Dividends designated by the
Fund as capital gain distributions will be treated as long-term capital gains in
the hands of holders regardless of the length of time such holders have held
their shares. Distributions in excess of current and accumulated earnings and
profits of the Fund are treated first as return of capital to the extent of the
shareholder's basis in the Preferred Shares and, thereafter, as capital gain.
The IRS currently requires that a regulated investment company that has two or
more classes of stock allocate to each such class proportionate amounts of each
type of its income (such as ordinary income and capital gains). Accordingly, the
Fund intends to designate distributions made with respect to Preferred Shares as
ordinary income, capital gain distributions, dividends qualifying for the
dividend's received deduction, if any, and "qualified dividend income," if any,
in proportion to the Preferred Shares' share of total dividends paid during the
year. See "U.S. Federal Income Tax Matters" in the Statement of Additional
Information.
If the Fund retains any net capital gain, the Fund may designate the
retained amount as undistributed capital gains in a notice to shareholders who,
if subject to U.S. federal income tax on long-term capital gains, (i) will be
required to include in income as long-term capital gain, their proportionate
share of such undistributed amount and (ii) will be entitled to credit their
proportionate share of the tax paid by the Fund on the undistributed amount
against their U.S. federal income tax liabilities, if any, and to claim refunds
to the extent the credit exceeds such liabilities. If such an event occurs, the
tax basis of shares owned by a shareholder of the Fund will, for U.S. federal
income tax purposes, generally be increased by the difference between the amount
of undistributed net capital gain included in the shareholder's gross income and
the tax deemed to have been paid by the shareholders.
Certain of the Fund's investment practices are subject to special and
complex federal income tax provisions that may, among other things, (i)
disallow, suspend or otherwise limit the allowance of certain losses or
deductions, (ii) convert tax-advantaged, long-term capital gains and qualified
dividend income into higher taxed short-term capital gain or ordinary income,
(iii) convert an ordinary loss or a deduction into a capital loss (the
deductibility of which is more limited), (iv) cause the Fund to recognize income
or gain without a corresponding receipt of cash, (v) adversely affect the timing
as to when a purchase or sale of stock or securities is deemed to occur, and
(vi) adversely alter the characterization of certain complex financial
transactions. The Fund will monitor its transactions and may make certain tax
elections where applicable in order to mitigate the effect of these provisions,
if possible.
Dividends, interest and some capital gains received by the Fund on foreign
securities may be subject to foreign tax withholdings or other foreign taxes. If
applicable, the Fund may make an election under the Code to pass through such
taxes to shareholders of the Fund. If such an election is not made, any foreign
taxes paid or accrued by the Fund will represent an expense of the Fund. If an
election is made, shareholders will generally be able to claim a credit or
deduction on their federal income tax return for, and will be required to treat
as part of the amounts distributed to them, their pro rata portion of the taxes
paid by the Fund to foreign countries with respect to such income.
Sales and other dispositions of the Preferred Shares are taxable events for
shareholders that are subject to federal income tax. Shareholders should consult
their own tax advisors with reference to their individual circumstances to
determine whether any particular transaction in the Preferred Shares is properly
treated as a sale for U.S. federal income tax purposes, as the following
discussion assumes, and the tax treatment of any gains or losses recognized in
such transactions. Any loss realized by a shareholder upon the sale or other
disposition of shares with a tax holding period of six months or less will be
treated as a long-term capital loss to the extent of any amounts treated as
distributions of long-term capital gain with respect to such shares. Losses on
sales or other dispositions of shares may be disallowed under the "wash sale"
rules in the event of other investments in the Fund (including those made
pursuant to reinvestment of dividends) within a period of 61 days beginning 30
days before and ending 30 days after a sale or other disposition of shares. In
such a case, the disallowed portion of any loss generally would be included in
the U.S. federal tax basis of the shares acquired in the other investments.
52
The Fund is required in certain circumstances to backup withhold at a rate
of 28% on reportable payments including dividends, capital gain distributions
and proceeds of sales or other dispositions of the Preferred Shares paid to
certain holders of the Preferred Shares who do not furnish the Fund with their
correct social security number or other taxpayer identification number and
certain other tax certifications, or who are otherwise subject to backup
withholding. Backup withholding is not an additional tax. Any amounts withheld
from payments made to a shareholder may be refunded or credited against such
shareholder's U.S. federal income tax liability, if any, provided that the
required information is furnished to the IRS.
Non-U.S. Shareholders of the Fund, including shareholders who, with respect
to the United States, are nonresident alien individuals, may be subject to U.S.
withholding tax on certain dividends and distributors at a rate of 30% or such
lower rates as may be prescribed by an applicable treaty.
THE FOREGOING IS A GENERAL AND ABBREVIATED SUMMARY OF THE PROVISIONS OF THE
CODE AND THE TREASURY REGULATIONS IN EFFECT AS THEY DIRECTLY GOVERN THE TAXATION
OF THE FUND AND ITS SHAREHOLDERS. THESE PROVISIONS ARE SUBJECT TO CHANGE BY
LEGISLATIVE OR ADMINISTRATIVE ACTION, AND ANY SUCH CHANGE MAY BE RETROACTIVE. A
MORE COMPLETE DISCUSSION OF THE TAX RULES APPLICABLE TO THE FUND CAN BE FOUND IN
THE STATEMENT OF ADDITIONAL INFORMATION, WHICH IS INCORPORATED BY REFERENCE INTO
THIS PROSPECTUS. SHAREHOLDERS ARE URGED TO CONSULT THEIR TAX ADVISORS REGARDING
SPECIFIC QUESTIONS AS TO U.S. FEDERAL, FOREIGN, STATE, AND LOCAL INCOME OR OTHER
TAXES.
CERTAIN PROVISIONS OF THE AGREEMENT AND
DECLARATION OF TRUST AND BY-LAWS
The Fund's Agreement and Declaration of Trust includes provisions that
could have the effect of limiting the ability of other entities or persons to
acquire control of the Fund or to change the composition of its Board of
Trustees and could have the effect of depriving shareholders of an opportunity
to sell their shares at a premium over prevailing market prices by discouraging
a third party from seeking to obtain control of the Fund. These provisions,
however, have the advantage of potentially requiring persons seeking control of
the Fund to negotiate with its management regarding the price to be paid and
facilitating the continuity of the Fund's investment objective and policies. The
Board of Trustees of the Fund has considered these provisions and concluded that
they are in the best interests of the Fund.
The Board of Trustees is divided into three classes. The terms of the
Trustees of the different classes are staggered. A Trustee may be removed from
office with or without cause by a vote of at least a majority of the then
Trustees if such removal is approved by the holders of at least 75% of the
shares entitled to vote with respect to the election of such Trustee and present
in person or by proxy at a meeting of shareholders called for such purpose.
In addition, the Agreement and Declaration of Trust requires the
affirmative vote of at least 75% of the outstanding shares entitled to vote on
the matter for the Fund to merge or consolidate with any other corporation,
association, trust or other organization or to sell, lease or exchange all or
substantially all of the Fund's assets; unless such action has been approved by
the affirmative vote of at least 75% of the Trustees then in office, in which
case, the affirmative vote of a majority of the outstanding shares entitled to
vote on the matter is required.
In addition, conversion of the Fund to an open-end investment company would
require an amendment to the Fund's Agreement and Declaration of Trust. Such an
amendment would require the favorable vote of a majority of the then Trustees
followed by a favorable vote of the holders of at least 75% of the shares
entitled to vote on the matter, voting as separate classes or series (or a
majority of such shares if the amendment was previously approved by 75% of the
Trustees). Such a vote also would satisfy a separate requirement in the 1940 Act
that the change be approved by the shareholders. The Fund would be required to
redeem all of its outstanding Preferred Shares prior to its conversion to an
open-end investment company.
53
Under the 1940 Act, shareholders of an open-end investment company may
require the company to redeem their shares of common stock at any time (except
in certain circumstances as authorized by or under the 1940 Act) at their net
asset value, less such redemption charge, if any, as might be in effect at the
time of a redemption. If the Fund is converted to an open-end investment
company, it could be required to liquidate portfolio securities to meet requests
for redemption, and the common shares would no longer be listed on the New York
Stock Exchange. Conversion to an open-end investment company would also require
changes in certain of the Fund's investment policies and restrictions.
In addition, the Agreement and Declaration of Trust requires the
affirmative vote or consent of a majority of the then Trustees followed by the
affirmative vote or consent of the holders of at least 75% of the shares of each
affected class or series of the Fund outstanding, voting separately as a class
or series, to approve, adopt or authorize certain transactions with a Principal
Shareholder, unless the transaction has been approved by at least 75% of the
Trustees, in which case a majority of the outstanding shares entitled to vote
shall be required. For purposes of these provisions, a Principal Shareholder
refers to any person who, whether directly or indirectly and whether alone or
together with its affiliates and associates, beneficially owns 5% or more of the
outstanding shares of any class or series of shares of beneficial interest of
the Fund. The 5% holder transactions subject to these special approval
requirements are:
- the merger or consolidation of the Fund or any subsidiary of the Fund
with or into any Principal Shareholder;
- the issuance of any securities of the Fund to any Principal Shareholder
for cash (other than pursuant to an automatic dividend reinvestment
plan); or
- the sale, lease or exchange to the Fund or any subsidiary of the Fund, in
exchange for securities of the Fund, of any assets of any Principal
Shareholder, except assets having an aggregate fair market value of less
than $1,000,000, aggregating for the purpose of such computation all
assets sold, leased or exchanged in any series of similar transactions
within a 12-month period.
The Fund may be terminated by the affirmative vote of not less than 75% of
the Trustees then in office by written notice to the shareholders.
The Agreement and Declaration of Trust and By-Laws provide that the Board
of Trustees has the power to make, alter or repeal any of the By-Laws except for
any By-Law that requires a vote of the shareholders to be amended, adopted or
repealed by the terms of the Agreement and Declaration of Trust, By-Laws or law.
Neither this provision of the Agreement and Declaration of Trust, nor any of the
foregoing provisions thereof requiring the affirmative vote of 75% of
outstanding shares of the Fund, can be amended or repealed except by the vote of
such required number of shares.
With respect to proposals by shareholders submitted outside the process of
Rule 14a-8 of the Securities Exchange Act of 1934, the Fund's By-Laws generally
require that advance notice be given to the Fund in the event a shareholder
desires to nominate a person for election to the Board of Trustees or to
transact any other business that is a proper matter for action by shareholders
at an annual meeting of shareholders. With respect to an annual meeting
following the first annual meeting of shareholders, notice of any such
nomination or business must be delivered to the principal executive offices of
the Fund not less than 90 calendar days nor more than 120 calendar days prior to
the first anniversary of the date of mailing of the notice for the prior year's
annual meeting (subject to certain exceptions). Any notice by a shareholder must
be accompanied by certain information as provided in the By-Laws.
CUSTODIAN, AUCTION AGENT, TRANSFER AGENT,
DIVIDEND PAYING AGENT AND REGISTRAR
The Fund's securities and cash are held under a custodian agreement with
The Bank of New York, One Wall Street, New York, New York 10286. The Bank of New
York is also the transfer agent, dividend paying agent and registrar for the
Fund's common shares and the Preferred Shares. In addition, The Bank of New York
is the auction agent with respect to the Preferred Shares.
54
UNDERWRITING
Subject to the terms and conditions stated in the underwriting agreement
dated the date of this prospectus, the underwriter named below has agreed to
purchase, and the Fund has agreed to sell to that underwriter, the number of
Preferred Shares set forth opposite the underwriter's name.
NUMBER OF
UNDERWRITER PREFERRED SHARES
----------- ----------------
Citigroup Global Markets Inc. .............................. 2,360
-----
Total.................................................. 2,360
The underwriting agreement provides that the obligations of the underwriter
to purchase the Preferred Shares included in this offering are subject to
approval of certain legal matters by counsel and to other conditions. The
underwriter is obligated to purchase all the Preferred Shares if it purchases
any of the Preferred Shares.
The underwriter proposes to offer some of the Preferred Shares directly to
the public at the public offering price set forth on the cover page of this
prospectus and some of the Preferred Shares to dealers at the public offering
price less a concession not to exceed $137.50 per Preferred Share. The sales
load the Fund will pay of $250 per Preferred Share is equal to 1% of the initial
offering price. The underwriter may allow, and dealers may reallow, a concession
not to exceed $37.50 per Preferred Share on sales to other dealers. After the
initial offering of the Preferred Shares to the public, the underwriter may
change the public offering price and the other selling terms. Investors must pay
for any Preferred Shares purchased on or before January 6, 2006.
The following table shows the sales load that the Fund will pay to the
underwriter in connection with this offering.
PAID BY THE FUND
----------------
Per Share................................................... $ 250
Total....................................................... $590,000
The Fund estimates that its total expenses for this offering will be
$316,326.
The Fund and Calamos have agreed that, for a period of 180 days from the
date of this prospectus, they will not, without the prior written consent of
Citigroup Global Markets Inc., dispose of or hedge any senior securities (as
defined in the 1940 Act) of the Fund, or any securities convertible into or
exchangeable for senior securities. Citigroup Global Markets Inc., in its sole
discretion, may release any of the securities subject to the lock-up agreements
at any time without notice.
The Fund and Calamos have each agreed to indemnify the underwriter against
certain liabilities, including liabilities under the Securities Act of 1933, or
to contribute to payments the underwriter may be required to make because of any
of those liabilities. Any indemnification by the Fund shall be subject to the
requirements and limitations of Section 17(i) of the 1940 Act.
A prospectus in electronic format may be made available on the website
maintained by the underwriter.
The Fund anticipates that from time to time, the underwriter may act as a
broker or dealer in connection with the execution of the Fund's portfolio
transactions after it has ceased to be an underwriter and, subject to certain
restrictions, may act as a broker while it is an underwriter.
The Fund anticipates that the underwriter or certain of its affiliates may,
from time to time, act in auctions as Broker-Dealers and receive fees as set
forth under "The Auction" and in the Statement of Additional Information.
The underwriter has advised the Fund that the underwriter and various other
Broker-Dealers and other firms that participate in the auction rate securities
market received letters from the staff of the
55
Commission in the spring of 2004. The letters requested that each of these firms
voluntarily conduct an investigation regarding its respective practices and
procedures in that market. Pursuant to these requests, the underwriter conducted
its own voluntary review and reported its findings to the Commission staff. At
the Commission staff's request, the underwriter is engaging in discussions with
the Commission staff concerning its inquiry. Neither the underwriter nor the
Fund can predict the ultimate outcome of the inquiry or how that outcome will
affect the market for auction rate securities or the auctions.
The underwriter has performed investment banking and advisory services for
Calamos and its affiliates from time to time, for which it has received
customary fees and expenses. The underwriter may, from time to time, engage in
transactions with or perform services for Calamos and its affiliates in the
ordinary course of business.
The principal business address of Citigroup Global Markets Inc. is 388
Greenwich Street, New York, New York 10013.
LEGAL OPINIONS
Bell, Boyd & Lloyd LLC, Chicago, Illinois, serves as counsel to the Fund
and to the non-interested Trustees. Vedder, Price, Kaufman & Kammholz, P.C.
("Vedder Price"), Chicago, Illinois, which is serving as special counsel to the
Fund in connection with the offering, will pass on the legality of the shares
offered hereby. Vedder Price is also counsel to Calamos. Certain matters will be
passed upon for the underwriter by Simpson Thacher & Bartlett LLP, New York, New
York. Vedder Price and Simpson Thacher & Bartlett LLP may rely on the opinion of
Morris, Nichols, Arsht & Tunnell, Wilmington, Delaware for certain matters of
Delaware law.
AVAILABLE INFORMATION
The Fund is subject to the informational requirements of the Securities
Exchange Act of 1934 and the 1940 Act and is required to file reports, proxy
statements and other information with the Securities and Exchange Commission.
These documents can be inspected and copied for a fee at the SEC's public
reference room, 100 F Street, N.E., Washington, D.C. 20549, and at the SEC's
Chicago Regional Office, Suite 1400, Northwestern Atrium Center, 500 West
Madison Street, Chicago, Illinois 60661-2511. Reports, proxy statements, and
other information about the Fund can be inspected at the offices of the New York
Stock Exchange, 20 Broad Street, New York, New York 10005.
This prospectus does not contain all of the information in the Fund's
registration statement, including amendments, exhibits, and schedules.
Statements in this prospectus about the contents of any contract or other
document are not necessarily complete and in each instance reference is made to
the copy of the contract or other document filed as an exhibit to the
registration statement, each such statement being qualified in all respects by
this reference.
Additional information about the Fund and Preferred Shares can be found in
the Fund's registration statement (including amendments, exhibits, and
schedules) on Form N-2 filed with the SEC. The SEC maintains a web site
(http://www.sec.gov) that contains the Fund's registration statement, other
documents incorporated by reference, and other information the Fund has filed
electronically with the Commission, including proxy statements and reports filed
under the Securities Exchange Act of 1934.
56
TABLE OF CONTENTS FOR THE STATEMENT OF ADDITIONAL INFORMATION
Use of Proceeds............................................. S-2
Investment Objective and Policies........................... S-2
Investment Restrictions..................................... S-25
Management of the Fund...................................... S-26
Portfolio Managers.......................................... S-35
Portfolio Transactions...................................... S-38
Net Asset Value............................................. S-38
Additional Information Concerning the Auctions for Preferred
Shares.................................................... S-39
Repurchase of Common Shares................................. S-40
U.S. Federal Income Tax Matters............................. S-42
Custodian, Transfer Agent, Dividend Paying Agent and
Registrar................................................. S-48
Experts..................................................... S-48
Additional Information...................................... S-48
Financial Statement and Independent Auditors' Report........ F-1
Appendix A -- Statement of Preferences of Auction Rate
Cumulative Preferred Shares............................... A-1
Appendix B -- Description of Ratings........................ B-1
57
$59,000,000
CALAMOS GLOBAL TOTAL RETURN FUND
PREFERRED SHARES
2,360 SHARES, SERIES T
------------
PROSPECTUS
JANUARY 4, 2006
------------
CITIGROUP
CALAMOS GLOBAL TOTAL RETURN FUND
STATEMENT OF ADDITIONAL INFORMATION
Calamos Global Total Return Fund (the "Fund") is a recently organized,
diversified, closed-end management investment company. This Statement of
Additional Information relating to Preferred Shares ("Preferred Shares") does
not constitute a prospectus, but should be read in conjunction with the
prospectus relating thereto dated January 4, 2006. This Statement of Additional
Information does not include all information that a prospective investor should
consider before purchasing and investors should obtain and read the Prospectus
prior to purchasing such shares. A copy of the prospectus may be obtained
without charge by calling 1-800-582-6959. You may also obtain a copy of the
prospectus on the Securities and Exchange Commission's web site
(http://www.sec.gov). Capitalized terms used but not defined in this Statement
of Additional Information have the same meanings ascribed to them in the
prospectus or the Statement of Preferences of Auction Rate Cumulative Preferred
Shares (the "Statement") attached as Appendix A.
TABLE OF CONTENTS FOR STATEMENT OF ADDITIONAL INFORMATION
Use of Proceeds............................................. S-2
Investment Objective and Policies........................... S-2
Investment Restrictions..................................... S-25
Management of the Fund...................................... S-26
Portfolio Managers.......................................... S-35
Portfolio Transactions...................................... S-38
Net Asset Value............................................. S-38
Additional Information Concerning the Auctions for Preferred
Shares.................................................... S-39
Repurchase of Common Shares................................. S-40
U.S. Federal Income Tax Matters............................. S-42
Custodian, Transfer Agent, Dividend Paying Agent and
Registrar................................................. S-48
Experts..................................................... S-48
Additional Information...................................... S-48
Financial Statement and Independent Auditors' Report........ F-1
Appendix A - Statement of Preferences of Auction Rate
Cumulative Preferred Shares............................... A-1
Appendix B - Description of Ratings......................... B-1
This Statement of Additional Information is dated January 4, 2006.
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USE OF PROCEEDS
The Fund will invest the net proceeds of the offering in accordance
with the Fund's investment objective and policies as stated below and in the
Prospectus. It is presently anticipated that the Fund will invest substantially
all of the net proceeds in securities that meet the investment objective and
policies within three months after completion of the offering. Pending such
investment, the net proceeds may be invested in U.S. government securities and
high-grade, short-term money market instruments. If necessary, the Fund may also
purchase, as temporary investments, securities of other open- or closed-end
investment companies that invest primarily the types of securities in which the
Fund may invest directly.
INVESTMENT OBJECTIVE AND POLICIES
The prospectus presents the investment objective and the principal
investment strategies and risks of the Fund. This section supplements the
disclosure in the Fund's prospectus and provides additional information on the
Fund's investment policies or restrictions. Restrictions or policies stated as a
maximum percentage of the Fund's assets are only applied immediately after a
portfolio investment to which the policy or restriction is applicable (other
than the limitations on borrowing). Accordingly, any later increase or decrease
resulting from a change in values, net assets or other circumstances will not be
considered in determining whether the investment complies with the Fund's
restrictions and policies.
PRIMARY INVESTMENTS. Under normal circumstances, the Fund will invest
primarily in a portfolio of equity securities, convertible securities and other
income producing securities such as investment grade and below investment grade
(high yield/high risk) debt securities. The Fund, under normal circumstances,
will invest at least 50% of its managed assets in equity securities (including
securities that are convertible into equity securities). The Fund may invest up
to 100% of its managed assets in securities of foreign issuers, including debt
and equity securities of corporate issuers and debt securities of government
issuers, in developed and emerging markets. Under normal circumstances, the Fund
will invest at least 30% of its managed assets in securities of foreign issuers.
The Fund will invest in the securities of issuers of several different countries
throughout the world, in addition to the United States. "Managed Assets" means
the total assets of the Fund (including any assets attributable to any leverage
that may be outstanding) minus the sum of accrued liabilities (other than debt
representing financial leverage). For this purpose the liquidation preference on
any preferred shares will not constitute a liability.
The Fund will attempt to keep a consistent balance between risk and
reward over the course of different market cycles, through various combinations
of stocks, bonds, and/or convertible securities, to achieve what the investment
adviser, Calamos Advisors, LLC ("Calamos"), believes to be an appropriate blend
for the then current market. As the market environment changes, portfolio
securities may change in an attempt to achieve a relatively consistent risk
level over time. At some points in a market cycle, one type of security may make
up a substantial portion of the portion of the portfolio, while at other times
certain securities may have minimal or no representation, depending on market
conditions.
FOREIGN SECURITIES. The Fund may invest up to 100% of its managed
assets in securities of foreign issuers, including debt and equity securities of
corporate issuers and debt securities of government issuers, in developed and
emerging markets. Under normal circumstances, the Fund will invest at least 30%
of its managed assets in securities of foreign issuers; however, the Fund
anticipates that ordinarily Calamos' investment process will result in the Fund
investing at least 40% of its managed assets in securities of foreign issuers.
The Fund will invest in the securities of issuers of several different
countries throughout the world, in addition to the United States. A foreign
issuer is a company organized under the laws of a foreign country. For these
purposes, foreign securities includes American Depositary Receipts ("ADRs") or
securities guaranteed by a United States person, and foreign securities in the
form of European Depositary Receipts ("EDRs"), Global Depositary
Receipts ("GDRs")
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or other securities representing underlying shares of foreign issuers. Positions
in those securities are not necessarily denominated in the same currency as the
common stocks into which they may be converted. ADRs are receipts typically
issued by an American bank or trust company evidencing ownership of the
underlying securities. EDRs are European receipts listed on the Luxembourg Stock
Exchange evidencing a similar arrangement. GDRs are U.S. dollar-denominated
receipts evidencing ownership of foreign securities. Generally, ADRs, in
registered form, are designed for the U.S. securities markets and EDRs and GDRs,
in bearer form, are designed for use in foreign securities markets. The Fund may
invest in sponsored or unsponsored ADRs. In the case of an unsponsored ADR, the
Fund is likely to bear its proportionate share of the expenses of the depository
and it may have greater difficulty in receiving shareholder communications than
it would have with a sponsored ADR. To the extent positions in portfolio
securities are denominated in foreign currencies, the Fund's investment
performance is affected by the strength or weakness of the U.S. dollar against
those currencies. For example, if the dollar falls in value relative to the
Japanese yen, the dollar value of a Japanese stock held in the portfolio will
rise even though the price of the stock remains unchanged. Conversely, if the
dollar rises in value relative to the yen, the dollar value of the Japanese
stock will fall. (See discussion of transaction hedging and portfolio hedging
below under "Currency Exchange Transactions.")
Investors should understand and consider carefully the risks involved
in foreign investing. Investing in foreign securities, which are generally
denominated in foreign currencies, and utilization of forward foreign currency
exchange contracts involve certain considerations comprising both risks and
opportunities not typically associated with investing in U.S. securities. These
considerations include: fluctuations in exchange rates of foreign currencies;
possible imposition of exchange control regulation or currency restrictions that
would prevent cash from being brought back to the United States; less public
information with respect to issuers of securities; less governmental supervision
of stock exchanges, securities brokers, and issuers of securities; lack of
uniform accounting, auditing and financial reporting standards; lack of uniform
settlement periods and trading practices; less liquidity and frequently greater
price volatility in foreign markets than in the United States; possible
imposition of foreign taxes; and sometimes less advantageous legal, operational
and financial protections applicable to foreign sub-custodial arrangements.
Although the Fund intends to invest in companies and government
securities of countries having stable political environments, there is the
possibility of expropriation or confiscatory taxation, seizure or
nationalization of foreign bank deposits or other assets, establishment of
exchange controls, the adoption of foreign government restrictions, or other
adverse political, social or diplomatic developments that could affect
investment in these nations.
The Fund may invest in the securities of emerging countries. The
securities markets of emerging countries are substantially smaller, less
developed, less liquid and more volatile than the securities markets of the U.S.
and other more developed countries. Disclosure and regulatory standards in many
respects are less stringent than in the U.S. and other major markets. There also
may be a lower level of monitoring and regulation of emerging markets and the
activities of investors in such markets, and enforcement of existing regulations
has been extremely limited. Economies in individual emerging markets may differ
favorably or unfavorably from the U.S. economy in such respects as growth of
gross domestic product, rates of inflation, currency depreciation, capital
reinvestment, resource self-sufficiency and balance of payments positions. Many
emerging market countries have experienced high rates of inflation for many
years, which has had and may continue to have very negative effects on the
economies and securities markets of those countries.
An investment in debt obligations of non-U.S. governments and their
political subdivisions (sovereign debt) involves special risks that are not
present in corporate debt obligations. The non-U.S. issuer of the sovereign debt
or the non-U.S. governmental authorities that control the repayment of the
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debt may be unable or unwilling to repay principal or interest when due, and the
Fund may have limited recourse in the event of a default. During periods of
economic uncertainty, the market prices of sovereign debt may be more volatile
than prices of debt obligations of U.S. issuers. In the past, certain non-U.S.
countries have encountered difficulties in servicing their debt obligations,
withheld payments of principal and interest and declared moratoria on the
payment of principal and interest on their sovereign debt.
A sovereign debtor's willingness or ability to repay principal and pay
interest in a timely manner may be affected by, among other factors, its cash
flow situation, the extent of its foreign currency reserves, the availability of
sufficient non-U.S. currency, the relative size of the debt service burden, the
sovereign debtor's policy toward its principal international lenders and local
political constraints.
Sovereign debtors may also be dependent on expected disbursements from
non-U.S. governments, multilateral agencies and other entities to reduce
principal and interest arrearages on their debt. The failure of a sovereign
debtor to implement economic reforms, achieve specified levels of economic
performance or repay principal or interest when due may result in the
cancellation of third-party commitments to lend funds to the sovereign debtor,
which may further impair such debtor's ability or willingness to service its
debts.
CURRENCY EXCHANGE TRANSACTIONS. Currency exchange transactions may be
conducted either on a spot (i.e., cash) basis at the spot rate for purchasing or
selling currency prevailing in the foreign exchange market or through forward
currency exchange contracts ("forward contracts"). Forward contracts are
contractual agreements to purchase or sell a specified currency at a specified
future date (or within a specified time period) and price set at the time of the
contract. Forward contracts are usually entered into with banks, foreign
exchange dealers and broker-dealers, are not exchange traded, and are usually
for less than one year, but may be renewed.
Forward currency exchange transactions may involve currencies of the
different countries in which the Fund may invest and serve as hedges against
possible variations in the exchange rate between these currencies. Currency
exchange transactions are limited to transaction hedging and portfolio hedging
involving either specific transactions or portfolio positions, except to the
extent described below under "Synthetic Foreign Money Market Positions."
Transaction hedging is the purchase or sale of forward contracts with respect to
specific receivables or payables of the Fund accruing in connection with the
purchase and sale of its portfolio securities or the receipt of dividends or
interest thereon. Portfolio hedging is the use of forward contracts with respect
to portfolio security positions denominated or quoted in a particular foreign
currency. Portfolio hedging allows the Fund to limit or reduce its exposure in a
foreign currency by entering into a forward contract to sell such foreign
currency (or another foreign currency that acts as a proxy for that currency) at
a future date for a price payable in U.S. dollars so that the value of the
foreign denominated portfolio securities can be approximately matched by a
foreign denominated liability. The Fund may not engage in portfolio hedging with
respect to the currency of a particular country to an extent greater than the
aggregate market value (at the time of making such sale) of the securities held
in its portfolio denominated or quoted in that particular currency, except that
the Fund may hedge all or part of its foreign currency exposure through the use
of a basket of currencies or a proxy currency where such currencies or currency
act as an effective proxy for other currencies. In such a case, the Fund may
enter into a forward contract where the amount of the foreign currency to be
sold exceeds the value of the securities denominated in such currency. The use
of this basket hedging technique may be more efficient and economical than
entering into separate forward contracts for each currency held in the Fund. The
Fund may not engage in "speculative" currency exchange transactions.
If the Fund enters into a forward contract, the Fund's custodian will
segregate liquid assets of the Fund having a value equal to the Fund's
commitment under such forward contract. At the maturity of the forward contract
to deliver a particular currency, the Fund may either sell the portfolio
security related to
S-4
the contract and make delivery of the currency, or it may retain the security
and either acquire the currency on the spot market or terminate its contractual
obligation to deliver the currency by purchasing an offsetting contract with the
same currency trader obligating it to purchase on the same maturity date the
same amount of the currency. It is impossible to forecast with absolute
precision the market value of portfolio securities at the expiration of a
forward contract. Accordingly, it may be necessary for a Fund to purchase
additional currency on the spot market (and bear the expense of such purchase)
if the market value of the security is less than the amount of currency the Fund
is obligated to deliver and if a decision is made to sell the security and make
delivery of the currency. Conversely, it may be necessary to sell on the spot
market some of the currency received upon the sale of the portfolio security if
its market value exceeds the amount of currency the Fund is obligated to
deliver.
If the Fund retains the portfolio security and engages in an offsetting
transaction, the Fund will incur a gain or a loss to the extent that there has
been movement in forward contract prices. If the Fund engages in an offsetting
transaction, it may subsequently enter into a new forward contract to sell the
currency. Should forward prices decline during the period between the Fund's
entering into a forward contract for the sale of a currency and the date it
enters into an offsetting contract for the purchase of the currency, the Fund
will realize a gain to the extent the price of the currency it has agreed to
sell exceeds the price of the currency it has agreed to purchase. Should forward
prices increase, the Fund will suffer a loss to the extent the price of the
currency it has agreed to purchase exceeds the price of the currency it has
agreed to sell. A default on the contract would deprive the Fund of unrealized
profits or force the Fund to cover its commitments for purchase or sale of
currency, if any, at the current market price.
Hedging against a decline in the value of a currency does not eliminate
fluctuations in the value of a portfolio security traded in that currency or
prevent a loss if the value of the security declines. Hedging transactions also
preclude the opportunity for gain if the value of the hedged currency should
rise. Moreover, it may not be possible for the Fund to hedge against a
devaluation that is so generally anticipated that the Fund is not able to
contract to sell the currency at a price above the devaluation level it
anticipates. The cost to the Fund of engaging in currency exchange transactions
varies with such factors as the currency involved, the length of the contract
period, and prevailing market conditions. Because currency exchange transactions
are usually conducted on a principal basis, no fees or commissions are involved.
EQUITY SECURITIES. Equity securities include common and preferred
stocks, warrants, rights, and depository receipts. Under normal circumstances,
the Fund will invest at least 50% of its managed assets in equity securities
(including securities that are convertible into equity securities). An
investment in the equity securities of a company represents a proportionate
ownership interest in that company. Therefore, the Fund participates in the
financial success or failure of any company in which it has an equity interest.
Equity investments are subject to greater fluctuations in market value than
other asset classes as a result of such factors as a company's business
performance, investor perceptions, stock market trends and general economic
conditions. Equity securities are subordinated to bonds and other debt
instruments in a company's capital structure in terms of priority to corporate
income and liquidation payments.
Preferred stocks involve credit risk, which is the risk that a
preferred stock in the Fund's portfolio will decline in price or fail to make
dividend payments when due because the issuer of the security experiences a
decline in its financial status. In addition to credit risk, investments in
preferred stocks involve certain other risks. Certain preferred stocks contain
provisions that allow an issuer under certain circumstances to skip
distributions (in the case of "non-cumulative" preferred stocks) or defer
distributions (in the case of "cumulative" preferred stocks). If the Fund owns a
preferred stock that is deferring its distributions, the Fund may be required to
report income for federal income tax purposes even though it is not currently
receiving income from that stock. In certain varying circumstances, an issuer
may redeem its preferred stock prior to a specified date in the event of certain
tax or legal changes or at the issuer's call. In the
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event of a redemption, the Fund may not be able to reinvest the proceeds at
comparable rates of return. Preferred stocks typically do not provide any voting
rights, except in cases when dividends are in arrears for a specified number of
periods.
Equity securities of small and mid cap companies historically have been
subject to greater investment risk than those of large companies. The risks
generally associated with small and medium-sized companies include more limited
product lines, markets and financial resources, lack of management depth or
experience, dependency on key personnel and vulnerability to adverse market and
economic developments. Accordingly, the prices of small and medium-sized company
equity securities tend to be more volatile than prices of large company stocks.
Further, the prices of small and medium-sized company equity securities are
often adversely affected by limited trading volumes and the lack of publicly
available information.
DEBT SECURITIES. In pursuing its investment objective, the Fund may
invest in convertible and non-convertible debt securities, including lower-rated
securities (i.e., securities rated BB or lower by Standard & Poor's Corporation,
a division of The McGraw-Hill Companies ("S&P"), or Ba or lower by Moody's
Investor Services, Inc. ("Moody's")) and securities that are not rated but are
considered by Calamos to be of similar quality. There are no restrictions as to
the ratings of debt securities acquired by the Fund or the portion of the Fund's
assets that may be invested in debt securities in a particular ratings category.
Securities rated BBB or Baa are considered to be medium grade and to
have speculative characteristics. Lower-rated debt securities are predominantly
speculative with respect to the issuer's capacity to pay interest and repay
principal. Investment in medium- or lower-quality debt securities involves
greater investment risk, including the possibility of issuer default or
bankruptcy. An economic downturn could severely disrupt the market for such
securities and adversely affect the value of such securities. In addition,
lower-quality bonds are less sensitive to interest rate changes than
higher-quality instruments and generally are more sensitive to adverse economic
changes or individual corporate developments. During a period of adverse
economic changes, including a period of rising interest rates, issuers of such
bonds may experience difficulty in servicing their principal and interest
payment obligations.
Achievement by the Fund of its investment objective will be more
dependent on Calamos' credit analysis than would be the case if the Fund were
investing in higher-quality debt securities. Because the ratings of rating
services (which evaluate the safety of principal and interest payments, not
market risks) are used only as preliminary indicators of investment quality,
Calamos employs its own credit research and analysis. These analyses may take
into consideration such quantitative factors as an issuer's present and
potential liquidity, profitability, internal capability to generate funds,
debt/equity ratio and debt servicing capabilities, and such qualitative factors
as an assessment of management, industry characteristics, accounting
methodology, and foreign business exposure.
Medium- and lower-quality debt securities may be less marketable than
higher-quality debt securities because the market for them is less broad. The
market for unrated debt securities is even narrower. During periods of thin
trading in these markets, the spread between bid and asked prices is likely to
increase significantly, and the Fund may have greater difficulty selling its
portfolio securities. The market value of these securities and their liquidity
may be affected by adverse publicity and investor perceptions.
HIGH YIELD SECURITIES. The high yield securities in which the Fund
invests are rated below investment grade (i.e. rated Ba or lower by Moody's or
BB or lower by S&P) or are unrated but determined by Calamos to be
of comparable quality.
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INVESTMENT IN HIGH YIELD SECURITIES INVOLVES SUBSTANTIAL RISK OF LOSS.
Below investment grade non-convertible debt securities or comparable unrated
securities are commonly referred to as "junk bonds" and are considered
predominantly speculative with respect to the issuer's ability to pay interest
and principal and are susceptible to default or decline in market value due to
adverse economic and business developments. The market values for high yield
securities tend to be very volatile, and these securities are less liquid than
investment grade debt securities. For these reasons, your investment in the Fund
is subject to the following specific risks:
- increased price sensitivity to changing interest rates and to
a deteriorating economic environment;
- greater risk of loss due to default or declining credit
quality;
- adverse company specific events are more likely to render the
issuer unable to make interest and/or principal payments; and
- if a negative perception of the high yield market develops,
the price and liquidity of high yield securities may be
depressed. This negative perception could last for a
significant period of time.
Securities rated below investment grade are speculative with respect to
the capacity to pay interest and repay principal in accordance with the terms of
such securities. A rating of C from Moody's means that the issue so rated can be
regarded as having extremely poor prospects of ever attaining any real
investment standing. S&P assigns a rating of C to issues that are currently
highly vulnerable to nonpayment, and the C rating may be used to cover a
situation where a bankruptcy petition has been filed or similar action taken,
but payments on the obligation are being continued (a C rating is also assigned
to a preferred stock issue in arrears on dividends or sinking fund payments, but
that is currently paying). See Appendix A to this statement of additional
information for a description of Moody's and S&P's ratings.
Adverse changes in economic conditions are more likely to lead to a
weakened capacity of a high yield issuer to make principal payments and interest
payments than an investment grade issuer. The principal amount of high yield
securities outstanding has proliferated in the past decade as an increasing
number of issuers have used high yield securities for corporate financing. An
economic downturn could severely affect the ability of highly leveraged issuers
to service their debt obligations or to repay their obligations upon maturity.
Similarly, down-turns in profitability in specific industries could adversely
affect the ability of high yield issuers in that industry to meet their
obligations. The market values of lower quality debt securities tend to reflect
individual developments of the issuer to a greater extent than do higher quality
securities, which react primarily to fluctuations in the general level of
interest rates. Factors having an adverse impact on the market value of lower
quality securities may have an adverse effect on the Fund's net asset value and
the market value of its common shares. In addition, the Fund may incur
additional expenses to the extent it is required to seek recovery upon a default
in payment of principal or interest on its portfolio holdings. In certain
circumstances, the Fund may be required to foreclose on an issuer's assets and
take possession of its property or operations. In such circumstances, the Fund
would incur additional costs in disposing of such assets and potential
liabilities from operating any business acquired.
The secondary market for high yield securities may not be as liquid as
the secondary market for more highly rated securities, a factor that may have an
adverse effect on the Fund's ability to dispose of a particular security when
necessary to meet its liquidity needs. There are fewer dealers in the market for
high yield securities than investment grade obligations. The prices quoted by
different dealers may vary
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significantly and the spread between the bid and asked price is generally much
larger than higher quality instruments. Under adverse market or economic
conditions, the secondary market for high yield securities could contract
further, independent of any specific adverse changes in the condition of a
particular issuer, and these instruments may become illiquid. As a result, the
Fund could find it more difficult to sell these securities or may be able to
sell the securities only at prices lower than if such securities were widely
traded. Prices realized upon the sale of such lower rated or unrated securities,
under these circumstances, may be less than the prices used in calculating the
Fund's net asset value.
Since investors generally perceive that there are greater risks
associated with lower quality debt securities of the type in which the Fund may
invest a portion of its assets, the yields and prices of such securities may
tend to fluctuate more than those for higher rated securities. In the lower
quality segments of the debt securities market, changes in perceptions of
issuers' creditworthiness tend to occur more frequently and in a more pronounced
manner than do changes in higher quality segments of the debt securities market,
resulting in greater yield and price volatility.
If the Fund invests in high yield securities that are rated C or below,
the Fund will incur significant risk in addition to the risks associated with
investments in high yield securities and corporate loans. Distressed securities
frequently do not produce income while they are outstanding. The Fund may
purchase distressed securities that are in default or the issuers of which are
in bankruptcy. The Fund may be required to bear certain extraordinary expenses
in order to protect and recover its investment.
DISTRESSED SECURITIES. The Fund may, but currently does not intend to,
invest up to 5% of its total assets in distressed securities, including
corporate loans, which are the subject of bankruptcy proceedings or otherwise in
default as to the repayment of principal and/or payment of interest at the time
of acquisition by the Fund or are rated in the lower rating categories (Ca or
lower by Moody's or CC or lower by S&P) or which are unrated investments
considered by Calamos to be of comparable quality. Investment in distressed
securities is speculative and involves significant risk. Distressed securities
frequently do not produce income while they are outstanding and may require the
Fund to bear certain extraordinary expenses in order to protect and recover its
investment. Therefore, to the extent the Fund seeks capital appreciation through
investment in distressed securities, the Fund's ability to achieve current
income for its shareholders may be diminished. The Fund also will be subject to
significant uncertainty as to when and in what manner and for what value the
obligations evidenced by the distressed securities will eventually be satisfied
(e.g., through a liquidation of the obligor's assets, an exchange offer or plan
of reorganization involving the distressed securities or a payment of some
amount in satisfaction of the obligation). In addition, even if an exchange
offer is made or a plan of reorganization is adopted with respect to distressed
securities held by the Fund, there can be no assurance that the securities or
other assets received by the Fund in connection with such exchange offer or plan
of reorganization will not have a lower value or income potential than may have
been anticipated when the investment was made. Moreover, any securities received
by the Fund upon completion of an exchange offer or plan of reorganization may
be restricted as to resale. As a result of the Fund's participation in
negotiations with respect to any exchange offer or plan of reorganization with
respect to an issuer of distressed securities, the Fund may be restricted from
disposing of such securities.
LOANS. The Fund may invest up to 5% of its total assets in loan
participations and other direct claims against a borrower. The corporate loans
in which the Fund invests primarily consist of direct obligations of a borrower
and may include debtor in possession financings pursuant to Chapter 11 of the
U.S. Bankruptcy Code, obligations of a borrower issued in connection with a
restructuring pursuant to Chapter 11 of the U.S. Bankruptcy Code, leveraged
buy-out loans, leveraged recapitalization loans, receivables purchase
facilities, and privately placed notes. The Fund may invest in a corporate loan
at origination as a co-lender or by acquiring in the secondary market
participations in, assignments of or novations of a corporate loan. By
purchasing a participation, the Fund acquires some or all of the interest
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of a bank or other lending institution in a loan to a corporate or government
borrower. The participations typically will result in the Fund having a
contractual relationship only with the lender not the borrower. The Fund will
have the right to receive payments of principal, interest and any fees to which
it is entitled only from the lender selling the participation and only upon
receipt by the lender of the payments from the borrower. Many such loans are
secured, although some may be unsecured. Such loans may be in default at the
time of purchase. Loans that are fully secured offer the Fund more protection
than an unsecured loan in the event of non-payment of scheduled interest or
principal. However, there is no assurance that the liquidation of collateral
from a secured loan would satisfy the corporate borrower's obligation, or that
the collateral can be liquidated. Direct debt instruments may involve a risk of
loss in case of default or insolvency of the borrower and may offer less legal
protection to the Fund in the event of fraud or misrepresentation. In addition,
loan participations involve a risk of insolvency of the lending bank or other
financial intermediary. The markets in loans are not regulated by federal
securities laws or the Securities and Exchange Commission (the "Commission").
As in the case of other high yield investments, such corporate loans
may be rated in the lower rating categories of the established rating services
(Ba or lower by Moody's or BB or lower by S&P), or may be unrated investments
considered by Calamos to be of comparable quality. As in the case of other high
yield investments, such corporate loans can be expected to provide higher yields
than lower yielding, higher rated fixed income securities, but may be subject to
greater risk of loss of principal and income. There are, however, some
significant differences between corporate loans and high yield bonds. Corporate
loan obligations are frequently secured by pledges of liens and security
interests in the assets of the borrower, and the holders of corporate loans are
frequently the beneficiaries of debt service subordination provisions imposed on
the borrower's bondholders. These arrangements are designed to give corporate
loan investors preferential treatment over high yield investors in the event of
a deterioration in the credit quality of the issuer. Even when these
arrangements exist, however, there can be no assurance that the borrowers of the
corporate loans will repay principal and/or pay interest in full. Corporate
loans generally bear interest at rates set at a margin above a generally
recognized base lending rate that may fluctuate on a day-to-day basis, in the
case of the prime rate of a U.S. bank, or which may be adjusted on set dates,
typically 30 days but generally not more than one year, in the case of the
London Interbank Offered Rate. Consequently, the value of corporate loans held
by the Fund may be expected to fluctuate significantly less than the value of
other fixed rate high yield instruments as a result of changes in the interest
rate environment. On the other hand, the secondary dealer market for certain
corporate loans may not be as well developed as the secondary dealer market for
high yield bonds, and therefore presents increased market risk relating to
liquidity and pricing concerns.
SYNTHETIC FOREIGN MONEY MARKET POSITIONS. The Fund may invest in money
market instruments denominated in foreign currencies. In addition to, or in lieu
of, such direct investment, the Fund may construct a synthetic foreign money
market position by (a) purchasing a money market instrument denominated in one
currency, generally U.S. dollars, and (b) concurrently entering into a forward
contract to deliver a corresponding amount of that currency in exchange for a
different currency on a future date and at a specified rate of exchange. For
example, a synthetic money market position in Japanese yen could be constructed
by purchasing a U.S. dollar money market instrument, and entering concurrently
into a forward contract to deliver a corresponding amount of U.S. dollars in
exchange for Japanese yen on a specified date and at a specified rate of
exchange. Because of the availability of a variety of highly liquid short-term
U.S. dollar money market instruments, a synthetic money market position
utilizing such U.S. dollar instruments may offer greater liquidity than direct
investment in foreign currency and a concurrent construction of a synthetic
position in such foreign currency, in terms of both income yield and gain or
loss from changes in currency exchange rates, in general should be similar, but
would not be identical because the components of the alternative investments
would not be identical.
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DEBT OBLIGATIONS OF NON-U.S. GOVERNMENTS. An investment in debt
obligations of non-U.S. governments and their political subdivisions (sovereign
debt) involves special risks that are not present in corporate debt obligations.
The non-U.S. issuer of the sovereign debt or the non-U.S. governmental
authorities that control the repayment of the debt may be unable or unwilling to
repay principal or interest when due, and the Fund may have limited recourse in
the event of a default. During periods of economic uncertainty, the market
prices of sovereign debt may be more volatile than prices of debt obligations of
U.S. issuers. In the past, certain non-U.S. countries have encountered
difficulties in servicing their debt obligations, withheld payments of principal
and interest and declared moratoria on the payment of principal and interest on
their sovereign debt.
A sovereign debtor's willingness or ability to repay principal and pay
interest in a timely manner may be affected by, among other factors, its cash
flow situation, the extent of its foreign currency reserves, the availability of
sufficient non-U.S. currency, the relative size of the debt service burden, the
sovereign debtor's policy toward its principal international lenders and local
political constraints.
Sovereign debtors may also be dependent on expected disbursements from
non-U.S. governments, multilateral agencies and other entities to reduce
principal and interest arrearages on their debt. The failure of a sovereign
debtor to implement economic reforms, achieve specified levels of economic
performance or repay principal or interest when due may result in the
cancellation of third-party commitments to lend funds to the sovereign debtor,
which may further impair such debtor's ability or willingness to service its
debts.
EURODOLLAR INSTRUMENTS AND SAMURAI AND YANKEE BONDS. The Fund may
invest in Eurodollar instruments and Samurai and Yankee bonds. Eurodollar
instruments are bonds of corporate and government issuers that pay interest and
principal in U.S. dollars but are issued in markets outside the United States,
primarily in Europe. Samurai bonds are yen-denominated bonds sold in Japan by
non-Japanese issuers. Yankee bonds are U.S. dollar-denominated bonds typically
issued in the U.S. by non-U.S. governments and their agencies and non-U.S. banks
and corporations. The Fund may also invest in Eurodollar Certificates of Deposit
("ECDs"), Eurodollar Time Deposits ("ETDs") and Yankee Certificates of Deposit
("Yankee CDs"). ECDs are U.S. dollar-denominated certificates of deposit issued
by non-U.S. branches of domestic banks; ETDs are U.S. dollar-denominated
deposits in a non-U.S. branch of a U.S. bank or in a non-U.S. bank; and Yankee
CDs are U.S. dollar-denominated certificates of deposit issued by a U.S. branch
of a non-U.S. bank and held in the U.S. These investments involve risks that are
different from investments in securities issued by U.S. issuers, including
potential unfavorable political and economic developments, non-U.S. withholding
or other taxes, seizure of non-U.S. deposits, currency controls, interest
limitations or other governmental restrictions that might affect payment of
principal or interest.
CONVERTIBLE SECURITIES. Convertible securities include any corporate
debt security or preferred stock that may be converted into underlying shares of
common stock. The common stock underlying convertible securities may be issued
by a different entity than the issuer of the convertible securities. Convertible
securities entitle the holder to receive interest payments paid on corporate
debt securities or the dividend preference on a preferred stock until such time
as the convertible security matures or is redeemed or until the holder elects to
exercise the conversion privilege. As a result of the conversion feature,
however, the interest rate or dividend preference on a convertible security is
generally less than would be the case if the securities were issued in
non-convertible form.
The value of convertible securities is influenced by both the yield of
non-convertible securities of comparable issuers and by the value of the
underlying common stock. The value of a convertible security viewed without
regard to its conversion feature (i.e., strictly on the basis of its yield) is
sometimes referred to as its "investment value." The investment value of the
convertible security typically will
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fluctuate inversely with changes in prevailing interest rates. However, at the
same time, the convertible security will be influenced by its "conversion
value," which is the market value of the underlying common stock that would be
obtained if the convertible security were converted. Conversion value fluctuates
directly with the price of the underlying common stock.
If, because of a low price of the common stock, the conversion value is
substantially below the investment value of the convertible security, the price
of the convertible security is governed principally by its investment value. If
the conversion value of a convertible security increases to a point that
approximates or exceeds its investment value, the value of the security will be
principally influenced by its conversion value. A convertible security will sell
at a premium over its conversion value to the extent investors place value on
the right to acquire the underlying common stock while holding a fixed income
security. Holders of convertible securities have a claim on the assets of the
issuer prior to the common stockholders, but may be subordinated to holders of
similar non-convertible securities of the same issuer.
SYNTHETIC CONVERTIBLE INSTRUMENTS. Calamos may establish a "synthetic"
convertible instrument by combining fixed income securities with the right to
acquire equity securities. In establishing a synthetic instrument, the Fund may
pool a basket of fixed-income securities and a basket of warrants or options
that produce the economic characteristics similar to a convertible security.
Within each basket of fixed-income securities and warrants or options, different
companies may issue the fixed-income and convertible components, which may be
purchased separately and at different times.
More flexibility is possible in the assembly of a synthetic convertible
instrument than in the purchase of a convertible security. Although synthetic
convertible instruments may be selected where the two components are issued by a
single issuer, thus making the synthetic convertible instrument similar to the
true convertible security, the character of a synthetic convertible instrument
allows the combination of components representing distinct issuers when Calamos
believes that such a combination would better promote the Fund's investment
objective. A synthetic convertible instrument also is a more flexible investment
in that its two components may be purchased separately. For example, the Fund
may purchase a warrant for inclusion in a synthetic convertible instrument but
temporarily hold short-term investments while postponing the purchase of a
corresponding bond pending development of more favorable market conditions.
A holder of a synthetic convertible instrument faces the risk of a
decline in the price of the instrument or the level of the index involved in the
convertible component, causing a decline in the value of the call option or
warrant purchased to create the synthetic convertible instrument. Should the
price of the stock fall below the exercise price and remain there throughout the
exercise period, the entire amount paid for the call option or warrant would be
lost. Because a synthetic convertible instrument includes the fixed-income
component as well, the holder of a synthetic convertible instrument also faces
the risk that interest rates will rise, causing a decline in the value of the
fixed-income instrument.
The Fund may also purchase synthetic convertible instruments
manufactured by other parties, including convertible structured notes.
Convertible structured notes are fixed income debentures linked to equity, and
are typically issued by investment banks. Convertible structured notes have the
attributes of a convertible security, however, the investment bank that issued
the convertible note assumes the credit risk associated with the investment,
rather than the issuer of the underlying common stock into which the note is
convertible.
LENDING OF PORTFOLIO SECURITIES. The Fund may lend its portfolio
securities to broker-dealers and banks. Any such loan must be continuously
secured by collateral in cash or cash equivalents maintained on a current basis
in an amount at least equal to the market value of the securities loaned by the
Fund. The Fund would continue to receive the equivalent of the interest or
dividends paid by the issuer on the securities loaned, and would also receive an
additional return that may be in the form of a fixed fee or a
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percentage of the collateral. The Fund may pay reasonable fees to persons
unaffiliated with the Fund for services in arranging these loans. The Fund would
have the right to call the loan and obtain the securities loaned at any time on
notice of not more than five business days. The Fund would not have the right to
vote the securities during the existence of the loan but would call the loan to
permit voting of the securities, if, in Calamos' judgment, a material event
requiring a shareholder vote would otherwise occur before the loan was repaid.
In the event of bankruptcy or other default of the borrower, the Fund could
experience both delays in liquidating the loan collateral or recovering the
loaned securities and losses, including (a) possible decline in the value of the
collateral or in the value of the securities loaned during the period while the
Fund seeks to enforce its rights thereto, (b) possible subnormal levels of
income and lack of access to income during this period, and (c) expenses of
enforcing its rights. In an effort to reduce these risks, Calamos will monitor
the creditworthiness of the firms to which the Fund lends securities.
OPTIONS ON SECURITIES, INDEXES AND CURRENCIES. The Fund may seek to
generate income from option premiums by writing (selling) options (with an
aggregate notional value of up to 33% of the value of the Fund's managed
assets). The Fund may write (sell) call options (i) on a portion of the equity
securities (including securities that are convertible into equity securities) in
the Fund's portfolio and (ii) on broad-based securities indices (such as the S&P
500 or MSCI EAFE) or certain ETFs (exchange traded funds) that trade like common
stocks but seek to replicate such market indices. The Fund may also write (sell)
both put and call options on certain of the equity securities (including
securities that are convertible into equity securities) in the Fund's portfolio
where the Fund will own an equity security and simultaneously, write call
options and write put options on that security. This strategy may produce a
considerably higher return than solely writing call options, but involves a
higher degree of risk and potential volatility.
Calamos may also utilize covered put option collars, in which the Fund
purchases a put option and simultaneously sells a put option on the same
security at a different strike price. The put option collars in which the Fund
will invest are sometimes referred to as debit spreads and credit spreads
(including strike spreads and time spreads). When the Fund engages in debit
spreads the Fund will pay a higher premium for the put option it purchases than
it receives for the put option it writes. In so doing, the Fund hopes to realize
current gains from favorable market price movements in relation to the exercise
price of the option it holds. The Fund's maximum potential profit would be equal
to the difference between the two exercise prices, less the net premium paid.
When the Fund engages in credit spreads the Fund will receive more in premiums
for the option it writes than it will pay for the option it purchases. In so
doing, the Fund hopes to realize current gains in the form of premiums. The
Fund's maximum potential profit would be equal to the net premium received for
the spread. The Fund's maximum potential loss would be limited to the difference
between the two exercise prices, less the net premium received.
In addition, to seek to offset some of the risk of a large potential
decline in the event the overall stock market has a sizeable short-term or
intermediate-term decline, the Fund may also, to a limited extent (with an
aggregate notional value of not more than 5% of the value of the Fund's managed
assets) purchase put options on broad-based securities indices (such as the S&P
500 or MSCI EAFE) or certain ETFs (exchange traded funds) that trade like common
stocks but seek to replicate such market indices.
The Fund may also purchase and sell put options and call options on
foreign currencies. The Fund may purchase agreements, sometimes called cash
puts, that may accompany the purchase of a new issue of bonds from a dealer.
A put option gives the purchaser of the option, upon payment of a
premium, the right to sell, and the writer the obligation to buy, the underlying
security, index, currency or other instrument at the exercise price. For
instance, the Fund's purchase of a put option on a security might be designed to
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protect its holdings in the underlying instrument (or, in some
cases, a similar instrument) against a substantial decline in the market value
by giving the Fund the right to sell such instrument at the option exercise
price. A call option, upon payment of a premium, gives the purchaser of the
option the right to buy, and the seller the obligation to sell, the underlying
instrument at the exercise price. The Fund's purchase of a call option on a
security, financial future, index, currency or other instrument might be
intended to protect a fund against an increase in the price of the underlying
instrument that it intends to purchase in the future by fixing the price at
which it may purchase such instrument.
The Fund is authorized to purchase and sell exchange listed options and
over-the-counter options ("OTC options"). Exchange listed options are issued by
a regulated intermediary such as the Options Clearing Corporation ("OCC"), which
guarantees the performance of the obligations of the parties to such options. In
addition, the Fund may purchase instruments structured by broker-dealers or
investment banks that package or possess economic characteristics of options.
See "Investment Objective and Policies -- Structured Products" below. The
discussion below uses the OCC as an example, but is also applicable to other
financial intermediaries.
With certain exceptions, OCC issued and exchange listed options
generally settle by physical delivery of the underlying security or currency,
although in the future cash settlement may become available. Index options and
Eurodollar instruments are cash settled for the net amount, if any, by which the
option is "in-the-money" (i.e., where the value of the underlying instrument
exceeds, in the case of a call option, or is less than, in the case of a put
option, the exercise price of the option) at the time the option is exercised.
Frequently, rather than taking or making delivery of the underlying instrument
through the process of exercising the option, listed options are closed by
entering into offsetting purchase or sale transactions that do not result in
ownership of the new option.
OTC options are purchased from or sold to securities dealers, financial
institutions or other parties ("Counterparties") through direct bilateral
agreement with the Counterparty. In contrast to exchange listed options, which
generally have standardized terms and performance mechanics, all the terms of an
OTC option, including such terms as method of settlement, term, exercise price,
premium, guarantees and security, are set by negotiation of the parties. The
Fund may sell OTC options (other than OTC currency options) that are subject to
a buy-back provision permitting the Fund to require the Counterparty to sell the
option back to a fund at a formula price within seven days. The Fund expects
generally to enter into OTC options that have cash settlement provisions,
although it is not required to do so. The staff of the Commission currently
takes the position that OTC options purchased by a fund, and portfolio
securities "covering" the amount of a fund's obligation pursuant to an OTC
option sold by it (or the amount of assets equal to the formula price for the
repurchase of the option, if any, less the amount by which the option is in the
money) are illiquid.
The Fund may also purchase and sell options on securities indices and
other financial indices. Options on securities indices and other financial
indices are similar to options on a security or other instrument except that,
rather than settling by physical delivery of the underlying instrument, they
settle by cash settlement, i.e., an option or an index gives the holder the
right to receive, upon exercise of the option, an amount of cash if the closing
level of the index upon which the option is based exceeds, in the case of a
call, or is less than, in the case of a put, the exercise price of the option
(except if, in the case of an OTC option, physical delivery is specified). This
amount of cash is equal to the excess of the closing price of the index over the
exercise price of the option, which also may be multiplied by a formula value.
The seller of the option is obligated, in return for the premium received, to
make delivery of this amount. The gain or loss on an option on an index depends
on price movements in the instruments making upon the market, market segment,
industry or other composite on which the underlying index is based, rather than
price movements in individual securities, as is the case with respect to options
on securities.
S-13
The Fund will write call options and put options only if they are
"covered." For example, a call option written by the Fund will require the Fund
to hold the securities subject to the call (or securities convertible into the
needed securities without additional consideration) or to segregate cash or
liquid assets sufficient to purchase and deliver the securities if the call is
exercised. A call option sold by a fund on an index will require the Fund to own
portfolio securities that correlate with the index or to segregate cash or
liquid assets equal to the excess of the index value over the exercise price on
a current basis. A put option written by the Fund requires the Fund to segregate
cash or liquid assets equal to the exercise price.
OTC options entered into by the Fund will generally provide for cash
settlement. As a result, when the Fund sells these instruments it will only
segregate an amount of cash or liquid assets equal to its accrued net
obligations, as there is no requirement for payment or delivery of amounts in
excess of the net amount. These amounts will equal 100% of the exercise price in
the case of a non cash-settled put, the same as an OCC guaranteed listed option
sold by the Fund, or the in-the-money amount plus any sell-back formula amount
in the case of a cash-settled put or call. In addition, when the Fund sells a
call option on an index at a time when the in-the-money amount exceeds the
exercise price, the Fund will segregate, until the option expires or is closed
out, cash or cash equivalents equal in value to such excess. OTC options other
than those above may also settle with physical delivery, or with an election of
either physical delivery or cash settlement and the Fund will segregate an
amount of cash or liquid assets equal to the full value of the option. OTC
options settling with physical delivery, or with an election of either physical
delivery or cash settlement, will be treated the same as other options settling
with physical delivery.
If an option written by the Fund expires, the Fund generally realizes a
capital gain equal to the premium received at the time the option was written.
If an option purchased by the Fund expires, the Fund generally realizes a
capital loss equal to the premium paid.
The Fund will realize a capital gain from a closing purchase
transaction if the cost of the closing option is less than the premium received
from writing the option, or, if it is more, the Fund will realize a capital
loss. If the premium received from a closing sale transaction is more than the
premium paid to purchase the option, the Fund will realize a capital gain or, if
it is less, the Fund will realize a capital loss. The principal factors
affecting the market value of a put or a call option include supply and demand,
interest rates, the current market price of the underlying security or index in
relation to the exercise price of the option, the volatility of the underlying
security or index, and the time remaining until the expiration date.
A put or call option purchased by the Fund is an asset of the Fund,
valued initially at the premium paid for the option. The premium received for an
option written by the Fund is recorded as a deferred credit. The value of an
option purchased or written is marked-to-market daily and is valued at the
closing price on the exchange on which it is traded or, if not traded on an
exchange or no closing price is available, at the mean between the last bid and
asked prices.
RISKS ASSOCIATED WITH OPTIONS. There are several risks associated with
transactions in options. For example, there are significant differences between
the securities markets, the currency markets and the options markets that could
result in an imperfect correlation among these markets, causing a given
transaction not to achieve its objectives. A decision as to whether, when and
how to use options involves the exercise of skill and judgment, and even a
well-conceived transaction may be unsuccessful to some degree because of market
behavior or unexpected events. The ability of the Fund to utilize options
successfully will depend on Calamos' ability to predict pertinent market
investments, which cannot be assured.
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The Fund's ability to close out its position as a purchaser or seller
of an OCC or exchange listed put or call option is dependent, in part, upon the
liquidity of the option market. Among the possible reasons for the absence of a
liquid option market on an exchange are: (i) insufficient trading interest in
certain options; (ii) restrictions on transactions imposed by an exchange; (iii)
trading halts, suspensions or other restrictions imposed with respect to
particular classes or series of options or underlying securities including
reaching daily price limits; (iv) interruption of the normal operations of the
OCC or an exchange; (v) inadequacy of the facilities of an exchange or OCC to
handle current trading volume; or (vi) a decision by one or more exchanges to
discontinue the trading of options (or a particular class or series of options),
in which event the relevant market for that option on that exchange would cease
to exist, although outstanding options on that exchange would generally continue
to be exercisable in accordance with their terms. If the Fund were unable to
close out an option that it has purchased on a security, it would have to
exercise the option in order to realize any profit or the option would expire
and become worthless. If the Fund were unable to close out a covered call option
that it had written on a security, it would not be able to sell the underlying
security until the option expired. As the writer of a covered call option on a
security, the Fund foregoes, during the option's life, the opportunity to profit
from increases in the market value of the security covering the call option
above the sum of the premium and the exercise price of the call. As the writer
of a covered call option on a foreign currency, the Fund foregoes, during the
option's life, the opportunity to profit from currency appreciation.
The hours of trading for listed options may not coincide with the hours
during which the underlying financial instruments are traded. To the extent that
the option markets close before the markets for the underlying financial
instruments, significant price and rate movements can take place in the
underlying markets that cannot be reflected in the option markets until the next
trading day.
Unless the parties provide for it, there is no central clearing or
guaranty function in an OTC option. As a result, if the Counterparty (as
described above under "Options on Securities, Indexes and Currencies") fails to
make or take delivery of the security, currency or other instrument underlying
an OTC option it has entered into with a fund or fails to make a cash settlement
payment due in accordance with the terms of that option, a fund will lose any
premium it paid for the option as well as any anticipated benefit of the
transaction. Accordingly, Calamos must assess the creditworthiness of each such
Counterparty or any guarantor or credit enhancement of the Counterparty's credit
to determine the likelihood that the terms of the OTC option will be satisfied.
The Fund will engage in OTC option transactions only with U.S. government
securities dealers recognized by the Federal Reserve Bank of New York as
"primary dealers" or broker/dealers, domestic or foreign banks or other
financial institutions that have received (or the guarantors of the obligation
of which have received) a short-term credit rating of A-1 from S&P or P-1 from
Moody's or an equivalent rating from any nationally recognized statistical
rating organization ("NRSRO") or, in the case of OTC currency transactions, are
determined to be of equivalent credit quality by Calamos.
The Fund may purchase and sell call options on securities indices and
currencies. All calls sold by the Fund must be "covered." Even though the Fund
will receive the option premium to help protect it against loss, a call sold by
the Fund exposes the Fund during the term of the option to possible loss of
opportunity to realize appreciation in the market price of the underlying
security or instrument and may require a fund to hold a security or instrument
that it might otherwise have sold. The Fund may purchase and sell put options on
securities indices and currencies. In selling put options, there is a risk that
the Fund may be required to buy the underlying security at a disadvantageous
price above the market price.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS. The Fund may use
interest rate futures contracts, index futures contracts and foreign currency
futures contracts. An interest rate, index or foreign
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currency futures contract provides for the future sale by one party and purchase
by another party of a specified quantity of a financial instrument or the cash
value of an index(1) at a specified price and time. A public market exists in
futures contracts covering a number of indexes (including, but not limited to:
the S&P 500 Index, the Russell 2000 Index, the Value Line Composite Index, and
the New York Stock Exchange Composite Index) as well as financial instruments
(including, but not limited to: U.S. Treasury bonds, U.S. Treasury notes,
Eurodollar certificates of deposit and foreign currencies). Other index and
financial instrument futures contracts are available and it is expected that
additional futures contracts will be developed and traded.
The Fund may purchase and write call and put futures options. Futures
options possess many of the same characteristics as options on securities,
indexes and foreign currencies (discussed above). A futures option gives the
holder the right, in return for the premium paid, to assume a long position
(call) or short position (put) in a futures contract at a specified exercise
price at any time during the period of the option. Upon exercise of a call
option, the holder acquires a long position in the futures contract and the
writer is assigned the opposite short position. In the case of a put option, the
opposite is true. The Fund might, for example, use futures contracts to hedge
against or gain exposure to fluctuations in the general level of stock prices,
anticipated changes in interest rates or currency fluctuations that might
adversely affect either the value of the Fund's securities or the price of the
securities that the Fund intends to purchase. Although other techniques could be
used to reduce or increase the Fund's exposure to stock price, interest rate and
currency fluctuations, the Fund may be able to achieve its desired exposure more
effectively and perhaps at a lower cost by using futures contracts and futures
options.
The Fund will only enter into futures contracts and futures options
that are standardized and traded on an exchange, board of trade or similar
entity, or quoted on an automated quotation system.
The success of any futures transaction depends on the investment
manager correctly predicting changes in the level and direction of stock prices,
interest rates, currency exchange rates and other factors. Should those
predictions be incorrect, the Fund's return might have been better had the
transaction not been attempted; however, in the absence of the ability to use
futures contracts, the investment manager might have taken portfolio actions in
anticipation of the same market movements with similar investment results, but,
presumably, at greater transaction costs.
When a purchase or sale of a futures contract is made by the Fund, the
Fund is required to deposit with its custodian (or broker, if legally permitted)
a specified amount of cash or U.S. Government securities or other securities
acceptable to the broker ("initial margin"). The margin required for a futures
contract is set by the exchange on which the contract is traded and may be
modified during the term of the contract, although the Fund's broker may require
margin deposits in excess of the minimum required by the exchange. The initial
margin is in the nature of a performance bond or good faith deposit on the
futures contract, which is returned to the Fund upon termination of the
contract, assuming all contractual obligations have been satisfied. The Fund
expects to earn interest income on its initial margin deposits. A futures
contract held by the Fund is valued daily at the official settlement price of
the exchange on which it is traded. Each day the Fund pays or receives cash,
called "variation margin," equal to the daily change in value of the futures
contract. This process is known as "marking-to-market." Variation margin
----------------------------------
(1) A futures contract on an index is an agreement pursuant to which two parties
agree to take or make delivery of an amount of cash equal to the difference
between the value of the index at the close of the last trading day of the
contract and the price at which the index contract was originally written.
Although the value of a securities index is a function of the value of certain
specified securities, no physical delivery of those securities is made.
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paid or received by the Fund does not represent a borrowing or loan by the Fund
but is instead settlement between the Fund and the broker of the amount one
would owe the other if the futures contract had expired at the close of the
previous day. In computing daily net asset value, the Fund will mark-to-market
its open futures positions.
The Fund is also required to deposit and maintain margin with respect
to put and call options on futures contracts written by it. Such margin deposits
will vary depending on the nature of the underlying futures contract (and the
related initial margin requirements), the current market value of the option and
other futures positions held by the Fund.
Although some futures contracts call for making or taking delivery of
the underlying securities, usually these obligations are closed out prior to
delivery by offsetting purchases or sales of matching futures contracts (same
exchange, underlying security or index, and delivery month). If an offsetting
purchase price is less than the original sale price, the Fund engaging in the
transaction realizes a capital gain, or if it is more, the Fund realizes a
capital loss. Conversely, if an offsetting sale price is more than the original
purchase price, the Fund engaging in the transaction realizes a capital gain, or
if it is less, the Fund realizes a capital loss. The transaction costs must also
be included in these calculations.
RISKS ASSOCIATED WITH FUTURES. There are several risks associated with
the use of futures contracts and futures options. A purchase or sale of a
futures contract may result in losses in excess of the amount invested in the
futures contract. In trying to increase or reduce market exposure, there can be
no guarantee that there will be a correlation between price movements in the
futures contract and in the portfolio exposure sought. In addition, there are
significant differences between the securities and futures markets that could
result in an imperfect correlation between the markets, causing a given
transaction not to achieve its objectives. The degree of imperfection of
correlation depends on circumstances such as: variations in speculative market
demand for futures, futures options and the related securities, including
technical influences in futures and futures options trading and differences
between the securities markets and the securities underlying the standard
contracts available for trading. For example, in the case of index futures
contracts, the composition of the index, including the issuers and the weighing
of each issue, may differ from the composition of the Fund's portfolio, and, in
the case of interest rate futures contracts, the interest rate levels,
maturities and creditworthiness of the issues underlying the futures contract
may differ from the financial instruments held in the Fund's portfolio. A
decision as to whether, when and how to use futures contracts involves the
exercise of skill and judgment, and even a well-conceived transaction may be
unsuccessful to some degree because of market behavior or unexpected stock price
or interest rate trends.
Futures exchanges may limit the amount of fluctuation permitted in
certain futures contract prices during a single trading day. The daily limit
establishes the maximum amount that the price of a futures contract may vary
either up or down from the previous day's settlement price at the end of the
current trading session. Once the daily limit has been reached in a futures
contract subject to the limit, no more trades may be made on that day at a price
beyond that limit. The daily limit governs only price movements during a
particular trading day and therefore does not limit potential losses because the
limit may work to prevent the liquidation of unfavorable positions. For example,
futures prices have occasionally moved to the daily limit for several
consecutive trading days with little or no trading, thereby preventing prompt
liquidation of positions and subjecting some holders of futures contracts to
substantial losses. Stock index futures contracts are not normally subject to
such daily price change limitations.
There can be no assurance that a liquid market will exist at a time
when the Fund seeks to close out a futures or futures option position. The Fund
would be exposed to possible loss on the position during the interval of
inability to close, and would continue to be required to meet margin
requirements until the position is closed. In addition, many of the contracts
discussed above are relatively new
S-17
instruments without a significant trading history. As a result, there can be no
assurance that an active secondary market will develop or continue to exist.
LIMITATIONS ON OPTIONS AND FUTURES. If other options, futures contracts
or futures options of types other than those described herein are traded in the
future, the Fund may also use those investment vehicles, provided the Board of
Trustees determines that their use is consistent with the Fund's investment
objective.
When purchasing a futures contract or writing a put option on a futures
contract, the Fund must maintain with its custodian (or broker, if legally
permitted) cash or cash equivalents (including any margin) equal to the market
value of such contract. When writing a call option on a futures contract, the
Fund similarly will maintain with its custodian cash or cash equivalents
(including any margin) equal to the amount by which such option is in-the-money
until the option expires or is closed by the Fund.
The Fund may not maintain open short positions in futures contracts,
call options written on futures contracts or call options written on indexes if,
in the aggregate, the market value of all such open positions exceeds the
current value of the securities in its portfolio, plus or minus unrealized gains
and losses on the open positions, adjusted for the historical relative
volatility of the relationship between the portfolio and the positions. For this
purpose, to the extent the Fund has written call options on specific securities
in its portfolio, the value of those securities will be deducted from the
current market value of the securities portfolio.
The Fund intends to segregate assets or otherwise "cover" its
interests in options and futures in accordance with regulatory requirements as
set forth in interpretive releases and no-action letters issued by the staff of
the Commission.
In order to comply with Commodity Futures Trading Commission ("CFTC")
Regulation 4.5 and thereby avoid being deemed a "commodity pool operator," a
Fund may use commodity futures or commodity options contracts for either risk
management or speculative purposes without any limitation on the notional value
of such positions. The Fund has qualified for an exemption from registration as
a "commodity pool operator" pursuant to CFTC Regulation 4.5 and, therefore, is
not subject to registration or regulation under the Commodity Exchange Act, as
amended.
WARRANTS. The Fund may invest in warrants. A warrant is a right to
purchase common stock at a specific price (usually at a premium above the market
value of the underlying common stock at time of issuance) during a specified
period of time. A warrant may have a life ranging from less than a year to
twenty years or longer, but a warrant becomes worthless unless it is exercised
or sold before expiration. In addition, if the market price of the common stock
does not exceed the warrant's exercise price during the life of the warrant, the
warrant will expire worthless. Warrants have no voting rights, pay no dividends
and have no rights with respect to the assets of the corporation issuing them.
The percentage increase or decrease in the value of a warrant may be greater
than the percentage increase or decrease in the value of the underlying common
stock.
PORTFOLIO TURNOVER. Although the Fund does not purchase securities with
a view to rapid turnover, there are no limitations on the length of time that
portfolio securities must be held. Portfolio turnover can occur for a number of
reasons, including calls for redemption, general conditions in the securities
markets, more favorable investment opportunities in other securities, or other
factors relating to the desirability of holding or changing a portfolio
investment. The portfolio turnover rates may vary greatly from year to year. A
high rate of portfolio turnover in the Fund would result in increased
transaction expense, which must be borne by that Fund. High portfolio turnover
may also result in the realization of capital gains or losses and, to the extent
net short-term capital gains are realized, any distributions resulting from such
gains will be considered ordinary income for federal income tax purposes.
SHORT SALES. The Fund may from time to time sell securities short to
enhance income and protect against market risk by hedging a portion of the
equity risk inherent in the Fund's portfolio. A short sale is
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effected when Calamos believes that the price of a security will decline, and
involves the sale of securities that the Fund does not own, in the hope of
purchasing the same securities at a later date at a lower price. There can be no
assurance that the Fund will be able to close out a short position (i.e.,
purchase the same securities) at any particular time or at an acceptable or
advantageous price. To make delivery to the buyer, the Fund must borrow the
securities from a broker-dealer through which the short sale is executed, and
the broker-dealer delivers the securities, on behalf of the Fund, to the buyer.
The broker-dealer is entitled to retain the proceeds from the short sale until
the Fund delivers to it the securities sold short. In addition, a Fund is
required to pay to the broker-dealer the amount of any dividends or interest
paid on the securities sold short.
To secure its obligation to deliver to the broker-dealer the securities
sold short, the Fund must segregate an amount of cash or liquid securities with
its custodian equal to any excess of the current market value of the securities
sold short over any cash or liquid securities deposited as collateral with the
broker in connection with the short sale (not including the proceeds of the
short sale). As a result of that requirement, the Fund will not gain any
leverage merely by selling short, except to the extent that it earns interest or
other income or gains on the segregated cash or liquid securities while also
being subject to the possibility of gain or loss from the securities sold short.
The Fund is said to have a short position in the securities sold until
it delivers to the broker-dealer the securities sold, at which time the Fund
receives the proceeds of the short sale. The Fund will normally close out a
short position by purchasing on the open market and delivering to the
broker-dealer an equal amount of the securities sold short.
The Fund will realize a gain if the price of the securities declines
between the date of the short sale and the date on which the Fund purchases
securities to replace the borrowed securities. On the other hand, a Fund will
incur a loss if the price of the securities increases between those dates. The
amount of any gain will be decreased and the amount of any loss increased by any
premium or interest that the Fund may be required to pay in connection with the
short sale. It should be noted that possible losses from short sales differ from
those that could arise from a cash investment in a security in that losses from
a short sale may be limitless, while the losses from a cash investment in a
security cannot exceed the total amount of the investment in the security.
There is also a risk that securities borrowed by the Fund and delivered
to the buyer of the securities sold short will need to be returned to the
broker-dealer on short notice. If the request for the return of securities
occurs at a time when other short sellers of the security are receiving similar
requests, a "short squeeze" can occur, meaning that the Fund might be compelled,
at the most disadvantageous time, to replace the borrowed securities with
securities purchased on the open market, possibly at prices significantly in
excess of the proceeds received earlier.
Rule 10a-1 under the Securities Exchange Act of 1934 provides that
exchange-traded securities can be sold short only at a price that is higher than
the last trade or the same as the last trade price if that price is higher than
the price of the previous reported trade. The requirements of Rule 10a-1 can
delay, or in some cases prevent, execution of short sales, resulting in
opportunity costs and increased exposure to market action.
The Fund may also make short sales "against the box," meaning that at
all times when a short position is open the Fund owns an equal amount of such
securities or securities convertible into or exchangeable, without payment of
further consideration, for securities of the same issue as, and in an amount
equal to, the securities sold short. Short sales "against the box" result in a
"constructive sale" and require the Fund to recognize any taxable gain unless an
exception to the constructive sale rule applies.
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The Fund will not make a short sale of securities (other than a short
sale "against the box"), if more than 20% of its net assets would be deposited
with brokers as collateral or allocated to segregated accounts in connection
with all outstanding short sales (other than short sales "against the box").
In addition to enabling the Fund to hedge against market risk, short
sales may afford the Fund an opportunity to earn additional current income to
the extent it is able to enter into arrangements with broker-dealers through
which the short sales are executed to receive income with respect to the
proceeds of the short sales during the period the Fund's short positions remain
open. The Funds believe that some broker-dealers may be willing to enter into
such arrangements, but there is no assurance that they will be able to enter
into such arrangements to the desired degree.
SWAPS, CAPS, FLOORS AND COLLARS. The Fund may enter into interest rate,
currency, index, credit default and other swaps and the purchase or sale of
related caps, floors and collars. The Fund expects to enter into these
transactions primarily as a hedge to preserve a return or spread on a particular
investment or portion of its portfolio, to protect against currency
fluctuations, as a duration management technique or to protect against any
increase in the price of securities the Fund anticipates purchasing at a later
date. The Fund will not sell interest rate caps or floors where it does not own
securities or other instruments providing the income stream the Fund may be
obligated to pay. Interest rate swaps involve the exchange by the Fund with
another party of their respective commitments to pay or receive interest, e.g.,
an exchange of floating rate payments for fixed rate payments with respect to a
notional amount of principal. A currency swap is an agreement to exchange cash
flows on a notional amount of two or more currencies based on the relative value
differential among them and an index swap is an agreement to swap cash flows on
a notional amount based on changes in the values of the reference indices. The
purchase of a cap entitles the purchaser to receive payments on a notional
principal amount from the party selling such cap to the extent that a specified
index exceeds a predetermined interest rate or amount. The purchase of a floor
entitles the purchaser to receive payments on a notional principal amount from
the party selling such floor to the extent that a specified index falls below a
predetermined interest rate or amount. A collar is a combination of a cap and a
floor that preserves a certain return within a predetermined range of interest
rates or values.
The Fund will usually enter into swaps on a net basis, i.e., the two
payment streams are netted out in a cash settlement on the payment date or dates
specified in the instrument, with the Fund receiving or paying, as the case may
be, only the net amount of the two payments. The Fund intends to maintain in a
segregated account with its custodian cash or liquid securities having a value
at least equal to the Fund's net payment obligations under any swap transaction,
marked-to-market daily. Inasmuch as the Fund will segregate assets (or enter
into offsetting positions) to cover its obligations under swaps, Calamos and the
Fund believe such obligations do not constitute senior securities under the
Investment Company Act of 1940 (the "1940 Act") and, accordingly, will not treat
them as being subject to its borrowing restrictions.
The Fund will not enter into any swap, cap, floor or collar transaction
unless, at the time of entering into such transaction, the Fund believes that
the Counterparty has the financial resources to honor its obligation under the
transaction. Further, Calamos will continually monitor the financial stability
of a Counterparty to a swap or cap transaction in an effort to proactively
protect the Fund's investments. If there is a default by the Counterparty, the
Fund may have contractual remedies pursuant to the agreements related to the
transaction. The use of swaps and caps is a highly specialized activity that
involves investment techniques and risks different from those associated with
ordinary portfolio security transactions. The Fund's use of swaps or caps could
enhance or harm the overall performance on the common shares. For example, to
the extent there is a decline in interest rates, the value of the interest rate
swap or cap could decline, and could result in a decline in the net asset value
of the common shares. In addition, if short-term interest rates are lower than
the Fund's fixed rate of payment on the interest rate swap, the swap will reduce
common share net earnings. If, on the other hand, short-term interest rates are
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higher than the fixed rate of payment on the interest rate swap, the swap will
enhance common share net earnings. Buying caps could enhance the performance of
the common shares by providing a maximum leverage expense. Buying caps could
also decrease the net earnings of the common shares in the event that the
premium paid by the Fund to the Counterparty exceeds the additional amount the
Fund would have been required to pay had it not entered into the cap agreement.
The Fund has no current intention of selling swaps or caps.
Swaps and caps do not involve the delivery of securities or other
underlying assets or principal. Accordingly, the risk of loss with respect to
swaps is limited to the net amount of payments that the Fund is contractually
obligated to make. If the Counterparty defaults, the Fund would not be able to
use the anticipated net receipts under the swap or cap to offset the payments
required of the Fund. Depending on whether the Fund would be entitled to receive
net payments from the Counterparty on the swap or cap, such a default could
negatively impact the performance of the common shares.
In addition, at the time the swap or cap transaction reaches its
scheduled termination date, there is a risk that the Fund would not be able to
obtain a replacement transaction or that the terms of the replacement would not
be as favorable as on the expiring transaction. If this occurs, it could have a
negative impact on the performance of the Fund's common shares.
The Fund may choose or be required to redeem some or all of the
preferred shares or prepay any borrowings. This redemption would likely result
in the Fund seeking to terminate early all or a portion of any swap or cap
transaction. Such early termination of a swap could result in termination
payment by or to the Fund. An early termination of a cap could result in a
termination payment to the Fund.
The swap market has grown substantially in recent years with a large
number of banks and investment banking firms acting both as principals and as
agents utilizing standardized swap documentation. As a result, the swap market
has become relatively liquid, however, some swaps may be considered illiquid.
Caps, floors and collars are more recent innovations for which standardized
documentation has not yet been fully developed and, accordingly, they are less
liquid than swaps.
STRUCTURED PRODUCTS. The Fund may invest in interests in entities
organized and operated for the purpose of restructuring the investment
characteristics of certain other investments. This type of restructuring
involves the deposit with or purchase by an entity, such as a corporation or
trust, of specified instruments and the issuance by that entity of one or more
classes of securities ("structured products") backed by, or representing
interests in, the underlying instruments. The term "structured products" as used
herein excludes synthetic convertibles and interest rate transactions. The cash
flow on the underlying instruments may be apportioned among the newly issued
structured products to create securities with different investment
characteristics such as varying maturities, payment priorities and interest rate
provisions, and the extent of the payments made with respect to structured
products is dependent on the extent of the cash flow on the underlying
instruments. The Fund may invest in structured products, which represent derived
investment positions based on relationships among different markets or asset
classes.
The Fund may also invest in other types of structured products,
including, among others, baskets of credit default swaps referencing a portfolio
of high-yield securities. A structured product may be considered to be leveraged
to the extent its interest rate varies by a magnitude that exceeds the magnitude
of the change in the index rate. Because they are linked to their underlying
markets or securities, investments in structured products generally are subject
to greater volatility than an investment directly in the underlying market or
security. Total return on the structured product is derived by linking return to
one or more characteristics of the underlying instrument. Because certain
structured products of the type in which the Fund may invest may involve no
credit enhancement, the credit risk of those structured products generally would
be equivalent to that of the underlying instruments. The Fund may invest in a
S-21
class of structured products that is either subordinated or unsubordinated to
the right of payment of another class. Subordinated structured products
typically have higher yields and present greater risks than unsubordinated
structured products. Although the Fund's purchase of subordinated structured
products would have similar economic effect to that of borrowing against the
underlying securities, the purchase will not be deemed to be leverage for
purposes of the Fund's limitations related to borrowing and leverage.
Certain issuers of structured products may be deemed to be "investment
companies" as defined in the 1940 Act. As a result, the Fund's investments in
these structured products may be limited by the restrictions contained in the
1940 Act. Structured products are typically sold in private placement
transactions, and there currently may be no active trading market for structured
products. As a result, certain structured products in which the Fund invests may
be deemed illiquid.
"WHEN-ISSUED" AND DELAYED DELIVERY SECURITIES AND REVERSE REPURCHASE
AGREEMENTS. The Fund may purchase securities on a when-issued or
delayed-delivery basis. Although the payment and interest terms of these
securities are established at the time the Fund enters into the commitment, the
securities may be delivered and paid for a month or more after the date of
purchase, when their value may have changed. The Fund makes such commitments
only with the intention of actually acquiring the securities, but may sell the
securities before settlement date if Calamos deems it advisable for investment
reasons. The Fund may utilize spot and forward foreign currency exchange
transactions to reduce the risk inherent in fluctuations in the exchange rate
between one currency and another when securities are purchased or sold on a
when-issued or delayed-delivery basis.
The Fund may enter into reverse repurchase agreements with banks and
securities dealers. A reverse repurchase agreement is a repurchase agreement in
which the Fund is the seller of, rather than the investor in, securities and
agrees to repurchase them at an agreed-upon time and price. Use of a reverse
repurchase agreement may be preferable to a regular sale and later repurchase of
securities because it avoids certain market risks and transaction costs.
At the time when the Fund enters into a binding obligation to purchase
securities on a when-issued basis or enters into a reverse repurchase agreement,
liquid assets (cash, U.S. Government securities or other "high-grade" debt
obligations) of the Fund having a value at least as great as the purchase price
of the securities to be purchased will be segregated on the books of the Fund
and held by the custodian throughout the period of the obligation. The use of
these investment strategies may increase net asset value fluctuation.
ILLIQUID SECURITIES. The Fund may invest up to 15% of its managed
assets in securities that, at the time of investment, are illiquid (determined
using the Commission's standard applicable to investment companies, i.e.,
securities that can not be disposed of within 7 days in the ordinary course of
business at approximately the value at which the Fund has valued the
securities). The Fund may also invest without limit in securities that have not
been registered for public sale, but that are eligible for purchase and sale by
certain qualified institutional buyers ("Rule 144A Securities"). Calamos, under
the supervision of the Board of Trustees, will determine whether securities
purchased under Rule 144A are illiquid (that is, not readily marketable) and
thus subject to the Fund's limit on investing in no more than 15% of its managed
assets in illiquid securities. Investments in Rule 144A Securities could have
the effect of increasing the amount of the Fund's assets invested in illiquid
securities if qualified institutional buyers are unwilling to purchase these
Rule 144A Securities.
Illiquid securities may be difficult to dispose of at a fair price at
the times when the Fund believes it is desirable to do so. The market price of
illiquid securities generally is more volatile than that of more liquid
securities, which may adversely affect the price that the Fund pays for or
recovers upon the sale of illiquid securities. Illiquid securities are also more
difficult to value and Calamos' judgment may play a
S-22
greater role in the valuation process. Investment of the Fund's assets in
illiquid securities may restrict the Fund's ability to take advantage of market
opportunities. The risks associated with illiquid securities may be particularly
acute in situations in which the Fund's operations require cash and could result
in the Fund borrowing to meet its short-term needs or incurring losses on the
sale of illiquid securities.
The Fund may invest in bonds, corporate loans, convertible securities,
preferred stocks and other securities that lack a secondary trading market or
are otherwise considered illiquid. Liquidity of a security relates to the
ability to easily dispose of the security and the price to be obtained upon
disposition of the security, which may be less than would be obtained for a
comparable more liquid security. Such investments may affect the Fund's ability
to realize the net asset value in the event of a voluntary or involuntary
liquidation of its assets.
TEMPORARY DEFENSIVE INVESTMENTS. The Fund may make temporary
investments without limitation when Calamos determines that a defensive position
is warranted. Such investments may be in money market instruments, consisting of
obligations of, or guaranteed as to principal and interest by, the U.S.
Government or its agencies or instrumentalities; certificates of deposit,
bankers' acceptances and other obligations of domestic banks having total assets
of at least $500 million and that are regulated by the U.S. Government, its
agencies or instrumentalities; commercial paper rated in the highest category by
a recognized rating agency; and repurchase agreements.
REPURCHASE AGREEMENTS. As part of its strategy for the temporary
investment of cash, the Fund may enter into "repurchase agreements" with member
banks of the Federal Reserve System or primary dealers (as designated by the
Federal Reserve Bank of New York) in such securities. A repurchase agreement
arises when the Fund purchases a security and simultaneously agrees to resell it
to the vendor at an agreed upon future date. The resale price is greater than
the purchase price, reflecting an agreed upon market rate of return that is
effective for the period of time the Fund holds the security and that is not
related to the coupon rate on the purchased security. Such agreements generally
have maturities of no more than seven days and could be used to permit the Fund
to earn interest on assets awaiting long term investment. The Fund requires
continuous maintenance by the custodian for the Fund's account in the Federal
Reserve/Treasury Book Entry System of collateral in an amount equal to, or in
excess of, the market value of the securities that are the subject of a
repurchase agreement. Repurchase agreements maturing in more than seven days are
considered illiquid securities. In the event of a bankruptcy or other default of
a seller of a repurchase agreement, the Fund could experience both delays in
liquidating the underlying security and losses, including: (a) possible decline
in the value of the underlying security during the period while the Fund seeks
to enforce its rights thereto; (b) possible subnormal levels of income and lack
of access to income during this period; and (c) expenses of enforcing its
rights.
REAL ESTATE INVESTMENT FUNDS ("REITS") AND ASSOCIATED RISK FACTORS.
REITs are pooled investment vehicles that invest primarily in income producing
real estate or real estate related loans or interests. REITs are generally
classified as equity REITs, mortgage REITs or a combination of equity and
mortgage REITs. Equity REITs invest the majority of their assets directly in
real property and derive income primarily from the collection of rents. Equity
REITs can also realize capital gains by selling properties that have appreciated
in value. Mortgage REITs invest the majority of their assets in real estate
mortgages and derive income from the collection of interest payments. For
federal income tax purposes, REITs are generally not taxed on income timely
distributed to shareholders provided they comply with the applicable
requirements of the Code. The Fund will indirectly bear its proportionate share
of any management and other expenses paid by REITs in which it invests in
addition to the expenses paid by the Fund. Debt securities issued by REITs are,
for the most part, general and unsecured obligations and are subject to risks
associated with REITs.
S-23
Investing in REITs involves certain unique risks in addition to those
risks associated with investing in the real estate industry in general. An
equity REIT may be affected by changes in the value of the underlying properties
owned by the REIT. A mortgage REIT may be affected by changes in interest rates
and the ability of the issuers of its portfolio mortgages to repay their
obligations. REITs are dependent upon the skills of their managers and are not
diversified. REITs are generally dependent upon maintaining cash flows to repay
borrowings and to make distributions to shareholders and are subject to the risk
of default by lessees or borrowers. REITs whose underlying assets are
concentrated in properties used by a particular industry, such as health care,
are also subject to risks associated with such industry.
REITs (especially mortgage REITs) are also subject to interest rate
risks. When interest rates decline, the value of a REIT's investment in fixed
rate obligations can be expected to rise. Conversely, when interest rates rise,
the value of a REIT's investment in fixed rate obligations can be expected to
decline. If the REIT invests in adjustable rate mortgage loans the interest
rates on which are reset periodically, yields on a REIT's investments in such
loans will gradually align themselves to reflect changes in market interest
rates. This causes the value of such investments to fluctuate less dramatically
in response to interest rate fluctuations than would investments in fixed rate
obligations.
REITs may have limited financial resources, may trade less frequently
and in a limited volume and may be subject to more abrupt or erratic price
movements than larger company securities. Historically, REITs have been more
volatile in price than the larger capitalization stocks included in the
S&P 500 Stock Index.
REITs are subject to a highly technical and complex set of provisions
in the Code. It is possible that the Fund may invest in a real estate company
that purports to be a REIT and that the company could fail to qualify as a REIT
and as a result, would fail to qualify for tax free pass-through of income under
the Code. In the event of any such unexpected failure to qualify as a REIT, the
company would be subject to corporate-level taxation, significantly reducing the
return to the Fund on its investment in such company. REITs could also possibly
fail to maintain their exemptions from registration under the 1940 Act. The
above factors may also adversely affect a borrower's or a lessee's ability to
meet its obligations to the REIT. In the event of a default by a borrower or
lessee, the REIT may experience delays in enforcing its rights as a mortgagee or
lessor and may incur substantial costs associated with protecting its
investments.
OTHER INVESTMENT COMPANIES. The Fund may invest in the securities of
other investment companies to the extent that such investments are consistent
with the Fund's investment objective and policies and permissible under the 1940
Act. Under the 1940 Act, the Fund may not acquire the securities of other
domestic or non-U.S. investment companies if, as a result, (i) more than 10% of
the Fund's total assets would be invested in securities of other investment
companies, (ii) such purchase would result in more than 3% of the total
outstanding voting securities of any one investment company being held by the
Fund, or (iii) more than 5% of the Fund's total assets would be invested in any
one investment company. These limitations do not apply to the purchase of shares
of any investment company in connection with a merger, consolidation,
reorganization or acquisition of substantially all the assets of another
investment company.
The Fund, as a holder of the securities of other investment companies,
will bear its pro rata portion of the other investment companies' expenses,
including advisory fees. These expenses are in addition to the direct expenses
of the Fund's own operations.
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INVESTMENT RESTRICTIONS
The following are the Fund's fundamental investment restrictions. These
restrictions may not be changed without the approval of the holders of a
majority of the Fund's outstanding voting securities (which for this purpose and
under the 1940 Act means the lesser of (i) 67% of the common shares represented
at a meeting at which more than 50% of the outstanding common shares are
represented or (ii) more than 50% of the outstanding common shares). If the Fund
were to issue a class of preferred shares, the investment restrictions could not
be changed without the approval of a majority of the outstanding common and
preferred shares, voting together as a class, and the approval of a majority of
the outstanding preferred shares, voting separately by class.
The Fund may not:
(1) Issue senior securities, except as permitted by the 1940
Act and the rules and interpretive positions of the Commission
thereunder.
(2) Borrow money, except as permitted by the 1940 Act and the
rules and interpretive positions of the Commission thereunder.
(3) Invest in real estate, except that the Fund may invest in
securities of issuers that invest in real estate or interests therein,
securities that are secured by real estate or interests therein,
securities of real estate investment funds and mortgage-backed
securities.
(4) Make loans, except by the purchase of debt obligations, by
entering into repurchase agreements or through the lending of portfolio
securities and as otherwise permitted by the 1940 Act and the rules and
interpretive positions of the Commission thereunder.
(5) Invest in physical commodities or contracts relating to
physical commodities.
(6) Act as an underwriter, except as it may be deemed to be an
underwriter in a sale of securities held in its portfolio.
(7) Make any investment inconsistent with the Fund's
classification as a diversified investment company under the 1940 Act
and the rules and interpretive positions of the Commission thereunder.
(8) Concentrate its investments in securities of companies in
any particular industry as defined in the 1940 Act and the rules and
interpretive positions of the Commission thereunder.
All other investment policies of the Fund are considered
non-fundamental and may be changed by the Board of Trustees without prior
approval of the Fund's outstanding voting shares.
Currently under the 1940 Act, the Fund is not permitted to issue
preferred shares unless immediately after such issuance the net asset value of
the Fund's portfolio is at least 200% of the liquidation value of the
outstanding preferred shares (i.e., such liquidation value may not exceed 50% of
the value of the Fund's total assets). In addition, currently under the 1940
Act, the Fund is not permitted to declare any cash dividend or other
distribution on its common shares unless, at the time of such declaration, the
net asset value of the Fund's portfolio (determined after deducting the amount
of such dividend or distribution) is at least 200% of such liquidation value.
Currently under the 1940 Act, the Fund is not permitted to incur indebtedness
unless immediately after such borrowing the Fund has asset coverage of at least
300% of the aggregate outstanding principal balance of indebtedness (i.e., such
indebtedness may not exceed 33 1/3% of the value of the Fund's total assets).
Additionally, currently
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under the 1940 Act, the Fund may not declare any dividend or other distribution
upon any class of its shares, or purchase any such shares, unless the aggregate
indebtedness of the Fund has, at the time of the declaration of any such
dividend or distribution or at the time of any such purchase, an asset coverage
of at least 300% after deducting the amount of such dividend, distribution, or
purchase price, as the case may be.
Currently under the 1940 Act, the Fund is not permitted to lend money
or property to any person, directly or indirectly, if such person controls or is
under common control with the Fund, except for a loan from the Fund to a company
that owns all of the outstanding securities of the Fund, except directors'
qualifying shares. Currently, under interpretative positions of the Commission,
the Fund may not have on loan at any given time securities representing more
than one-third of its total assets.
Currently under the 1940 Act, a "senior security" does not include any
promissory note or evidence of indebtedness where such loan is for temporary
purposes only and in an amount not exceeding 5% of the value of the total assets
of the issuer at the time the loan is made. A loan is presumed to be for
temporary purposes if it is repaid within sixty days and is not extended or
renewed.
Currently, the Fund would be deemed to "concentrate" in a particular
industry if it invested 25% or more of its total assets in that industry.
Currently under the 1940 Act, a "diversified company" means a management company
that meets the following requirements: at least 75% of the value of its total
assets is represented by cash and cash items (including receivables), government
securities, securities of other investment companies, and other securities for
the purposes of this calculation limited in respect of any one issuer to an
amount not greater in value than 5% of the value of the total assets of such
management company and not more than 10% of the outstanding voting securities of
such issuer.
Under the 1940 Act, the Fund may invest up to 10% of its total assets
in the aggregate in shares of other investment companies and up to 5% of its
total assets in any one investment company, provided the investment does not
represent more than 3% of the voting stock of the acquired investment company at
the time such shares are purchased. As a shareholder in any investment company,
the Fund will bear its ratable share of that investment company's expenses, and
would remain subject to payment of the Fund's advisory fees and other expenses
with respect to assets so invested. Holders of common shares would therefore be
subject to duplicative expenses to the extent the Fund invests in other
investment companies. In addition, the securities of other investment companies
may also be leveraged and will therefore be subject to the same leverage risks
described herein and in the Prospectus. As described in the prospectus in the
section entitled "Risk Factors" the net asset value and market value of
leveraged shares will be more volatile and the yield to shareholders will tend
to fluctuate more than the yield generated by unleveraged shares.
In addition, to comply with U.S. federal income tax requirements for
qualification as a "regulated investment company," the Fund's investments will
be limited by both an income and an asset diversification test. See "U.S.
Federal Income Tax Matters."
As a non-fundamental policy, the Fund may not issue preferred shares,
including the Preferred Shares, borrow money or issue debt securities in an
aggregate amount exceeding 38% of the Fund's total assets.
MANAGEMENT OF THE FUND
TRUSTEES AND OFFICERS. The Fund's Board of Trustees provides broad
supervision over the Fund's affairs. The officers of the Fund are responsible
for the Fund's operations. The Fund's Trustees and officers are listed below,
together with their age, positions held with the Fund, term of office and length
S-26
of service and principal occupations during the past five years. Asterisks
indicates those Trustees who are interested persons of the Fund within the
meaning of the 1940 Act, and they are referred to as Interested Trustees.
Trustees who are not interested persons of the Fund are referred to as
Independent Trustees. Each of the Trustees serves as a Trustee of other
investment companies (13 U.S. registered investment portfolios, not including
the Fund) for which Calamos serves as investment adviser (collectively, the
"Calamos Funds"). The address for all independent and Interested Trustees and
all officers of the Fund is 2020 Calamos Court, Naperville, Illinois 60563.
NUMBER OF
PORTFOLIOS
IN FUND
POSITIONS TERM OF OFFICE COMPLEX PRINCIPAL OCCUPATION DURING PAST
NAME AND AGE AT HELD WITH AND LENGTH OF OVERSEEN BY FIVE YEARS AND OTHER
MARCH 31, 2005 THE FUND SERVICE TRUSTEE DIRECTORSHIPS HELD BY THE TRUSTEE
----------------------- -------------- ------------------- ------------ ---------------------------------
INTERESTED TRUSTEES:
*John P. Calamos (64) Trustee and Trustee since 13 President and CEO, Calamos Asset
President March 12, 2004. Management, Inc. ("CAM"), Calamos
Term expires in Holdings, LLC ("CHLLC"); Calamos
2008. and its predecessor, and Calamos
Financial Services LLC and its
predecessor ("CFS"); Director, CAM
*Nick P. Calamos (43) Trustee and Trustee since 13 Senior Executive Vice President,
Vice President March 12, 2004. CAM, CHLLC, Calamos and CFS;
Term expires in Director, CAM.
2007.
**Weston W. Marsh (55) Trustee Trustee since 13 Partner, Freeborn & Peters (law
March 12, 2004. firm).
Term expires in
2008.
INDEPENDENT TRUSTEES:
Joe F. Hanauer (68) Trustee Trustee since 13 Private investor; Director, MAF
March 12, 2004. Bancorp (banking); Chairman and
Term expires in Director, Homestore.com, Inc.,
2006. (Internet provider of real estate
information and products);
Director, Combined Investments,
L.P. (investment management).
John E. Neal (55) Trustee Trustee since 13 Private investor; Managing
March 12, 2004. Director, Bank One Capital Markets,
Term expires in Inc. (investment banking)
2006. (2000-2004); Executive Vice
President and Head of Real Estate
Department, Bank One (1998-2000);
Director, the Brickman Group, Ltd.
(landscaping company).
William R. Rybak (54) Trustee Trustee since 13 Private investor; formerly
March 12, 2004. Executive Vice President and CFO,
Term expires in Van Kampen Investments, Inc.
2008. (investment manager); Director,
Howe Barnes Investments (investment
services firm); Director,
PrivateBancorp, Inc. (bank holding
company).
***Stephen B. Timbers (60) Trustee Trustee since 13 Private investor; formerly Vice
March 12, 2004. Chairman Northern Trust Corporation
Term expires in (bank holding company); President and
S-27
NUMBER OF
PORTFOLIOS
IN FUND
POSITIONS TERM OF OFFICE COMPLEX PRINCIPAL OCCUPATION DURING PAST
NAME AND AGE AT HELD WITH AND LENGTH OF OVERSEEN BY FIVE YEARS AND OTHER
MARCH 31, 2005 THE FUND SERVICE TRUSTEE DIRECTORSHIPS HELD BY THE TRUSTEE
----------------------- -------------- ------------------- ------------ ---------------------------------
2007. Chief Executive Officer,
Northern Trust Investments, N.A.
(investment manager) formerly
President, Northern Trust Global
Investments, a division of Northern
Trust Corporation and Executive
Vice President, The Northern Trust
Corporation; Trustee, Northern
Mutual Fund Complex**** (registered
investment companies).
---------------------------------------
* Messrs. John Calamos and Nick Calamos are trustees who are "interested
persons" of the Fund as defined in the Investment Company Act of 1940
because they are affiliates of Calamos and CFS. Nick Calamos is a
nephew of John Calamos.
** Mr. Marsh is a partner at a law firm that has performed work for a
number of underwriters and may be deemed to be an interested person in
accordance with Section 2(a)(19) of the 1940 Act. In addition, Mr.
Marsh's law firm has performed work for John P. Calamos, the chief
executive and a controlling person of Calamos (such work was not with
respect to 1940 Act or Investment Advisers Act of 1940 matters). Upon
the advice of counsel to the Fund, the Fund does not believe that Mr.
Marsh is an "interested person" of Calamos.
*** Mr. Timbers serves as lead Independent Trustee of the board.
**** Overseeing 53 portfolios in fund complex.
POSITIONS TERM OF OFFICE PRINCIPAL OCCUPATION DURING PAST FIVE
NAME AND AGE AT HELD WITH AND LENGTH OF YEARS AND OTHER DIRECTORSHIPS HELD BY THE
MARCH 31, 2005 THE FUND SERVICE TRUSTEE
------------------------ ------------ ---------------- -----------------------------------------
FUND OFFICERS:
Nimish Bhatt (42) Treasurer Since March 12, Senior Vice President and Director of
2004. Serves at Operations, Calamos, CAM, CHLLC and CFS
the discretion of (since 2004); Senior Vice President,
the Board. Alternative Investments and Tax Services,
BISYS (financial services firm) (1996-2004).
Patrick H. Dudasik (50) Vice President Since March 12, Executive Vice President, Chief Financial
2004. Serves at Officer and Administrative Officer and
the discretion of Treasurer of CAM and CHLLC (since 2004),
the Board. Calamos and CFS (since 2001); Chief
Financial Officer, David Gomez and
Associates, Inc. (executive search firm)
(1998-2001); and Chief Financial Officer,
Scudder Kemper Investments Inc., prior
thereto.
James S. Hamman, Jr. (35) Secretary Since March 12, Executive Vice President, Secretary and
2004. Serves at General Counsel, CAM and CHLLC (since
the discretion of 2004), Calamos and CFS (since 1998).
the Board.
Moses Kovalchuck (38) Assistant Since June 30, Vice President of Mutual Fund Operations,
Treasurer 2005. Serves at Calamos (since 2005); Vice President of
the discretion of Fund Accounting, J.P. Morgan Chase
the board. (2002-2005); Vice President of Fund Accounting,
S-28
POSITIONS TERM OF OFFICE PRINCIPAL OCCUPATION DURING PAST FIVE
NAME AND AGE AT HELD WITH AND LENGTH OF YEARS AND OTHER DIRECTORSHIPS HELD BY THE
MARCH 31, 2005 THE FUND SERVICE TRUSTEE
------------------------ ------------ ---------------- -----------------------------------------
Deutsche Asset Management
(2000-2002).
Kevin S. Woodard (39) Assistant Since April 6, Senior Vice President and Associate General
Secretary 2005. Serves at Counsel, Calamos (since 2005); Vice
the discretion of President and Counsel, Fifth Third Bank
the board. (1997-2005).
Mark Mickey (53) Chief Compliance Since June 30, Chief Compliance Officer, Calamos (since
Officer 2005. Serves at 2005); Director of Risk Assessment and
the discretion of Internal Audit, Calamos (2003-2005);
the board. President, Mark Mickey Consulting
(2002-2003); Executive Vice President and
Head of Compliance, ABN AMRO, prior thereto.
The Fund's Board of Trustees consists of seven members. The term of one
class expires each year commencing with the first annual meeting following the
Fund's initial public offering and no term shall continue for more than three
years after the applicable election. The terms of Joe F. Hanauer and John E.
Neal expire at the first annual meeting following the Fund's initial public
offering, the terms of Nick P. Calamos and Stephen B. Timbers expire at the
second annual meeting, and the terms of John P. Calamos, Weston W. Marsh and
William Rybak expire at the third annual meeting. Subsequently, each class of
Trustees will stand for election at the conclusion of its respective term. Such
classification may prevent replacement of a majority of the Trustees for up to a
two-year period. Each officer serves until his or her successor is chosen and
qualified or until his or her resignation or removal by the Board of Trustees.
COMMITTEES OF THE BOARD OF TRUSTEES. The Fund's Board of Trustees
currently has four standing committees. The committees are described below and
the members of each committee constitute the entire committee.
EXECUTIVE COMMITTEE. Messrs. John Calamos, Nick Calamos and Stephen
Timbers are members of the Executive Committee, which has authority during
intervals between meetings of the Board of Trustees to exercise the powers of
the Board, with certain exceptions. Both John Calamos and Nick Calamos are
Interested Trustees of the Fund.
AUDIT COMMITTEE. Messrs. Hanauer, Neal, Rybak and Timbers serve on the
Audit Committee. The Audit Committee operates under a written charter adopted
and approved by the Board. The Audit Committee selects independent auditors,
approves services to be rendered by the auditors, monitors the auditors'
performance, reviews the results of the Fund's audit, determines whether to
recommend to the Board that the Fund's audited financial statements be included
in the Fund's annual report and responds to other matters deemed appropriate by
the Board of Trustees. All members of the Audit Committee are Independent
Trustees of the Fund.
GOVERNANCE COMMITTEE. Messrs. Hanauer, Marsh, Neal, Rybak and Timbers
serve on the Governance Committee. The Governance Committee operates under a
written charter adopted and approved by the Board. The Governance Committee
oversees the independence and effective functioning of the Board of Trustees and
endeavors to be informed about good practices for mutual fund boards. The
Governance Committee also functions as a nominating committee by making
recommendations to the Board of Trustees regarding candidates for election as
non-interested Trustees. In making such recommendations, the Governance
Committee considers a number of factors, including a candidate's background,
integrity, knowledge and relevant experience. These factors are set forth in an
appendix to
S-29
the written charter. Any prospective candidate is interviewed by the Trustees,
and references are checked. The Governance Committee does not have a policy to
consider shareholder recommendations regarding candidates for election as
trustees. The Committee determined that it is appropriate not to have a policy
to consider shareholder recommendations because the current process of
identifying and recommending potential candidates is sufficient to ensure a
knowledgeable and independent Board.
DIVIDEND COMMITTEE. Messrs. John Calamos and Nick Calamos serve on the
Dividend Committee, which has the authority to declare dividends, capital gains
distributions and return of capital distributions on behalf of the Fund. Both
John Calamos and Nick Calamos are interested trustees of the Fund.
In addition to the above committees, there is a pricing committee,
appointed by the Board of Trustees, comprised of officers of the Fund and
employees of Calamos.
During the fiscal year ended October 31, 2004, the Fund's Board of
Trustees held 3 meetings, the Executive Committee held no meetings, the Audit
Committee held 2 meetings, the Governance Committee held 1 meeting and the
Dividend Committee held no meetings. All of the Trustees and committee members
then serving attended at least 75% of the meetings of the Board of Trustees and
applicable committees held during each such fiscal year.
COMPENSATION OF OFFICERS AND TRUSTEES. The Fund pays no salaries or
compensation to any of its officers or to the Trustees who are affiliated
persons of Calamos. Although they are compensated, the Independent Trustees
do not receive any pension or retirement benefits from the Fund. The following
table sets forth the total compensation paid to each Trustee (including any
amounts deferred, as described below) by the Fund and the Calamos Fund Complex
as a group. Compensation from the Fund is for the current calendar year and is
estimated. Total compensation from the Calamos Fund Complex as a group is for
the calendar year ended December 31, 2004.
ESTIMATED AGGREGATE TOTAL COMPENSATION FROM
NAME OF TRUSTEE COMPENSATION FROM FUND CALAMOS FUND COMPLEX(1)*
---------------------------------- ---------------------- ------------------------
Interested Trustees:
John P. Calamos................... $ 0 $ 0
Nick P. Calamos................... 0 0
Weston W. Marsh................... 1,259.93 48,750
Joe F. Hanauer.................... 1,292.23 50,000
Independent Trustees:
John E. Neal...................... 1,292.23 50,000
William Rybak..................... 1,292.23 50,000
Stephen B. Timbers................ 982.10 38,000
---------------------------------------
(1) Includes fees deferred during the year pursuant to a deferred
compensation plan with Calamos Investment Trust. Deferred amounts are
treated as though such amounts have been invested and reinvested in
shares of one or more of the Calamos Funds selected by the Trustee. As
of December 31, 2004, the value of each of Messrs. Marsh's and Neal's
deferred compensation account was $31,955 and $162,664, respectively.
* The Calamos Fund Complex consists of 14 portfolios, including the Fund.
Prior to October 1, 2004, the compensation paid to the Independent
Trustees of the Calamos Funds for their services as such consisted of an annual
retainer fee in the amount of $15,000. In addition, prior to September 27, 2004,
the Independent Trustees received a meeting attendance fee of $4,000 for any
board meeting attended in person and $2,000 for any board meeting attended by
telephone. The Independent Trustees received $1,000 for any committee meeting
attended (even if by telephone) and $4,000 for any special board meeting
attended (even if by telephone).
S-30
Beginning on October 1, 2004, the compensation paid to the Independent
Trustees of Calamos Funds for their services as such consists of an annual
retainer fee in the amount of $30,000. In addition, the chair of any committee
receives an additional $5,000 annually. Independent Trustees receive a meeting
attendance fee of $2,000 for any board meeting attended in person and $3,000 for
any board meeting attended by telephone. In addition, Independent Trustees
receive $2,000 for any committee meeting attended (even if by telephone) and
$3,000 for any special board meeting attended (even if by telephone). Beginning
on April 1, 2005, the lead Independent Trustee receives an annual retainer of
$60,000.
Compensation is paid only to Trustees who are not interested persons of
Calamos or CAM and is allocated among the portfolios of the Calamos Funds in
accordance with a procedure determined from time to time by the Board.
The Fund has adopted a deferred compensation plan (the "Plan"). Under
the Plan, a Trustee who is not an "interested person" of Calamos and who has
elected to participate in the Plan ("participating Trustees") may defer receipt
of all or a portion of his compensation from the Fund in order to defer payment
of income taxes or for other reasons. The deferred compensation payable to the
participating Trustee is credited to the Trustee's deferral account as of the
business day such compensation would have been paid to the Trustee. The value of
a Trustee's deferred compensation account at any time is equal to what would be
the value if the amounts credited to the account had instead been invested in
shares of one or more of the portfolios of Calamos Investment Trust as
designated by the Trustee. Thus, the value of the account increases with
contributions to the account or with increases in the value of the measuring
shares, and the value of the account decreases with withdrawals from the account
or with declines in the value of the measuring shares. If a participating
trustee retires, the Trustee may elect to receive payments under the Plan in a
lump sum or in equal installments over a period of five years. If a
participating Trustee dies, any amount payable under the Plan will be paid to
the Trustee's beneficiaries.
OWNERSHIP OF SHARES OF THE FUND AND OTHER CALAMOS FUNDS. The following
table indicates the value of shares that each Trustee beneficially owns in the
Fund and the Calamos Fund Complex in the aggregate. The value of shares of the
Calamos Funds is determined on the basis of the net asset value of the class of
shares held as of December 31, 2004. The value of the shares held are stated in
ranges in accordance with the requirements of the Commission. The table reflects
the Trustee's beneficial ownership of shares of the Calamos Fund Complex.
Beneficial ownership is determined in accordance with the rules of the
Commission.
DOLLAR RANGE OF AGGREGATE DOLLAR RANGE OF EQUITY
EQUITY SECURITIES SECURITIES IN ALL REGISTERED INVESTMENT
NAME OF TRUSTEE IN THE FUND COMPANIES IN THE CALAMOS FUNDS
--------------------------------------------- ----------------- ---------------------------------------
INTERESTED TRUSTEES:
John P. Calamos.............................. None Over $100,000
Nick P. Calamos.............................. None Over $100,000
Weston W. Marsh.............................. None Over $100,000
INDEPENDENT TRUSTEES:
Joe F. Hanauer............................... None Over $100,000
John E. Neal................................. None Over $100,000
William Rybak................................ None Over $100,000
Stephen B. Timbers........................... None Over $100,000
CODE OF ETHICS. The Fund and Calamos have adopted a code of ethics
under Rule 17j-1 of the 1940 Act that is applicable to officers,
directors/Trustees and designated employees of Calamos and CFS. Employees of
Calamos and CFS are permitted to make personal securities transactions,
including transactions in securities that the Fund may purchase, sell or hold,
subject to requirements and restrictions
S-31
set forth in the code of ethics of Calamos and CFS. The code of ethics contains
provisions and requirements designed to identify and address certain conflicts
of interest between personal investment activities of Calamos and CFS employees
and the interests of investment advisory clients such as the Fund. Among other
things, the code of ethics prohibits certain types of transactions absent prior
approval, imposes time periods during which personal transactions may not be
made in certain securities, and requires the submission of duplicate broker
confirmations and statements and quarterly reporting of securities transactions.
Additional restrictions apply to portfolio managers, traders, research analysts
and others involved in the investment advisory process. Exceptions to these and
other provisions of the code of ethics may be granted in particular
circumstances after review by appropriate personnel. Text-only versions of the
code of ethics can be viewed online or downloaded from the EDGAR Database on the
Commission's internet web site at www.sec.gov. You may review and copy the code
of ethics by visiting the Commission's Public Reference Room in Washington, D.C.
Information on the operation of the Public Reference Room may be obtained by
calling the Commission at 202-551-8090. In addition, copies of the code of
ethics may be obtained, after mailing the appropriate duplicating fee, by
writing to the Commission's Public Reference Section, 100 F Street, N.E.,
Washington, DC 20549 or by e-mail request at publicinfo@sec.gov.
PROXY VOTING PROCEDURES. The Fund has delegated proxy voting
responsibilities to Calamos, subject to the Board of Trustees' general
oversight. The Fund expects Calamos to vote proxies related to the Fund's
portfolio securities for which the Fund has voting authority consistent with the
Fund's best economic interests. Calamos has adopted its own Proxy Voting
Policies and Procedures ("Policies"). The Policies address, among other things,
conflicts of interest that may arise between the interests of the Fund, and the
interests of the adviser and its affiliates.
The following is a summary of the Policies used by Calamos in voting
proxies.
To assist it in voting proxies, Calamos has established a Committee
comprised of members of its Portfolio Management and Research Departments. The
Committee and/or its members will vote proxies using the following guidelines.
In general, if Calamos believes that a company's management and board
have interests sufficiently aligned with the Fund's interest, Calamos will vote
in favor of proposals recommended by a company's board. More specifically,
Calamos seeks to ensure that the board of directors of a company is sufficiently
aligned with security holders' interests and provides proper oversight of the
company's management. In many cases this may be best accomplished by having a
majority of independent board members. Although Calamos will examine board
member elections on a case-by-case basis, it will generally vote for the
election of directors that would result in a board comprised of a majority of
independent directors.
Because of the enormous variety and complexity of transactions that are
presented to shareholders, such as mergers, acquisitions, reincorporations,
adoptions of anti-take over measures (including adoption of a shareholder rights
plan, requiring supermajority voting on particular issues, adoption of fair
price provisions, issuance of blank check preferred stocks and the creation of a
separate class of stock with unequal voting rights), changes to capital
structures (including authorizing additional shares, repurchasing stock or
approving a stock split), executive compensation and option plans, that occur in
a variety of industries, companies and market cycles, it is extremely difficult
to foresee exactly what would be in the best interests of the Fund in all
circumstances. Moreover, voting on such proposals involves considerations unique
to each transaction. Accordingly, Calamos will vote on a case-by-case basis on
proposals presenting these transactions.
Finally, Calamos has established procedures to help resolve conflicts
of interests that might arise when voting proxies for the Fund. These procedures
provide that the Committee, along with Calamos'
S-32
Legal and Compliance Departments, will examine conflicts of interests with the
Fund of which Calamos is aware and seek to resolve such conflicts in the best
interests of the Fund, irrespective of any such conflict. If a member of the
Committee has a personal conflict of interest, that member will refrain from
voting and the remainder of the Committee will determine how to vote the proxy
solely on the investment merits of any proposal. The Committee will then
memorialize the conflict and the procedures used to address the conflict.
The Fund is required to file with the SEC its complete proxy voting
record for the twelve-month period ending June 30, by no later than August 31 of
each year. The Fund's proxy voting record for the most recent twelve-month
period ending June 30 is available by August 31 of each year (1) on the SEC's
website at www.sec.gov and (2) without charge, upon request, by calling
800-582-6959.
You may obtain a copy a Calamos' Policies by calling (800) 582-6959, by
visiting the Fund's website at www.calamos.com, by writing Calamos at: Calamos
Investments, Attn: Client Services, 2020 Calamos Court, Naperville, IL 60563,
and on the Commission's website at www.sec.gov.
INVESTMENT ADVISER AND INVESTMENT MANAGEMENT AGREEMENT. Subject to the
overall authority of the board of trustees, Calamos provides the Fund with
investment research, advice and supervision and furnishes continuously an
investment program for the Fund. In addition, Calamos furnishes for use of the
Fund such office space and facilities as the Fund may require for its reasonable
needs and supervises the business and affairs of the Fund and provides the
following other services on behalf of the Fund and not provided by persons not a
party to the investment management agreement: (i) preparing or assisting in the
preparation of reports to and meeting materials for the Trustees; (ii)
supervising, negotiating contractual arrangements with, to the extent
appropriate, and monitoring the performance of, accounting agents, custodians,
depositories, transfer agents and pricing agents, accountants, attorneys,
printers, underwriters, brokers and dealers, insurers and other persons in any
capacity deemed to be necessary or desirable to Fund operations; (iii) assisting
in the preparation and making of filings with the Commission and other
regulatory and self-regulatory organizations, including, but not limited to,
preliminary and definitive proxy materials, amendments to the Fund's
registration statement on Form N-2 and semi-annual reports on Form N-SAR and
Form N-CSR; (iv) overseeing the tabulation of proxies by the Fund's transfer
agent; (v) assisting in the preparation and filing of the Fund's federal, state
and local tax returns; (vi) assisting in the preparation and filing of the
Fund's federal excise tax return pursuant to Section 4982 of the Code; (vii)
providing assistance with investor and public relations matters; (viii)
monitoring the valuation of portfolio securities and the calculation of net
asset value; (ix) monitoring the registration of shares of beneficial interest
of the Fund under applicable federal and state securities laws; (x) maintaining
or causing to be maintained for the Fund all books, records and reports and any
other information required under the 1940 Act, to the extent that such books,
records and reports and other information are not maintained by the Fund's
custodian or other agents of the Fund; (xi) assisting in establishing the
accounting policies of the Fund; (xii) assisting in the resolution of accounting
issues that may arise with respect to the Fund's operations and consulting with
the Fund's independent accountants, legal counsel and the Fund's other agents as
necessary in connection therewith; (xiii) reviewing the Fund's bills; (xiv)
assisting the Fund in determining the amount of dividends and distributions
available to be paid by the Fund to its shareholders, preparing and arranging
for the printing of dividend notices to shareholders, and providing the transfer
and dividend paying agent, the custodian, and the accounting agent with such
information as is required for such parties to effect the payment of dividends
and distributions; and (xv) otherwise assisting the Fund as it may reasonably
request in the conduct of the Fund's business, subject to the direction and
control of the Trustees.
Under the investment management agreement, the Fund pays to Calamos a
fee based on the average weekly managed assets that is computed weekly and paid
on a monthly basis. The fee paid by the Fund is at the annual rate of 1.00% of
managed assets. Because the fees paid to Calamos are determined
S-33
on the basis of the Fund's managed assets, Calamos' interest in determining
whether to leverage the Fund may differ from the interests of the Fund.
Under the terms of its investment management agreement with the Fund,
except for the services and facilities provided by Calamos as set forth therein,
the Fund shall assume and pay all expenses for all other Fund operations and
activities and shall reimburse Calamos for any such expenses incurred by
Calamos. The expenses borne by the Fund shall include, without limitation: (a)
organization expenses of the Fund (including out-of-pocket expenses, but not
including the Manager's overhead or employee costs); (b) fees payable to
Calamos; (c) legal expenses; (d) auditing and accounting expenses; (e)
maintenance of books and records that are required to be maintained by the
Fund's custodian or other agents of the Fund; (f) telephone, telex, facsimile,
postage and other communications expenses; (g) taxes and governmental fees; (h)
fees, dues and expenses incurred by the Fund in connection with membership in
investment company trade organizations and the expense of attendance at
professional meetings of such organizations; (i) fees and expenses of accounting
agents, custodians, subcustodians, transfer agents, dividend disbursing agents
and registrars; (j) payment for portfolio pricing or valuation services to
pricing agents, accountants, bankers and other specialists, if any; (k) expenses
of preparing share certificates; (l) expenses in connection with the issuance,
offering, distribution, sale, redemption or repurchase of securities issued by
the Fund; (m) expenses relating to investor and public relations provided by
parties other than Calamos; (n) expenses and fees of registering or qualifying
shares of beneficial interest of the Fund for sale; (o) interest charges, bond
premiums and other insurance expenses; (p) freight, insurance and other charges
in connection with the shipment of the Fund's portfolio securities; (q) the
compensation and all expenses (specifically including travel expenses relating
to Fund business) of Trustees, officers and employees of the Fund who are not
affiliated persons of Calamos; (r) brokerage commissions or other costs of
acquiring or disposing of any portfolio securities of the Fund; (s) expenses of
printing and distributing reports, notices and dividends to shareholders; (t)
expenses of preparing and setting in type, printing and mailing prospectuses and
statements of additional information of the Fund and supplements thereto; (u)
costs of stationery; (v) any litigation expenses; (w) indemnification of
Trustees and officers of the Fund; (x) costs of shareholders' and other
meetings; (y) interest on borrowed money, if any; and (z) the fees and other
expenses of listing the Fund's shares on the New York Stock Exchange or any
other national stock exchange.
Unless earlier terminated as described below, the investment management
agreement will remain in effect until August 1, 2006. The investment management
agreement continues in effect from year to year so long as such continuation is
approved at least annually by (1) the board of trustees or the vote of a
majority of the outstanding voting securities (as defined in the 1940 Act) of
the Fund, and (2) a majority of the Trustees who are not interested persons of
any party to the investment management agreement, cast in person at a meeting
called for the purpose of voting on such approval. The investment management
agreement may be terminated at any time, without penalty, by either the Fund or
Calamos upon 60 days' written notice, and is automatically terminated in the
event of its assignment as defined in the 1940 Act.
Calamos is an indirect subsidiary of Calamos Asset Management, Inc.,
whose voting shares are majority-owned by Calamos Family Partners, Inc., which
is controlled by John P. Calamos, Sr. and the Calamos family.
FACTORS CONSIDERED BY THE INDEPENDENT TRUSTEES IN APPROVING THE
INVESTMENT MANAGEMENT AGREEMENT. The Fund's investment management agreement is
required to be approved before it is entered into, and may be continued annually
beyond its initial term both by the Board of Trustees and by a majority of the
Independent Trustees voting separately. The Independent Trustees have determined
that the terms of the Fund's investment management agreement are fair and
reasonable and that the agreement is in the Fund's best interests. The
Independent Trustees believe that the investment management agreement will
enable the Fund to obtain high quality investment management services at a cost
that they deem appropriate, reasonable and in the best interests of the Fund and
its shareholders. In making such determinations, the Independent Trustees relied
upon the assistance of counsel to the Independent Trustees.
In evaluating the investment management agreement, the Independent
Trustees reviewed materials furnished by Calamos, including information
regarding Calamos, its affiliates, their personnel, operations and financial
condition, and the factors set out in judicial decisions and SEC directives
relating to the approval of advisory contracts, which include but are not
limited to the following: (a) the nature and quality of Calamos' services; (b)
Calamos' investment performance; (c) Calamos' cost in providing its services;
(d) the extent to which Calamos realizes economies of scale as the Fund grows
larger; and (e) the extent to which Calamos realizes other benefits from its
role as the Fund's adviser.
Nature and Quality of Services. The Trustees reviewed the nature,
extent and quality of services Calamos is expected to provide to the Fund,
taking into account the Fund's investment objective and strategy and the
Trustees' knowledge gained from their regular meetings with management on at
least a quarterly basis. At a meeting held in June 2005, the Trustees reviewed
narrative and statistical information concerning the types of services that
Calamos currently provides to other funds it advises, Calamos' performance
record with other funds it advises, and the performance of comparable,
unaffiliated funds. In addition, the Trustees reviewed Calamos' resources and
key personnel, especially those who provide investment management services to
the Fund. The Trustees also considered other services to be provided to the Fund
by Calamos, such as managing the execution of portfolio transactions and the
selection of broker-dealers for those transactions, monitoring adherence to the
Fund's investment restrictions, producing shareholder reports, providing support
services for the Board and Board committees, communicating with shareholders and
overseeing the activities of other service providers, including monitoring
compliance with various Fund policies and procedures and with applicable
securities laws and regulations.
S-34
At a meeting held in October 2005, the Trustees concluded that the
nature and extent of the services to be provided by Calamos to the Fund are
appropriate and consistent with the terms of the investment management agreement
and that the Fund is likely to benefit from the continued provision of those
services. They also concluded that Calamos had sufficient personnel, with the
appropriate education and experience, to serve the Fund effectively and had
demonstrated its continuing ability to attract and retain well qualified
personnel.
Fees, Expenses and Profitability. In evaluating the management fees and
expenses that the Fund is expected to bear, the Trustees considered the Fund's
management fee, the Fund's expected expense ratios and the fees and expenses of
comparable funds. The Trustees also considered the ratio of Calamos' fees to
their costs and the amount of its profit in relation to the nature and quality
of services rendered to other Calamos funds, institutional separate accounts and
other subadvised funds to determine whether its compensation is fair and
reasonable. At their June 2005 meeting, the Trustees also looked at Calamos'
expense allocation methodology. In evaluating the reasonableness of Calamos'
compensation, the Trustees considered the following information provided at the
June 2005 meeting, among other things: (a) the methodology used by Calamos in
determining compensation payable to portfolio managers; (b) the very competitive
environment for investment management talent; (c) the competitive market for
mutual funds in different distribution channels; and (d) Calamos' financial
condition, which they found to be sound.
The Trustees concluded that the management fees and other compensation
payable by the Fund to Calamos is reasonable in relation to the nature and
quality of the services to be provided, taking into account the fees charged by
other advisers for managing comparable mutual funds with similar strategies and
the fees Calamos charges to other clients. The Trustees also concluded that the
Fund's estimated overall expense ratios, taking into account quality of services
provided by Calamos and the investment performance of the other Calamos funds,
were also reasonable.
Economies of Scale. The Trustees noted that the advisory fee schedule
for the Fund does not contain breakpoints that reduce the fee rate on assets
above specified levels. The Trustees received and discussed information
concerning whether Calamos realizes economies of scale as the assets under its
management increase. The Trustees concluded that the fee schedule for the Fund
currently in effect represents an appropriate sharing of economies of scale at
current asset levels but concluded to continue their periodic consideration of
economies of scale.
Other Benefits to Calamos. The Trustees also considered benefits that
accrue to Calamos and its affiliates from their relationship with the Fund. The
Trustees concluded that, other than the services to be provided by Calamos
pursuant to the investment management agreement and the fees payable by the Fund
therefor, the Fund and Calamos may potentially benefit from their relationship
with each other in other ways. The Trustees also considered Calamos' use of
commissions to be paid by the Fund on its portfolio brokerage transactions to
obtain proprietary research products and services benefiting the Fund and/or
other Calamos clients. The Trustees concluded that Calamos' expected use of
"soft" commission dollars to obtain research products and services is consistent
with regulatory requirements and is expected to be beneficial to the Fund. They
concluded that, although Calamos may derive additional benefits through the use
of soft dollars from the Fund's portfolio transactions, the Fund also benefits
from the receipt of research products and services to be acquired through
commissions paid on the portfolio transactions of other Calamos clients. They
also concluded that the Fund's success could attract other business to Calamos
or its other funds and that Calamos' success could enhance its ability to serve
the Fund.
The Trustees did not identify any single factor as all-important or
controlling. After full consideration of the above factors as well as other
factors that were instructive in analyzing the management arrangements, the
Trustees, including all of the Independent Trustees, concluded that the terms of
the investment management agreement was fair and reasonable, that Calamos' fees
are reasonable in light of the services to be provided to the Fund and that the
Calamos investment management agreement should be approved.
The use of the name "Calamos" in the name of the Fund is pursuant to
licenses granted by Calamos, and the Fund has agreed to change the names to
remove those references if Calamos ceases to act as investment adviser to the
Fund.
PORTFOLIO MANAGERS
John P. Calamos, Nick P. Calamos and John P. Calamos, Jr. share
responsibility for managing the Fund's portfolio. The portfolio managers are
supported by and lead a team of investment professionals whose valuable
contributions create a synergy of expertise that can be applied across many
different investment strategies.
The portfolio managers also have responsibility for the day-to-day
management of accounts other than the Fund. Information regarding these other
accounts is set forth below.
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NUMBER OF OTHER ACCOUNTS MANAGED AND ASSETS BY ACCOUNT TYPE AS OF OCTOBER 31, 2005
----------------------------------------------------------------------------------------------------------------
REGISTERED INVESTMENT OTHER POOLED INVESTMENT
PORTFOLIO MANAGER COMPANIES VEHICLES OTHER ACCOUNTS
---------------------- --------------------------- ------------------------ --------------------------
ACCOUNTS ASSETS ACCOUNTS ASSETS ACCOUNTS ASSETS
John P. Calamos 18 30,531,621,967 3 145,711,009 25,917 10,632,214,331
Nick P. Calamos 18 30,531,621,967 3 145,711,009 25,917 10,632,214,331
John P. Calamos, Jr. 7 17,322,976,077 2 86,355,635 25,917 10,258,141,695
NUMBER OF ACCOUNTS AND ASSETS FOR WHICH ADVISORY FEE IS PERFORMANCE BASED AS OF OCTOBER 31, 2005
---------------------------------------------------------------------------------------------------------------
REGISTERED INVESTMENT OTHER POOLED INVESTMENT
PORTFOLIO MANAGER COMPANIES VEHICLES OTHER ACCOUNTS
--------------------- ------------------------- ------------------------ -------------------------
ACCOUNTS ASSETS ACCOUNTS ASSETS ACCOUNTS ASSETS
John P. Calamos 1 122,169,844 2 86,355,635 1 8,101,609
Nick P. Calamos 1 122,169,844 2 86,355,635 1 8,101,609
John P. Calamos, Jr. None None 2 86,355,635 1 8,101,609
The Fund's portfolio managers are responsible for managing the Fund and
other accounts, including separate accounts and unregistered funds.
Other than potential conflicts between investment strategies, the
side-by-side management of both the Fund and other accounts may raise potential
conflicts of interest due to the interest held by Calamos in an account and
certain trading practices used by the portfolio managers (e.g., cross trades
between the Fund and another account and allocation of aggregated trades).
Calamos has developed policies and procedures reasonably designed to mitigate
those conflicts. For example, Calamos will only place cross-trades in securities
held by the Fund in accordance with the rules promulgated under the 1940 Act and
has adopted policies designed to ensure the fair allocation of securities
purchased on an aggregated basis.
The portfolio managers advise certain accounts under a performance fee
arrangement. A performance fee arrangement may create an incentive for a
portfolio manager to make investments that are riskier or more speculative than
would be the case in the absence of performance fees. A performance fee
arrangement may result in increased compensation to the portfolio managers from
such accounts due to unrealized appreciation as well as realized gains in the
client's account.
As of October 31, 2005, the portfolio managers receive all of their
compensation from Calamos Asset Management, Inc. The portfolio managers have
each entered into employment agreements that provide for compensation in the
form of a minimum annual base salary and a maximum discretionary target bonus.
The amounts paid to portfolio managers and the criteria utilized to determine
the amounts are benchmarked against industry specific data provided by third
party analytical agencies. The discretionary target bonus is set at a percentage
of base salary, ranging from 300% to 600% of base salary, with a maximum annual
bonus opportunity of at least 150% of the target bonus. Portfolio performance,
as measured by risk-adjusted portfolio performance over a rolling three-year
period, is utilized to determine the discretionary target bonus. Also, due to
the portfolio managers' ownership and executive management positions with
Calamos and its parent companies, additional multiple corporate objectives are
utilized to determine the discretionary target bonus. For 2004, the additional
corporate objectives were advisory fee revenue, measured by growth in revenues
compared to industry percentages; marketing effectiveness, as measured by growth
in assets under management relative to industry percentages; operating
efficiencies, as measured by operating margin relative to industry levels; and
stock price performance.
S-36
The portfolio managers are also eligible to receive annual equity
awards under a long term incentive compensation program. The target annual
equity awards are set at a percentage of base salary, ranging from 225% to 300%.
Prior to entering into employment agreements, John P. Calamos and Nick
P. Calamos each received compensation in the form of salary, bonus and
distributions due to their unique ownership positions with Calamos, its parent
company and their predecessor companies. At that time, compensation for each
portfolio manager was benchmarked against industry compensation standards for
portfolio managers in comparable executive positions, with advisors managing
comparably sized portfolios. Further, bonus and distributions were benchmarked
against industry compensation standards, but also were determined by income
growth, revenue growth and growth of assets under management.
At October 31, 2005, each portfolio manager beneficially owned (as
determined pursuant to Rule 16a-1(a)(2) under the 1934 Act) shares of the Fund
having values within the indicated dollar ranges.
FUND
------
John P. Calamos $0
Nick P. Calamos $0
John P. Calamos, Jr. $0
FUND ACCOUNTANT. Under the arrangements with State Street Bank and
Trust Company ("State Street") to provide fund accounting services, State Street
provides certain administrative and accounting services including providing
daily reconciliation of cash, trades and positions; maintaining general ledger
and capital stock accounts; preparing daily trial balance; calculating net asset
value; providing selected general ledger reports; preferred share compliance;
calculating total returns; and providing monthly distribution analysis to the
Fund and such other funds advised by Calamos that may be part of those
arrangements (the Fund and such other funds are collectively referred to as the
"Calamos Funds"). For the services rendered to the Calamos Funds, State Street
receives fees based on the combined managed assets of the Calamos Funds
("Combined Assets"). State Street receives a fee at the annual rate of .0175%
for the first $1.5 billion of Combined Assets, .0150% for the next $1.5 billion
of Combined Assets, .0125% for the next $1.5 billion of Combined Assets, .010%
for the next $1.5 billion of Combined Assets, .0075% for the next $1.5 billion
of Combined Assets and .00375% for the Combined Assets in excess of $7.5
billion. Each fund of the Calamos Funds pays its pro-rata share of the fees
payable to State Street described below based on relative managed assets of each
fund.
Calamos will provide the following financial accounting services to
Calamos Funds, rather than State Street: management of expenses and expense
payment processing; monitor the calculation of expense accrual amounts for any
fund and make any necessary modifications; coordinate any expense reimbursement
calculations and payment; calculate yields on the funds in accordance with rules
and regulations of the Commission; calculate net investment income dividends and
capital gains distributions; calculate track and report tax adjustments on all
assets of each fund, including but not limited to contingent debt and preferred
trust obligations; prepare excise tax and fiscal year distributions schedules;
prepare tax information required for financial statement footnotes; prepare
state and federal income tax returns; prepare specialized calculations of
amortization on convertible securities; prepare year-end dividend disclosure
information; monitor trustee deferred compensation plan accruals and valuations;
and prepare Form 1099 information statements for Board members and service
providers. For providing those financial accounting services, will receive a fee
payable monthly at the annual rate of 0.0175% on the first $1 billion of
Combined Assets; 0.0150% on the next $1 billion of Combined Assets; and 0.0110%
on Combined Assets above $2 billion ("financial accounting service fee"). Each
fund of the Calamos Funds will pay its pro-rata share of the financial
accounting service fee payable to Calamos based on relative managed assets of
each fund.
S-37
PORTFOLIO TRANSACTIONS
Portfolio transactions on behalf of the Fund effected on stock
exchanges involve the payment of negotiated brokerage commissions. There is
generally no stated commission in the case of securities traded in the
over-the-counter markets, but the price paid by the Fund usually includes an
undisclosed dealer commission or mark-up. In underwritten offerings, the price
paid by the Fund includes a disclosed, fixed commission or discount retained by
the underwriter or dealer.
In executing portfolio transactions, Calamos uses its best efforts to
obtain for the Fund the most favorable combination of price and execution
available. In seeking the most favorable combination of price and execution,
Calamos considers all factors it deems relevant, including price, the size of
the transaction, the nature of the market for the security, the amount of
commission, the timing of the transaction taking into account market prices and
trends, the execution capability of the broker-dealer and the quality of service
rendered by the broker-dealer in other transactions.
In allocating the Fund's portfolio brokerage transactions to
unaffiliated broker-dealers, Calamos may take into consideration the research,
analytical, statistical and other information and services provided by the
broker-dealer, such as general economic reports and information, reports or
analyses of particular companies or industry groups, market timing and technical
information, and the availability of the brokerage firm's analysts for
consultation. Although Calamos believes these services have substantial value,
they are considered supplemental to Calamos' own efforts in the performance of
its duties under the management agreement. As permitted by Section 28(e) of the
Securities Exchange Act of 1934 ("1934 Act"), Calamos may pay a broker-dealer
that provides brokerage and research services an amount of commission for
effecting a securities transaction for the Fund in excess of the commission that
another broker-dealer would have charged for effecting that transaction if the
amount is believed by Calamos to be reasonable in relation to the value of the
overall quality of the brokerage and research services provided. Other clients
of Calamos may indirectly benefit from the provision of these services to
Calamos, and the Fund may indirectly benefit from services provided to Calamos
as a result of transactions for other clients.
In certain cases, Calamos may obtain products or services from a broker
that have both research and non-research uses. Examples of non-research uses are
administrative and marketing functions. These are referred to as "mixed use"
products. In each case, Calamos makes a good faith effort to determine the
proportion of such products or services that may be used for research and
non-research purposes. That determination is based upon the time spent by
Calamos personnel for research and non-research uses. The portion of the costs
of such products or services attributable to research usage may be defrayed by
Calamos through brokerage commissions generated by transactions of its clients,
including the Fund. Calamos pays the provider in cash for the non-research
portion of its use of these products or services.
NET ASSET VALUE
Net asset value per share is determined as of the close of regular
session trading on the New York Stock Exchange (usually 4:00 p.m., Eastern
time), on the last business day in each week. Net asset value is calculated by
dividing the value of all of the securities and other assets of the Fund, less
its liabilities (including accrued expenses and indebtedness) and the aggregate
liquidation value of any outstanding preferred shares, by the total number of
common shares outstanding. Currently, the net asset values of shares of publicly
traded closed-end investment companies investing in debt securities are
published in Barron's, the Monday edition of The Wall Street Journal and the
Monday and Saturday editions of The New York Times.
S-38
The values of the securities in the Fund are based on market prices
from the primary market in which they are traded. As a general rule, equity
securities listed on a U.S. securities exchange are valued at the last current
reported sale price as of the time of valuation. Securities quoted on the NASDAQ
National Market System are valued at the Nasdaq Official Closing Price ("NOCP"),
as determined by Nasdaq, or lacking an NOCP, at the last current reported sale
price as of the time of valuation. Bonds and other fixed-income securities that
are traded over the counter and on an exchange will be valued according to the
broadest and most representative market, and it is expected this will ordinarily
be the over-the-counter market. The foreign securities held by a Fund are traded
on exchanges throughout the world. Trading on these foreign securities exchanges
is completed at various times throughout the day and often does not coincide
with the close of trading on the New York Stock Exchange. The value of foreign
securities is determined at the close of trading of the exchange on which the
securities are traded or at the close of trading on the New York Stock Exchange,
whichever is earlier. If market prices are not readily available or the Fund's
valuation methods do not produce a value reflective of the fair value of the
security, securities and other assets are priced at a fair value as determined
by the Board of Trustees or a committee thereof, subject to the Board of
Trustees responsibility for any such valuation.
ADDITIONAL INFORMATION CONCERNING THE AUCTIONS FOR PREFERRED SHARES
GENERAL
The Depository Trust Company ("DTC") will act as the Securities
Depository with respect to the Preferred Shares. One certificate for all of the
shares of each series will be registered in the name of Cede & Co., as nominee
of the Securities Depository. Such certificate will bear a legend to the effect
that such certificate is issued subject to the provisions restricting transfers
of shares of the Preferred Shares contained in the Statement. The Fund will also
issue stop-transfer instructions to the transfer agent for the Preferred Shares.
Prior to the commencement of the right of holders of the Preferred Shares to
elect a majority of the Fund's Trustees, as described under "Description of the
Preferred Shares--Voting Rights" in the prospectus, Cede & Co. will be the
holder of record of the Preferred Shares and owners of such shares will not be
entitled to receive certificates representing their ownership interest in such
shares.
DTC, a New York-chartered limited purpose trust company, performs
services for its participants, some of whom (and/or their representatives) own
DTC. DTC maintains lists of its participants and will maintain the positions
(ownership interests) held by each such participant in Preferred Shares, whether
for its own account or as a nominee for another person.
CONCERNING THE AUCTION AGENT
The auction agent (the "Auction Agent") will act as agent for the Fund
in connection with the auctions of the Preferred Shares (the "Auctions"). In the
absence of willful misconduct or gross negligence on its part, the Auction Agent
will not be liable for any action taken, suffered, or omitted or for any error
of judgment made by it in the performance of its duties under the auction agency
agreement between the Fund and the Auction Agent and will not be liable for any
error of judgment made in good faith unless the Auction Agent was grossly
negligent in ascertaining the pertinent facts.
The Auction Agent may conclusively rely upon, as evidence of the
identities of the holders of the Preferred Shares, the Auction Agent's registry
of holders, and the results of Auctions and notices from any Broker-Dealer (or
other person, if permitted by the Fund) with respect to transfers described
under "The Auction--Secondary Market Trading and Transfers of the Preferred
Shares" in the prospectus and notices from the Fund. The Auction Agent is not
required to accept any such notice for an Auction unless it is received by the
Auction Agent by 3:00 p.m., New York City time, on the business day preceding
such Auction.
S-39
The Auction Agent may terminate its auction agency agreement with the
Fund upon notice to the Fund on a date no earlier than 60 days after such
notice. If the auction agent should resign, the Fund will use its best efforts
to enter into an agreement with a successor auction agent containing
substantially the same terms and conditions as the auction agency agreement. The
Fund may remove the auction agent provided that prior to such removal the Fund
has entered into such an agreement with a successor Auction Agent.
BROKER-DEALERS
The Auction Agent after each Auction for the Preferred Shares will pay
to each Broker-Dealer, from funds provided by the Fund, a service charge at the
annual rate of 1/4 of 1% in the case of any auction immediately preceding the
dividend period of less than one year, or a percentage agreed to by the Fund and
the Broker-Dealer in the case of any Auction immediately preceding a dividend
period of one year or longer, of the purchase price of the Preferred Shares
placed by such Broker-Dealer at such auction. For the purposes of the preceding
sentence, the Preferred Shares will be placed by a Broker-Dealer if such shares
were (a) the subject of hold orders deemed to have been submitted to the Auction
Agent by the Broker-Dealer and were acquired by such Broker-Dealer for its
customers who are beneficial owners or (b) the subject of an order submitted by
such Broker-Dealer that is (i) a submitted bid of an existing holder that
resulted in the existing holder continuing to hold such shares as a result of
the Auction or (ii) a submitted bid of a potential bidder that resulted in the
potential holder purchasing such shares as a result of the auction or (iii) a
valid hold order.
The Fund may request the Auction Agent to terminate one or more
Broker-Dealer agreements at any time, provided that at least one Broker-Dealer
agreement is in effect after such termination.
The Broker-Dealer agreement provides that a Broker-Dealer (other than
an affiliate of the Fund) may submit orders in Auctions for its own account,
unless the Fund notifies all Broker-Dealers that they may no longer do so, in
which case Broker-Dealers may continue to submit hold orders and sell orders for
their own accounts. Any Broker-Dealer that is an affiliate of the Fund may
submit orders in Auctions, but only if such orders are not for its own account.
If a Broker-Dealer submits an order for its own account in any Auction, it might
have an advantage over other bidders because it would have knowledge of all
orders submitted by it in that Auction; such Broker-Dealer, however, would not
have knowledge of orders submitted by other Broker-Dealers in that Auction.
REPURCHASE OF COMMON SHARES
The Fund is a closed-end investment company and as such its
shareholders will not have the right to cause the Fund to redeem their shares.
Instead, the Fund's common shares will trade in the open market at a price that
will be a function of several factors, including dividend levels (which are in
turn affected by expenses), net asset value, call protection, dividend
stability, relative demand for and supply of such shares in the market, general
market and economic conditions and other factors. Because shares of a closed-end
investment company may frequently trade at prices lower than net asset value,
the Fund's Board of Trustees may consider action that might be taken to reduce
or eliminate any material discount from net asset value in respect of common
shares, which may include the repurchase of such shares in the open market or in
other transactions permitted under the 1940 Act, the making of a tender offer
for such shares, or the conversion of the Fund to an open-end investment
company. The Board of Trustees may decide not to take any of these actions. In
addition, there can be no assurance that share repurchases or tender offers, if
undertaken, will reduce market discount.
Notwithstanding the foregoing, at any time when the Fund's preferred
shares are outstanding, the Fund may not purchase, redeem or otherwise acquire
any of its common shares unless (1) all accumulated
S-40
preferred shares dividends have been paid and (2) at the time of such purchase,
redemption or acquisition, the net asset value of the Fund's portfolio
(determined after deducting the acquisition price of the common shares) is at
least 200% of the liquidation value of the outstanding preferred shares
(expected to equal the original purchase price per share plus any accrued and
unpaid dividends thereon). Any service fees incurred in connection with any
tender offer made by the Fund will be borne by the Fund and will not reduce the
stated consideration to be paid to tendering shareholders.
Subject to its investment restrictions, the Fund may borrow to finance
the repurchase of shares or to make a tender offer. Interest on any borrowings
to finance share repurchase transactions or the accumulation of cash by the Fund
in anticipation of share repurchases or tenders will reduce the Fund's net
income. Any share repurchase, tender offer or borrowing that might be approved
by the Fund's Board of Trustees would have to comply with the Exchange Act, the
1940 Act and the rules and regulations thereunder.
Although the decision to take action in response to a discount from net
asset value will be made by the Board of Trustees at the time it considers such
issue, it is not currently anticipated that the Board of Trustees would
authorize repurchases of common shares or a tender offer for such shares if: (1)
such transactions, if consummated, would (a) result in the delisting of the
common shares from the New York Stock Exchange, or (b) impair the Fund's status
as a regulated investment company under the Code (which would make the Fund a
taxable entity, causing the Fund's income to be taxed at the corporate level in
addition to the taxation of shareholders who receive dividends from the Fund) or
as a registered closed-end investment company under the 1940 Act; (2) the Fund
would not be able to liquidate portfolio securities in an orderly manner and
consistent with the Fund's investment objective and policies in order to
repurchase shares; or (3) there is, in the board's judgment, any (a) material
legal action or proceeding instituted or threatened challenging such
transactions or otherwise materially adversely affecting the Fund, (b) general
suspension of or limitation on prices for trading securities on the New York
Stock Exchange, (c) declaration of a banking moratorium by federal or state
authorities or any suspension of payment by United States or New York banks, (d)
material limitation affecting the Fund or the issuers of its portfolio
securities by federal or state authorities on the extension of credit by lending
institutions or on the exchange of foreign currency, (e) commencement of war,
armed hostilities or other international or national calamity directly or
indirectly involving the United States, or (f) other event or condition which
would have a material adverse effect (including any adverse tax effect) on the
Fund or its shareholders if shares were repurchased.
The repurchase by the Fund of its shares at prices below net asset
value will result in an increase in the net asset value of those shares that
remain outstanding. However, there can be no assurance that share repurchases or
tender offers at or below net asset value will result in the Fund's shares
trading at a price equal to their net asset value. Nevertheless, the fact that
the Fund's shares may be the subject of repurchase or tender offers from time to
time, or that the Fund may be converted to an open-end investment company, may
reduce any spread between market price and net asset value that might otherwise
exist.
In addition, a purchase by the Fund of its common shares will decrease
the Fund's total managed assets which would likely have the effect of increasing
the Fund's expense ratio. Any purchase by the Fund of its common shares at a
time when preferred shares are outstanding will increase the leverage applicable
to the outstanding common shares then remaining.
Before deciding whether to take any action if the common shares trade
below net asset value, the Fund's Board of Trustees would likely consider all
relevant factors, including the extent and duration of the discount, the
liquidity of the Fund's portfolio, the impact of any action that might be taken
on the Fund or its shareholders and market considerations. Based on these
considerations, even if the Fund's
S-41
shares should trade at a discount, the Board of Trustees may determine that, in
the interest of the Fund and its shareholders, no action should be taken.
U.S. FEDERAL INCOME TAX MATTERS
The following is a summary discussion of certain U.S. federal income
tax consequences that may be relevant to a shareholder that acquires, holds
and/or disposes of Preferred Shares of the Fund. This discussion only addresses
U.S. federal income tax consequences to U.S. shareholders who hold their shares
as capital assets and does not address all of the U.S. federal income tax
consequences that may be relevant to particular shareholders in light of their
individual circumstances. This discussion also does not address the tax
consequences to shareholders who are subject to special rules, including,
without limitation, financial institutions, insurance companies, dealers in
securities or foreign currencies, foreign holders, persons who hold their shares
as or in a hedge against currency risk, a constructive sale, or conversion
transaction, holders who are subject to the alternative minimum tax, or
tax-exempt or tax-deferred plans, accounts, or entities. In addition, the
discussion does not address any state, local, or foreign tax consequences. The
discussion reflects applicable tax laws of the United States as of the date of
this prospectus, which tax laws may be changed or subject to new interpretations
by the courts or the Internal Revenue Service ("IRS") retroactively or
prospectively. No attempt is made to present a detailed explanation of all U.S.
federal income tax concerns affecting the Fund and its shareholders, and the
discussion set forth herein does not constitute tax advice. INVESTORS ARE URGED
TO CONSULT THEIR OWN TAX ADVISERS TO DETERMINE THE SPECIFIC TAX CONSEQUENCES TO
THEM OF INVESTING IN THE FUND, INCLUDING THE APPLICABLE FEDERAL, STATE, LOCAL
AND FOREIGN TAX CONSEQUENCES TO THEM AND THE EFFECT OF POSSIBLE CHANGES IN TAX
LAWS.
The Fund intends to elect to be treated, and to qualify each year, as a
"regulated investment company" under Subchapter M of the Internal Revenue Code
of 1986, as amended (the "Code"), so that it will not pay U.S. federal income
tax on investment company taxable income and net capital gains timely
distributed to shareholders. If the Fund qualifies as a regulated investment
company and distributes to its shareholders at least 90% of the sum of (i) its
"investment company taxable income" as that term is defined in the Code (which
includes, among other things, dividends, taxable interest, the excess of any net
short-term capital gains over net long-term capital losses and certain net
foreign exchange gains as reduced by certain deductible expenses) without regard
to the deduction for dividends paid and (ii) the excess of its gross tax-exempt
interest, if any, over certain disallowed deductions, the Fund will be relieved
of U.S. federal income tax on any income of the Fund, including long-term
capital gains, distributed to shareholders. However, if the Fund retains any
investment company taxable income or "net capital gain" (i.e., the excess of net
long-term capital gain over the sum of net short-term capital loss and any
capital loss carryforward), it will be subject to U.S. federal income tax at
regular corporate rates on the amount retained. The Fund intends to distribute
at least annually all or substantially all of its investment company taxable
income, net tax-exempt interest, and net capital gain.
Under the Code, the Fund will also be subject to a nondeductible 4%
federal excise tax on a portion of its undistributed ordinary income and capital
gains for any taxable year if it fails to meet certain distribution requirements
with respect to that year. The Fund intends to make distributions in a timely
manner and accordingly does not expect to be subject to this excise tax.
If for any taxable year the Fund does not qualify as a regulated
investment company for U.S. federal income tax purposes, it would be treated in
the same manner as an ordinary corporation subject to U.S. federal income tax
and distributions to its shareholders would not be deductible by the Fund in
computing its taxable income. In such event, the Fund's distributions, to the
extent derived from the Fund's current or accumulated earnings and profits,
would generally constitute ordinary dividends, which would generally be eligible
for the dividends received deduction available to corporate shareholders.
Furthermore, individual and other noncorporate shareholders would generally be
able to treat such distributions as "qualified dividend income" eligible for
reduced rates of federal income taxation under Section 1(h)(11) of the Code as
described below.
S-42
In order to qualify as a regulated investment company under Subchapter
M of the Code, the Fund must, among other things, derive at least 90% of its
gross income for each taxable year from (i) dividends, interest, payments with
respect to securities loans, gains from the sale or other disposition of stock,
securities or foreign currencies, or other income (including gains from options,
futures and forward contracts) derived with respect to its business of investing
in such stock, securities or currencies and (ii) net income derived from
interests in certain publicly traded partnerships that derive less than 90% of
their gross income from the items described in (i) above (each a "Qualified
Publicly Traded Partnership")(the "90% income test"). For purposes of the 90%
income test, the character of income earned by certain entities in which the
Fund invests that are not treated as corporations (e.g., partnerships other than
Qualified Publicly Traded Partnerships) for U.S. federal income tax purposes
will generally pass through to the Fund. Consequently, the Fund may be required
to limit its equity investments in such entities that earn fee income, rental
income or other nonqualifying income.
In addition to the 90% income test, the Fund must also diversify its
holdings (commonly referred to as the "asset test") so that, at the end of each
quarter of its taxable year (i) at least 50% of the market value of the Fund's
total assets is represented by cash and cash items, U.S. government securities,
securities of other regulated investment companies and other securities, with
such other securities of any one issuer limited for the purposes of this
calculation to an amount not greater in value than 5% of the value of the Fund's
total assets and to not more than 10% of the outstanding voting securities of
such issuer, and (ii) not more than 25% of the value of its total assets is
invested in the securities of any one issuer (other than U.S. government
securities or securities of other regulated investment companies) or of two or
more issuers controlled by the Fund and engaged in the same, similar or related
trades or businesses, or the securities of one or more Qualified Publicly Traded
Partnerships.
Under present law and based in part on the fact that there is no
express or implied agreement between or among a Broker-Dealer or any other
party, and the Fund or any owners of Preferred Shares, that the Broker-Dealer or
any other party will guarantee or otherwise arrange to ensure that an owner of
Preferred Shares will be able to sell his or her shares, it is anticipated that
the Preferred Shares will constitute stock of the Fund, and thus distributions
with respect to the Preferred Shares (other than capital gain distributions and
distributions in redemption of the Preferred Shares subject to section 302(b) of
the Code) will generally constitute dividends to the extent of the Fund's
current or accumulated earnings and profits, as calculated for U.S. federal
income tax purposes. The following discussion assumes such treatment will apply.
Distributions in excess of current and accumulated earnings and profits of the
Fund are treated first as return of capital to the extent of the shareholder's
basis in the Preferred Shares and, after the adjusted basis is reduced to zero,
will be treated as capital gain to a holder of Preferred Shares that holds such
shares as a capital asset.
Dividends from investment company taxable income, which includes net
investment income, net short-term capital gain in excess of net long-term
capital loss and certain net foreign exchange gains, are, except as discussed
below, taxable as ordinary income to the extent of the Fund's current and
accumulated earnings and profits. A portion of such dividends may qualify for
the dividends received deduction available to corporations under Section 243 of
the Code and the reduced rate of taxation that applies to "qualified dividend
income" received by individual and other noncorporate shareholders under Section
1(h)(11) of the Code. For taxable years beginning on or before December 31,
2008, qualified dividend income received by individual and other noncorporate
shareholders is taxed at rates equivalent to long-term capital gains, which
currently reach a maximum of 15%. Qualified dividend income generally includes
dividends from domestic corporations and dividends from foreign corporations
that meet certain specified criteria, although dividends paid by REITs will not
generally be eligible to qualify as qualified dividend income. For these
purposes, a "qualified foreign corporation" is a foreign corporation (i) that is
incorporated in a possession of the United States or is eligible for benefits
under a qualifying income tax treaty with the United States, or (ii) whose stock
with respect to which such dividend is paid is readily tradable on an
established securities market in the United States. A qualified foreign
corporation does not include a foreign corporation that for the taxable year of
the corporation in which the dividend was paid, or the preceding taxable year,
is a "passive foreign investment company," as defined in the Code. The Fund
generally can pass the tax treatment of qualified dividend income it receives
through to Fund shareholders. For the Fund to receive qualified dividend income,
the Fund must meet
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certain holding period requirements for the stock on which the otherwise
qualified dividend is paid. In addition, the Fund cannot be obligated to make
payments (pursuant to a short sale or otherwise) with respect to substantially
similar or related property. The same provisions, including the holding period
requirements, apply to each shareholder's investment in the Fund. The provisions
of the Code applicable to qualified dividend income and the 15% maximum
individual tax rate on long-term capital gains are currently effective through
2008. Thereafter, qualified dividend income will no longer be taxed at the rates
applicable to long-term capital gains, but rather will be taxed at ordinary
income tax rates, which can reach a current maximum rate of 35%, unless Congress
enacts legislation providing otherwise.
Distributors of net capital gain, if any, are taxable as long-term
capital gains for U.S. federal income tax purposes without regard to the length
of time the shareholder has held shares of the Fund. The U.S. federal income tax
status of all distributions will be designated by the Fund and reported to the
shareholders annually. Any dividend declared by the Fund as of a record date in
October, November or December and paid during the following January will be
treated for U.S. federal income tax purposes as received by shareholders on
December 31 of the calendar year in which it is declared.
If the Fund retains any net capital gain, the Fund may designate the
retained amount as undistributed capital gains in a notice to shareholders who,
if subject to U.S. federal income tax on long-term capital gains (i) will be
required to include in income, as long-term capital gain, their proportionate
share of such undistributed amount, and (ii) will be entitled to credit their
proportionate share of the tax paid by the Fund on the undistributed amount
against their U.S. federal income tax liabilities, if any, and to claim refunds
to the extent the credit exceeds such liabilities. For U.S. federal income tax
purposes, the tax basis of shares owned by a shareholder of the Fund will be
increased by the difference between the amount of undistributed net capital gain
included in the shareholder's gross income and the tax deemed paid by the
shareholders.
Foreign exchange gains and losses realized by the Fund in connection
with certain transactions involving foreign currency-denominated debt
securities, certain options and futures contracts relating to foreign currency,
foreign currency forward contracts, foreign currencies, or payables or
receivables denominated in a foreign currency are subject to Section 988 of the
Code, which generally causes such gains and losses to be treated as ordinary
income and losses and may affect the amount, timing and character of
distributions to shareholders.
If the Fund acquires any equity interest (generally including not only
stock but also an option to acquire stock such as is inherent in a convertible
bond) in certain foreign corporations that receive at least 75% of their annual
gross income from passive sources (such as interest, dividends, certain rents
and royalties, or capital gains) or that hold at least 50% of their assets in
investments producing such passive income ("passive foreign investment
companies"), the Fund could be subject to U.S. federal income tax and additional
interest charges on "excess distributions" received from such companies or on
gain from the sale of stock in such companies, even if all income or gain
actually received by the Fund is timely distributed to its shareholders. The
Fund would not be able to pass through to its shareholders any credit or
deduction for such a tax. An election may generally be available that would
ameliorate these adverse tax consequences, but any such election could require
the Fund to recognize taxable income or gain (subject to tax distribution
requirements) without the concurrent receipt of cash. These investments could
also result in the treatment of associated capital gains as ordinary income. The
Fund may limit and/or manage its holdings in passive foreign investment
companies to limit its tax liability or maximize its return from these
investments.
The Fund may invest in debt obligations that are in the lowest rating
categories or are unrated, including debt obligations of issuers not currently
paying interest or who are in default. Investments in debt obligations that are
at risk of or in default present special tax issues for the
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Fund. Tax rules are not entirely clear about issues such as when the Fund may
cease to accrue interest, original issue discount or market discount, when and
to what extent deductions may be taken for bad debts or worthless securities and
how payments received on obligations in default should be allocated between
principal and income. These and other related issues will be addressed by the
Fund when, as and if it invests in such securities, in order to seek to ensure
that it distributes sufficient income to preserve its status as a regulated
investment company and does not become subject to U.S. federal income or excise
taxes.
If the Fund utilizes leverage through Borrowings, or otherwise, asset
coverage limitations imposed by the 1940 Act as well as additional restrictions
that may be imposed by certain lenders on the payment of dividends or
distributions potentially could limit or eliminate the Fund's ability to make
distributions on its common shares and/or Preferred Shares until the asset
coverage is restored. These limitations could prevent the Fund from distributing
at least 90% of its investment company taxable income as is required under the
Code and therefore might jeopardize the Fund's qualification for the reduced
rates of taxation available to regulated investment companies and/or might
subject the Fund to a nondeductible 4% federal excise tax. Upon any failure to
meet the asset coverage requirements imposed by the 1940 Act, the Fund may, in
its sole discretion and to the extent permitted under the 1940 Act, purchase or
redeem Preferred Shares in order to maintain or restore the requisite asset
coverage and avoid the adverse consequences to the Fund and its shareholders of
failing to meet the distribution requirements. There can be no assurance,
however, that any such action would achieve these objectives. The Fund will
endeavor to avoid restrictions on its ability to distribute dividends.
If the Fund invests in certain pay-in-kind securities, zero coupon
securities, deferred interest securities or, in general, any other securities
with original issue discount (or with market discount if the Fund elects to
include market discount in income currently), the Fund must accrue income on
such investments for each taxable year, which generally will be prior to the
receipt of the corresponding cash payments. However, the Fund must distribute,
at least annually, all or substantially all of its net investment income,
including such accrued income, to shareholders to avoid U.S. federal income and
excise taxes. Therefore, the Fund may have to dispose of its portfolio
securities under disadvantageous circumstances to generate cash, or may have to
leverage itself by borrowing the cash, to satisfy distribution requirements.
At the time of an investor's purchase of the Preferred Shares, a
portion of the purchase price may be attributable to realized or unrealized
appreciation in the Fund's portfolio or undistributed taxable income of the
Fund. Consequently, subsequent distributions by the Fund with respect to these
shares from such appreciation or income may be taxable to such investor even if
the net asset value of the investor's shares is, as a result of the
distributions, reduced below the investor's cost for such shares and the
distributions economically represent a return of a portion of the investment.
The Fund's income will consist of investment company taxable income and may also
consist of net capital gain. The character of the Fund's income will not affect
the amount of dividends to which the holders of the Preferred Shares are
entitled. Holders of the Preferred Shares are entitled to receive only the
amount of dividends as determined by periodic auctions. For U.S. federal income
tax purposes, however, the IRS currently requires that a regulated investment
company that has two or more classes of shares allocate to each such class
proportionate amounts of each type of its income (such as ordinary income and
net capital gain) for each tax year. Accordingly, the Fund intends to designate
distributions made with respect to the common shares and the Preferred Shares as
consisting of particular types of income (e.g., net capital gain and ordinary
income), in accordance with each class's proportionate share of the total
dividends paid to both classes. Thus, each dividend paid with respect to the
Preferred Shares during a year will be designated as ordinary income dividends
and, if the Fund designates any dividend as a capital gains dividend, qualified
dividend income, and/or dividends eligible for the dividends received deduction,
such dividends will be paid in proportion to the Preferred Shares proportionate
share of the total distributions paid on the Preferred Shares during the year to
the total distributions paid on both the Preferred Shares and the Common Shares
during the year. Each holder of the Preferred Shares during the year will be
notified of
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the allocation within 60 days after the end of the year. The amount of the net
capital gain realized by the Fund may not be significant, and there is no
assurance that any such income will be realized by the Fund in any year.
Distributions of the Fund's investment company taxable income are, except in the
case of qualified dividend income, taxable to shareholders as ordinary income.
Distributions of the Fund's net capital gain, if any, are taxable to
shareholders at rates applicable to long-term capital gains, regardless of the
length of time the Preferred Shares have been held by holders. Distributions in
excess of the Fund's earnings and profits will first reduce a shareholder's
adjusted tax basis in his or her shares of Preferred Shares and, after the
adjusted tax basis is reduced to zero, will constitute capital gains to a holder
of Preferred Shares who holds his or her shares of Preferred Shares as a capital
asset.
Although the Fund is required to distribute annually at least 90% of
its investment company taxable income, the Fund is not required to distribute
net capital gains to the shareholders. The Fund may retain and reinvest such
gains and pay federal income taxes on such gains (the "net undistributed capital
gain"). However, it is unclear whether a portion of the net undistributed
capital gain would have to be allocated to the Preferred Shares for U.S. federal
income tax purposes. Until and unless the Fund receives acceptable guidance from
the IRS as to the allocation of the net undistributed capital gain between the
Common Shares and the Preferred Shares, the Fund intends to distribute its net
capital gain for any year during which it has shares of Preferred Shares
outstanding. Such distribution will affect the tax character but not the amount
of dividends to which holders of shares of Preferred Shares are entitled.
Sales and other dispositions of the Preferred Shares are generally
taxable events for shareholders that are subject to U.S. federal income tax.
Shareholders should consult their own tax advisors with reference to their
individual circumstances to determine whether any particular transaction in the
Preferred Shares is properly treated as a sale for tax purposes (as the
following discussion assumes) and the tax treatment of any gains or losses
recognized in such transactions. Any loss realized by a shareholder upon the
sale or other disposition of shares with a tax holding period of six months or
less will be treated as a long-term capital loss to the extent of any amounts
treated as distributions of long-term capital gain with respect to such shares.
Losses on sales or other dispositions of shares may be disallowed under "wash
sale" rules in the event of other investments in the Fund (including those made
pursuant to reinvestment of dividends) within a period of 61 days beginning 30
days before and ending 30 days after a sale or other disposition of shares. In
such a case, the disallowed portion of any loss generally would be included in
the U.S. federal income tax basis of the shares acquired in the other
investments in the Fund.
The Fund may engage in various transactions utilizing options, futures
contracts, forward contracts, hedge instruments, straddles, swaps and other
similar transactions. Such transactions may be subject to special provisions of
the Code that, among other things, affect the character of any income realized
by the Fund from such investments, accelerate recognition of income to the Fund,
defer Fund losses, and affect the determination of whether capital gain and loss
is characterized as long-term or short-term capital gain or loss. These rules
could therefore affect the character, amount and timing of distributions to
shareholders. These provisions may also require the Fund to mark-to-market
certain types of the positions in its portfolio (i.e., treat them as if they
were closed out), which may cause the Fund to recognize income without receiving
cash with which to make distributions in amounts necessary to satisfy the
distribution requirements for avoiding U.S. federal income and excise taxes. The
Fund will monitor its transactions and will make the appropriate entries in its
books and records when it acquires an option, futures contract, forward
contract, hedge instrument or other similar investment, and if the Fund deems it
advisable, will make appropriate elections in order to mitigate the effect of
these rules, prevent disqualification of the Fund as a regulated investment
company and to minimize the imposition of U.S. federal income and excise taxes.
Certain distributions by the Fund may qualify for the dividends
received deduction available to corporate shareholders, subject to certain
holding period and other requirements, but generally only to the extent the Fund
earned dividend income from stock investments in U.S. domestic corporations
(other than REITs). In addition, certain distributions of "qualified dividend
income" (as discussed above) will
S-46
currently qualify for reduced rates of federal income taxation if certain
holding period and other requirements under the Code are satisfied by both the
Fund and such shareholder. Distributions from REITs generally will not qualify
for treatment as "qualified dividend income."
The Fund may invest in REITs that hold residual interests in real
estate mortgage investment conduits ("REMICs"). Under Treasury regulations that
have not yet been issued, but may apply retroactively, a portion of the Fund's
income from a REIT that is attributable to the REIT's residual interest in a
REMIC (referred to in the Code as an "excess inclusion") will be subject to U.S.
federal income tax in all events. These regulations are also expected to provide
that excess inclusion income of a regulated investment company, such as the
Fund, will be allocated to shareholders of the regulated investment company in
proportion to the dividends received by such shareholders, with the same
consequences as if the shareholders held the related REMIC residual interest
directly. In general, excess inclusion income allocated to shareholders (i)
cannot be offset by net operating losses (subject to a limited exception for
certain thrift institutions), (ii) will constitute unrelated business taxable
income to entities (including a qualified pension plan, an individual retirement
account, a 401(k) plan, a Keogh plan or other tax-exempt entity) subject to tax
on unrelated business income, thereby potentially requiring such an entity that
is allocated excess inclusion income, and otherwise might not be required to
file a tax return, to file a tax return and pay tax on such income, and (iii) in
the case of a foreign shareholder, will not qualify for any reduction in U.S.
federal withholding tax. In addition, if at any time during any taxable year a
"disqualified organization" (as defined in the Code) is a record holder of a
share in a regulated investment company, then the regulated investment company
will be subject to a tax equal to that portion of its excess inclusion income
for the taxable year that is allocable to the disqualified organization,
multiplied by the highest federal income tax rate imposed on corporations. The
Fund does not intend to invest in REITs in which a substantial portion of the
assets will consist of residual interests in REMICs.
The Fund may be subject to withholding and other taxes imposed by
foreign countries, including taxes on interest, dividends and capital gains with
respect to its investments in those countries, which would, if imposed, reduce
the yield on or return from those investments. Tax treaties between certain
countries and the U.S. may reduce or eliminate such taxes in some cases. If,
however, more than 50% of the value of a Fund's total assets at the close of any
taxable year consists of stock or securities in foreign corporations, and the
Fund distributes at least 90% of its investment company taxable income and net
tax exempt interest, the Fund may file an election with the Internal Revenue
Service pursuant to which shareholders of the Fund will be required to (i)
include in gross income (in addition to taxable dividends actually received)
their pro rata shares of foreign income taxes paid by the Fund even though not
actually received, (ii) treat such respective pro rata shares as foreign income
taxes paid by them, and (iii) deduct such pro rata shares in computing their
U.S. federal taxable income, or, alternatively, use them as foreign tax credits,
subject to applicable limitations, against their U.S. federal income tax
liability. Tax-exempt shareholders will not ordinarily benefit from this
election relating to foreign taxes. Each year, the Funds will notify their
respective shareholders of the amount of (i) each shareholder's pro rata share
of foreign income taxes paid by the Fund, if any, and (ii) the portion of the
Fund's dividends which represents income from each foreign country, if the Fund
qualifies to pass along such credit.
Under Treasury regulations, if a shareholder recognizes a loss with
respect to shares of $2 million or more in a single taxable year (or $4 million
or more in any combination of taxable years) for an individual shareholder, S
corporation or trust or $10 million or more in any single taxable year (or $20
million or more in any combination of years), for a shareholder that is a C
corporation, such shareholder must file with the IRS a disclosure statement on
Form 8886. Shareholders who directly own portfolio securities are in many cases
excepted from this reporting requirement, but under current guidance,
shareholders of a regulated investment company are not excepted. Future guidance
may extend the current exception from this reporting requirement to shareholders
of most or all regulated investment companies. The fact that a loss is
reportable under these regulations does not affect the legal determination of
whether the taxpayer's treatment of the loss is proper. Shareholders should
consult their tax advisors to determine the applicability of these regulations
in light of their individual circumstances.
Federal law requires that the Fund withhold, as "backup withholding"
28% of reportable payments, including dividends, capital gain distributions and
the proceeds of sales or other dispositions of the Preferred Shares paid to
shareholders who have not complied with IRS requirements. In order to avoid this
withholding requirement, shareholders must certify on their Account
Applications, or on a separate IRS Form W-9, that the Social Security Number or
other Taxpayer Identification Number they provide is their correct number and
that they are not currently subject to backup withholding, or that they are
exempt from backup withholding. The Fund may nevertheless be required to
withhold if it receives
S-47
notice from the IRS or a broker that the number provided is incorrect or backup
withholding is applicable as a result of previous underreporting of interest or
dividend income.
The description of certain federal tax provisions above relates only to
U.S. federal income tax consequences for shareholders who are U.S. persons,
(i.e., U.S. citizens or residents or U.S. corporations, partnerships, trusts or
estates and who are subject to U.S. federal income tax). Investors other than
U.S. persons may be subject to different U.S. tax treatment, including a
non-resident alien individual. With respect to such persons, the Fund must
generally withhold U.S. federal withholding tax at the rate of 30% (or, if the
Fund receives certain certifications from such non-U.S. shareholder, such lower
rate as prescribed by an applicable tax treaty) on amounts treated as ordinary
dividends from the Fund. Recently enacted legislation modifies the tax treatment
of certain of these payments made by the Fund to non-U.S. persons. Effective for
taxable years of a Fund before January 1, 2008, the Fund will generally not be
required to withhold tax on any amounts paid to a non-U.S. person with respect
to dividends attributable to "qualified short-term gain" (i.e., the excess of
short-term capital gain over net long-term capital loss) designated as such by
the Fund and dividends attributable to certain U.S. source interest income that
would not be subject to federal withholding tax if earned directly by a non-U.S.
person, provided such amounts are properly designated by the Fund. SHAREHOLDERS
SHOULD CONSULT THEIR OWN TAX ADVISORS ON THESE MATTERS AND ON ANY SPECIFIC
QUESTION OF U.S. FEDERAL, STATE, LOCAL, FOREIGN AND OTHER APPLICABLE TAX LAWS,
BEFORE MAKING AN INVESTMENT IN THE FUND.
CUSTODIAN, TRANSFER AGENT, DIVIDEND PAYING AGENT AND REGISTRAR
The Fund's securities and cash are held under a custodian agreement
with The Bank of New York, One Wall Street, New York, New York 10286. The
transfer agent, dividend paying agent and registrar for the Fund's common shares
and the Preferred Shares is also The Bank of New York. In addition, The Bank of
New York is the auction agent with respect to the Preferred Shares.
EXPERTS
The financial statement of the Fund as of October 31, 2005 appearing in
this Statement of Additional Information has been audited by Deloitte & Touche
LLP, independent registered public accounting firm, 111 South Wacker Drive,
Chicago, Illinois 60606, as set forth in their report thereon appearing
elsewhere herein, and is included in reliance upon such report given upon the
authority of such firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
A Registration Statement on Form N-2, including amendments thereto,
relating to the shares offered hereby, has been filed by the Fund with the
Commission, Washington, D.C. The prospectus and this Statement of Additional
Information do not contain all of the information set forth in the Registration
Statement, including any exhibits and schedules thereto. For further information
with respect to the Fund and the shares offered hereby, reference is made to the
Registration Statement. Statements contained in the prospectus and this
Statement of Additional Information as to the contents of any contract or other
document referred to are not necessarily complete and in each instance reference
is made to the copy of such contract or other document filed as an exhibit to
the Registration Statement, each such statement being qualified in all respects
by such reference. A copy of the Registration Statement may be inspected without
charge at the Commission's principal office in Washington, D.C., and copies of
all or any part thereof may be obtained from the Commission upon the payment of
certain fees prescribed by the Commission.
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FINANCIAL STATEMENT AND REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Report of Independent Registered Public Accounting Firm
To the Board of Trustees and Shareholders of Calamos Global Total Return Fund
We have audited the accompanying statement of assets and liabilities of Calamos
Global Total Return Fund (the "Fund") as of October 31, 2005, and the related
statement of operations, and statement of changes in net assets and the
financial highlights for the period from October 27, 2005 (commencement of
operations) through October 31, 2005. These financial statements and financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. The Fund
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audit included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Fund's internal control over
financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
Fund as of October 31, 2005, the results of its operations, the changes in its
net assets, and the financial highlights for the period from October 27, 2005
(commencement of operations) through October 31, 2005, in conformity with
accounting principles generally accepted in the United States of America.
[DELOITTE & TOUCHE LLP]
Chicago, Illinois
December 16, 2005
F-1
Statement of Assets and Liabilities
OCTOBER 31, 2005
ASSETS
Cash with custodian $ 114,700,000
Due from investment advisor 16,262
-------------
Total assets 114,716,262
-------------
LIABILITIES
Payable for accrued offering costs 240,209
Payable to financial accountant 178
Other accounts payable and accrued liabilities 36,945
-------------
Total liabilities 277,332
-------------
NET ASSETS APPLICABLE TO COMMON SHAREHOLDERS 114,438,930
=============
COMPOSITION OF NET ASSETS APPLICABLE TO COMMON SHAREHOLDERS
Common stock, no par value, unlimited shares authorized 8,006,981 shares issued and outstanding $ 114,438,930
-------------
NET ASSETS APPLICABLE TO COMMON SHAREHOLDERS $ 114,438,930
=============
Net asset value per common share based on 8,006,981 shares issued and outstanding $ 14.29
=============
See accompanying Notes to Financial Statements
F-2
Statement of Operations
FOR THE PERIOD ENDED OCTOBER 31, 2005*
INVESTMENT INCOME
Total investment income $ --
------------
EXPENSES
Investment advisory fees 15,685
Financial accounting fees 178
Printing and mailing fees 25,000
Accounting fees 295
Audit and legal fees 11,000
Registration fees 235
Transfer agent fees 415
------------
Total expenses 52,808
------------
Less investment advisory fees waived (15,685)
Less expense reimbursed (16,262)
------------
Net expenses 20,861
------------
NET INVESTMENT INCOME (LOSS) (20,861)
============
NET INCREASE (DECREASE) IN NET ASSETS APPLICABLE TO COMMON SHAREHOLDERS RESULTING FROM OPERATIONS $ (20,861)
============
* The Fund commenced operations on October 27, 2005.
See accompanying Notes to Financial Statements
F-3
Statement of Changes in Net Assets
For the Period Ended
October 31, 2005*
--------------------
OPERATIONS
Net investment income (loss) $ (20,861)
-------------
Net increase (decrease) in net assets applicable to common shareholders resulting from operations (20,861)
-------------
CAPITAL STOCK TRANSACTIONS
Proceeds from initial offering 114,700,000
Offering costs on common shares (240,209)
-------------
Net increase (decrease) in net assets from capital stock transactions 114,459,791
-------------
TOTAL INCREASE (DECREASE) IN NET ASSETS APPLICABLE TO COMMON SHAREHOLDERS 114,438,930
-------------
NET ASSETS APPLICABLE TO COMMON SHAREHOLDERS
Beginning of period* --
-------------
End of period $ 114,438,930
=============
Undistributed net investment income (loss) $ --
* The Fund commenced operations on October 27, 2005.
See accompanying Notes to Financial Statements
F-4
Notes to Financial Statements
NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION. CALAMOS Global Total Return Fund (the "Fund") was organized as a
Delaware statutory trust on March 30, 2004 and is registered under the
Investment Company Act of 1940 (the "1940 Act") as a diversified, closed-end
management investment company. The Fund commenced operations on October 27, 2005
and began investing the proceeds of the offering November 1, 2005.
The Fund's investment objective is to provide total return through a combination
of capital appreciation and current income.
USE OF ESTIMATES. The preparation of financial statements in conformity with
U.S. generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results may differ from those
estimates.
INCOME TAXES. No provision has been made for income taxes because the Fund's
policy is to qualify as a regulated investment company under Subchapter M of the
Internal Revenue Code and distribute to shareholders substantially all of its
taxable income and gains.
Effective October 7, 2005, the Fund adopted a level rate monthly distribution to
common shareholders, which may be modified by the Board of Trustees from time to
time. Monthly distributions may include net investment income, net realized
short-term capital gains and, if necessary, return of capital. In addition,
distributions may include net realized long-term capital gains to the extent
permitted by the 1940 Act.
In order to make these monthly distributions, the Fund might have to sell a
portion of its investment portfolio at a time when independent investment
judgment might not dictate such action. Also, for purposes of maintaining level
rate distributions the Fund may realize short-term capital gains on securities
that, if sold at a later date, would have resulted in long-term capital gains.
Maintenance of level rate distributions may increase transaction and tax costs
associated with the Fund.
INDEMNIFICATIONS. Under the Fund's organizational documents, its Officers and
Trustees are indemnified against certain liabilities arising out of the
performance of their duties to the Fund. In addition, in the normal course of
business, the Fund enters into contracts that provide general indemnifications
to other parties. The Fund's maximum exposure under these arrangements is
unknown as this would involve future claims that may be made against the Fund
that have not yet occurred. However, the Fund has not had prior claims or losses
pursuant to these contracts and expects the risk of loss to be remote.
NOTE 2 - INVESTMENT ADVISOR AND TRANSACTIONS WITH AFFILIATES OR CERTAIN OTHER
PARTIES
Pursuant to an investment advisory agreement with Calamos Advisors LLC ("Calamos
Advisors"), the Fund pays an annual fee, payable monthly, equal to 1.00% based
on the average weekly managed assets. "Managed assets" means the total Fund's
assets (including any assets attributable to any leverage that may be
outstanding) minus total liabilities (other than debt representing financial
leverage).
Calamos Advisors receives a fee payable monthly at the annual rate of 0.0175% on
the first $1 billion of combined assets; 0.0150% on the next $1 billion of
combined assets; and 0.0110% on combined assets above $2 billion for financial
accounting services (for purposes of this calculation, "combined assets" means
the total net assets of Calamos Investment Trust, Calamos Advisors Trust and
managed assets of Calamos Convertible and High Income Fund, Calamos Convertible
Opportunities and Income Fund, Calamos Strategic Total Return Fund and Calamos
Global Total Return Fund). Financial accounting services include, but are not
limited to, the following: managing expenses and expense payment processing;
monitoring the calculation of expense accrual amounts; calculating, tracking,
and reporting tax adjustments on all assets and monitoring trustee deferred
compensation plan accruals and valuations. The Fund will pay its pro rata share
of the financial accounting service fee payable to Calamos Advisors based on the
Fund's relative portion of combined assets.
F-5
Notes to Financial Statements
Calamos Advisors has voluntarily agreed to limit ordinary expenses of the Fund
at an annual rate of 1.33% of average daily net assets for the fiscal period
ended October 31, 2005.
The Fund reimburses the advisor for a portion of the compensation paid to the
Chief Compliance Officer of the Fund. This compensation is reported as part of
"Other" expenses on the Statement of Operations.
Certain officers and trustees of the Fund are also officers and directors of
Calamos Financial Services LLC ("CFS") and Calamos Advisors. All officers and
affiliated trustees serve without direct compensation from the Fund.
The Fund has adopted a deferred compensation plan (the "Plan"). Under the Plan,
a trustee who is not an "interested person" (as defined in the 1940 Act) of CFS
or Calamos Advisors and has elected to participate in the Plan (a "participating
trustee") may defer receipt of all or a portion of his compensation from the
Fund. The deferred compensation payable to the participating trustee is credited
to the trustee's deferral account as of the business day such compensation would
have been paid to the participating trustee. The value of a participating
trustee's deferred compensation account at any time is equal to what would be
the value if the amounts credited to the account had instead been invested in
shares of one or more of the Funds of the Calamos Investment Trust as designated
by the trustee. Thus, the value of the account increases with contributions to
the account or with increases in the value of the measuring shares, and the
value of the account decreases with withdrawals from the account or with
declines in the value of the measuring shares. If a participating trustee
retires, the trustee may elect to receive payments under the plan in a lump sum
or in equal installments over a period of five years. If a participating trustee
dies, any amount payable under the Plan will be paid to the trustee's
beneficiaries. There are no deferred compensation investments included in the
Statement of Assets and Liabilities at October 31, 2005.
NOTE 3 - INCOME TAXES
For the period ended October 31, 2005, the Fund recorded the following permanent
reclassifications to reflect tax character. Results of operations and net assets
were not affected by these reclassifications.
Paid-in capital $ (20,861)
Undistributed net investment income (loss) 20,861
Accumulated net realized gain (loss) on investments and foreign currency transactions and interest rate swaps --
As of October 31, 2005, the components of net assets on a tax basis were as follows:
Undistributed ordinary income $ --
Undistributed capital gains --
-------------
Total undistributed earnings --
Accumulated capital and other losses --
Net unrealized gains/(losses) --
-------------
Total accumulated earnings/(losses) --
Other --
Paid-in capital 114,438,930
-------------
Net assets applicable to common shareholders $ 114,438,930
-------------
F-6
Notes to Financial Statements
Distributions during the fiscal period ended October 31, 2005 were characterized
for income tax purposes as follows:
2005*
-----
Distributions paid from:
Ordinary income --
Long-Term capital gain --
* The Fund commenced operations on October 27, 2005.
NOTE 4 - COMMON STOCK
There are unlimited common shares of beneficial interest authorized and
8,006,981 shares outstanding at October 31, 2005. Calamos Advisors owned 6,981
of the outstanding shares at October 31, 2005. Transactions in common shares
were as follows:
For the Period Ended
October 31, 2005*
--------------------
Beginning shares --
Shares sold 8,006,981
Shares issued through reinvestment of distributions --
---------
Ending shares 8,006,981
=========
* The Fund commenced operations on October 27, 2005.
F-7
Financial Highlights
SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD WERE AS FOLLOWS:
October 27,
2005*
through
October 31,
--------------
2005
--------------
Net asset value, beginning of period $ 14.32(a)
--------------
Income from investment operations:
Net investment income (loss) --(b)
--------------
Total from investment operations --
Less dividends to common shareholders from:
Net investment income --
--------------
Capital charge resulting from issuance of common shares (0.03)
--------------
Net asset value, end of period $ 14.29
--------------
Market value, end of period $ 15.00
--------------
Total investment return based on(c):
Net asset value (0.24)%
--------------
Market value 0.00%
--------------
Ratios and supplemental data:
Net assets applicable to common shareholders, end of period (000's omitted) $ 114,439
--------------
Ratios to average net assets applicable to common shareholders:
Net expenses(d) 1.33%
--------------
Gross expenses prior to waivers and reimbursement of expenses by the advisor(d) 3.37%
--------------
Net investment income (loss)(d) (1.33)%
--------------
* Commencement of operations.
(a) Net of sales load of $0.675 on initial shares issued and beginning net
asset value of $14.325.
(b) Amount equated to less than $0.005 per common share.
(c) Total investment return is calculated assuming a purchase of common stock
on the opening of the first day and a sale on the closing of the last day
of the period reported. Dividends and distributions are assumed, for
purposes of this calculation, to be reinvested at prices obtained under
the Fund's dividend reinvestment plan. Total return is not annualized for
periods less than one year. Brokerage commissions are not reflected. NAV
per share is determined by dividing the value of the Fund's portfolio
securities, cash and other assets, less all liabilities, by the total
number of common shares outstanding. The common share market price is the
price the market is willing to pay for shares of the Fund at a given time.
Common share market price is influenced by a range of factors, including
supply and demand and market conditions.
(d) Annualized for periods less than one year.
F-8
CALAMOS GLOBAL TOTAL RETURN FUND
NOVEMBER 30, 3005 (UNAUDITED)
PRINCIPAL AMOUNT VALUE
------------------------------------------------------------------------
CORPORATE BONDS (37.6%)
CONSUMER DISCRETIONARY (13.9%)
$ 2,500,000 Asbury Automotive Group, Inc.
9.000%, 06/15/12 $ 2,506,251
2,250,000 Beazer Homes USA, Inc.
8.375%, 04/15/12 2,328,750
1,875,000 Goodyear Tire & Rubber Company+
7.860%, 08/15/11 1,818,750
1,000,000 GSC Holdings Corp.
(Gamestop, Inc.)*+
8.000%, 10/01/12 970,000
1,600,000 La Quinta, Corp.
8.875%, 03/15/11 1,734,000
2,325,000 NCL Holding, ASA+
10.625%, 07/15/14 2,429,625
2,500,000 Russell Corp.
9.250%, 05/01/10 2,550,000
825,000 Warner Music Group
7.375%, 04/15/14 804,375
1,000,000 William Lyon Homes, Inc.
10.750%, 04/01/13 1,035,000
--------------
16,176,751
--------------
CONSUMER STAPLES (7.2%)
1,500,000 Del Monte Foods Company
8.625%, 12/15/12 1,582,500
2,250,000 Gold Kist, Inc.
10.250%, 03/15/14 2,553,750
1,900,000 Revlon, Inc.
9.500%, 04/01/11 1,738,500
2,250,000 WH Intermediate Holdings, Ltd.
9.500%, 04/01/11 2,430,000
--------------
8,304,750
--------------
ENERGY (2.2%)
1,700,000 Paramount Resources Ltd.
8.500%, 01/31/13 1,751,000
750,000 Petroleo Brasileiro, SA
8.375%, 12/10/18 828,750
--------------
2,579,750
--------------
FINANCIALS (0.4%)
500,000 E*TRADE FINANCIAL, Corp.+
7.875%, 12/01/15 508,749
--------------
INDUSTRIALS (6.0%)
1,650,000 Accuride Corp.
8.500%, 02/01/15 1,625,250
230,000 Columbus McKinnon Corp.*+
8.875%, 11/01/13 236,325
1,000,000 Commercial Vehicle Group, Inc.*
8.000%, 07/01/13 987,500
1,700,000 General Cable Corp.
9.500%, 11/15/10 1,819,000
See accompanying Notes to Schedule of Investments
F-9
CALAMOS GLOBAL TOTAL RETURN FUND
NOVEMBER 30, 3005 (UNAUDITED)
PRINCIPAL AMOUNT VALUE
-------------------------------------------------------------------------
$ 1,700,000 Greenbrier Companies, Inc.
8.375%, 05/15/15 $ 1,731,875
500,000 Sequa Corp.
8.875%, 04/01/08 522,500
--------------
6,922,450
--------------
INFORMATION TECHNOLOGY (1.6%)
100,000 Avago Technologies*
11.875%, 12/01/15 102,000
1,700,000 SunGard Data Systems Inc.*+
9.125%, 08/15/13 1,768,000
--------------
1,870,000
--------------
MATERIALS (3.4%)
2,000,000 Aleris International, Inc.
9.000%, 11/15/14 2,095,000
1,815,000 U.S. Concrete, Inc.
8.375%, 04/01/14 1,819,537
--------------
3,914,537
--------------
TELECOMMUNICATION SERVICES (2.2%)
2,250,000 Alamosa Holdings, Inc.
11.000%, 07/31/10 2,565,000
--------------
UTILITIES (0.7%)
750,000 Edison International
7.730%, 06/15/09 778,125
--------------
TOTAL CORPORATE BONDS
(Cost $43,434,691) 43,620,112
==============
CONVERTIBLE BONDS (7.6%)
ENERGY (1.0%)
850,000 Repsol Ypf, SA
4.500%, 01/26/11 1,122,255
--------------
FINANCIALS (1.1%)
1,000,000 Deutsche Bank, LUX
(USA Interactive)*
4.450%, 05/01/12 1,251,875
--------------
HEALTH CARE (1.5%)
1,700,000 Wyeth
3.320%, 01/15/24 1,732,487
--------------
INDUSTRIALS (1.4%)
500,000 GATX Corp.
7.500%, 02/01/07 608,125
750,000 Quanta Services, Inc.
4.500%, 10/01/23 1,042,500
--------------
1,650,625
--------------
INFORMATION TECHNOLOGY (2.7%)
1,100,000 Advanced Micro Devices, Inc.+
4.750%, 02/01/22 1,282,875
700,000 DST Systems, Inc.
4.125%, 08/15/23 924,000
900,000 LSI Logic Corp.
4.000%, 05/15/10 875,250
--------------
3,082,125
--------------
TOTAL CONVERTIBLE BONDS
(Cost $8,662,059) 8,839,367
==============
See accompanying Notes to Schedule of Investments
F-10
CALAMOS GLOBAL TOTAL RETURN FUND
NOVEMBER 30, 3005 (UNAUDITED)
NUMBER OF SHARES VALUE
-------------------------------------------------------------------------
CONVERTIBLE PREFERRED STOCKS (8.5%)
CONSUMER DISCRETIONARY (1.5%)
56,000 Ford Motor Company Capital
Trust II
6.50% $ 1,727,040
--------------
CONSUMER STAPLES (1.4%)
72,000 Albertson's, Inc.
7.25% 1,678,320
--------------
FINANCIALS (4.2%)
550,000 Fortis, NV (Assurant)*
7.75% 678,562
32,000 Genworth Financial, Inc.
6.00% 1,217,600
66,000 Lehman Brothers Holdings, Inc.
6.25% 1,712,040
16,000 Morgan Stanley (Nuveen Investments)
5.88% 633,856
15,000 National Australia Bank, Ltd.
7.88% 602,400
--------------
4,844,458
--------------
INDUSTRIALS (1.4%)
575,000 GBP BAE Systems, PLC
7.75% 1,647,550
--------------
TOTAL CONVERTIBLE PREFERRED
STOCKS
(Cost $9,886,540) 9,897,368
==============
COMMON STOCKS (45.1%)
CONSUMER DISCRETIONARY (3.0%)
100,000 SEK Electrolux AB 2,319,525
15,000 Grupo Televisa, S.A. 1,191,000
--------------
3,510,525
--------------
CONSUMER STAPLES (4.9%)
100,000 GBP British American Tobacco p.l.c. 2,170,690
410,000 ZAR Pick'n Pay Stores Ltd. 1,680,756
20,000 Reynolds American, Inc.+ 1,780,400
--------------
5,631,846
--------------
ENERGY (6.2%)
30,000 Chevrontexaco Corp.++ 1,719,300
88,000 EUR Eni S.p.A. 2,384,490
11,000 EUR OMV, AG 604,480
31,000 PetroChina Company, Ltd.+ 2,439,700
--------------
7,147,970
--------------
FINANCIALS (12.7%)
105,000 AUD Australian Stock Exchange, Ltd. 2,358,760
25,000 Bancolombia, SA 642,500
40,000 Bank of America Corp.++ 1,835,600
7,000 Goldman Sachs Group, Inc.++ 902,720
31,000 GBP Investec, PLC 1,258,076
24,000 AUD Macquarie Bank Limited 1,196,105
170,000 AUD QBE Insurance Group Limited 2,383,722
1,500,000 SGD Singapore Exchange, Ltd. 2,436,730
43,000 Washington Mutual, Inc.++ 1,771,170
--------------
14,785,383
--------------
See accompanying Notes to Schedule of Investments
F-11
CALAMOS GLOBAL TOTAL RETURN FUND
NOVEMBER 30, 3005 (UNAUDITED)
NUMBER OF SHARES VALUE
--------------------------------------------------------------------------
HEALTH CARE (6.3%)
6,500 Alcon, Inc.+ $ 911,300
190,000 ZAR Aspen Pharmacare Holdings, Ltd.# 962,255
53,000 Bristol-Myers Squibb Company++ 1,144,270
60,000 Merck & Company, Inc.++ 1,764,000
2,500 CHF Nobel Biocare Holding AG 568,081
52,000 Pfizer, Inc.++ 1,102,400
6,000 CHF Roche Holding AG 898,021
---------------
7,350,327
---------------
INDUSTRIALS (4.4%)
9,000 Boeing Company++ 613,710
11,000 JPY FANUC, Ltd. 898,031
87,000 JPY Komatsu Ltd. 1,204,525
260,000 GBP Rolls-Royce Group plc# 1,748,200
15,000 EUR YIT-Yhtyma Oyj 606,165
---------------
5,070,631
---------------
INFORMATION TECHNOLOGY (4.6%)
32,000 JPY HOYA Corp. 1,153,500
9,000 Infosys Technologies, Ltd. 648,540
36,000 LSI Logic Corp.#++ 295,560
22,000 Microsoft Corp.++ 609,620
100,000 EUR Nokia Corp. 1,704,446
185,000 JPY Toshiba Corp. 969,103
---------------
5,380,769
---------------
MATERIALS (1.1%)
28,000 CAD Teck Cominco Ltd. 1,285,218
---------------
UTILITIES (1.9%)
132,000 GBP Scottish & Southern Energy 2,233,781
---------------
TOTAL COMMON STOCKS
(Cost $51,579,910) 52,396,450
===============
PRINCIPAL AMOUNT VALUE
--------------------------------------------------------------------------
SHORT-TERM INVESTMENT (1.6%)
$ 1,851,000 Citigroup, Inc.
3.970%, 12/01/05
(Cost $1,851,000) $ 1,851,000
---------------
NUMBER OF SHARES VALUE
--------------------------------------------------------------------------
INVESTMENT OF CASH COLLATERAL
FOR SECURITIES ON LOAN (8.2%)
9,463,215 Bank of New York Institutional
Cash Reserve Fund
current rate 4.146%
(Cost $9,463,215) 9,463,215
---------------
TOTAL INVESTMENTS (108.6%)
(Cost $124,877,415) $ 126,067,512
===============
NUMBER OF CONTRACTS VALUE
--------------------------------------------------------------------------
WRITTEN OPTIONS (-0.2%)
FINANCIALS (-0.2%)
S&P 500#
35 Call, 01/21/06, 1,250 (80,500)
50 Call, 02/18/06, 1,275 (95,000)
---------------
TOTAL WRITTEN OPTIONS
(Premium $167,438) (175,500)
---------------
See accompanying Notes to Schedule of Investments
F-12
CALAMOS GLOBAL TOTAL RETURN FUND
NOVEMBER 30, 3005 (UNAUDITED)
PAYABLE UPON RETURN OF SECURITIES ON LOAN
(-8.2%) (9,463,215)
---------------
LIABILITIES, LESS OTHER ASSETS
(-0.3%) (365,206)
---------------
NET ASSETS APPLICABLE TO COMMON SHAREHOLDERS (100%) $ 116,063,591
===============
NOTES TO SCHEDULE OF INVESTMENTS
Note: Market Value for Securities denominated in foreign currencies are shown in
U.S. dollars.
# Non-income producing security.
* 144A securities are those that are exempt from registration under Rule 144A
of the Securities Act of 1933, as amended. These securities are generally
issued to qualified institutional buyers ("QIBs"), such as the Fund. Any
resale of these securities must generally be effected through a sale that
is exempt from registration (e.g. a sale to another QIB), or the security
must be registered for public sale. At November 30, 2005, the market value
of 144A securities that could not be exchanged to the registered form is
$5,994,262 or 5.2% of net assets.
+ Security, or portion of security, is on loan.
++ Security, or portion of security, is held in a segregated account as
collateral for written options aggregating to a total market value of
$11,170,350
FOREIGN CURRENCY ABBREVIATIONS
AUD Australian Dollar
CAD Canadian Dollar
CHF Swiss Franc
EUR European Monetary Unit
GBP British Pound Sterling
JPY Japanese Yen
SEK Swedish Krona
SGD Singapore Dollar
ZAR South African Rand
See accompanying Notes to Schedule of Investments
F-13
STATEMENT OF ASSETS AND LIABILITIES
November 30, 2005 (Unaudited)
ASSETS
Investments, at value* (cost $124,877,415) $126,067,512
Cash with custodian (interest bearing) 168,333
Accrued interest and dividends receivables 1,108,716
------------
Total assets 127,344,561
------------
LIABILITIES
Options written, at value (premium $167,438) 175,500
Payable upon return of securities loaned 9,463,215
Payable for investments purchased 1,282,089
Payable for accrued offering costs 240,209
Payable to investment advisor 62,971
Payable to financial accountant 1,078
Other accounts payable and accrued liabilities 55,908
------------
Total liabilities 11,280,970
------------
NET ASSETS APPLICABLE TO COMMON SHAREHOLDERS 116,063,591
============
COMPOSITION OF NET ASSETS APPLICABLE TO COMMON SHAREHOLDERS
Common stock, no par value, unlimited shares authorized, 8,006,981 shares issued and outstanding 114,438,930
Undistributed net investment income (loss) 324,124
Accumulated net realized gain (loss) on investments, written options and foreign currency transactions 118,246
Net unrealized appreciation (depreciation) on investments, written options and foreign currency translations 1,182,291
------------
NET ASSETS APPLICABLE TO COMMON SHAREHOLDERS $116,063,591
============
Net asset value per common share based on 8,006,981 shares issued and outstanding $ 14.50
============
* Includes $9,237,611 of securities loaned
See accompanying Notes to Financial Statements.
F-14
STATEMENT OF OPERATIONS
One month ended November 30, 2005 (unaudited)
INVESTMENT INCOME
Interest $ 303,998
Dividends (net of foreign taxes withheld of $238) 127,924
Securities lending income 7,298
-----------
Total investment income 439,220
-----------
EXPENSES
Investment advisory fees 94,918
Financial accounting fees 1,078
Accounting fees 1,788
Printing and mailing fees 6,660
Audit and legal fees 4,623
Custodian fees 720
Registration fees 2,880
Trustees' fees 840
Transfer agent fees 990
Other 599
-----------
Total expenses 115,096
-----------
NET INVESTMENT INCOME(LOSS) 324,124
-----------
REALIZED AND UNREALIZED GAIN(LOSS) FROM INVESTMENTS, WRITTEN OPTIONS AND FOREIGN
CURRENCY Net realized gain (loss) from:
Investments 521
Written options -
Foreign currency transactions 117,725
Change in net unrealized appreciation/depreciation on:
Investments 1,190,097
Written options (8,062)
Foreign currency translations 256
-----------
NET REALIZED AND UNREALIZED GAIN (LOSS) FROM INVESTMENTS, WRITTEN OPTIONS AND FOREIGN CURRENCY 1,300,537
-----------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ 1,624,661
-----------
See accompanying Notes to Financial Statements.
F-15
STATEMENT OF CHANGES IN NET ASSETS (UNAUDITED)
FOR THE ONE FOR THE PERIOD
MONTH ENDED ENDED OCTOBER
NOVEMBER 30, 2005 31, 2005*
-----------------------------------------------------------------------------------------------------------------------------------
OPERATIONS
Net investment income (loss) $ 324,124 $ (20,861)
Net realized gain (loss) from investments, written options and foreign currency transactions 118,246 -
Change in net unrealized appreciation/depreciation on investments, written options and
foreign currency translations 1,182,291 -
------------- -------------
Net increase (decrease) in net assets applicable to common shareholders resulting from
operations 1,624,661 (20,861)
------------- -------------
DISTRIBUTIONS TO COMMON SHAREHOLDERS FROM
Net investment income - -
CAPITAL STOCK TRANSACTIONS
Proceeds from initial offering - 114,700,000
Offering costs on common shares - (240,209)
------------- -------------
Net increase (decrease) in net assets from capital stock transactions - 114,459,791
------------- -------------
TOTAL INCREASE (DECREASE) IN NET ASSETS APPLICABLE TO COMMON SHAREHOLDERS 1,624,661 114,438,930
------------- -------------
NET ASSETS APPLICABLE TO COMMON SHAREHOLDERS
Beginning of period 114,438,930 -
End of period $ 116,063,591 $ 114,438,930
============= =============
Undistributed net investment income (loss) $ 324,124 $ -
* The Fund commenced operations on October 27, 2005.
See accompanying Notes to Financial Statements.
F-16
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION. Calamos Global Total Return Fund (the "Fund") was organized as a
Delaware statutory trust on March 30, 2004 and is registered under the
Investment Company Act of 1940 (the "1940 Act") as a diversified, closed-end
management investment company. The Fund commenced operations on October 27,
2005.
The Fund's investment objective is to provide total return through a combination
of capital appreciation and current income.
PORTFOLIO VALUATION. In computing the Fund's net asset value, portfolio
securities that are traded on a securities exchange in the United States, except
for option securities, are valued at the last reported sale price as of the time
of valuation, or lacking any current reported sale at the time of valuation, at
the mean between the most recent bid and asked quotations. Each option security
traded on a securities exchange in the United States is valued at the last
current reported sale price as of the time of valuation if the last current
reported sale price falls within the consolidated bid/ask quote for the option
security. If the last current reported sale price as of the time of valuation
does not fall within the consolidated bid/ask quote for the option security, the
security is valued at the mid-point of the consolidated bid/ask quote for the
option security. Each security traded in the over-the-counter market and quoted
on the NASDAQ National Market System, is valued at the NASDAQ Official Closing
Price ("NOCP"), as determined by NASDAQ, or lacking an NOCP, the last current
reported sale price as of the time of valuation by NASDAQ, or lacking any
current reported sale on NASDAQ at the time of valuation, at the mean between
the most recent bid and asked quotations. Each over-the-counter option that is
not traded through the Options Clearing Corporation is valued by the
counterparty, or if the counterparty's price is not readily available then by
using the Black-Scholes method. Each other security traded over-the-counter is
valued at the mean between the most recent bid and asked quotations. Short-term
securities with maturities of 60 days or less are valued at amortized cost,
which approximates market value.
When market quotations are not readily available or when the valuation methods
mentioned above are not reflective of the fair value of the security, the
security is priced at a fair value following procedures and/or guidelines
approved by the Board of Trustees, which may include utilizing a systematic fair
valuation model provided by an independent pricing system. The Fund may also use
fair value pricing if the value of a security it holds is, pursuant to Board of
Trustees' guidelines, materially affected by events occurring before the Fund's
pricing time but after the close of the primary market or exchange on which the
security is traded. These procedures may utilize valuations furnished by pricing
services approved by the Board of Trustees, which may be based on market
transactions for comparable securities and various relationships between
securities that are generally recognized by institutional traders, a
computerized matrix system, or appraisals derived from information concerning
the securities or similar securities received from recognized dealers in those
securities. When fair value pricing is employed, the value of the portfolio
security used to calculate the Funds' net asset value may differ from quoted or
official closing prices.
Securities that are principally traded in a foreign market are valued at the
last current sale price at the time of valuation or lacking any current or
reported sale, at the time of valuation, at the mean between the most recent bid
and asked quotations as of the close of the appropriate exchange or other
designated time. Trading in securities on European and Far Eastern securities
exchanges and over-the-counter markets is normally completed at various times
before the close of business on each day on which the New York Stock Exchange
("NYSE") is open. Trading of these securities may not take place on every NYSE
business day. In addition, trading may take place in various foreign markets on
Saturdays or on other days when the NYSE is not open and on which the Fund's net
asset value is not calculated. As stated above, if the market prices are not
readily available or are not reflective of the fair value of the security, the
security will be priced at a fair value following procedures approved by
F-17
NOTES TO FINANCIAL STATEMENTS
the Board of Trustees. In light of the judgment involved in fair value
decisions, there can be no assurance that a fair value assigned to a particular
security is accurate.
INVESTMENT TRANSACTIONS AND INVESTMENT INCOME. Short-term investment
transactions are recorded on a trade date basis. Long-term investment
transactions are recorded on a trade date plus one basis, except for fiscal
quarter ends, which are recorded on trade date. Net realized gains and losses
from investment transactions are reported on an identified cost basis. Interest
income is recognized using the accrual method and includes accretion of original
issue and market discount and amortization of premium. Dividend income is
recognized on the ex-dividend date, except that certain dividends from foreign
securities are recorded as soon as the information becomes available.
FOREIGN CURRENCY TRANSLATION. Except for securities of foreign issuers valued by
a pricing service, values of investments and other assets and liabilities
denominated in foreign currencies are translated into U.S. dollars using a rate
selected by the advisor from rates quoted by any major bank or dealer in the
particular currency market, as reported by a recognized quotation dissemination
service.
The Fund does not isolate that portion of the results of operations resulting
from changes in foreign exchange rates on investments from the fluctuations
arising from changes in market prices of securities held. Such fluctuations are
included with the net realized and unrealized gain or loss from investments.
Reported net realized foreign currency gains or losses arise from disposition of
foreign currency, foreign currency gains or losses realized between the trade
and settlement dates on securities transactions, and the difference between the
amounts of dividends, interest and foreign withholding taxes recorded on the
Fund's books on the transaction date and the U.S. dollar equivalent of the
amounts actually received or paid. Net unrealized foreign currency appreciation
and depreciation arise from changes (due to the changes in the exchange rate) in
the value of foreign currency and other assets and liabilities denominated in
foreign currencies held at period end.
OPTION TRANSACTIONS. For hedging and investment purposes, the Fund may purchase
or write (sell) put and call options. One of the risks associated with
purchasing an option, among others, is that the Fund pays a premium whether or
not the option is exercised. Additionally, the Fund bears the risk of loss of
premium and change in market value should the counterparty not perform under the
contract. Put and call options purchased are accounted for in the same manner as
portfolio securities. The cost of securities acquired through the exercise of
purchased call options is increased by premiums paid. The proceeds from
securities sold through the exercise of purchased put options are decreased by
the premiums paid.
When the Fund writes an option, an amount equal to the premium received by the
Fund is recorded as a liability and is subsequently adjusted to the current
value of the option written. Premiums received from writing options that expire
unexercised are treated by the Fund on the expiration date as realized gains
from written options. The difference between the premium and the amount paid on
effecting a closing purchase transaction, including brokerage commissions, is
also treated as a realized gain, or, if the premium is less than the amount paid
for the closing purchase transaction, as a realized loss. If a call option is
exercised, the premium is added to the proceeds from the sale of the underlying
security or currency in determining whether the Fund has realized a gain or
loss. If a put option is exercised, the premium reduces the cost basis of the
securities purchased by the Fund. The Fund as writer of an option bears the
market risk of an unfavorable change in the price of the security underlying the
written option.
USE OF ESTIMATES. The preparation of financial statements in conformity with
U.S. generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts
F-18
NOTES TO FINANCIAL STATEMENTS
reported in the financial statements and accompanying notes. Actual results may
differ from those estimates.
INCOME TAXES. No provision has been made for income taxes because the Fund's
policy is to qualify as a regulated investment company under Subchapter M of the
Internal Revenue Code and distribute to shareholders substantially all of its
taxable income and gains.
Dividends and distributions paid to shareholders are recorded on the ex-dividend
date. The amount of dividends and distributions from net investment income and
net realized capital gains is determined in accordance with federal income tax
regulations, which may differ from U.S. generally accepted accounting
principles. To the extent these "book/tax" differences are permanent in nature,
such amounts are reclassified within the capital accounts based on their federal
tax-basis treatment. These differences are primarily due to differing treatments
for foreign currency transactions, contingent payment debt instruments and
methods of amortizing and accreting fixed income securities. Financial records
are not adjusted for temporary differences.
The Fund has adopted a level rate monthly distribution to common shareholders.
The rate may be modified by the Board of Trustees from time to time.
Monthly distributions may include net investment income, net realized short-term
capital gains and, if necessary, return of capital. In addition, distributions
may include net realized long-term capital gains to the extent permitted by the
1940 Act.
In order to make these monthly distributions, the Fund might have to sell a
portion of its investment portfolio at a time when independent investment
judgment might not dictate such action. Also, for purposes of maintaining level
rate distributions the Fund may realize short-term capital gains on securities
that, if sold at a later date, would have resulted in long-term capital gains.
Maintenance of level rate distributions may increase transaction and tax costs
associated with the Fund.
INDEMNIFICATIONS. Under the Fund's organizational documents, its Officers and
Trustees are indemnified against certain liabilities arising out of the
performance of their duties to the Fund. In addition, in the normal course of
business, the Fund enters into contracts that provide general indemnifications
to other parties. The Fund's maximum exposure under these arrangements is
unknown as this would involve future claims that may be made against the Fund
that have not yet occurred. However, the Fund has not had prior claims or losses
pursuant to these contracts and expects the risk of loss to be remote.
NOTE 2 - INVESTMENT ADVISOR AND TRANSACTIONS WITH AFFILIATES OR CERTAIN OTHER
PARTIES
Pursuant to an investment advisory agreement with Calamos Advisors LLC
("Calamos Advisors"), the Fund pays an annual fee, payable monthly, equal to
1.00% based on the average weekly managed assets. "Managed assets" means the
Fund's total assets (including any assets attributable to any leverage that may
be outstanding) minus total liabilities (other than debt representing financial
leverage).
Calamos Advisors receives a fee payable monthly at the annual rate of 0.0175% on
the first $1 billion of combined assets; 0.0150% on the next $1 billion of
combined assets; and 0.0110% on combined assets above $2 billion for financial
accounting services (for purposes of this calculation, "combined assets" means
the total average daily net assets of Calamos Investment Trust and Calamos
Advisors Trust and the average daily managed assets of Calamos Convertible and
High Income Fund, Calamos Convertible Opportunities and Income Fund, Calamos
Strategic Total Return Fund and Calamos Global Total Return Fund). Financial
accounting services include, but are not limited to, the following: managing
expenses and expense payment processing; monitoring the calculation of
F-19
NOTES TO FINANCIAL STATEMENTS
expense accrual amounts; calculating, tracking, and reporting tax adjustments on
all assets and liabilities and monitoring trustee deferred compensation plan
accruals and valuations. The Fund will pay its pro rata share of the financial
accounting service fee payable to Calamos Advisors based on the Fund's relative
portion of combined assets.
The Fund began reimbursing the advisor for a portion of the compensation paid to
the Chief Compliance Officer of the Trust. This compensation is reported as part
of "Other" expenses on the Statement of Operations.
Certain officers and Trustees of the Fund are also officers and directors of
Calamos Financial Services LLC ("CFS") and Calamos Advisors. All officers and
affiliated Trustees serve without direct compensation from the Fund.
The Fund has adopted a deferred compensation plan (the "Plan"). Under the Plan,
a trustee who is not an "interested person" (as defined in the 1940 Act) of CFS
or Calamos Advisors and has elected to participate in the Plan (a "participating
trustee") may defer receipt of all or a portion of his compensation from the
Fund. The deferred compensation payable to the participating trustee is credited
to the trustee's deferral account as of the business day such compensation would
have been paid to the participating trustee. The value of a participating
trustee's deferred compensation account at any time is equal to what would be
the value if the amounts credited to the account had instead been invested in
shares of one or more of the Funds of the Calamos Investment Trust as designated
by the trustee. Thus, the value of the account increases with contributions to
the account or with increases in the value of the measuring shares, and the
value of the account decreases with withdrawals from the account or with
declines in the value of the measuring shares. If a participating trustee
retires, the trustee may elect to receive payments under the plan in a lump sum
or in equal installments over a period of five years. If a participating trustee
dies, any amount payable under the Plan will be paid to the trustee's
beneficiaries. There are no deferred compensation investments included in the
Statement of Assets and Liabilities at November 30, 2005.
NOTE 3 - INVESTMENTS
Purchases and sales of investments, other than short-term obligations, for the
month end November 30, 2005 were as follows:
Purchases $115,981,498
Proceeds from sales 2,409,654
The following information is presented on an income tax basis as of November 30,
2005. Differences between amounts for financial statements and Federal income
tax purposes are primarily due to timing differences.
The cost basis of investments for federal income tax purposes at November 30,
2005 was as follows:
Cost basis of investments $124,925,773
------------
Gross unrealized appreciation 1,896,157
Gross unrealized depreciation (754,418)
------------
Net unrealized appreciation (depreciation) $ 1,141,739
------------
F-20
NOTES TO FINANCIAL STATEMENTS
NOTE 4 - COMMON STOCK
There are unlimited common shares of beneficial interest authorized and
8,006,981 shares outstanding at November 30, 2005. Calamos Advisors owned 6,981
of the outstanding shares at October 31, 2005. Transactions in common shares
were as follows:
FOR THE ONE MONTH ENDED FOR THE PERIOD ENDED
NOVEMBER 30, 2005 OCTOBER 31, 2005*
-------------------------------------------------------------------------------------------------
Beginning shares 8,006,981 -
Shares sold - 8,006,981
Shares issued through reinvestment of - -
distributions
-------------------------------------------------------------------------------------------------
Ending shares 8,006,981 8,006,981
-------------------------------------------------------------------------------------------------
* The Fund commenced operations on October 27, 2005.
NOTE 5 - FORWARD FOREIGN CURRENCY CONTRACTS
The Fund may engage in portfolio hedging with respect to changes in currency
exchange rates by entering into forward foreign currency contracts to purchase
or sell currencies. A forward foreign currency contract is a commitment to
purchase or sell a foreign currency at a future date at a negotiated forward
rate. Risks associated with such contracts include, among other things, movement
in the value of the foreign currency relative to the U.S. dollar and the ability
of the counterparty to perform. The net unrealized gain, if any, represents the
credit risk to the Fund on a forward foreign currency contract. The contracts
are valued daily at forward exchange rates, and an unrealized gain or loss is
recorded. The Fund realizes a gain or loss upon settlement of the contracts.
There were no open forward foreign currency contracts at November 30, 2005.
NOTE 6 - OPTIONS TRANSACTIONS
The Fund may engage in options transactions and in doing so achieve similar
objectives to what it would achieve through the sale or purchase of individual
securities. Transactions in options written during the month ended November 30,
2005 were as follows:
Number of Premiums
Contracts Received
---------------------------------------------------------------------------------------
Options outstanding at October 31, 2005 - -
Options written 85 $167,438
---------------------------------------------------------------------------------------
Options outstanding at November 30, 2005 85 $167,438
NOTE 7 - SECURITIES LENDING
During the month ended November 30, 2005 the Fund lent certain of its securities
to broker-dealers and banks. Any such loan must be continuously secured by
collateral in cash or cash equivalents maintained on a current basis in an
amount at least equal to the market value of the securities loaned by the Fund.
The Fund continues to receive the equivalent of the interest or dividends paid
by the
F-21
NOTES TO FINANCIAL STATEMENTS
issuer on the securities loaned and also receives an additional return that may
be in the form of a fixed fee or a percentage of the collateral. The Fund may
pay reasonable fees to persons unaffiliated with the Fund for services in
arranging these loans. The Fund has the right to call the loan and obtain the
securities loaned at any time on notice of not more than five business days. The
Fund does not have the right to vote the securities during the existence of the
loan but could call the loan in an attempt to permit voting of the securities in
certain circumstances. Upon return of the securities loaned, the cash or cash
equivalent collateral will be returned to the borrower. In the event of
bankruptcy or other default of the borrower, the Fund could experience both
delays in liquidating the loan collateral or recovering the loaned securities
and losses, including (a) possible decline in the value of the collateral or in
the value of the securities loaned during the period while the Fund seeks to
enforce its rights thereto, (b) possible subnormal levels of income and lack of
access to income during this period, and (c) the expenses of enforcing its
rights. In an effort to reduce these risks, Calamos Advisors and the security
lending agent will monitor the creditworthiness of the firms to which the Fund
lends securities. At November 30, 2005, the Fund had securities valued at
$9,237,611 that were on loan to broker-dealers and banks and $9,463,215 in cash
or cash equivalent collateral.
F-22
FINANCIAL HIGHLIGHTS (UNAUDITED)
SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD WERE AS FOLLOWS:
November 1, 2005 October 27, 2005*
through through
November 30, 2005 October 31, 2005
------------------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $ 14.29 $ 14.32(a)
---------------------------------------
Income from investment operations:
Net investment income (loss) 0.04 -(b)
Net realized and unrealized gain (loss) from investments, options,
foreign currency and interest rate swaps 0.17 -
---------------------------------------
Total from investment operations 0.21 -
------------------------------------------------------------------------------------------------------------------------------------
Less dividends to common shareholders from:
Net investment income - -
Capital charge resulting from issuance of common shares - (0.03)
------------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 14.50 $ 14.29
=======================================
Market value, end of period $ 13.35 $ 15.00
------------------------------------------------------------------------------------------------------------------------------------
Total investment return based on(c):
Net asset value 1.47% (0.24)%
Market value (11.00)% 0.00%
------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data:
Net assets applicable to common shareholders, end of period (000's omitted) $ 116,064 $ 114,439
Ratios to average net assets applicable to common shareholders:
Net expenses(d) 1.21% 1.33%
Gross expenses prior to waivers and reimbursement of expenses by the advisor (d) 1.21% 3.37%
Net investment income (loss)(d) 3.41% (1.33)%
Portfolio turnover rate 4%
Average commission rate paid $ 0.0255
------------------------------------------------------------------------------------------------------------------------------------
* Commencement of operations.
(a) Net of sales load of $0.675 on initial shares issued and beginning net
asset value of $14.325.
(b) Amount equated to less than $0.005 per common share.
(c) Total investment return is calculated assuming a purchase of common stock
on the opening of the first day and a sale on the closing of the last day
of the period reported. Dividends and distributions are assumed, for
purposes of this calculation, to be reinvested at prices obtained under the
Fund's dividend reinvestment plan. Total return is not annualized for
periods less than one year. Brokerage commissions are not reflected.
(d) Annualized for periods less than one year.
F-23
APPENDIX A
CALAMOS GLOBAL TOTAL RETURN FUND
STATEMENT OF PREFERENCES OF
AUCTION RATE CUMULATIVE PREFERRED SHARES ("PREFERRED SHARES")
TABLE OF CONTENTS
PAGE
Designation........................................................................................ 1
Part I: Terms of Preferred Shares................................................................. 1
1. Number of Shares; Ranking................................................................. 1
2. Dividends................................................................................. 2
3. Redemption................................................................................ 4
4. Designation of Dividend Period............................................................ 8
5. Restrictions on Transfer.................................................................. 9
6. Voting Rights............................................................................. 9
7. Liquidation Rights........................................................................ 13
8. Auction Agent............................................................................. 14
9. 1940 Act Preferred Shares Asset Coverage.................................................. 14
10. Preferred Shares Basic Maintenance Amount................................................. 14
11. Certain Other Restrictions................................................................ 14
12. Compliance Procedures for Asset Maintenance Tests......................................... 15
13. Notices................................................................................... 16
14. Waiver.................................................................................... 16
15. Termination............................................................................... 16
16. Amendment................................................................................. 17
17. Definitions............................................................................... 17
18. Interpretation............................................................................ 43
Part II: Auction Procedures........................................................................ 44
1. Certain Definitions....................................................................... 44
2. Orders.................................................................................... 45
3. Submission of Orders by Broker-Dealers to Auction Agent................................... 46
4. Determination of Sufficient Clearing Bids, Winning Bid Rate and Applicable Rate........... 48
5. Acceptance and Rejection of Submitted Bids and Submitted Sell Orders and Allocation....... 50
6. Transfer of Preferred Shares.............................................................. 52
i
Calamos Global Total Return Fund, a Delaware statutory trust (the
"Trust"), certifies that:
FIRST: Pursuant to authority expressly vested in the Board of Trustees of
the Trust by Article V of its Agreement and Declaration of Trust (which as
hereafter amended, restated and supplemented from time to time, is together with
this Statement, the "Declaration"), the Board of Trustees has duly authorized
the creation and issuance of, __________ shares of preferred shares (no par
value) and has further classified __________ of such shares as "Series __
Preferred Shares", liquidation preference $25,000 per share (herein referred to,
together with any additional series of Preferred Shares, the "Series," and
together, with any additional Preferred Shares, the "Preferred Shares").
SECOND: The preferences, voting powers, restrictions, limitations as to
dividends, qualifications, and terms and conditions of redemption, of the
Preferred Shares are as follows:
DESIGNATION
Series __ Preferred Shares: a Series of __________ Preferred Shares, no
par value, liquidation preference $25,000 per share, is hereby designated
"Series __ Preferred Shares" ("Series __ Preferred Shares"). Each share of
Series __ Preferred Shares shall have an initial dividend rate per annum equal
to _____% and an initial Dividend Payment Date of __________ __, 200__ and have
such other preferences, rights, voting powers, restrictions, limitations as to
dividends, qualifications and terms and conditions of redemption, in addition to
those required by applicable law, or as are set forth in Part I and Part II of
this Statement. The Series __ Preferred Shares shall constitute a separate
series of Preferred Shares of the Trust.
Subject to the provisions of Section 11(b) of Part I hereof, the Board of
Trusts of the Trust may, in the future, reclassify additional shares of the
Trust's unissued common shares as preferred shares, with the same preferences,
rights, voting powers, restrictions, limitations as to dividends, qualifications
and terms and conditions of redemption and other terms herein described, except
that the dividend rate for its initial Dividend Period, its initial Dividend
Payment Date and any other changes in the terms herein set forth shall be as set
forth in this Statement with respect to the additional shares.
As used in Part I and Part II of this Statement, capitalized terms shall
have the meanings provided in Section 17 of Part I and Section 1 of Part II of
this Statement.
PART I: TERMS OF PREFERRED SHARES
1. Number of Shares; Ranking.
(a) The initial number of authorized shares constituting the Series
__ Preferred Shares is __________ shares. No fractional shares of any Series
shall be issued.
(b) Shares of each Series that at any time have been redeemed or
purchased by the Trust shall, after such redemption or purchase, have the status
of authorized but unissued preferred shares of beneficial interest.
(c) Shares of each Series shall rank on a parity with shares of any
other Series of preferred shares of the Trust (including any other Preferred
Shares) as to the payment of dividends to which such shares are entitled.
(d) No Holder of shares of any Series shall have, solely by reason
of being such a holder, any preemptive exchange, conversion or other right to
acquire, purchase or subscribe for any
A-1
shares of any Series, Common Shares or other securities of the Trust which it
may hereafter issue or sell. The Preferred Shares shall not be subject to any
sinking fund.
2. Dividends.
(a) The Holders of shares of each Series shall be entitled to
receive, when, as and if declared by the Board of Trustees, out of funds legally
available therefor, cumulative cash dividends on their shares at the Applicable
Rate, determined as set forth in paragraph (c) of this Section 2, and no more,
payable on the respective dates determined as set forth in paragraph (b) of this
Section 2. Dividends on the Outstanding shares of each Series issued on the Date
of Original Issue shall accumulate from the Date of Original Issue.
(b) (i) Dividends shall be payable when, as and if declared by the
Board of Trustees following the initial Dividend Payment Date, subject to
subparagraph (b)(ii) of this Section 2, on the shares of each Series, as
follows:
(A) with respect to any Dividend Period of one year or
less, on the Business Day following the last day of such Dividend
Period; provided, however, if the Dividend Period is more than 91
days then on the 91st, 181st and 271st days within such period, if
applicable, and on the Business Day following the last day of such
Dividend Period; and
(B) with respect to any Dividend Period of more than one
year, on a quarterly basis on each January 1, April 1, July 1 and
October 1 within such Dividend Period and on the Business Day
following the last day of such Dividend Period.
(ii) If a day for payment of dividends resulting from the
application of subparagraph (b) above is not a Business Day, then the
Dividend Payment Date shall be the first Business Day following such day
for payment of dividends.
(iii) The Trust shall pay to the Paying Agent not later than
12:00 noon, New York City time, on each Dividend Payment Date for a
Series, an aggregate amount of immediately available funds equal to the
dividends to be paid to all Holders of such Series on such Dividend
Payment Date. The Trust shall not be required to establish any reserves
for the payment of dividends.
(iv) All moneys paid to the Paying Agent for the payment of
dividends shall be held in trust for the payment of such dividends by the
Paying Agent for the benefit of the Holders specified in subparagraph
(b)(v) of this Section 2. Any moneys paid to the Paying Agent in
accordance with the foregoing but not applied by the Paying Agent to the
payment of dividends will, upon request and to the extent permitted by
law, be repaid to the Trust at the end of 90 days from the date on which
such moneys were to have been so applied.
(v) Each dividend on each Series shall be paid on the Dividend
Payment Date therefor to the Holders of that Series as their names appear
on the share ledger or share records of the Trust on the Business Day next
preceding such Dividend Payment Date; provided, however, if dividends are
in arrears, they may be declared and paid at any time to Holders as their
names appear on the share ledger or share records of the Trust on such
date not exceeding 15 days preceding the payment date thereof, as may be
fixed by the Board of Trustees. No interest will be payable in respect of
any dividend payment or payments which may be in arrears.
A-2
(c) (i) The dividend rate on Outstanding shares of each Series
during the period from and after the Date of Original Issue to and
including the last day of the initial Dividend Period therefor shall be
equal to the rate set forth under "Designation" above. For each subsequent
Dividend Period for each Series, the dividend rate shall be equal to the
rate per annum that results from an Auction (but the rate set at the
Auction will not exceed the Maximum Rate); provided, however, that if an
Auction for any subsequent Dividend Period of a Series is not held for any
reason or if Sufficient Clearing Orders have not been made in an Auction
(other than as a result of all shares of any Series being the subject of
Submitted Hold Orders and other than in an auction for a Special Dividend
Period), then the dividend rate on the shares of that Series for any such
Dividend Period shall be the Maximum Rate (except (i) during a Default
Period when the dividend rate shall be the Default Rate, as set forth in
Section 2(c)(ii) below or (ii) after a Default Period and prior to the
beginning of the next Dividend Period when the dividend rate shall be the
Maximum Rate at the close of business on the last day of such Default
Period). If the Trust has declared a Special Dividend Period and there are
not Sufficient Clearing Orders, the dividend rate for the next Dividend
Period will be the same as during the current Dividend Period. If as a
result of an unforeseeable disruption of the financial markets, an Auction
cannot be held, the dividend rate for the subsequent Dividend Period will
be the same as the dividend rate for the current Dividend Period.
(ii) Subject to the cure provisions in Section 2(c)(iii)
below, a "Default Period" with respect to a particular Series will
commence on any date the Trust fails to deposit irrevocably in trust in
same-day funds, with the Paying Agent by 12:00 noon, New York City time,
(A) the full amount of any declared dividend on that Series payable on the
Dividend Payment Date (a "Dividend Default") or (B) the full amount of any
redemption price (the "Redemption Price") payable on the date fixed for
redemption (the "Redemption Date") (a "Redemption Default") and together
with a Dividend Default, hereinafter referred to as "Default").
Subject to the cure provisions of Section 2(c)(iii) below, a
Default Period with respect to a Dividend Default or a Redemption Default
shall end on the Business Day on which, by 12:00 noon, New York City time,
all unpaid dividends and any unpaid Redemption Price shall have been
deposited irrevocably in trust in same-day funds with the Paying Agent. In
the case of a Dividend Default, the Applicable Rate for each Dividend
Period commencing during a Default Period will be equal to the Default
Rate, and each subsequent Dividend Period commencing after the beginning
of a Default Period shall be a Standard Dividend Period; provided,
however, that the commencement of a Default Period will not by itself
cause the commencement of a new Dividend Period. No Auction shall be held
during a Default Period applicable to that Series.
(iii) No Default Period with respect to a Dividend Default or
Redemption Default shall be deemed to commence if the amount of any
dividend or any Redemption Price due (if such default is not solely due to
the willful failure of the Trust) is deposited irrevocably in trust, in
same-day funds with the Paying Agent by 12:00 noon, New York City time
within three Business Days after the applicable Dividend Payment Date or
Redemption Date, together with an amount equal to the Default Rate applied
to the amount of such non-payment based on the actual number of days
comprising such period divided by 360 for each Series. The Default Rate
shall be equal to the Reference Rate multiplied by three (3).
(iv) The amount of dividends per share payable (if declared)
on each Dividend Payment Date of each Dividend Period of less than one (1)
year (or in respect of dividends on another date in connection with a
redemption during such Dividend Period) shall be computed by multiplying
the Applicable Rate (or the Default Rate) for such Dividend Period (or
A-3
a portion thereof) by a fraction, the numerator of which will be the
number of days in such Dividend Period (or portion thereof) that such
share was Outstanding and for which the Applicable Rate or the Default
Rate was applicable and the denominator of which will be 360 for each
Series, multiplying the amount so obtained by $25,000, and rounding the
amount so obtained to the nearest cent. During any Dividend Period of one
(1) year or more, the amount of dividends per share payable on any
Dividend Payment Date (or in respect of dividends on another date in
connection with a redemption during such Dividend Period) shall be
computed as described in the preceding sentence, except that it will be
determined on the basis of a year consisting of twelve 30-day months.
(d) Any dividend payment made on shares of any Series shall first be
credited against the earliest accumulated but unpaid dividends due with respect
to that Series.
(e) For so long as the Preferred Shares are Outstanding, except as
otherwise contemplated by Part I of this Statement, the Trust will not declare,
pay or set apart for payment any dividend or other distribution (other than a
dividend or distribution paid in shares of, or options, warrants or rights to
subscribe for or purchase, Common Shares or other shares ranking junior to the
Preferred Shares as to dividends or upon liquidation) with respect to Common
Shares or any other shares of beneficial interest of the Trust ranking junior to
the Preferred Shares as to dividends or upon liquidation, or call for
redemption, redeem, purchase or otherwise acquire for consideration any Common
Shares or other shares of beneficial interest ranking junior to the Preferred
Shares (except by conversion into or exchange for shares of the Trust ranking
junior to the Preferred Shares as to dividends and upon liquidation), unless (i)
immediately after such transaction, the Trust would have Eligible Assets with an
aggregate Discounted Value at least equal to the Preferred Shares Basic
Maintenance Amount and the 1940 Act Preferred Shares Asset Coverage would be
achieved, (ii) all cumulative and unpaid dividends due on or prior to the date
of the transaction have been declared and paid in full with respect to the
Trust's preferred shares, including the Preferred Shares, or shall have been
declared and sufficient funds for the payment thereof deposited with the Paying
Agent, and (iii) the Trust has redeemed the full number of preferred shares
required to be redeemed by any provision for mandatory redemption including the
Preferred Shares required to be redeemed by any provision for mandatory
redemption contained in Section 3(a)(ii) of Part I of this Statement.
(f) For so long as the Preferred Shares are Outstanding, except as
set forth in the next sentence, the Trust will not declare, pay or set apart for
payment on any series of shares of beneficial interest of the Trust ranking, as
to the payment of dividends, on a parity with the Preferred Shares for any
period unless full cumulative dividends have been or contemporaneously are
declared and paid on each Series through their most recent Dividend Payment
Date. When dividends are not paid in full upon the Preferred Shares through
their most recent Dividend Payment Dates or upon any other series of shares of
beneficial interest ranking on parity as to the payment of dividends with
Preferred Shares through their most recent respective Dividend Payment Dates,
all dividends declared upon the Preferred Shares and any other such series of
shares of beneficial interest ranking on parity as to the payment of dividends
with the Preferred Shares shall be declared pro rata so that the amount of
dividends declared per share on the Preferred Shares and such other series of
shares of beneficial interest ranking on parity therewith shall in all cases
bear to each other the same ratio that accumulated dividends per share on the
Preferred Shares and such other series of shares of beneficial interest ranking
on parity therewith bear to each other.
3. Redemption.
(a) (i) After the initial Dividend Period, subject to the provisions
of this Section 3 and to the extent permitted under the 1940 Act and
Delaware law, the Trust may, at its option, redeem in whole or in part out
of funds legally available therefor shares of any Series
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herein designated as (A) having a Dividend Period of one year or less, on
the Business Day after the last day of such Dividend Period by delivering
a notice of redemption not less than 15 calendar days and not more than 40
calendar days prior to the Redemption Date, at a redemption price per
share equal to $25,000, plus an amount equal to accumulated but unpaid
dividends thereon (whether or not earned or declared) to the Redemption
Date ("Redemption Price"), or (B) having a Dividend Period of more than
one year, on any Business Day prior to the end of the relevant Dividend
Period by delivering a notice of redemption not less than 15 calendar days
and not more than 40 calendar days prior to the Redemption Date, at the
Redemption Price, plus a redemption premium, if any, determined by the
Board of Trustees after consultation with the Broker-Dealers and set forth
in any applicable Specific Redemption Provisions at the time of the
designation of such Dividend Period as set forth in Section 4 of Part I of
this Statement; provided, however, that during a Dividend Period of more
than one year, no shares of any Series will be subject to optional
redemption except in accordance with any Specific Redemption Provisions
approved by the Board of Trustees after consultation with the
Broker-Dealers at the time of the designation of such Dividend Period.
Notwithstanding the foregoing, the Trust shall not give a notice of or
effect any redemption pursuant to this Section 3(a)(i) unless, on the date
on which the Trust gives such notice and on the Redemption Date, (a) the
Trust has available Deposit Securities with maturity or tender dates not
later than the day preceding the applicable Redemption Date and having a
value not less than the amount (including any applicable premium) due to
Holders of each Series by reason of the redemption of each Series on the
Redemption Date and (b) the Trust would have Eligible Assets with an
aggregate Discounted Value at least equal to the Preferred Shares Basic
Maintenance Amount immediately subsequent to such redemption, if such
redemption were to occur on such date, it being understood that the
provisions of paragraph (d) of this Section 3 shall be applicable in such
circumstances in the event the Trust makes the deposit and gives a notice
of redemption to the Auction Agent under paragraph (b) of this Section 3.
(ii) If the Trust fails as of any Valuation Date to meet the
Preferred Shares Basic Maintenance Amount Test or, as of the last Business
Day of any month, the 1940 Act Preferred Shares Asset Coverage, and such
failure is not cured within ten Business Days following the relevant
Valuation Date, in the case of a failure to meet the Preferred Shares
Basic Maintenance Amount Test, or the last Business Day of the following
month in the case of a failure to meet the 1940 Act Preferred Shares Asset
Coverage (each an "Asset Coverage Cure Date"), the Preferred Shares will
be subject to mandatory redemption out of funds legally available
therefor. The number of Preferred Shares to be redeemed in such
circumstances will be equal to the lesser of (A) the minimum number of
Preferred Shares the redemption of which, if deemed to have occurred
immediately prior to the opening of business on the relevant Asset
Coverage Cure Date, would result in the Trust meeting the Preferred Shares
Basic Maintenance Amount Test, and the 1940 Act Preferred Shares Asset
Coverage, as the case may be, in either case as of the relevant Asset
Coverage Cure Date (provided that, if there is no such minimum number of
shares the redemption of which would have such result, all Preferred
Shares then Outstanding will be redeemed) and (B) the maximum number of
Preferred Shares that can be redeemed out of funds expected to be
available therefor on the Mandatory Redemption Date at the Mandatory
Redemption Price set forth in subparagraph (a)(iii) of this Section 3.
(iii) In determining the Preferred Shares required to be
redeemed in accordance with the foregoing Section 3(a)(ii), the Trust
shall allocate the number of Preferred Shares required to be redeemed to
satisfy the Preferred Shares Basic Maintenance Amount Test or the 1940 Act
Preferred Shares Asset Coverage, as the case may be, pro rata or among the
Holders of the Preferred Shares in proportion to the number of shares they
hold and other preferred shares subject to mandatory redemption provisions
similar to those contained in this
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Section 3, subject to the further provisions of this subparagraph (iii).
The Trust shall effect any required mandatory redemption pursuant to: (A)
the Preferred Shares Basic Maintenance Amount Test, as described in
subparagraph (a)(ii) of this Section 3, no later than 30 days after the
Trust last met the Preferred Shares Basic Maintenance Amount Test, or (B)
the 1940 Act Preferred Shares Asset Coverage, as described in subparagraph
(a)(ii) of this Section 3, no later than 30 days after the Asset Coverage
Cure Date (the "Mandatory Redemption Date"), except that if the Trust does
not have funds legally available for the redemption of, or is not
otherwise legally permitted to redeem, the number of Preferred Shares
which would be required to be redeemed by the Trust under clause (A) of
subparagraph (a)(ii) of this Section 3 if sufficient funds were available,
together with other preferred shares which are subject to mandatory
redemption under provisions similar to those contained in this Section 3,
or the Trust otherwise is unable to effect such redemption on or prior to
such Mandatory Redemption Date, the Trust shall redeem those Preferred
Shares, and other preferred shares which it was unable to redeem, on the
earliest practicable date on which the Trust will have such funds
available, upon notice pursuant to Section 3(b) to record owners of
Preferred Shares to be redeemed and the Paying Agent. The Trust will
deposit with the Paying Agent funds sufficient to redeem the specified
number of Preferred Shares with respect to a redemption required under
subparagraph (a)(ii) of this Section 3, by 1:00 P.M., New York City time,
of the Business Day immediately preceding the Mandatory Redemption Date.
If fewer than all of the Outstanding Preferred Shares are to be redeemed
pursuant to this Section 3(a)(iii), the number of shares to be redeemed
shall be redeemed pro rata from the Holders of such shares in proportion
to the number of the Preferred Shares held by such Holders, by lot or by
such other method as the Trust shall deem fair and equitable, subject,
however, to the terms of any applicable Specific Redemption Provisions.
"Mandatory Redemption Price" means the Redemption Price plus (in the case
of a Dividend Period of one year or more only) a redemption premium, if
any, determined by the Board of Trustees after consultation with the
Broker-Dealers and set forth in any applicable Specific Redemption
Provisions.
(b) In the event of a redemption pursuant to the foregoing Section
3(a), the Trust will file a notice of its intention to redeem with the
Securities and Exchange Commission so as to provide at least the minimum notice
required under Rule 23c-2 under the 1940 Act or any successor provision. In
addition, the Trust shall deliver a notice of redemption to the Auction Agent
(the "Notice of Redemption") containing the information set forth below (i) in
the case of an optional redemption pursuant to Section 3(a)(i) above, one
Business Day prior to the giving of notice to the Holders and (ii) in the case
of a mandatory redemption pursuant to Section 3(a)(ii) above, on or prior to the
10th day preceding the Mandatory Redemption Date. Only with respect to shares
held by the Securities Depository, the Auction Agent will use its reasonable
efforts to provide telephonic notice to each Holder of shares of any Series
called for redemption not later than the close of business on the Business Day
immediately following the day on which the Auction Agent determines the shares
to be redeemed (or, during a Default Period with respect to such shares, not
later than the close of business on the Business Day immediately following the
day on which the Auction Agent receives Notice of Redemption from the Trust).
The Auction Agent shall confirm such telephonic notice in writing not later than
the close of business on the third Business Day preceding the date fixed for
redemption by providing the Notice of Redemption to each Holder of shares called
for redemption, the Paying Agent (if different from the Auction Agent) and the
Securities Depository. Notice of Redemption will be addressed to the registered
owners of shares of any Series at their addresses appearing on the share records
of the Trust. Such Notice of Redemption will set forth (i) the date fixed for
redemption, (ii) the number and identity of shares of each Series to be
redeemed, (iii) the redemption price (specifying the amount of accumulated
dividends to be included therein), (iv) that dividends on the shares to be
redeemed will cease to accumulate on such date fixed for redemption, and (v) the
provision under which redemption shall be made. No defect in the Notice of
Redemption or in the transmittal or mailing thereof will affect the validity of
the redemption
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proceedings, except as required by applicable law. If fewer than all shares held
by any Holder are to be redeemed, the Notice of Redemption mailed to such Holder
shall also specify the number of shares to be redeemed from such Holder. The
Trust shall provide Fitch (if Fitch is then rating the Preferred Shares) written
notice of the Trust's intent to redeem shares pursuant to Section 3(a) above.
(c) Notwithstanding the provisions of paragraph (a) of this Section
3, no preferred shares, including the Preferred Shares, may be redeemed at the
option of the Trust unless all dividends in arrears on the Outstanding Preferred
Shares and any other preferred shares have been or are being contemporaneously
paid or set aside for payment; provided, however, that the foregoing shall not
prevent the purchase or acquisition of outstanding preferred shares pursuant to
the successful completion of an otherwise lawful purchase or exchange offer made
on the same terms to holders of all outstanding preferred shares.
(d) Upon the deposit of funds sufficient to redeem shares of any
Series with the Paying Agent and the giving of the Notice of Redemption to the
Auction Agent under paragraph (b) of this Section 3, dividends on such shares
shall cease to accumulate and such shares shall no longer be deemed to be
Outstanding for any purpose (including, without limitation, for purposes of
calculating whether the Trust has met the Preferred Shares Basic Maintenance
Amount Test or the 1940 Act Preferred Shares Asset Coverage), and all rights of
the Holders of the shares so called for redemption shall cease and terminate,
except the right of such Holder to receive the Redemption Price specified
herein, but without any interest or other additional amount. Such Redemption
Price shall be paid by the Paying Agent to the nominee of the Securities
Depository. The Trust shall be entitled to receive from the Paying Agent,
promptly after the date fixed for redemption, any cash deposited with the Paying
Agent in excess of (i) the aggregate Redemption Price of the shares of any
Series called for redemption on such date and (ii) such other amounts, if any,
to which Holders of shares of any Series called for redemption may be entitled.
Any funds so deposited that are unclaimed at the end of two years from such
redemption date shall, to the extent permitted by law, and upon request, be paid
to the Trust, after which time the Holders of shares of each Series so called
for redemption may look only to the Trust for payment of the Redemption Price
and all other amounts, if any, to which they may be entitled; provided, however,
that the Paying Agent shall notify all Holders whose funds are unclaimed by
placing a notice in The Wall Street Journal concerning the availability of such
funds once each week for three consecutive weeks.
(e) To the extent that any redemption for which Notice of Redemption
has been given is not made by reason of the absence of legally available funds
therefor, or is otherwise prohibited, such redemption shall be made as soon as
practicable to the extent such funds become legally available or such redemption
is no longer otherwise prohibited. Failure to redeem shares of any Series shall
be deemed to exist at any time after the date specified for redemption in a
Notice of Redemption when the Trust shall have failed, for any reason
whatsoever, to deposit in trust with the Paying Agent the Redemption Price with
respect to any shares for which such Notice of Redemption has been given.
Notwithstanding the fact that the Trust may not have redeemed shares of each
Series for which a Notice of Redemption has been given, dividends may be
declared and paid on shares of any Series and shall include those shares of any
Series for which Notice of Redemption has been given but for which deposit of
funds has not been made.
(f) All moneys paid to the Paying Agent for payment of the
Redemption Price of shares of any Series called for redemption shall be held in
trust by the Paying Agent for the benefit of holders of shares so to be
redeemed.
(g) So long as any shares of any Series are held of record by the
nominee of the Securities Depository, the redemption price for such shares will
be paid on the date fixed for redemption
A-7
to the nominee of the Securities Depository for distribution to Agent Members
for distribution to the persons for whom they are acting as agent.
(h) Except for the provisions described above, nothing contained in
this Statement limits any right of the Trust to purchase or otherwise acquire
any shares of each Series outside of an Auction at any price, whether higher or
lower than the price that would be paid in connection with an optional or
mandatory redemption, so long as, at the time of any such purchase, there is no
arrearage in the payment of dividends on, or the mandatory or optional
redemption price with respect to, any shares of each Series for which Notice of
Redemption has been given and the Trust meets the 1940 Act Preferred Shares
Asset Coverage and the Preferred Shares Basic Maintenance Amount Test after
giving effect to such purchase or acquisition on the date thereof. Any shares
which are purchased, redeemed or otherwise acquired by the Trust shall have no
voting rights. If fewer than all the Outstanding shares of any Series are
redeemed or otherwise acquired by the Trust, the Trust shall give notice of such
transaction to the Auction Agent, in accordance with the procedures agreed upon
by the Board of Trustees.
(i) In the case of any redemption pursuant to this Section 3, only
whole shares of each Series shall be redeemed, and in the event that any
provision of the Charter would require redemption of a fractional share, the
Auction Agent shall be authorized to round up so that only whole shares are
redeemed.
(j) Notwithstanding anything herein to the contrary, including,
without limitation, Section 6 of Part I of this Statement, the Board of
Trustees, upon notification to each Rating Agency, may authorize, create or
issue other Series of preferred shares, including other Series of Preferred
Shares, series of preferred shares ranking on parity with the Preferred Shares
with respect to the payment of dividends or the distribution of assets upon
dissolution, liquidation or winding up of the affairs of the Trust, and senior
securities representing indebtedness as defined in the 1940 Act, to the extent
permitted by the 1940 Act, if upon issuance of any such series, either (A) the
net proceeds from the sale of such shares (or such portion thereof needed to
redeem or repurchase the Outstanding Preferred Shares) are deposited with the
Paying Agent in accordance with Section 3(d) of Part I of this Statement, Notice
of Redemption as contemplated by Section 3(b) of Part I of this Statement has
been delivered prior thereto or is sent promptly thereafter, and such proceeds
are used to redeem all Outstanding Preferred Shares or (B) the Trust would meet
the 1940 Act Preferred Shares Asset Coverage, the Preferred Shares Basic
Maintenance Amount Test and the requirements of Section 11 of Part I of this
Statement.
4. Designation of Dividend Period.
(a) The initial Dividend Period for each Series shall be the period
from the Date of Original Issue to the initial Dividend Payment Date set forth
under "Designation" above. The Trust will designate the duration of subsequent
Dividend Periods of each Series; provided, however, that no such designation is
necessary for a Standard Dividend Period and, provided further, that any
designation of a Special Dividend Period shall be effective only if (i) notice
thereof shall have been given as provided herein, (ii) any failure to pay in a
timely manner to the Auction Agent the full amount of any dividend on, or the
Redemption Price of, each Series shall have been cured as provided above, (iii)
Sufficient Clearing Orders shall have existed in an Auction held on the Auction
Date immediately preceding the first day of such proposed Special Dividend
Period, and (iv) if the Trust shall have mailed a Notice of Redemption with
respect to any shares, the Redemption Price with respect to such shares shall
have been deposited with the Paying Agent.
(b) If the Trust proposes to designate any Special Dividend Period,
not fewer than seven Business Days (or two Business Days in the event the
duration of the Dividend Period prior to such Special Dividend Period is fewer
than eight days) nor more than 30 Business Days prior to the first day of
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such Special Dividend Period, notice shall be (i) made by press release and (ii)
communicated by the Trust by telephonic or other means to the Auction Agent and
each Broker-Dealer and confirmed in writing promptly thereafter. Each such
notice shall state (A) that the Trust proposes to exercise its option to
designate a succeeding Special Dividend Period, specifying the first and last
days thereof and the Maximum Rate for such Special Dividend Period and (B) that
the Trust will by 3:00 P.M., New York City time, on the second Business Day next
preceding the first day of such Special Dividend Period, notify the Auction
Agent, who will promptly notify the Broker-Dealers, of either (x) its
determination, subject to certain conditions, to proceed with such Special
Dividend Period, subject to the terms of any Specific Redemption Provisions, or
(y) its determination not to proceed with such Special Dividend Period, in which
latter event the succeeding Dividend Period shall be a Standard Dividend Period.
No later than 3:00 P.M., New York City time, on the second Business Day next
preceding the first day of any proposed Special Dividend Period, the Trust shall
deliver to the Auction Agent, who will promptly deliver to the Broker-Dealers
and Existing Holders, either:
(i) a notice stating (A) that the Trust has determined to
designate the next succeeding Dividend Period as a Special Dividend
Period, specifying the first and last days thereof and (B) the terms of
any Specific Redemption Provisions; or
(ii) a notice stating that the Trust has determined not to
exercise its option to designate a Special Dividend Period.
If the Trust fails to deliver either such notice with respect to any designation
of any proposed Special Dividend Period to the Auction Agent by 3:00 P.M., New
York City time, on the second Business Day next preceding the first day of such
proposed Special Dividend Period, the Trust shall be deemed to have delivered a
notice to the Auction Agent with respect to such Dividend Period to the effect
set forth in clause (ii) above, thereby resulting in a Standard Dividend Period.
5. Restrictions on Transfer. Shares of each Series may be transferred only
(a) pursuant to an order placed in an Auction, (b) to or through a Broker-Dealer
or (c) to the Trust or any Affiliate. Notwithstanding the foregoing, a transfer
other than pursuant to an Auction will not be effective unless the selling
Existing Holder or the Agent Member of such Existing Holder, in the case of an
Existing Holder whose shares are listed in its own name on the books of the
Auction Agent, or the Broker-Dealer or Agent Member of such Broker-Dealer, in
the case of a transfer between persons holding shares of any Series through
different Broker-Dealers, advises the Auction Agent of such transfer. The
certificates representing the shares of each Series issued to the Securities
Depository will bear legends with respect to the restrictions described above
and stop-transfer instructions will be issued to the Transfer Agent and/or
Registrar.
6. Voting Rights.
(a) Except as otherwise provided in the Declaration or as otherwise
required by applicable law, (i) each Holder of shares of any Series shall be
entitled to one vote for each share of any Series held on each matter on which
the Holders of the Preferred Shares are entitled to vote, and (ii) the holders
of the outstanding preferred shares, including each Series, and holders of
shares of Common Shares shall vote together as a single class on all matters
submitted to the shareholders; provided, however, that, with respect to the
election of trustees, the holders of the outstanding preferred shares, including
each Series, represented in person or by proxy at a meeting for the election of
trustees, shall be entitled, as a class, to the exclusion of the holders of all
other securities and classes of shares, including the Common Shares, to elect
two trustees of the Trust, each share of preferred, including each Series,
entitling the holder thereof to one vote. The identities of the nominees of such
trusteeships may be fixed by the Board of Trustees. The Board of Trustees will
determine to which class or classes the trustees
A-9
elected by the outstanding preferred shares will be assigned and the holders of
outstanding preferred shares shall only be entitled to elect the trustees so
designated as being elected by the holders of preferred shares when their term
shall have expired and such trustees appointed by the holders of preferred
shares will be allocated as evenly as possible among the classes of trustees.
Subject to paragraph (b) of this Section 6, the holders of Outstanding shares of
Common Shares and outstanding preferred shares, including each Series, voting
together as a single class, shall be entitled to elect the balance of the
trustees.
(b) If at any time dividends on the Preferred Shares shall be unpaid
in an amount equal to two full years' dividends on the Preferred Shares (a
"Voting Period"), the number of trustees constituting the Board of Trustees
shall be automatically increased by the smallest number of additional trustees
that, when added to the number of trustees then constituting the Board of
Trustees, shall (together with the two trustees elected by the holders of
preferred shares, including each Series, pursuant to paragraph (a) of this
Section 6) constitute a majority of such increased number, and the holders of
any shares of preferred shares, including each Series, shall be entitled, voting
as a single class on a one-vote-per-share basis (to the exclusion of the holders
of all other securities and classes of shares of the Trust), to elect the
smallest number of such additional trustees of the Trust that shall constitute a
majority of the total number of trustees of the Trust so increased. The Voting
Period and the voting rights so created upon the occurrence of the conditions
set forth in this paragraph (b) of Section 6 shall continue unless and until all
dividends in arrears on each Series shall have been paid or declared and
sufficient cash or specified securities are set apart for the payment of such
dividends. Upon the termination of a Voting Period, the voting rights described
in this paragraph (b) of Section 6 shall cease, subject always, however, to the
revesting of such voting rights in the holders of preferred shares, including
each Series, upon the further occurrence of any of the events described in this
paragraph (b) of Section 6.
(c) As soon as practicable after the accrual of any right of the
holders of preferred shares, including each Series, to elect additional trustees
as described in paragraph (b) of this Section 6, the Trust shall notify the
Auction Agent, and the Auction Agent shall call a special meeting of such
holders, by mailing a notice of such special meeting to such holders, such
meeting to be held not less than ten nor more than 90 days after the date of
mailing of such notice. If the Trust fails to send such notice to the Auction
Agent or if the Auction Agent does not call such a special meeting, it may be
called by any such holder on like notice. The record date for determining the
holders entitled to notice of and to vote at such special meeting shall be the
close of business on the fifth Business Day preceding the day on which such
notice is mailed. At any such special meeting and at each meeting of holders of
preferred shares, including each Series, held during a Voting Period at which
trustees are to be elected, such holders, voting together as a class (to the
exclusion of the holders of all other securities and classes of shares of the
Trust), shall be entitled to elect the number of trustees prescribed in
paragraph (b) of this Section 6 on a one-vote-per-share basis. At any such
meeting or adjournment thereof in the absence of a quorum, a majority of the
holders of preferred shares, including Holders of the Preferred Shares, present
in person or by proxy shall have the power to adjourn the meeting without
notice, other than an announcement at the meeting, until a quorum is present.
(d) For purposes of determining any rights of the holders of the
shares of preferred shares, including each Series, to vote on any matter,
whether such right is created by this Statement, by statute or otherwise, if
redemption of some or all of the preferred shares, including each Series, is
required, no holder of preferred shares, including each Series, shall be
entitled to vote and no preferred shares, including each Series, shall be deemed
to be "outstanding" for the purpose of voting or determining the number of
shares required to constitute a quorum, if prior to or concurrently with the
time of determination, sufficient Deposit Securities for the redemption of such
shares have been deposited in the case of Preferred Shares in trust with the
Paying Agent for that purpose and the requisite Notice of Redemption with
respect to such shares shall have been given as provided in Section 3(b) of Part
I of this
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Statement and in the case of other preferred shares, the Trust has otherwise met
the conditions for redemption applicable to such shares.
(e) The terms of office of all persons who are trustees of the Trust
at the time of a special meeting of Holders of the Preferred Shares and holders
of other preferred shares to elect trustees pursuant to paragraph (b) of this
Section 6 shall continue, notwithstanding the election at such meeting by the
holders of the number of trustees that they are entitled to elect.
(f) Simultaneously with the termination of a Voting Period, the
terms of office of the additional trustees elected by the Holders of the
Preferred Shares and holders of other preferred shares pursuant to paragraph (b)
of this Section 6 shall terminate, the remaining trustees shall constitute the
trustees of the Trust and the voting rights of such holders to elect additional
trustees pursuant to paragraph (b) of this Section 6 shall cease, subject to the
provisions of the last sentence of paragraph (b) of this Section 6.
(g) Unless otherwise required by law or in the Trust's Declaration,
the Holders of Preferred Shares shall not have any relative rights or
preferences or other special rights other than those specifically set forth
herein. In the event that the Trust fails to pay any dividends on the Preferred
Shares or fails to redeem any Preferred Shares which it is required to redeem,
or any other event occurs which requires the mandatory redemption of Preferred
Shares and the required Notice of Redemption has not been given, other than the
rights set forth in paragraph (a) of Section 3 of Part I of this Statement, the
exclusive remedy of the Holders of Preferred Shares shall be the right to vote
for trustees pursuant to the provisions of paragraph (b) of this Section 6. In
no event shall the Holders of Preferred Shares have any right to sue for, or
bring a proceeding with respect to, such dividends or redemptions or damages for
the failure to receive the same.
(h) For so long as any preferred shares, including each Series, are
outstanding, the Trust will not, without the affirmative vote of the Holders of
a majority of the outstanding preferred shares, (i) institute any proceedings to
be adjudicated bankrupt or insolvent, or consent to the institution of
bankruptcy or insolvency proceedings against it, or file a petition seeking or
consenting to reorganization or relief under any applicable federal or state law
relating to bankruptcy or insolvency, or consent to the appointment of a
receiver, liquidator, assignee, trustee, sequestrator (or other similar
official) of the Trust or a substantial part of its property, or make any
assignment for the benefit of creditors, or, except as may be required by
applicable law, admit in writing its inability to pay its debts generally as
they become due or take any corporate action in furtherance of any such action;
(ii) create, incur or suffer to exist, or agree to create, incur or suffer to
exist, or consent to cause or permit in the future (upon the happening of a
contingency or otherwise) the creation, incurrence or existence of any material
lien, mortgage, pledge, charge, security interest, security agreement,
conditional sale or trust receipt or other material encumbrance of any kind upon
any of the Trust's assets as a whole, except (A) liens the validity of which are
being contested in good faith by appropriate proceedings, (B) liens for taxes
that are not then due and payable or that can be paid thereafter without
penalty, (C) liens, pledges, charges, security interests, security agreements or
other encumbrances arising in connection with any indebtedness senior to the
Preferred Shares, or arising in connection with any futures contracts or options
thereon, interest rate swap or cap transactions, forward rate transactions, put
or call options or other similar transactions, (D) liens, pledges, charges,
security interests, security agreements or other encumbrances arising in
connection with any indebtedness permitted under clause (iii) below and (E)
liens to secure payment for services rendered including, without limitation,
services rendered by the Trust's Paying Agent and the Auction Agent; or (iii)
create, authorize, issue, incur or suffer to exist any indebtedness for borrowed
money or any direct or indirect guarantee of such indebtedness for borrowed
money or any direct or indirect guarantee of such indebtedness, except the Trust
may borrow as may be permitted by the Trust's investment restrictions; provided,
however, that transfers of assets by the Trust
A-11
subject to an obligation to repurchase shall not be deemed to be indebtedness
for purposes of this provision to the extent that after any such transaction the
Trust has Eligible Assets with an aggregate Discounted Value at least equal to
the Preferred Shares Basic Maintenance Amount as of the immediately preceding
Valuation Date.
(i) The affirmative vote of the holders of a majority, as defined in
the 1940 Act, of the outstanding preferred shares, including each Series, voting
as a separate class, shall be required to approve any plan of reorganization (as
such term is used in the 1940 Act) adversely affecting such shares or any action
requiring a vote of security holders of the Trust under Section 13(a) of the
1940 Act. In the event a vote of holders of preferred shares is required
pursuant to the provisions of Section 13(a) of the 1940 Act, the Trust shall,
not later than ten Business Days prior to the date on which such vote is to be
taken, notify each Rating Agency that such vote is to be taken and the nature of
the action with respect to which such vote is to be taken and shall, not later
than ten Business Days after the date on which such vote is taken, notify each
Rating Agency of the results of such vote.
(j) The affirmative vote of the Holders of a majority, as defined in
the 1940 Act, of the outstanding preferred shares of any series, voting
separately from any other series, shall be required with respect to any matter
that materially and adversely affects the rights, preferences, or powers of that
series in a manner different from that of other series or classes of the Trust's
shares of beneficial interest. For purposes of the foregoing, no matter shall be
deemed to adversely affect any rights, preference or power unless such matter
(i) alters or abolishes any preferential right of such series; (ii) creates,
alters or abolishes any right in respect of redemption of such series; or (iii)
creates or alters (other than to abolish) any restriction on transfer applicable
to such series. The vote of holders of any series described in this Section (j)
will in each case be in addition to a separate vote of the requisite percentage
of Common Shares and/or preferred shares necessary to authorize the action in
question.
(k) The Board of Trustees, without the vote or consent of any holder
of preferred shares, including each Series, or any other shareholder of the
Trust, may from time to time add, amend, alter or repeal any or all of the
definitions contained herein, add, amend, alter or repeal covenants and other
obligations of the Trust, or confirm the applicability of covenants and other
obligations set forth herein, all in connection with obtaining or maintaining
the rating of any Rating Agency with respect to each Series, and any such
addition, amendment, alteration or repeal will not be deemed to affect the
preferences, rights or powers of Preferred Shares or the Holders thereof,
provided that the Board of Trustees receives written confirmation from each
relevant Rating Agency (with such confirmation in no event being required to be
obtained from a particular Rating Agency with respect to definitions or other
provisions relevant only to and adopted in connection with another Rating
Agency's rating of any Series) that any such amendment, alteration or repeal
would not adversely affect the rating then assigned by such Rating Agency.
In addition, subject to compliance with applicable law, the Board of
Trustees may amend the definition of Maximum Rate to increase the percentage
amount by which the Reference Rate is multiplied to determine the Maximum Rate
shown therein without the vote or consent of the holders of preferred shares,
including each Series, or any other shareholder of the Trust, but only with
confirmation from each Rating Agency, and after consultation with the
Broker-Dealers, provided that immediately following any such increase the Trust
would meet the Preferred Shares Basic Maintenance Amount test.
The Board of Trustees may amend the definition of Standard Dividend Period
to change the Dividend Period with respect to one or more Series without the
vote or consent of the holders of shares of preferred, including each series, or
any other shareholder of the Trust, and any such change will not be deemed to
affect the preferences, rights or powers of Preferred Shares or the Holders
thereof.
A-12
7. Liquidation Rights.
(a) In the event of any liquidation, dissolution or winding up of
the affairs of the Trust, whether voluntary or involuntary, the holders of
preferred shares, including each Series, shall be entitled to receive out of the
assets of the Trust available for distribution to shareholders, after claims of
creditors but before distribution or payment shall be made in respect of the
Common Shares or to any other shares of beneficial interest of the Trust ranking
junior to the preferred shares, as to liquidation payments, a liquidation
distribution in the amount of $25,000 per share (the "Liquidation Preference"),
plus an amount equal to all unpaid dividends accrued to and including the date
fixed for such distribution or payment (whether or not declared by the Board of
Trustees, but excluding interest thereon), but such Holders shall be entitled to
no further participation in any distribution or payment in connection with any
such liquidation, dissolution or winding up. Each Series shall rank on a parity
with shares of any other series of preferred shares of the Trust (including each
Series) as to the distribution of assets upon dissolution, liquidation or
winding up of the affairs of the Trust.
(b) If, upon any such liquidation, dissolution or winding up of the
affairs of the Trust, whether voluntary or involuntary, the assets of the Trust
available for distribution among the holders of all outstanding preferred
shares, including each Series, shall be insufficient to permit the payment in
full to such holders of the amounts to which they are entitled, then such
available assets shall be distributed among the holders of all outstanding
preferred shares, including each Series, ratably in any such distribution of
assets according to the respective amounts which would be payable on all such
shares if all amounts thereon were paid in full. Unless and until payment in
full has been made to the holders of all outstanding preferred shares, including
each Series, of the liquidation distributions to which they are entitled, no
dividends or distributions will be made to holders of Common Shares or any
shares of beneficial interest of the Trust ranking junior to the preferred
shares as to liquidation.
(c) Neither the consolidation nor merger of the Trust with or into
any other business entity, nor the sale, lease, exchange or transfer by the
Trust of all or substantially all of its property and assets, shall be deemed to
be a liquidation, dissolution or winding up of the Trust for purposes of this
Section 7.
(d) After the payment to Holders of Preferred Shares of the full
preferential amounts provided for in this Section 7, the Holders of the
Preferred Shares as such shall have no right or claim to any of the remaining
assets of the Trust.
(e) In the event the assets of the Trust or proceeds thereof
available for distribution to the Holders of Preferred Shares, upon dissolution,
liquidation or winding up of the affairs of the Trust, whether voluntary or
involuntary, shall be insufficient to pay in full all amounts to which such
Holders are entitled pursuant to paragraph (a) of this Section 7, no such
distribution shall be made on account of any shares of any other series of
preferred shares unless proportionate distributive amounts shall be paid on
account of the Preferred Shares, ratably, in proportion to the full
distributable amounts to which holders of all preferred shares are entitled upon
such dissolution, liquidation or winding up.
(f) Subject to the rights of the holders of other preferred shares
or after payment shall have been made in full to the Holders of Preferred Shares
as provided in paragraph (a) of this Section 7, but not prior thereto, any other
series or class of shares ranking junior to the Preferred Shares with respect to
the distribution of assets upon dissolution, liquidation or winding up of the
affairs of the Trust shall, subject to any respective terms and provisions (if
any) applying thereto, be entitled to receive any and all assets remaining to be
paid or distributed, and the Holders of the Preferred Shares shall not be
entitled to share therein.
A-13
8. Auction Agent. For so long as any Preferred Shares are Outstanding, the
Auction Agent, duly appointed by the Trust to so act, shall be in each case a
commercial bank, trust company or other financial institution independent of the
Trust and its Affiliates (which, however, may engage or have engaged in business
transactions with the Trust or its Affiliates) and at no time shall the Trust or
any of its Affiliates act as the Auction Agent in connection with the Auction
Procedures. If the Auction Agent resigns or for any reason its appointment is
terminated during any period that any shares of any Series are Outstanding, the
Trust will use its best efforts to enter into an agreement with a successor
auction agent containing substantially the same terms and conditions as the
auction agency agreement. The Trust may remove the Auction Agent provided that
prior to such removal the Trust shall have entered into such an agreement with a
successor auction agent.
9. 1940 Act Preferred Shares Asset Coverage. The Trust shall maintain, as
of the last Business Day of each month in which any Preferred Shares are
Outstanding, the 1940 Act Preferred Shares Asset Coverage; provided, however,
that Section 3(a)(ii) shall be the sole remedy in the event the Trust fails to
do so.
10. Preferred Shares Basic Maintenance Amount. So long as any Preferred
Shares are Outstanding and any Rating Agency so requires, the Trust shall
maintain, as of each Valuation Date, S&P Eligible Assets and Fitch Eligible
Assets, as applicable, having an aggregate Discounted Value equal to or greater
than the Preferred Shares Basic Maintenance Amount; provided, however, that
Section 3(a)(ii) shall be the sole remedy in the event the Trust fails to do so.
11. Certain Other Restrictions. So long as any Preferred Shares are
Outstanding and S&P, Fitch or any Other Rating Agency that is rating such shares
so requires, the Trust will not, unless it has received written confirmation
from S&P (if S&P is then rating the Preferred Shares), Fitch (if Fitch is then
rating the Preferred Shares) and (if applicable) such Other Rating Agency, that
any such action would not impair the rating then assigned by such Rating Agency
to the Preferred Shares, engage in any one or more of the following
transactions:
(a) issue any additional class or series of shares ranking prior to
the Preferred Shares with respect to the payment of dividends or the
distribution of assets upon dissolution, liquidation or winding up of the Trust;
(b) issue additional shares of any Series of Preferred Shares,
including any Series previously purchased or redeemed by the Trust;
(c) issue senior securities representing indebtedness as defined
under the 1940 Act;
(d) engage in any short sales of securities;
(e) lend portfolio securities;
(f) merge or consolidate into or with any other entity;
(g) borrow money except for the purpose of clearing transactions in
portfolio securities (which borrowings shall under any circumstances be limited
to the lesser of $10 million and an amount equal to 5% of the Market Value of
the Trust's total assets at the time of such borrowings and which borrowings
shall be repaid within 60 days and not to be extended or renewed and shall not
cause the aggregate Discounted Value of the S&P Eligible Assets or the Fitch
Eligible Assets to be less than the Preferred Shares Basic Maintenance Amount);
A-14
(h) engage in dollar rolls and reverse repurchase agreements if, at
the time the Trust enters into such agreements, such activity results in a
failure to maintain the 1940 Act Preferred Shares Asset Coverage or the
Preferred Shares Basic Maintenance Amount, or if any such dollar rolls and
reverse repurchase agreements have a maturity of greater than 30 days.
12. Compliance Procedures for Asset Maintenance Tests. For so long as any
Preferred Shares are Outstanding and any Rating Agency so requires:
(a) As of each Valuation Date, the Trust shall determine (i) the
Market Value of each Eligible Asset owned by the Trust on that date, (ii) the
Discounted Value of each such Eligible Asset, (iii) whether the Preferred Shares
Basic Maintenance Amount Test is met as of that date, (iv) the value (as used in
the 1940 Act) of the total assets of the Trust, less all liabilities, and (v)
whether the 1940 Act Preferred Shares Asset Coverage is met as of that date.
(b) Upon any failure to meet the Preferred Shares Basic Maintenance
Amount Test or 1940 Act Preferred Shares Asset Coverage on any Valuation Date,
the Trust may use reasonable commercial efforts (including, without limitation,
altering the composition of its portfolio, purchasing Preferred Shares outside
of an Auction or, in the event of a failure to file a certificate on a timely
basis, submitting the requisite certificate), to meet (or certify in the case of
a failure to file a certificate on a timely basis, as the case may be) the
Preferred Shares Basic Maintenance Amount Test or 1940 Act Preferred Shares
Asset Coverage on or prior to the Asset Coverage Cure Date.
(c) Compliance with the Preferred Shares Basic Maintenance Amount
and 1940 Act Preferred Shares Asset Coverage tests shall be determined with
reference to those Preferred Shares which are deemed to be Outstanding
hereunder.
(d) In the case of the asset coverage requirements for Fitch and
S&P, the auditors must certify once per annum, or as requested by a Rating
Agency, the asset coverage test on a date randomly selected by the auditor.
(e) The Trust shall deliver to the Auction Agent and each Rating
Agency a certificate which sets forth a determination of items (i)-(iii) of
paragraph (a) of this Section 12 (a "Preferred Shares Basic Maintenance
Certificate") as of (A) within seven Business Days after the Date of Original
Issue, (B) the last Valuation Date of each month, (C) any date requested by any
Rating Agency, (D) a Business Day on or before any Asset Coverage Cure Date
relating to the Trust's cure of a failure to meet the Preferred Shares Basic
Maintenance Amount Test, (E) any day that Common Shares or Preferred Shares are
redeemed, (F) any day Fitch Eligible Assets have an aggregate Discounted Value
less than or equal to 110% of the Preferred Shares Basic Maintenance Amount.
Such Preferred Shares Basic Maintenance Certificate shall be delivered in the
case of clause (i)(A) on or before the seventh Business Day after the Date of
Original Issue and in the case of all other clauses above on or before the
seventh Business Day after the relevant Valuation Date or Asset Coverage Cure
Date.
(f) The Trust shall deliver to the Auction Agent and each Rating
Agency a certificate which sets forth a determination of items (iv) and (v) of
paragraph (a) of this Section 12 (a "1940 Act Preferred Shares Asset Coverage
Certificate") (i) as of the Date of Original Issue, and (ii) as of (A) the last
Valuation Date of each quarter thereafter, and (B) as of a Business Day on or
before any Asset Coverage Cure Date relating to the failure to meet the 1940 Act
Preferred Shares Asset Coverage. Such 1940 Act Preferred Shares Asset Coverage
Certificate shall be delivered in the case of clause (i) on or before the
seventh Business Day after the Date of Original Issue and in the case of clause
(ii) on or before the seventh Business Day after the relevant Valuation Date or
the Asset Coverage Cure Date. The
A-15
certificates required by paragraphs (d) and (e) of this Section 12 may be
combined into a single certificate.
(g) Within ten Business Days of the Date of Original Issue, the
Trust shall deliver to the Auction Agent and each Rating Agency a letter
prepared by the Trust's independent auditors (an "Auditor's Certificate")
regarding the accuracy of the calculations made by the Trust in the Preferred
Shares Basic Maintenance Certificate and the 1940 Act Preferred Shares Asset
Coverage Certificate required to be delivered by the Trust on or before the
seventh Business Day after the Date of Original Issue. Within ten Business Days
after delivery of the Preferred Shares Basic Maintenance Certificate and the
1940 Act Preferred Shares Asset Coverage Certificate relating to the last
Valuation Date of each fiscal year of the Trust, the Trust will deliver to the
Auction Agent and each Rating Agency an Auditor's Certificate regarding the
accuracy of the calculations made by the Trust in such Certificates. In
addition, the Trust will deliver to the persons specified in the preceding
sentence an Auditor's Certificate regarding the accuracy of the calculations
made by the Trust on each Preferred Shares Basic Maintenance Certificate and
1940 Act Preferred Shares Asset Coverage Certificate delivered in relation to an
Asset Coverage Cure Date within ten days after the relevant Asset Coverage Cure
Date. If an Auditor's Certificate shows that an error was made in any such
report, the calculation or determination made by the Trust's independent
auditors will be conclusive and binding on the Trust.
(h) The Auditor's Certificates referred to in paragraph (g) above
will confirm, based upon the independent auditor's review of portfolio data
provided by the Trust, (i) the mathematical accuracy of the calculations
reflected in the related Preferred Shares Basic Maintenance Amount Certificates
and 1940 Act Preferred Shares Asset Coverage Certificates and (ii) that, based
upon such calculations, the Trust had, at such Valuation Date, met the Preferred
Shares Basic Maintenance Amount Test.
(i) In the event that a Preferred Shares Basic Maintenance
Certificate or 1940 Act Preferred Shares Asset Coverage Certificate with respect
to an applicable Valuation Date is not delivered within the time periods
specified in this Section 12, the Trust shall be deemed to have failed to meet
the Preferred Shares Basic Maintenance Amount Test or the 1940 Act Preferred
Shares Asset Coverage, as the case may be, on such Valuation Date for purposes
of Section 12(b) of Part I of this Statement. In the event that a Preferred
Shares Basic Maintenance Certificate, a 1940 Act Preferred Shares Asset Coverage
Certificate or an applicable Auditor's Certificate with respect to an Asset
Coverage Cure Date is not delivered within the time periods specified herein,
the Trust shall be deemed to have failed to meet the Preferred Shares Basic
Maintenance Amount Test or the 1940 Preferred Shares Asset Coverage, as the case
may be, as of the related Valuation Date.
13. Notices. All notices or communications hereunder, unless otherwise
specified in this Statement, shall be sufficiently given if in writing and
delivered in person, by facsimile or mailed by first-class mail, postage
prepaid. Notices delivered pursuant to this Section 13 shall be deemed given on
the earlier of the date received or the date five days after which such notice
is mailed, except as otherwise provided in this Statement or by the Delaware law
for notices of shareholders' meetings.
14. Waiver. To the extent permitted by Delaware law, Holders of at least
two-thirds of the Outstanding Preferred Shares, acting collectively, or each
Series, acting as a separate series, may waive any provision hereof intended for
their respective benefit in accordance with such procedures as may from time to
time be established by the Board of Trustees.
15. Termination. In the event that no Preferred Shares are Outstanding,
all rights and preferences of such shares established and designated hereunder
shall cease and terminate, and all obligations of the Trust under this Statement
shall terminate.
A-16
16. Amendment. Subject to the provisions of this Statement, the Board of
Trustees may, by resolution duly adopted without shareholder approval (except as
otherwise provided by this Statement or required by applicable law), amend this
Statement to reflect any amendments hereto which the Board of Trustees is
entitled to adopt pursuant to the terms of Section 6(k) of Part I of this
Statement without shareholder approval. To the extent permitted by applicable
law, the Board of Trustees may interpret, amend or adjust the provisions of this
Statement to resolve any inconsistency or ambiguity or to remedy any patent
defect.
17. Definitions. As used in Part I and Part II of this Statement, the
following terms shall have the following meanings (with terms defined in the
singular having comparable meanings when used in the plural and vice versa),
unless the context otherwise requires:
"Affiliate" means any person actually known to the Auction Agent to be
controlled by, in control of or under common control with the Trust; provided,
however, that no Broker-Dealer controlled by, in control of or under common
control with the Trust shall be deemed to be an Affiliate nor shall any
corporation or any Person controlled by, in control of or under common control
with such corporation, one of the directors or executive officers of which is a
trustee of the Trust be deemed to be an Affiliate solely because such director
or executive officer is also a trustee of the Trust.
"Agent Member" means a member of or a participant in the Securities
Depository that will act on behalf of a Bidder.
"All Hold Rate" means 80% of the Reference Rate
"Applicable Percentage" means the percentage determined based on the
higher of the credit ratings assigned to the series of Preferred Shares on such
date by Fitch and S&P or equivalent credit rating by any Other Rating Agency as
follows:
CREDIT RATING APPLICABLE PERCENTAGE
AA- or higher 150%
A- to A+ 200%
BBB- to BBB+ 250%
Below BBB- 275%
The Applicable Percentage as so determined shall be further subject to
upward but not downward adjustment in the discretion of the Board of Trustees of
the Trust after consultation with the Broker-Dealers, provided that immediately
following any such increase the Trust would be in compliance with the Preferred
Shares Basic Maintenance Amount.
"Applicable Rate" means, with respect to each Series for each Dividend
Period (i) if Sufficient Clearing Orders exist for the Auction in respect
thereof, the Winning Bid Rate, (ii) if Sufficient Clearing Orders do not exist
for the Auction in respect thereof, the Maximum Rate, and (iii) in the case of
any Dividend Period if all the shares of a Series are the subject of Submitted
Hold Orders for the Auction in respect thereof, the All Hold Rate corresponding
to that Series.
"Asset Coverage Cure Date" has the meaning set forth in Section 3(a)(ii)
of this Statement.
"Auction" means each periodic operation of the Auction Procedures.
"Auction Agent" means The Bank of New York unless and until another
commercial bank, trust company, or other financial institution appointed by a
resolution of the Board of Trustees enters into an
A-17
agreement with the Trust to follow the Auction Procedures for the purpose of
determining the Applicable Rate.
"Auction Date" means the first Business Day next preceding the first day
of a Dividend Period for each Series.
"Auction Procedures" means the procedures for conducting Auctions as set
forth in Part II of this Statement.
"Auditor's Certificate" has the meaning set forth in Section 12(g) of Part
I of this Statement.
"Beneficial Owner," with respect to shares of each Series, means a
customer of a Broker-Dealer who is listed on the records of that Broker-Dealer
(or, if applicable, the Auction Agent) as a holder of shares of such series.
"Bid" has the meaning set forth in Section 2(a)(ii) of Part II of this
Statement.
"Bidder" has the meaning set forth in Section 2(a)(ii) of Part II of this
Statement, provided, however, that neither the Trust nor any Affiliate shall be
permitted to be a Bidder in an Auction.
"Board of Trustees" or "Board" means the Board of Trustees of the Trust or
any duly authorized committee thereof as permitted by applicable law.
"Broker-Dealer" means any broker-dealer or broker-dealers, or other entity
permitted by law to perform the functions required of a Broker-Dealer by the
Auction Procedures, that has been selected by the Trust and has entered into a
Broker-Dealer Agreement that remains effective.
"Broker-Dealer Agreement" means an agreement between the Auction Agent and
a Broker-Dealer, pursuant to which such Broker-Dealer agrees to follow the
Auction Procedures.
"Business Day" means a day on which the New York Stock Exchange is open
for trading and which is not a Saturday, Sunday or other day on which banks in
The City of New York, New York are authorized or obligated by law to close.
"Code" means the Internal Revenue Code of 1986, as amended.
"Commission" means the Securities and Exchange Commission.
"Common Shares" means the shares of the Trust common shares of beneficial
interest, no par value.
"Date of Original Issue" means the date on which a Series is originally
issued by the Trust.
"Default" has the meaning set forth in Section 2(c)(ii) of Part I of this
Statement.
"Default Period" has the meaning set forth in Sections 2(c)(ii) or (iii)
of Part I of this Statement.
"Default Rate" has the meaning set forth in Section 2(c)(iii) of Part I of
this Statement.
"Deposit Securities" means cash and any obligations or securities,
including Short Term Money Market Instruments that are Eligible Assets, rated at
least AAA or A-1 by S&P, except that, for purposes of optional redemption, such
obligations or securities will be considered "Deposit Securities" only if they
also are rated at least P-1 by Moody's.
A-18
"Discount Factor" means the S&P Discount Factor (if S&P is then rating the
Preferred Shares), the Fitch Discount Factor (if Fitch is then rating the
Preferred Shares) or the discount factor established by any Other Rating Agency
which is then rating the Preferred Shares and which so requires, whichever is
applicable.
"Discounted Value" means the quotient of the Market Value of an Eligible
Asset divided by the applicable Discount Factor.
"Dividend Default" has the meaning set forth in Section 2(c)(iii) of Part
I of this Statement.
"Dividend Payment Date" with respect to the Preferred Shares means any
date on which dividends are payable pursuant to Section 2(b) of Part I of this
Statement.
"Dividend Period" means, with respect to each Series, the initial period
from the Date of Original Issue to the initial Dividend Payment Date set forth
under "Designation" above, and thereafter, as to such Series, the period
commencing on the Business Day following each Dividend Period for such Series
and ending on the calendar day immediately preceding the next Dividend Payment
Date for such Series.
"Eligible Assets" means Fitch Eligible Assets (if Fitch is then rating the
Preferred Shares), S&P Eligible Assets (if S&P is then rating the Preferred
Shares), and/or Other Rating Agency Eligible Assets if any Other Rating Agency
is then rating the Preferred Shares, whichever is applicable.
"Existing Holder" has the meaning set forth in Section 1(d) of Part II of
this Statement.
"Failure to Deposit" with respect to shares of a series of Preferred
Shares, means a failure by the Trust to pay the Auction Agent, not later than
12:00 noon, New York City time, (A) on the Business Day next preceding any
Dividend Payment Date for shares of such series, in funds available on such
Dividend Payment Date in The City of New York, New York, the full amount of any
dividend (whether or not earned or declared) to be paid on such Dividend Payment
Date on any share of such series or (B) on the Business Day next preceding any
redemption date in funds available on such redemption date for shares of such
series in The City of New York, New York, the Redemption Price to be paid on
such redemption date for any share of such series after notice of redemption is
mailed pursuant to paragraph (c) of Section 3 of Part I of this Statement;
provided, however, that the foregoing clause (B) shall not apply to the Trust's
failure to pay the Redemption Price in respect of shares of Preferred Shares
when the related Notice of Redemption provides that redemption of such shares is
subject to one or more conditions precedent and any such condition precedent
shall not have been satisfied at the time or times and in the manner specified
in such Notice of Redemption.
"Fitch" means Fitch Ratings.
"Fitch Discount Factor" means, for the purposes of determining the
Discounted Value of any Fitch Eligible Asset, the percentage determined as
follows. The Fitch Discount Factor for any Fitch Eligible Asset other than the
securities set forth below will be the percentage provided in writing by Fitch.
Any documents provided to Fitch pursuant to this Statement shall be delivered
to Fitch electronically at the following e-mail address:
funds.surveillance@fitchratings.com.
(i) Corporate debt securities. The percentage determined by
reference to the rating of a corporate debt security in accordance with
the table set forth below.
A-19
NOT
RATED
OR
TERM TO MATURITY OF CORPORATE BELOW
DEBT SECURITY UNRATED(1) AAA AA A BBB BB BB
3 years or less (but longer than 1 year)...... 106.38% 108.11% 109.89% 111.73% 129.87% 151.52%
5 years or less (but longer than 3 years)..... 111.11 112.99 114.94 116.96 134.24 151.52
7 years or less (but longer than 5 years)..... 113.64 115.61 117.65 119.76 135.66 151.52
10 years or less (but longer than 7 years).... 115.61 117.65 119.76 121.95 136.74 151.52
15 years or less (but longer than 10 years)... 119.76 121.95 124.22 126.58 139.05 151.52
More than 15 years............................ 124.22 126.58 129.03 131.58 144.55 151.52
----------
(1) If a security is not rated by Fitch but is rated by two other Rating
Agencies, then the lower of the ratings on the security from the two other
Rating Agencies will be used to determine the Fitch Discount Factor (e.g.,
where the S&P rating is A- and the Moody's rating is Baa1, a Fitch rating
of BBB+ will be used). If a security is not rated by Fitch but is rated by
only one other Rating Agency, then the rating on the security from the
other Rating Agency will be used to determine the Fitch Discount Factor
(e.g., where the only rating on a security is an S&P rating of AAA, a
Fitch rating of AAA will be used, and where the only rating on a security
is a Moody's rating of Ba3, a Fitch rating of BB- will be used). If a
security is not rated by any Rating Agency, the Trust will use the
percentage set forth under "Unrated" in this table.
(ii) Convertible securities. The Fitch Discount Factor applied
to convertible securities is (A) 200% for investment grade convertibles
and (B) 222% for below investment grade convertibles so long as such
convertible securities have neither (x) conversion premium greater than
100% nor (y) have a yield to maturity or yield to worst of >15.00% above
the relevant Treasury curve.
The Fitch Discount Factor applied to convertible securities
which have conversion premiums of greater than 100% is (A) 152% for
investment grade convertibles and (B) 179% for below investment grade
convertibles so long as such convertible securities do not have a yield to
maturity or yield to worst of > 15.00% above the relevant Treasury curve.
The Fitch Discount Factor applied to convertible securities
which have a yield to maturity or yield to worst of > 15.00% above the
relevant Treasury curve is 370%.
If a security is not rated by Fitch but is rated by two other
Rating Agencies, then the lower of the ratings on the security from the
two other Rating Agencies will be used to determine the Fitch Discount
Factor (e.g., where the S&P rating is A- and the Moody's rating is Baa1, a
Fitch rating of BBB+ will be used). If a security is not rated by Fitch
but is rated by only one other Rating Agency, then the rating on the
security from the other Rating Agency will be used to determine the Fitch
Discount Factor (e.g., where the only rating on a security is an S&P
rating of AAA, a Fitch rating of AAA will be used, and where the only
rating on a security is a Moody's rating of Ba3, a Fitch rating of BB-
will be used). If a security is not rated by any Rating Agency, the Trust
will treat the security as if it were below investment grade.
(iii) Preferred securities: The percentage determined by
reference to the rating of a preferred security in accordance with the
table set forth below.
A-20
NOT
RATED
OR
BELOW
PREFERRED SECURITY(1) AAA AA A BBB BB BB
Taxable Preferred............. 130.58% 133.19% 135.91% 138.73% 153.23% 161.08%
Dividend-Received Deduction
(DRD) Preferred............ 163.40% 163.40% 163.40% 163.40% 201.21% 201.21%
----------
(1) If a security is not rated by Fitch but is rated by two other Rating
Agencies, then the lower of the ratings on the security from the two other
Rating Agencies will be used to determine the Fitch Discount Factor (e.g.,
where the S&P rating is A- and the Moody's rating is Baa1, a Fitch rating
of BBB+ will be used). If a security is not rated by Fitch but is rated by
only one other Rating Agency, then the rating on the security from the
other Rating Agency will be used to determine the Fitch Discount Factor
(e.g., where the only rating on a security is an S&P rating of AAA, a
Fitch rating of AAA will be used, and where the only rating on a security
is a Moody's rating of Ba3, a Fitch rating of BB- will be used). If a
security is not rated by any Rating Agency, the Trust will use the
percentage set forth under "Unrated" in this table.
(iv) U.S. Government Securities and U.S. Treasury Strips:
DISCOUNT
TIME REMAINING TO MATURITY FACTOR
1 year or less................................ 100%
2 years or less (but longer than 1 year)...... 103%
3 years or less (but longer than 2 years)..... 105%
4 years or less (but longer than 3 years)..... 107%
5 years or less (but longer than 4 years)..... 109%
7 years or less (but longer than 5 years)..... 112%
10 years or less (but longer than 7 years).... 114%
15 years or less (but longer than 10 years)... 122%
20 years or less (but longer than 15 years)... 130%
25 years or less (but longer than 20 years)... 146%
Greater than 30 years......................... 154%
(v) Short-Term Investments and Cash: The Fitch Discount Factor
applied to short-term portfolio securities, including without limitation
Debt Securities, Short Term Money Market Instruments and municipal debt
obligations, will be (A) 100%, so long as such portfolio securities mature
or have a demand feature at par exercisable within the Fitch Exposure
Period; (B) 115%, so long as such portfolio securities mature or have a
demand feature at par not exercisable within the Fitch Exposure Period;
and (C) 125%, so long as such portfolio securities neither mature nor have
a demand feature at par exercisable within the Fitch Exposure Period. A
Fitch Discount Factor of 100% will be applied to cash.
(vi) Rule 144A Securities: The Fitch Discount Factor applied
to Rule 144A Securities will be 110% of the Fitch Discount Factor which
would apply were the securities registered under the Securities Act.
(vii) Foreign Bonds: The Fitch Discount Factor (A) for a
Foreign Bond the principal of which (if not denominated in U.S. dollars)
is subject to a currency hedging transaction will be the Fitch Discount
Factor that would otherwise apply to such Foreign Bonds in accordance with
this definition and (B) for (1) a Foreign Bond the principal of which (if
not denominated in U.S. dollars) is not subject to a currency hedging
transaction and (2) a bond issued in a currency other than U.S. dollars by
a corporation, limited liability company or limited partnership domiciled
in, or the government or any agency, instrumentality or political
subdivision of, a nation other than an Approved Foreign Nation, will be
370%.
A-21
(viii) Common stock and warrants: The Fitch Discount Factor
applied to common stock will be:
Large-cap stocks: 200%
Mid-cap stocks: 233%
Small-cap stocks: 286%
Others: 370%
See "Fitch Eligible Assets -- common stocks" for definitions
of large-cap, mid-cap and small-cap stocks.
(ix) Futures and call options: For purposes of the Preferred
Shares Basic Maintenance Amount, futures held by the Fund shall not be
included as Fitch Eligible Assets. However, such assets shall be valued at
market value by subtracting the good faith margin and the maximum daily
trading variance as of the Valuation Date. Options purchased by the Fund
shall not be included as Fitch Eligible Assets. For written covered call
options (when the Fund holds the underlying position), to determine the
Fitch Eligible Asset, use the product of (a) the number of exercisable
shares in the contract, and (b) the lesser of (i) the market value of the
underlying security, and (ii) the strike price. For written uncovered call
options, to determine the reduction in the aggregate Fitch Discounted
Value, use the greater of (a) zero and (b) the product of (i) the number
of exercisable shares in the contract, and (ii) the product of (1) the
market value of the underlying security or index and (2) the applicable
discount factor, less the strike price. For written put options, to
determine the reduction in the aggregate Fitch Discounted Value, use the
greater of (a) zero and (b) the product of (i) the number of exercisable
shares in the contract, and (ii) the strike price less the quotient of (1)
the market value of the underlying security or index, and (2) the
applicable discount factor.
(x) Real Estate Investment Trusts:
(A) For common stock and preferred stock of REITs and
other real estate companies, the Fitch Discount Factor applied shall
be:
REIT or other real estate company preferred stock.............. 154%
REIT or other real estate company stock........................ 196%
(B) For corporate debt securities or REITs, the Fitch
Discount Factor applied shall be:
TERMS TO MATURITY AAA AA A BBB BB B UNRATED(1)
----------------- ---- ---- ---- ---- ---- ---- ---------
1 year or less............... 111% 114% 117% 120% 121% 127% 127%
2 years or less (but
longer than 1 year)....... 116% 123% 125% 127% 132% 137% 137%
3 years or less (but
longer than 2 years)...... 121% 125% 127% 131% 133% 140% 152%
4 years or less (but
longer than 3 years)...... 126% 126% 129% 132% 136% 140% 164%
5 years or less (but
longer than 4 years)...... 131% 132% 135% 139% 144% 149% 185%
7 years or less (but
longer than 5 years)...... 140% 143% 146% 152% 159% 167% 228%
10 years or less (but
longer than 7 years)...... 141% 143% 147% 153% 160% 168% 232%
12 years or less (but
longer than 7 years)...... 144% 144% 150% 157% 165% 174% 249%
15 years or less (but
longer than 12 years)..... 148% 151% 155% 163% 172% 182% 274%
30 years or less (but
longer than 15 years)..... 152% 156% 160% 169% 180% 191% 306%
----------
(1) If a security is not rated by Fitch but is rated by two other Rating
Agencies, then the lower of the ratings on the security from the two other
Rating Agencies will be used to determine the Fitch Discount Factor (e.g.,
where the S&P rating is A and the Moody's rating is Baa, a Fitch rating of
BBB will be used). If a security is not rated by Fitch but is rated by
only one other Rating Agency, then the rating on the security from the
other Rating Agency will be used to determined the Fitch Discount Factor
(e.g., where the only rating on a security is an S&P rating of AAA, a
Fitch rating of AAA will be used, and where the only rating on a security
is a Moody's rating of Ba, a Fitch rating of BB will be used). Securities
rated either below B or not rated by any Rating Agency shall be treated as
"Unrated" in the table above.
A-22
"Fitch Eligible Assets" means:
(i) cash (including interest and dividends due on assets rated
(A) BBB or higher by Fitch or the equivalent by another Rating Agency if
the payment date is within five Business Days of the Valuation Date, (B) A
or higher by Fitch or the equivalent by another Rating Agency if the
payment date is within thirty days of the Valuation Date, and (C) A+ or
higher by Fitch or the equivalent by another Rating Agency if the payment
date is within the Fitch Exposure Period) and receivables for Fitch
Eligible Assets sold if the receivable is due within five Business Days of
the Valuation Date, and if the trades which generated such receivables are
settled within five business days;
(ii) Short Term Money Market Instruments so long as (A) such
securities are rated at least F1+ by Fitch or the equivalent by another
Rating Agency, (B) in the case of demand deposits, time deposits and
overnight funds, the supporting entity is rated at least A by Fitch or the
equivalent by another Rating Agency, or (C) in all other cases, the
supporting entity (1) is rated at least A by Fitch or the equivalent by
another Rating Agency and the security matures within one month, (2) is
rated at least A by Fitch or the equivalent by another Rating Agency and
the security matures within three months or (3) is rated at least AA by
Fitch or the equivalent by another Rating Agency and the security matures
within six months;
(iii) U.S. Government Securities and U.S. Treasury Strips;
(iv) debt securities if such securities have been registered
under the Securities Act or are restricted as to resale under federal
securities laws but are eligible for resale pursuant to Rule 144A under
the Securities Act as determined by the Trust's investment manager or
portfolio manager acting pursuant to procedures approved by the Board of
Trustees of the Trust; and such securities are issued by (1) a U.S.
corporation, limited liability company or limited partnership, (2) a
corporation, limited liability company or limited partnership domiciled in
Argentina, Australia, Brazil, Chile, France, Germany, Italy, Japan, Korea,
Mexico, Spain or the United Kingdom (the "Approved Foreign Nations"), (3)
the government of any Approved Foreign Nation or any of its agencies,
instrumentalities or political subdivisions (the debt securities of
Approved Foreign Nation issuers being referred to collectively as "Foreign
Bonds"), (4) a corporation, limited liability company or limited
partnership domiciled in Canada or (5) the Canadian government or any of
its agencies, instrumentalities or political subdivisions (the debt
securities of Canadian issuers being referred to collectively as "Canadian
Bonds"). Foreign Bonds held by the Trust will qualify as Fitch Eligible
Assets only up to a maximum of 20% of the aggregate Market Value of all
assets constituting Fitch Eligible Assets. Similarly, Canadian Bonds held
by the Trust will qualify as Fitch Eligible Assets only up to a maximum of
20% of the aggregate Market Value of all assets constituting Fitch
Eligible Assets. Notwithstanding the limitations in the two preceding
sentences, Foreign Bonds and Canadian Bonds held by the Trust will qualify
as Fitch Eligible Assets only up to a maximum of 30% of the aggregate
Market Value of all assets constituting Fitch Eligible Assets. In
addition, bonds which are issued in connection with a reorganization under
U.S. federal bankruptcy law ("Reorganization Bonds") will be considered
debt securities constituting Fitch Eligible Assets if (a) they provide for
periodic payment of interest in cash in U.S. dollars or euros; (b) they do
not provide for conversion or exchange into equity capital at any time
over their lives; (c) they have been registered under the Securities Act
or are restricted as to resale under federal securities laws but are
eligible for trading under Rule 144A promulgated pursuant to the
Securities Act as determined by the Trust's investment manager or
portfolio manager acting pursuant to procedures approved by the Board of
Trustees of the Trust; (d) they were issued by a U.S. corporation, limited
liability company or limited partnership; and (e) at the time of purchase
at least one year had elapsed since the issuer's
A-23
reorganization. Reorganization Bonds may also be considered debt
securities constituting Fitch Eligible Assets if they have been approved
by Fitch, which approval shall not be unreasonably withheld. All debt
securities satisfying the foregoing requirements and restrictions of this
paragraph (iv) are herein referred to as "Debt Securities."
(v) Preferred stocks if (A) dividends on such preferred stock
are cumulative, (B) such securities provide for the periodic payment of
dividends thereon in cash in U.S. dollars or euros and do not provide for
conversion or exchange into, or have warrants attached entitling the
holder to receive equity capital at any time over the respective lives of
such securities, (C) the issuer of such a preferred stock has common stock
listed on either the New York Stock Exchange or the American Stock
Exchange, (D) the issuer of such a preferred stock has a senior debt
rating or preferred stock rating from Fitch of BBB - or higher or the
equivalent rating by another Rating Agency. In addition, the preferred
stocks issue must be at least $50 million;
(vi) Asset-backed and mortgage-backed securities;
(vii) Rule 144A Securities;
(viii) Bank Loans;
(ix) Municipal debt obligation that (A) pays interest in cash
(B) is part of an issue of municipal debt obligations of at least $5
million, except for municipal debt obligations rated below A by Fitch or
the equivalent rating by another Rating Agency, in which case the minimum
issue size is $10 million;
(x) Tradable credit baskets (e.g., Traded Custody Receipts or
TRACERS and Targeted Return Index Securities Trust or TRAINS);
(xi) Convertible debt and convertible preferred stocks;
(xii) Financial contracts, as such term is defined in Section
3(c)(2)(B)(ii) of the Investment Company Act, not otherwise provided for
in this definition may be included in Fitch Eligible Assets, but, with
respect to any financial contract, only upon receipt by the Trust of a
writing from Fitch specifying any conditions on including such financial
contract in Fitch Eligible Assets and assuring the Trust that including
such financial contract in the manner so specified would not affect the
credit rating assigned by Fitch to the Preferred Shares;
(xiii) Interest rate swaps entered into according to
International Swap Dealers Association ("ISDA") standards if (1) the
counterparty to the swap transaction has a short-term rating of not less
than F1 by Fitch or the equivalent by another, NRSRO, or, if the swap
counterparty does not have a short-term rating, the counterparty's senior
unsecured long-term debt rating is AA or higher by Fitch or the equivalent
by another NRSRO and (2) the original aggregate notional amount of the
interest rate swap transaction or transactions is not greater than the
liquidation preference of the Preferred Shares originally issued.
(xiv) Common stocks (1)(A) which are traded on the New York
Stock Exchange, the American Stock Exchange or in the over-the-counter
market, (B) which, if cash dividend paying, pay cash dividends in U.S.
dollars, and (C) which may be sold without restriction by the Trust;
provided, however, that (i) common stock which, while a Fitch Eligible
Asset owned by the Trust, ceases paying any regular cash dividend will no
longer be considered a Fitch Eligible Assets until 60 calendar days after
the date of the announcement of such cessation,
A-24
unless the issuer of the common stock has senior debt securities rated at
least A- by Fitch and (ii) the aggregate Market Value of the Trust's
holdings of the common stock of any issuer in excess of 5% per U.S. issuer
of the number of Outstanding shares times the Market Value of such common
stock shall not be a Fitch's Eligible Asset; and (2) securities
denominated in any currency other than the U.S. dollar and securities of
issuers formed under the laws of jurisdictions other than the United
States, its states and the District of Columbia for which there are
dollar-denominated American Depository Receipts ("ADRs") which are traded
in the United States on exchanges or over-the-counter and are issued by
banks formed under the laws of the United States, its states or the
District of Columbia; provided, however, that the aggregate Market Value
of the Trust's holdings of securities denominated in currencies other than
the U.S. dollar and ADRs in excess of 3% of the aggregate Market Value of
the Outstanding shares of common stock of such issuer or in excess of 10%
of the Market Value of the Trust's Fitch Eligible Assets with respect to
issuers formed under the laws of any single such non-U.S. jurisdiction
other than Approved Foreign Nations shall not be a Fitch Eligible Asset;
(iii) Small-cap stocks refer to stocks with a market capitalization
between $300 million to $2 billion. Mid-cap stocks refer to stocks with a
market capitalization between $2 billion to $10 billion. Large-cap stocks
are companies having a market capitalization greater than $10 billion;
(xv) REIT and other real estate securities; 5% issuer
limitation (including common, preferred, debt and other securities)
Where the Trust sells an asset and agrees to repurchase such asset in the
future, the Discounted Value of such asset will constitute a Fitch Eligible
Asset and the amount the Trust is required to pay upon repurchase of such asset
will count as a liability for the purposes of the Preferred Shares Basic
Maintenance Amount. Where the Trust purchases an asset and agrees to sell it to
a third party in the future, cash receivable by the Trust thereby will
constitute a Fitch Eligible Asset if the long-term debt of such other party is
rated at least A - by Fitch or the equivalent by another Rating Agency and such
agreement has a term of 30 days or less; otherwise the Discounted Value of such
purchased asset will constitute a Fitch Eligible Asset.
Notwithstanding the foregoing, an asset will not be considered a Fitch
Eligible Asset to the extent that it has been irrevocably deposited for the
payment of (i)(A) through (i)(E) under the definition of Preferred Shares Basic
Maintenance Amount or to the extent it is subject to any Liens, except for (A)
Liens which are being contested in good faith by appropriate proceedings and
which Fitch has indicated to the Trust will not affect the status of such asset
as a Fitch Eligible Asset, (B) Liens for taxes that are not then due and payable
or that can be paid thereafter without penalty, (C) Liens to secure payment for
services rendered or cash advanced to the Trust by its investment manager or
portfolio manager, the Trust's custodian, transfer agent or registrar or the
Auction Agent and (D) Liens arising by virtue of any repurchase agreement.
A-25
Portfolio holdings as described above must be within the following
diversification and issue size requirements in order to be included in Fitch's
Eligible Assets:
MINIMUM
SECURITY MAXIMUM MAXIMUM ISSUE SIZE
RATED SINGLE SINGLE ($ IN
AT LEAST ISSUER(1) INDUSTRY(1)(2) MILLION)(3)
AAA 100% 100% $ 100
AA - 20 75 100
A - 10 50 100
BBB - 6 25 100
BB - 4 16 50
B - 3 12 50
CCC 2 8 50
----------
(1) Percentages represent a portion of the aggregate market value of corporate
debt securities.
(2) Industries are determined according to Fitch's Industry Classifications,
as defined herein.
(3) Preferred stock has a minimum issue size of $50 million.
"Fitch Exposure Period" means the period commencing on (and including) a
given Valuation Date and ending 49 days thereafter.
"Fitch Hedging Transactions" means purchases or sales of exchange-traded
financial futures contracts based on any index approved by Fitch or Treasury
Bonds, and purchases, writings or sales of exchange-traded put options on such
futures contracts, any index approved by Fitch or Treasury Bonds and purchases,
writings or sales of exchange-traded call options on such financial futures
contracts, any index approved by Fitch or Treasury bonds ("Fitch Hedging
Transactions"), subject to the following limitations:
(i) The Trust may not engage in any Fitch Hedging Transaction
based on any index approved by Fitch (other than transactions that
terminate a futures contract or option held by the Trust by the Trust's
taking the opposite position thereto ("closing transactions")) that would
cause the Trust at the time of such transaction to own or have sold
outstanding financial futures contracts based on such index exceeding in
number 10% of the average number of daily traded financial futures
contracts based on such index in the 30 days preceding the time of
effecting such transaction as reported by The Wall Street Journal.
(ii) The Trust will not engage in any Fitch Hedging
Transaction based on Treasury Bonds (other than closing transactions) that
would cause the Trust at the time of such transaction to own or have sold:
(A) Outstanding financial futures contracts based on
Treasury Bonds with such contracts having an aggregate market value
exceeding 20% of the aggregate market value of Fitch Eligible Assets
owned by the Trust and rated AA by Fitch (or, if not rated by Fitch
Ratings, rated Aa by Moody's; or, if not rated by Moody's, rated AAA
by S&P); or
(B) Outstanding financial futures contracts based on
Treasury Bonds with such contracts having an aggregate market value
exceeding 40% of the aggregate market value of all Fitch Eligible
Assets owned by the Trust (other than Fitch Eligible Assets already
subject to a Fitch Hedging Transaction) and rated A or BBB by Fitch
(or, if not rated by Fitch Ratings, rated Baa by Moody's; or, if not
rated by Moody's, rated A or AA by S&P) (for purposes of the
foregoing clauses (i) and (ii), the Trust shall be
A-26
deemed to own futures contracts that underlie any outstanding
options written by the Trust);
(iii) The Trust may engage in closing transactions to close
out any outstanding financial futures contract based on any index approved
by Fitch if the amount of open interest in such index as reported by The
Wall Street Journal is less than an amount to be mutually determined by
Fitch and the Trust.
(iv) The Trust may not enter into an option or futures
transaction unless, after giving effect thereto, the Trust would continue
to have Fitch Eligible Assets with an aggregate Discounted Value equal to
or greater than the Preferred Shares Basic Maintenance Amount.
"Fitch Industry Classifications" means, for the purposes of determining
Fitch Eligible Assets, each of the following industry classifications:
FITCH INDUSTRY CLASSIFICATIONS SIC CODE (MAJOR GROUPS)
1. Aerospace and Defense 37, 45
2. Automobiles 37, 55
3. Banking, Finance and Real Estate 60, 65, 67
4. Broadcasting and Media 27, 48
5. Building and Materials 15-17, 32, 52
6. Cable 48
7. Chemicals 28, 30
8. Computers and Electronics 35, 36
9. Consumer Products 23, 51
10. Energy 13, 29, 49
11. Environmental Services 87
12. Farming and Agriculture 1-3, 7-9
13. Food, Beverage and Tobacco 20, 21, 54
14. Gaming, Lodging and Restaurants 70, 58
15. Health Care and Pharmaceuticals 38, 28, 80
16. Industrial/Manufacturing 35
17. Insurance 63, 64
18. Leisure and Entertainment 78, 79
19. Metals and Mining 10, 12, 14, 33, 34
20. Miscellaneous 50, 72-76, 99
21. Paper and Forest Products 8, 24, 26
22. Retail 53, 56, 59
23. Sovereign NA
24. Supermarkets and Drug Stores 54
25. Telecommunications 48
26. Textiles and Furniture 22, 25, 31, 57
27. Transportation 40, 42-47
28. Utilities 49
29. Structured Finance Obligations NA
30. Packaging and Containers 26, 32, 34
31. Business Series 73, 87
The Trust shall use its discretion in determining which industry
classification is applicable to a particular investment.
"Hold Order" has the meaning set forth in Section 2(a)(ii) of Part II of
this Statement.
A-27
"Holder" means, with respect to the Preferred Shares, the registered
holder of shares of each Series as the same appears on the share ledger or share
records of the Trust.
"Investment Manager" means Calamos Advisors LLC.
"LIBOR Rate" on any Auction Date, means (i) the rate for deposits in U.S.
dollars for the designated Dividend Period, which appears on display page 3750
of Moneyline's Telerate Service ("Telerate Page 3750") (or such other page as
may replace that page on that service, or such other service as may be selected
by Citigroup Global Markets Inc. or its successors) as of 11:00 a.m., London
time, on the day that is the London Business Day on the Auction Date or, if the
Auction Date is not a London Business Day, the London Business Day proceeding
the Auction Date (the "LIBOR Determination Date"), or (ii) if such rate does not
appear on Telerate Page 3750 or such other page as may replace such Telerate
Page 3750, (A) Citigroup Global Markets Inc. shall determine the arithmetic mean
of the offered quotations of the reference banks to leading banks in the London
interbank market for deposits in U.S. dollars for the designated Dividend Period
in an amount determined by Citigroup Global Markets Inc. by reference to
requests for quotations as of approximately 11:00 a.m. (London time) on such
date made by Citigroup Global Markets Inc. to the reference banks, (B) if at
least two of the reference banks provide such quotations, LIBOR Rate shall equal
such arithmetic mean of such quotations, (C) if only one or none of the
reference banks provide such quotations, LIBOR Rate shall be deemed to be the
arithmetic mean of the offered quotations that leading banks in The City of New
York selected by Citigroup Global Markets Inc. (after obtaining the Trust's
approval) are quoting on the relevant LIBOR Determination Date for deposits in
U.S. dollars for the designated Dividend Period in an amount determined by
Citigroup Global Markets Inc. (after obtaining the Trust's approval) that is
representative of a single transaction in such market at such time by reference
to the principal London offices of leading banks in the London interbank market;
provided, however, that if Citigroup Global Markets Inc. is not a Broker-Dealer
or does not quote a rate required to determine the LIBOR Rate, the LIBOR Rate
will be determined on the basis of the quotation or quotations furnished by any
other Broker-Dealer selected by the Trust to provide such rate or rates not
being supplied by Citigroup Global Markets Inc.; provided further, that if
Citigroup Global Markets Inc. and/or a substitute Broker-Dealer are required but
unable to determine a rate in accordance with at least one of the procedures
provided above, the LIBOR Rate shall be the most recently determinable LIBOR
Rate. If the number of Dividend Period days shall be (i) 7 or more but fewer
than 21 days, such rate shall be the seven-day LIBOR rate; (ii) more than 21 but
fewer than 49 days, such rate shall be one-month LIBOR rate; (iii) 49 or more
but fewer than 77 days, such rate shall be the two-month LIBOR rate; (iv) 77 or
more but fewer than 112 days, such rate shall be the three-month LIBOR rate; (v)
112 or more but fewer than 140 days, such rate shall be the four-month LIBOR
rate; (vi) 140 or more but fewer that 168 days, such rate shall be the
five-month LIBOR rate; (vii) 168 or more but fewer 189 days, such rate shall be
the six-month LIBOR rate; (viii) 189 or more but fewer than 217 days, such rate
shall be the seven-month LIBOR rate; (ix) 217 or more but fewer than 252 days,
such rate shall be the eight-month LIBOR rate; (x) 252 or more but fewer than
287 days, such rate shall be the nine-month LIBOR rate; (xi) 287 or more but
fewer than 315 days, such rate shall be the ten-month LIBOR rate; (xii) 315 or
more but fewer than 343 days, such rate shall be the eleven-month LIBOR rate;
and (xiii) 343 or more days but fewer than 365 days, such rate shall be the
twelve-month LIBOR rate.
"London Business Day" means any day on which commercial banks are
generally open for business in London.
"Liquidation Preference" means $25,000 per preferred share.
"Mandatory Redemption Date" has meaning set forth in Section 3(a)(iv) of
Part I of this Statement.
A-28
"Mandatory Redemption Price" has the meaning set forth in Section
3(a)(iii) of Part I of this Statement.
"Market Value" means the fair market value of an asset of the Trust as
computed in accordance with the Trust's pricing procedures adopted by the Board
of the Trust in connection with valuing the Trust's assets.
"Maximum Rate" means the Applicable Percentage of the Reference Rate. The
Auction Agent will round each applicable Maximum Rate to the nearest
one-thousandth (0.001) of one percent per annum, with any such number ending in
five ten-thousandths of one percent being rounded upwards to the nearest
one-thousandth (0.001) of one percent.
"Moody's" means Moody's Investors Service, Inc. and its successors at law.
"1933 Act" means the Securities Act of 1933, as amended.
"1940 Act" means the Investment Company Act of 1940, as amended.
"1940 Act Preferred Shares Asset Coverage" means asset coverage, as
determined in accordance with Section 18(h) of the 1940 Act, of at least 200%
with respect to all outstanding senior securities of the Trust which are stock,
including all Outstanding Preferred Shares (or such other asset coverage as may
in the future be specified in or under the 1940 Act as the minimum asset
coverage for senior securities which are stock of a closed-end investment
company as a condition of declaring dividends on its common shares), determined
on the basis of values calculated as of a time within 48 hours (not including
Sundays or holidays) next preceding the time of such determination.
"1940 Act Preferred Shares Asset Coverage Certificate" means the
certificate required to be delivered by the Trust pursuant to Section 12(e) of
this Statement.
"Notice of Redemption" means any notice with respect to the redemption of
Preferred Shares pursuant to Section 3 of Part I of this Statement.
"Order" has the meaning set forth in Section 2(a)(ii) of Part II of this
Statement.
"Other Rating Agency" means any rating agency other than S&P or Fitch then
providing a rating for the Preferred Shares pursuant to the request of the
Trust.
"Other Rating Agency Eligible Assets" means assets of the Trust designated
by any Other Rating Agency as eligible for inclusion in calculating the
discounted value of the Trust's assets in connection with such Other Rating
Agency's rating of the Preferred Shares.
"Outstanding" means, as of any date, Preferred Shares theretofore issued
by the Trust except, without duplication, (i) any Preferred Shares theretofore
canceled, redeemed or repurchased by the Trust, or delivered to the Auction
Agent for cancellation or with respect to which the Trust has given notice of
redemption and irrevocably deposited with the Paying Agent sufficient funds to
redeem such shares and (ii) any Preferred Shares represented by any certificate
in lieu of which a new certificate has been executed and delivered by the Trust.
Notwithstanding the foregoing, (A) for purposes of voting rights (including the
determination of the number of shares required to constitute a quorum), any
Preferred Shares as to which the Trust or any Affiliate is the Existing Holder
will be disregarded and not deemed Outstanding; (B) in connection with any
Auction, any Preferred Shares as to which the Trust or any person known to the
Auction Agent to be an Affiliate is the Existing Holder will be disregarded and
not deemed Outstanding; and (C) for purposes of determining the Preferred Shares
Basic Maintenance
A-29
Amount, Preferred Shares held by the Trust will be disregarded and not deemed
Outstanding, but shares held by any Affiliate will be deemed Outstanding.
"Paying Agent" means The Bank of New York unless and until another entity
appointed by a resolution of the Board of Trustees enters into an agreement with
the Trust to serve as paying agent, which paying agent may be the same as the
Auction Agent.
"Person" or "Persons" means and includes an individual, a partnership, the
Trust, a trust, a corporation, a limited liability company, an unincorporated
association, a joint venture or other entity or a government or any agency or
political subdivision thereof.
"Potential Beneficial Owner" or "Potential Beneficial Holder" has the
meaning set forth in Section 1 of Part II of this Statement.
"Preferred Shares" has the meaning set forth in paragraph FIRST of Part I
of this Statement.
"Preferred Shares Basic Maintenance Amount" means as of any Valuation Date
as the dollar amount equal to:
(i) the sum of (A) the product of the number of Preferred
Shares outstanding on such date multiplied by $25,000 (plus the product of
the number of shares of any other series of preferred shares outstanding
on such date multiplied by the Liquidation Preference of such shares),
plus any redemption premium applicable to the Preferred Shares (or other
preferred shares) then subject to redemption; (B) the aggregate amount of
dividends that will have accumulated at the respective Applicable Rates
(whether or not earned or declared) to (but not including) the first
respective Dividend Payment Dates for Preferred Shares outstanding that
follow such Valuation Date (plus the aggregate amount of dividends,
whether or not earned or declared, that will have accumulated in respect
of other outstanding preferred shares to, but not including, the first
respective dividend payment dates for such other shares that follow such
Valuation Date); (C) the aggregate amount of dividends that would
accumulate on shares of each series of Preferred Shares outstanding from
such first respective Dividend Payment Date therefor through the 49th day
after such Valuation Date, at the Maximum Rate (calculated as if such
Valuation Date were the Auction Date for the Dividend Period commencing on
such Dividend Payment Date) for a Standard Dividend Period of shares of
such series to commence on such Dividend Payment Date, assuming, solely
for purposes of the foregoing, that if on such Valuation Date the Trust
shall have delivered a notice of Special Dividend Period to the Auction
Agent pursuant to Section 4(b) of Part I of the Statement with respect to
shares of such series, such Maximum Rate shall be the Maximum Rate for the
Special Dividend Period of shares of such series to commence on such
Dividend Payment Date (except that (1) if such Valuation Date occurs at a
time when a Failure to Deposit (or, in the case of preferred shares other
than Preferred Shares, a failure similar to a Failure to Deposit) has
occurred that has not been cured, the dividend for purposes of calculation
would accumulate at the current dividend rate then applicable to the
shares in respect of which such failure has occurred and (2) for those
days during the period described in this subparagraph (C) in respect of
which the Applicable Rate in effect immediately prior to such Dividend
Payment Date will remain in effect (or, in the case of preferred shares
other than Preferred Shares, in respect of which the dividend rate or
rates in effect immediately prior to such respective dividend payment
dates will remain in effect), the dividend for purposes of calculation
would accumulate at such Applicable Rate (or other rate or rates, as the
case may be in respect of those days); (D) the amount of anticipated
expenses of the Trust for the 90 days subsequent to such Valuation Date;
(E) the amount of any indebtedness or obligations of the Trust senior in
right of payments to the Preferred Shares; and (F) any current liabilities
as of such Valuation Date to the extent not reflected in any of (i)(A)
through (i)(E)
A-30
(including, without limitation, any payables for portfolio securities
purchased as of such Valuation Date and any liabilities incurred for the
purpose of clearing securities transactions); less
(ii) the value (i.e., the face value of cash, short-term
municipal obligations and short-term securities that are the direct
obligation of the U.S. government, provided in each case that such
securities mature on or prior to the date upon which any of (i)(A) though
(i)(F) became payable, otherwise the S&P Discounted Value) of any of the
Trust's assets irrevocably deposited by the Trust for the payment of any
of (i)(A) through (i)(F).
"Preferred Shares Basic Maintenance Amount Test" means a test which is met
if the lower of the aggregate Discounted Values of the Fitch Eligible Assets or
the S&P Eligible Assets meets or exceeds the Preferred Shares Basic Maintenance
Amount.
"Preferred Shares Basic Maintenance Certificate" has the meaning set forth
in Section 12(d) of Part I of this Statement.
"Rating Agency" means Fitch and S&P, as long as such rating agency is then
rating the Preferred Shares and any Other Rating Agency then rating the
Preferred Shares.
"Redemption Date" has the meaning set forth in Section 2(c)(ii) of Part II
of this Statement.
"Redemption Default" has the meaning set forth in Section 2(c)(ii) of Part
I of this Statement.
"Redemption Price" has the meaning set forth in Section 3(a)(i) of Part I
of this Statement.
"Reference Rate" means, with respect to the determination of the Default
Rate, the applicable LIBOR Rate (for a Dividend Period of fewer than 365 days)
or the applicable Treasury Index Rate (for a Dividend Period of 365 days or
more).
"Registrar" means The Bank of New York, unless and until another entity
appointed by a resolution of the Board of Trustees enters into an agreement with
the Trust to serve as transfer agent.
"S&P" means Standard & Poor's, a division of The McGraw-Hill Companies,
Inc., or its successors at law.
"S&P Discount Factor" means:
DISCOUNT
FACTOR FOR
TYPE OF S&P ELIGIBLE ASSET AAA RATING
----------------------------------------------------------------------- ----------
Fixed rate Preferred stock............................................. 228.10%
Adjustable rate Preferred stock........................................ 198.29%
Taxable Preferred stock (Non-DRD)...................................... 154.66%
Convertible securities `AAA'........................................... 148.25%
Convertible securities `AA'............................................ 154.97%
Convertible securities `A'............................................. 161.70%
Convertible securities `BBB'........................................... 168.42%
Convertible securities `BB'............................................ 175.15%
Convertible securities `B'............................................. 181.87%
Convertible securities `CCC'........................................... 188.60%
Treasury 1-year........................................................ 101.99%
Treasury 2-year........................................................ 103.77%
A-31
DISCOUNT
FACTOR FOR
TYPE OF S&P ELIGIBLE ASSET AAA RATING
----------------------------------------------------------------------- ----------
Treasury 5-year........................................................ 109.09%
Treasury 10-year....................................................... 115.14%
Treasury 30-year....................................................... 126.33%
U.S. Agency Debt Securities............................................ 120.48%
U.S. Agency Mortgage Securities 15-year................................ 128.80%
U.S. Agency Mortgage Securities 30-year................................ 131.20%
U.S. Agency Mortgage Securities 1/1 ARMS............................... 121.70%
U.S. Agency Mortgage Securities 3/1 ARMS............................... 122.10%
U.S. Agency Mortgage Securities 5/1 ARMS............................... 122.50%
U.S. Agency Mortgage Securities 10/1 ARMS.............................. 122.70%
Corporate Bonds Rated AAA.............................................. 110.01%
Corporate Bonds Rated AA............................................... 113.28%
Corporate Bonds Rated A................................................ 116.85%
Corporate Bonds Rated BBB.............................................. 121.82%
Corporate Bonds Rated BB............................................... 135.32%
Corporate Bonds Rated B................................................ 168.76%
Corporate Bonds Rated CCC.............................................. 252.03%
Corporate Bonds Rated CCC-............................................. 350.00%
Bank Loan Performing, greater than $.90................................ 117.79%
Bank Loan Performing, between $.85 and $.90............................ 125.47%
Bank Loan Non-performing, greater than $.85............................ 154.08%
Bank Loan Non-performing, less than or equal to $.85................... 178.25%
Auto Loans (fixed or floating) WAL less than 5-years................... 130.00%
Auto Loans (fixed or floating) WAL between 5 and 10-years.............. 140.00%
Credit Card Loans (fixed) WAL less than 5-years........................ 130.00%
Credit Card Loans (fixed) WAL between 5 and 10-years................... 140.00%
Credit Card Loans (floating)........................................... 112.70%
REIT Common Stock...................................................... 148.79%
Standard & Poor's 500 Index (including ADRs)........................... 168.46%
Master Limited Partnerships............................................ 625.00%
Notwithstanding the foregoing, the S&P Discount Factor for short-term
Municipal Obligations will be 115% so long as such Municipal Obligations are
rated A-1 + or SP-1 + by S&P and mature or have a demand feature exercisable
within 30 days or less, or 123% so long as such Municipal Obligations are rated
A-1 or SP-1 by S&P and mature or have a demand feature exercisable in 30 days or
less, or 125% if such Municipal Obligations are not rated by S&P but are rated
equivalent to A-1+ or SP-1+ by another nationally recognized statistical rating
organization, on a case by case basis; provided, however, that any such non-S&P
rated short-term Municipal Obligations which have demand features exercisable
within 30 days or less must be backed by a letter of credit, liquidity facility
or guarantee from a bank or other financial institution with a short-term rating
of at least A-l+ from S&P ; and further provided that such non-S&P rated
short-term Municipal Obligations may comprise no more than 50% of short-term
Municipal Obligations that qualify as S&P Eligible Assets; provided, however,
that Municipal Obligations not rated by S&P but rated equivalent to BBB or lower
by another nationally recognized statistical rating organization, rated BB+ or
lower by S&P or non-rated (such Municipal Obligations are hereinafter referred
to as "High Yield Securities") may comprise no more than 20% of the short-term
Municipal Obligations that qualify as S&P Eligible Assets; (ii) the S&P Discount
Factor for Receivables for Municipal Obligations Sold that are due in more than
five Business Days from such Valuation Date will be the S&P Discount Factor
applicable to the Municipal Obligations sold; (iii) no S&P Discount Factor will
be applied to cash or to Receivables for Municipal Obligations Sold if such
receivables are due within five Business Days of such Valuation Date; and (iv)
except as set forth in clause (i) above, in
A-32
the case of any Municipal Obligation that is not rated by S&P but qualifies as
an S&P Eligible Asset pursuant to clause (iii) of that definition, such
Municipal Obligation will be deemed to have an S&P rating one full rating
category lower than the S&P rating category that is the equivalent of the rating
category in which such Municipal Obligation is placed by a nationally recognized
statistical rating organization. "Receivables for Municipal Obligations Sold,"
for purposes of calculating S&P Eligible Assets as of any Valuation Date, means
the book value of receivables for Municipal Obligations sold as of or prior to
such Valuation Date. The Trust may adopt S&P Discount Factors for Municipal
Obligations other than Municipal Obligations provided that S&P advises the Trust
in writing that such action will not adversely affect its then current rating on
the Preferred Shares. For purposes of the foregoing, Anticipation Notes rated
SP-1+ or, if not rated by S&P, equivalent to A-l+ or SP-1+ by another nationally
recognized statistical rating organization, on a case by case basis, which do
not mature or have a demand feature at par exercisable in 30 days and which do
not have a long-term rating, shall be considered to be short-term Municipal
Obligations.
The S&P Discount Factor applied to cash, cash equivalents and demand
deposits in an "A-l+" rated institution will be 100%. "A-1+" rated commercial
paper, with maturities no greater then 30 calendar days and held instead of cash
until maturity is valued at 100%. Securities with next-day maturities invested
in "A-1+" rated institutions are considered cash equivalents and are valued at
100%. Securities maturing in 181 to 360 calendar days are valued at 114.2%.
The S&P Discount Factor for shares of unrated affiliated Money Market
Funds used as "sweep" vehicles will be 110%. Money Market Funds rated "AAAm"
will be discounted at the appropriate level as dictated by the exposure period.
No S&P Discount Factor will be applied to Money Market Funds rated AAAm by S&P
with effective next day maturities.
Receivables due within five business days of a valuation will be treated
as cash and are valued at 100%.
Receivables that are due in more than five business days of a Valuation
Date qualify as an S&P Eligible Asset at a value no greater than the settlement
price discounted at the applicable credit rating and/or exposure period discount
factor.
For purposes of determining the discount factors applicable to collateral
not rated by S&P, the collateral will carry an S&P rating one full rating
category lower than the equivalent S&P rating.
"S&P Eligible Asset" means:
(i) Deposit Securities;
(ii) U.S. Government Obligations and U.S. Government Agencies;
(iii) Corporate Indebtedness. Evidences of indebtedness other
than Deposit Securities, U.S. Government Obligations and Municipal
Obligations that are not convertible into or exchangeable or exercisable
for stock of a corporation (except to the extent of ten percent (10%) in
the case of a share exchange or tender offer) ("Other Debt") and that
satisfy all of the following conditions:
(A) no more than 10% of the Other Debt may be unrated;
(B) the remaining term to maturity of such Other Debt
shall not exceed thirty (30) years;
A-33
(C) and such Other Debt must provide for periodic
interest payments in cash over the life of the security;
(D) the issuer of such evidences of indebtedness files
periodic financial statements with the Commission; provided,
however, non-rated evidences of such indebtedness or issuers of
Other Debt may not constitute more than 10% of the Trust's Other
Debt;
(iv) Convertible Corporate Indebtedness. Evidences of
indebtedness other than Deposit Securities, U.S. Government Obligations
and Municipal Obligations that are convertible into or exchangeable or
exercisable for stock of a corporation and that satisfy all of the
following conditions:
(A) such evidence of indebtedness is rated at least CCC
by S&P ; and
(B) if such evidence of indebtedness is rated BBB or
lower by S&P, the market capitalization of the issuer of such
evidence of indebtedness is at least $100 million;
(v) Agency Mortgage Collateral. Certificates guaranteed by
U.S. Government Agencies (as defined below) (e.g., FNMA, GNMA and FHLMC)
for timely payment of interest and full and ultimate payment of principal.
Agency Mortgage Collateral also evidence undivided interests in pools of
level-payment, fixed, variable, or adjustable rate, fully amortizing loans
that are secured by first liens on one- to four-family residences
residential properties (or in the case of Plan B FHLMC certificates, five
or more units primarily designed for residential use) ("Agency Mortgage
Collateral"). Agency Mortgage Collateral the following conditions apply:
(A) For GNMA certificates backed by pools of graduated
payment mortgages, levels are 20 points above established levels;
(B) Qualifying "large pool" FNMA mortgage-backed
securities and FHLMC participation certificates are acceptable as
eligible collateral. The eligible fixed-rate programs include FNMA
MegaPools, FNMA Majors, FHLMC Multilender Swaps, and FHLMC Giant
certificates. Eligible adjustable rate mortgage ("ARMs") programs
include nonconvertible FNMA ARM MegaPools and FHLMC weighted average
coupon ARM certificates. Eligible FHLMC Giant programs exclude
interest-only and principal only stripped securities;
(C) FNMA certificates backed by multifamily ARMs pegged
to the 11th District Cost of Funds Index are acceptable as eligible
collateral at 5 points above established levels; and
(D) Multiclass REMICs issued by FNMA and FHLMC are
acceptable as eligible collateral at the collateral levels
established for CMOs.
(vi) Mortgage Pass-Through Certificates. Publicly issued
instruments maintaining at least a AA- ratings by S&P. Certificates
evidence proportional, undivided interests in pools of whole residential
mortgage loans. Pass-through certificates backed by pools of convertible
ARMs are acceptable as eligible collateral at 5 points above the levels
established for pass-through certificates backed by fixed or
non-convertible ARM pools.
A-34
(vii) Mortgage-backed Securities.
(A) Mortgage Pass-through Certificates are publicly
issued instruments rated at least `AA-' by S&P. Pass-throughs backed
by pools of convertible adjustable-rate mortgages (ARMs) are
discounted at an additional five percentage points above the levels
established for pass-throughs backed by fixed or nonconventional ARM
pools.
(B) Fixed-Rate and Adjustable-rate mortgage collateral
(conventional/FHA/VA and Whole Loans) Pool must consist of at least
100 loans each secured by single-family, one-unit, detached primary
residence. 25% of the total pool may have an LTV greater than 80%
but less than or equal to 90%. 10% may have an original LTV of no
greater than 95%. Loans with LTV greater than 80% must have a `AA'
rated primary mortgage insurance. 25% may have balances between
$400,000 and $600,000, provided the maximum size of any loan is
appropriate with respect to the market area of the originator. 10%
of the pool may represent condominiums that are four stories or
less. High LTVs, high loan balance, and condominiums, in aggregate,
should not exceed 35% of the pool.
(C) FHAA-Insured Multifamily Loans must have a minimum
principal balance of $100,000 and have at least a one-year remaining
maturity. The aggregate market value of any one loan may not exceed
5% of the aggregate market value of the portfolio. Such loans should
be initially included in minimum blocks of $5 million. Project loans
must have at least a 90% occupancy rate at the time the loan is
pledged. After 90 days defaulted mortgage loans must be valued at
zero. A loan in default should be liquidated or substituted within a
90-day period.
(D) Collateralized Mortgage Obligations tranches are
publicly issued instruments rated `AAA' by S&P. No more than 25% of
the total market value of collateral may be from one private sector
issuer.
(viii) Rule 144A Securities;
(ix) Senior Loans, provided, however, that the initial issue
amount (facility size) is at least $100 million. The minimum accepted
holding size (notional amount) of any given loan not rated by S&P, Fitch
or other nationally recognized rating agency is at least $1 million,
provided, that participation loans are limited to not more than 10% of the
aggregate value of the S&P Eligible Asset. For loans rated by S&P, Fitch
or other nationally recognized rating agency, there is no minimum accepted
holding size. Senior Loan Participations and non-Senior Loans will qualify
as S&P Eligible Assets only up to an aggregate maximum of 15% of the
Trust's total assets. These levels apply to U.S. lenders only; any
international loans are excluded.
(x) Preferred stocks that satisfy all of the following
conditions:
(A) The preferred stock issue has a senior rating from
S&P, or the preferred issue must be rated. In the case of Yankee
preferred stock, the issuer should have an S&P senior rating of at
least `BBB-, or the preferred issue must be rated at least BBB-.
(B) The issuer -- or if the issuer is a special purpose
corporation, its parent -- is listed on either the New York Stock
Exchange, the American Stock
A-35
Exchange or NASDAQ if the traded par amount is less than $1,000. If
the traded par amount is $1,000 or more exchange listing is not
required.
(C) The collateral pays cash dividends denominated in
U.S. dollars.
(D) Private placements under Rule 144A with registration
rights are eligible assets.
(E) The minimum market capitalization of eligible
issuers is $100 million.
Restrictions for floating-rate preferred stock:
(F) Holdings must be limited to preferred stock with a
dividend period of less than or equal to 49 days, except for a new
issue, where the first dividend period may be up to 64 days.
(G) The floating-rate preferred stock may not have been
subject to a failed auction.
Restrictions for adjustable -- or auction-rate preferred
stock:
(H) The total fair market value of adjustable-rate
preferred stock held in the portfolio may not exceed 10% of eligible
assets.
Concentration Limits:
(I) Total issuer exposure in preferred stock of any one
issuer is limited to 10% of the fair market value of eligible
assets.
(J) Preferred stock rated below B- (including non-rated
preferred stock) are limited to no more than 15% of the fair market
value of the eligible assets.
(K) Add 5 points to over-collateralization level for
issuers with a senior rating or preferred stock rating of less than
BBB-.
(L) Add 10 point to over-collateralization level of
issuers with no senior rating, preferred stock rating or dividend
history.
(xi) Common Stocks. Common stocks that satisfy all of the
following conditions:
(A) The issuer can hold no more than the average monthly
trading volume over the past year.
(B) Each stock must have a minimum market capitalization
of at least $100 million.
(C) Restricted stocks (144A securities) or any pink
sheet stocks (generally, stocks that are not carried in daily
over-the-counter newspaper listings) are ineligible.
A-36
(D) The issuer may not hold any equity unless it has
been listed on an exchange or traded for more than one year and one
quarter, or 15 months (eligible stock exchanges are the New York
Stock Exchange, American Stock Exchange, Philadelphia Stock
Exchange, Boston Stock Exchange, Washington Stock Exchange, Midwest
Stock Exchange, Pacific Stock Exchange, NASDAQ, and National Market
Quotations).
(E) The collateral is owned by the Trust, or the trustee
or collateral agent has a first perfected priority security interest
in the collateral. (For S&P's perfection of Security Interest
Criteria, see Legal Criteria For Structured Finance Transactions,
April 2002).
Note:
Add 20 percentage points to the overcollateralization level for common
stock that do not meet the requirement of item (D) above.
Receivables due within five business days of a Valuation Date will be
treated as cash and are valued at 100%.
Receivables that are due in more than five business days of a Valuation
Date qualify as an S&P Eligible Asset at a value no greater than the settlement
price discounted at the applicable credit rating and/or exposure period discount
factor.
(xii) Municipal Obligations. A Municipal Obligation owned by
the Trust that (i) is interest bearing and pays interest at least
semi-annually; (ii) is payable with respect to principal and interest in
U.S. Dollars; (iii) has an original issuance size of $10 million or
greater and any securities with an issuance size of under $10 million must
be rated `AA' or better by S&P; or, if not rated by S&P but rated AAA by
another nationally recognized statistical rating organization, on a case
by case basis; (iv) except for Inverse Floaters, is not part of a private
placement of Municipal Obligations; (v) is issued by any of the 50 states
of the U.S., its territories, and their subdivisions, counties, cities,
towns, villages, and school districts; by agencies such as authorities and
special districts created by the states; and by certain federally
sponsored agencies such as local housing authorities. Payments made on
these bonds are exempt from federal income taxes and are generally exempt
from state and local taxes in the state of issuance; and (vi) Fifty
percent of the aggregate fair market value of the pledged pool may be
rated by a nationally recognized statistical rating organization other
than S&P. Notwithstanding the foregoing limitations:
(A) Municipal Obligations (excluding Escrowed Bonds) of
any one issuer or guarantor (excluding bond insurers) rated at least
"BBB" by S&P or "A" by another NRSRO shall be considered S&P
Eligible Assets only to the extent the Market Value of such
Municipal Obligations (including short-term Municipal Obligations)
does not exceed 10% of the aggregate Market Value of S&P Eligible
Assets, provided that either (i) 2% is added to the S&P Discount
Factor for every 1% by which the Market Value for any issuer exceeds
5%, up to a maximum of 10% or (ii) 10% is added to the S&P Discount
Factor for any issuer that exceeds 5% of the aggregate S&P Eligible
Assets. High Yield Securities (as defined below) of any one issuer
shall be considered S&P Eligible Assets only to the extent the
Market Value of such Municipal Obligations does not exceed 5% of the
aggregate Market Value of S&P Eligible Assets;
A-37
(B) Municipal Obligations not rated by S&P shall be
considered S&P Eligible Assets only to the extent the Market Value
of such Municipal Obligations does not exceed 50% of the aggregate
Market Value of S&P Eligible Assets; provided, however, that High
Yield Securities (as defined below) shall be considered S&P Eligible
Assets only to the extent the Market Value of such Municipal
Obligations does not exceed 20% of the aggregate Market Value of S&P
Eligible Assets; and
(C) Municipal Obligations issued by issuers in any one
state or territory will be considered S&P Eligible Assets only to
the extent the Market Value of such Municipal Obligations does not
exceed 25% of the aggregate Market Value of S&P Eligible Assets; or
(xiii) Asset Backed Securities. Receivables-backed tranches
are publicly issued with a rating of "AA" or higher by S&P, tranches are
current interest-bearing, fixed- or floating-rate, and are backed by
automobile loans or credit card (fixed-rate only) receivables with an
original issuance size of at least $200 million. No more than 25% of the
total market value of the collateral can be from one private sector
issuer. With respect to floating-rate credit card receivables, not more
than 25% of the collateral may be from one investment-grade private sector
issuer. No more than 10% of the market value of the collateral may be from
one noninvestment-grade private sector issuer.
Escrow Bonds may comprise 100% of the Trust's S&P Eligible Assets.
Bonds that are legally defeased and secured by direct U.S. government
obligations are not required to meet any minimum issuance size
requirement. Bonds that are economically defeased or secured by other U.S.
agency paper must meet the minimum issuance size requirement for the Trust
described above. Bonds initially rated or rerated as an escrow bond by
another NRSRO are limited to 50% of the Trust's S&P Eligible Assets, and
carry one full rating lower than the equivalent S&P rating for purposes of
determining the applicable discount factors. Bonds economically defeased
and either initially rated or rerated by S&P or another NRSRO are assigned
that same rating level as its debt issuer, and will remain in its original
industry category.
The Trust's portfolio must consist of no less than 20 issues
representing no less than 10 industries as determined by the S&P Global
Industry Classification System.
"S&P Exposure Period" means the sum of (i) that number of days from the
last Valuation Date on which the Trust's Discounted Value of S&P Eligible Assets
were greater than the Preferred Shares Basic Maintenance Amount to the Valuation
Date on which the Trust's Discounted Value of S&P Eligible Assets failed to
exceed the Preferred Shares Basic Maintenance Amount, (ii) the maximum number of
days following a Valuation Date that the Trust has under this Statement to cure
any failure to maintain a Discounted Value of S&P Eligible Assets at least equal
to the Preferred Shares Basic Maintenance Amount, and (iii) the maximum number
of days the Trust has to effect a mandatory redemption under this Statement.
"S&P Hedging Transactions" means the purchases or sales of futures
contracts based on the Municipal Index or Treasury Bonds, the writings,
purchases or sales of put and call options on such contracts, purchases of
interest rate locks, interest rate caps, interest rate floors, interest rate
collars, and entering into interest rate swaps. For so long as any Preferred
Shares are rated by S&P, the Trust will not purchase or sell futures contracts,
write, purchase or sell options on futures contracts or write put options
(except covered put options) or call options (except covered call options) on
portfolio securities unless it receives written confirmation from S&P that
engaging in such transactions will not impair the ratings then
A-38
assigned to the Preferred Shares by S&P except that the Trust may engage in S&P
Hedging Transactions, subject to the following limitations.
(i) the Trust will not engage in any S&P Hedging Transaction
based on the Municipal Index (other than Closing Transactions), which
would cause the Trust at the time of such transaction to own or have sold
the least of (A) more than 1,000 outstanding futures contracts based on
the Municipal Index, (B) outstanding futures contracts based on the
Municipal Index exceeding in number 50% of the quotient of the Market
Value of the Trust's total assets divided by $1,000 or (C) outstanding
futures contracts based on the Municipal Index exceeding in number 10% of
the average number of daily traded futures contracts based on the
Municipal Index in the 30 days preceding the time of effecting such
transaction as reported by The Wall Street Journal;
(ii) the Trust will not engage in any S&P Hedging Transaction
based on Treasury Bonds (other than Closing Transactions) which would
cause the Trust at the time of such transaction to own or have sold the
lesser of (A) outstanding futures contracts based on Treasury Bonds and on
the Municipal Index exceeding in number 50% of the quotient of the Market
Value of the Trust's total assets divided by $100,000 ($200,000 in the
case of the two-year United States Treasury Note) or (B) outstanding
futures contracts based on Treasury Bonds exceeding in number 10% of the
average number of daily traded futures contracts based on Treasury Bonds
in the 30 days preceding the time of effecting such transaction as
reported by The Wall Street Journal;
(iii) the Trust will engage in Closing Transactions to close
out any outstanding futures contract which the Trust owns or has sold or
any outstanding option thereon owned by the Trust in the event (A) the
Trust does not have S&P Eligible Assets with an aggregate Discounted Value
equal to or greater than the Preferred Shares Basic Maintenance Amount on
two consecutive Valuation Dates and (B) the Trust is required to pay
variation margin on the second such Valuation Date;
(iv) the Trust will engage in a Closing Transaction to close
out any outstanding futures contract or option thereon in the month prior
to the delivery month under the terms of such futures contract or option
thereon unless the Trust holds the securities deliverable under such
terms; and
(v) when the Trust writes a futures contract or option
thereon, it will either (A) maintain an amount of cash, cash equivalents
or high grade (rated A or better by S&P), fixed-income securities in a
segregated account with the Trust's custodian, so that the amount so
segregated plus the amount of initial margin and variation margin held in
the account of or on behalf of the Trust's broker with respect to such
futures contract or option equals the Market Value of the futures contract
or option, or, (B) in the event the Trust writes a futures contract or
option thereon which requires delivery of an underlying security, hold
such underlying security in its portfolio.
For purposes of determining whether the Trust has S&P Eligible
Assets with a Discounted Value that equals or exceeds the Preferred Shares
Basic Maintenance Amount, the Discounted Value of cash or securities held
for the payment of initial margin or variation margin shall be zero and
the aggregate Discounted Value of S&P Eligible Assets shall be reduced by
an amount equal to (i) 30% of the aggregate settlement value, as
marked-to-market, of any outstanding futures contracts based on the
Municipal Index which are owned by the Trust, plus
A-39
(ii) 25% of the aggregate settlement value, as marked to market, of any
outstanding futures contracts based on Treasury Bonds which contracts are
owned by the Trust.
The Trust will only enter into interest rate swaps subject to the
following conditions:
(A) The counterparty to the swap transaction has a
short-term rating of "A-l," "A-" or equivalent by S&P, or, if the
counterparty does not have a short-term rating, the counterparty's
senior unsecured long-term debt rating is "A+," or equivalent by
S&P, or higher.
(B) The original aggregate notional amount of the
interest rate swap transaction or transactions is not to be greater
than the liquidation preference of the Preferred Shares.
(C) The interest rate swap transaction will be
marked-to-market weekly by the swap counterparty.
(D) If the Trust fails to maintain an aggregate
discounted value at least equal to the Preferred Shares Basic
Maintenance Amount on two consecutive valuation dates then the
agreement shall terminate immediately.
(E) For the purpose of calculating the Preferred Shares
Basic Maintenance Amount: (i) 90% of any positive mark-to-market
valuation of the Trust's rights will be S&P Eligible Assets and 100%
of any negative mark-to-market valuation of the Trust's rights will
be included in the calculation of the basic maintenance amount.
(F) The Trust must maintain liquid assets with an
aggregate value at least equal to the net amount of the excess, if
any, of the Trust's obligations over its entitlement with respect to
each swap. For caps/floors, the Trust must maintain liquid assets
with an aggregate a value at least equal to the Trust's obligations
with respect to such caps or floors.
"S&P Industry Classifications" means for the purpose of determining S&P
Eligible Assets, each of the following industry classifications (as defined by
the S&P Global Industry Classification System):
Aerospace & Defense Industrial Conglomerates
Air Freight and Logistics Airlines Insurance
Automobiles Internet & Catalog Retail
Automobile Components Internet Software & Services
Beverages IT Services
Biotechnology Leisure Equipment & Products
Building Products Machinery
Cable Marine
Capital Markets Media
Computers & Peripherals Metals & Mining
Commercial Banks Office Electronics
Commercial Services & Supplies Oil & Gas
Communications Equipment Packaging and Containers
Construction & Engineering Paper & Forest Products
Consumer Finance Personal Products
Containing & Packaging Pharmaceuticals
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Distributors Real Estate
Diversified Financial Services Retail
Diversified Telecommunication Services Road & Rail
Electric Utilities Software
Electrical Equipment Specialty Retail
Electronic Equipment & Instrument Semiconducters and Semi Conducter
Energy Equipment & Services Equipment
Food & Staples Retailing Textiles, Apparel and Luxury Goods
Food Products Thrift & Mortgage Finance
Gas Utilities Tobacco
Healthcare Equipment & Supplies Trading Companies & Distributors
Healthcare Providers & Services Transportation and Infrastructure
Hotels, Restaurants & Leisure Transportation Utilities
Household Durables Water Utilities
Household Products Wireless Telecommunication Services
The Trust will use its discretion in determining which industry
classification is applicable to a particular investment in consultation with its
independent auditors and S&P, to the extent the Trust considers necessary.
"S&P Loan Category" means the following four categories (and, for purposes
of this categorization, the Market Value of an S&P Eligible Asset trading at par
is equal to $1.00):
(i) "S&P Loan Category A" means Performing Senior Loans which
have a Market Value greater than $0.90;
(ii) "S&P Loan Category B" means Performing Senior Loans which
have a Market Value greater than or equal to $0.85 but equal to or less
than $0.90;
(iii) "S&P Loan Category C" means non-Performing Senior Loans
which have a Market Value greater than $0.85;
(iv) "S&P Loan Category D" means:
(A) Performing Senior Loans which have a Market Value
less than $.85; and
(B) Non-Performing Senior Loans which have a Market
Value less than or equal to $.85.
(v) "Performing" means that no default as to the payment of
principal or interest has occurred and is continuing.
"S&P Real Estate Industry/Property Sector Classification" means, for the
purposes of determining S&P Eligible Assets, each of the following industry
classifications (as defined by NAREIT):
Office Shopping Centers Industrial
Regional Malls
Mixed Free Standing
Apartments Home Financing
Manufactured Homes Commercial Financing Diversified
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Self Storage
Lodging/Resorts Specialty
Health Care
The Trust will use its discretion in determining which NAREIT Industry
Classification is applicable to a particular investment, and, will consult with
the independent auditor and/or S&P, as necessary.
"Securities Depository" means The Depository Trust Company and its
successors and assigns or any successor securities depository selected by the
Trust that agrees to follow the procedures required to be followed by such
securities depository in connection with the Preferred Shares.
"Sell Order" has the meaning set forth in Section 2(b) of Part II of this
Statement.
"Short-Term Money Market Instrument" means the following types of
instruments if, on the date of purchase or other acquisition thereof by the
Trust, the remaining term to maturity thereof is not in excess of 180 days:
(i) commercial paper rated A-1 if such commercial paper
matures in 30 days or A-1+ if such commercial paper matures in over 30
days;
(ii) demand or time deposits in, and banker's acceptances and
certificates of deposit of (A) a depository institution or trust company
incorporated under the laws of the United States of America or any state
thereof or the District of Columbia or (B) a United States branch office
or agency of a foreign depository institution (provided that such branch
office or agency is subject to banking regulation under the laws of the
United States, any state thereof or the District of Columbia);
(iii) overnight funds; and
(iv) U.S. Government Securities.
"Special Dividend Period" means a Dividend Period that is not a Standard
Dividend Period.
"Specific Redemption Provisions" means, with respect to any Special
Dividend Period of more than one year, either, or any combination of (i) a
period (a "Non-Call Period") determined by the Board of Trustees after
consultation with the Broker-Dealers, during which the shares subject to such
Special Dividend Period are not subject to redemption at the option of the
Trust, and (ii) a period (a "Premium Call Period"), consisting of a number of
whole years, as determined by the Board of Trustees after consultation with the
Broker-Dealers, during each year of which the shares subject to such Special
Dividend Period will be redeemable at the Trust's option at a price per share
equal to the Liquidation Preference plus accumulated but unpaid dividends
(whether or not earned or declared) plus a premium expressed as a percentage or
percentages of the Liquidation Preference or expressed as a formula using
specified variables as determined by the Board of Trustees after consultation
with the Broker-Dealers.
"Standard Dividend Period" means a Dividend Period of seven days in the
case of Series __ Preferred Shares unless such seventh day is not a Business
Day, then the number of days ending on the next Business Day following such
seventh day.
"Submission Deadline" means 1:00 p.m., New York City time, on any Auction
Date or such other time on any Auction Date by which Broker-Dealers are required
to submit Orders to the Auction Agent as specified by the Auction Agent from
time to time.
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"Transfer Agent" means The Bank of New York, unless and until another
entity appointed by a resolution of the Board of Trustees enters into an
agreement with the Trust to serve as Transfer Agent.
"Treasury Index Rate" means the average yield to maturity for actively
traded marketable U.S. Treasury fixed interest rate securities having the same
number of 30-day periods to maturity as the length of the applicable Dividend
Period, determined, to the extent necessary, by linear interpolation based upon
the yield for such securities having the next shorter and next longer number of
30-day periods to maturity treating all Dividend Periods with a length greater
than the longest maturity for such securities as having a length equal to such
longest maturity, in all cases based upon data set forth in the most recent
weekly statistical release published by the Board of Governors of the Federal
Reserve System (currently in H.15 (519)); provided, however, if the most recent
such statistical release shall not have been published during the 15 days
preceding the date of computation, the foregoing computations shall be based
upon the average of comparable data as quoted to the Trust by at least three
recognized dealers in U.S. Government Securities selected by the Trust.
"U.S. Government Securities" means direct obligations of the United States
or of its agencies or instrumentalities that are entitled to the full faith and
credit of the United States and that, other than United States Treasury Bills,
provide for the periodic payment of interest and the full payment of principal
at maturity or call for redemption.
"Valuation Date" means the last Business Day of each week, or such other
date as to which the Trust and Rating Agencies may agree for purposes of
determining the Preferred Shares Basic Maintenance Amount.
"Voting Period" has the meaning set forth in Section 6(b) of Part I of
this Statement.
"Winning Bid Rate" has the meaning set forth in Section 4(a)(iii) of Part
II of this Statement.
18. Interpretation. References to sections, subsections, clauses,
sub-clauses, paragraphs and subparagraphs are to such sections, subsections,
clauses, sub-clauses, paragraphs and subparagraphs contained in this Part I or
Part II hereof, as the case may be, unless specifically identified otherwise.
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PART II: AUCTION PROCEDURES
1. Certain Definitions. As used in Part II of this Statement, the
following terms shall have the following meanings, unless the context otherwise
requires and all section references below are to Part II of this Statement
except as otherwise indicated. Capitalized terms not defined in Section 1 of
Part II of this Statement shall have the respective meanings specified in Part I
of this Statement.
"Agent Member" means a member of or participant in the Securities
Depository that will act on behalf of existing or potential holders of Preferred
Shares.
"Available Preferred Shares" has the meaning set forth in Section 4(a)(i)
of Part II of this Statement.
"Existing Holder" with respect to shares of a series of Preferred Shares
means a Broker-Dealer (or any such other Person as may be permitted by the
Trust) that is listed on the records of the Auction Agent as a holder of such
series.
"Hold Order" has the meaning set forth in Section 2(a) of Part II of this
Statement.
"Order" has the meaning set forth in Section 2(a) of Part II of this
Statement.
"Potential Beneficial Holder" or "Potential Beneficial Owner" means (a)
any Existing Holder who may be interested in acquiring additional Preferred
Shares, or (b) any other person who may be interested in acquiring Preferred
Shares or whose shares will be listed under such person's Broker-Dealer's name
on the records of the Auction Agent.
"Sell Order" has the meaning set forth in Section 2(a) of Part II of this
Statement.
"Submitted Bid Order" has the meaning set forth in Section 4(a) of Part II
of this Statement.
"Submitted Hold Order" has the meaning set forth in Section 4(a) of Part
II of this Statement.
"Submitted Order" has the meaning set forth in Section 4(a) of Part II of
this Statement.
"Submitted Sell Order" has the meaning set forth in Section 4(a) of Part
II of this Statement.
"Sufficient Clearing Orders" means that all Preferred Shares are the
subject of Submitted Hold Orders or that the number of Preferred Shares that are
the subject of Submitted Buy Orders by Potential Holders specifying one or more
rates equal to or less than the Maximum Rate exceeds or equals the sum of (A)
the number of Preferred Shares that are subject of Submitted Hold/Sell Orders by
Existing Holders specifying one or more rates higher than the Maximum Rate and
(B) the number of Preferred Shares that are subject to Submitted Sell Orders.
"Winning Bid Rate" means the lowest rate specified in the Submitted Orders
which, if (A) each Submitted Hold/Sell Order from Existing Holders specifying
such lowest rate and all other Submitted Hold/Sell Orders from Existing Holders
specifying lower rates were accepted and (B) each Submitted Buy Order from
Potential Holders specifying such lowest rate and all other Submitted Buy Orders
from Potential Holders specifying lower rates were accepted, would result in the
Existing Holders described in clause (A) above continuing to hold an aggregate
number of Preferred Shares which, when added to the number of Preferred Shares
to be purchased by the Potential Holders described in clause (B) above and the
number of Preferred Shares subject to Submitted Hold Orders, would be equal to
the number of Preferred Shares.
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2. Orders.
(a) On or prior to the Submission Deadline on each Auction Date for
shares of a Series of Preferred Shares:
(i) each Beneficial Owner of shares of such Series may submit
to its Broker-Dealer by telephone or otherwise information as to:
(A) the number of Outstanding shares, if any, of such
Series held by such Beneficial Owner which such Beneficial Owner
desires to continue to hold without regard to the Applicable Rate
for shares of such Series for the next succeeding Dividend Period of
such shares;
(B) the number of Outstanding shares, if any, of such
Series held by such Beneficial Owner which such Beneficial Owner
offers to sell if the Applicable Rate for shares of such Series for
the next succeeding Dividend Period of shares of such Series shall
be less than the rate per annum specified by such Beneficial Owner;
and/or
(C) the number of Outstanding shares, if any, of such
Series held by such Beneficial Owner which such Beneficial Owner
offers to sell without regard to the Applicable Rate for shares of
such Series for the next succeeding Dividend Period of shares of
such series; and
(ii) each Broker-Dealer, using lists of Potential Beneficial
Owners, shall in good faith for the purpose of conducting a competitive
Auction in a commercially reasonable manner, contact Potential Beneficial
Owners (by telephone or otherwise), including Persons that are not
Beneficial Owners, on such lists to determine the number of shares, if
any, of such Series which each such Potential Beneficial Owner offers to
purchase if the Applicable Rate for shares of such Series for the next
succeeding Dividend Period of shares of such Series shall not be less than
the rate per annum specified by such Potential Beneficial Owner.
For the purposes hereof, the communication by a Beneficial Owner or Potential
Beneficial Owner to a Broker-Dealer, or by a Broker-Dealer to the Auction Agent,
of information referred to in clause (i)(A), (i)(B), (i)(C) or (ii) of this
paragraph (a) is hereinafter referred to as an "Order" and collectively as
"Orders" and each Beneficial Owner and each Potential Beneficial Owner placing
an Order with a Broker-Dealer, and such Broker-Dealer placing an Order with the
Auction Agent, is hereinafter referred to as a "Bidder" and collectively as
"Bidders"; an Order containing the information referred to in clause (i)(A) of
this paragraph (a) is hereinafter referred to as a "Hold Order" and collectively
as "Hold Orders"; an Order containing the information referred to in clause
(i)(B) or (ii) of this paragraph (a) is hereinafter referred to as a "Bid" and
collectively as "Bids"; and an Order containing the information referred to in
clause (i)(C) of this paragraph (a) is hereinafter referred to as a "Sell Order"
and collectively as "Sell Orders."
(b) (i) A Bid by a Beneficial Owner or an Existing Holder of shares
of a Series of Preferred Shares subject to an Auction on any Auction Date shall
constitute an irrevocable offer to sell:
(A) the number of Outstanding shares of such Series
specified in such Bid if the Applicable Rate for shares of such
Series determined on such Auction Date shall be less than the rate
specified therein;
A-45
(B) such number or a lesser number of Outstanding shares
of such Series to be determined as set forth in clause (iv) of
paragraph (a) of Section 5 of this Part II if the Applicable Rate
for shares of such Series determined on such Auction Date shall be
equal to the rate specified therein; or
(C) the number of Outstanding shares of such Series
specified in such Bid if the rate specified therein shall be higher
than the Maximum Rate for shares of such series, or such number or a
lesser number of Outstanding shares of such Series to be determined
as set forth in clause (iii) of paragraph (b) of Section 5 of this
Part II if the rate specified therein shall be higher than the
Maximum Rate for shares of such Series and Sufficient Clearing Bids
for shares of such Series do not exist.
(ii) A Sell Order by a Beneficial Owner or an Existing Holder
of shares of a Series of Preferred Shares subject to an Auction on any
Auction Date shall constitute an irrevocable offer to sell:
(A) the number of Outstanding shares of such Series
specified in such Sell Order; or
(B) such number or a lesser number of Outstanding shares
of such series as set forth in clause (iii) of paragraph (b) of
Section 5 of this Part II if Sufficient Clearing Bids for shares of
such Series do not exist;
provided, however, that a Broker-Dealer that is an Existing Holder with
respect to shares of a Series of Preferred Shares shall not be liable to
any Person for failing to sell such shares pursuant to a Sell Order
described in the proviso to paragraph (c) of Section 3 of this Part II if
(1) such shares were transferred by the Beneficial Owner thereof without
compliance by such Beneficial Owner or its transferee Broker-Dealer (or
other transferee person, if permitted by the Trust) with the provisions of
Section 6 of this Part II or (2) such Broker-Dealer has informed the
Auction Agent pursuant to the terms of its Broker-Dealer Agreement that,
according to such Broker-Dealer's records, such Broker-Dealer believes it
is not the Existing Holder of such shares.
(iii) A Bid by a Potential Holder of shares of a Series of
Preferred Shares subject to an Auction on any Auction Date shall
constitute an irrevocable offer to purchase:
(A) the number of Outstanding shares of such Series
specified in such Bid if the Applicable Rate for shares of such
Series determined on such Auction Date shall be higher than the rate
specified therein; or (B) such number or a lesser number of
Outstanding shares of such Series as set forth in clause (v) of
paragraph (a) of Section 5 of this Part II if the Applicable Rate
for shares of such Series determined on such Auction Date shall be
equal to the rate specified therein.
(c) No Order for any number of Preferred Shares other than whole
shares shall be valid.
3. Submission of Orders by Broker-Dealers to Auction Agent.
(a) Each Broker-Dealer shall submit in writing to the Auction Agent
prior to the Submission Deadline on each Auction Date all Orders for Preferred
Shares of a Series subject to an Auction on such Auction Date obtained by such
Broker-Dealer, designating itself (unless otherwise permitted by the Trust) as
an Existing Holder in respect of shares subject to Orders submitted or deemed
A-46
submitted to it by Beneficial Owners and as a Potential Holder in respect of
shares subject to Orders submitted to it by Potential Beneficial Owners, and
shall specify with respect to each Order for such shares:
(i) the name of the Bidder placing such Order (which shall be
the Broker-Dealer unless otherwise permitted by the Trust);
(ii) the aggregate number of shares of such Series that are
the subject of such Order;
(iii) to the extent that such Bidder is an Existing Holder of
shares of such series:
(A) the number of shares, if any, of such Series subject
to any Hold Order of such Existing Holder;
(B) the number of shares, if any, of such Series subject
to any Bid of such Existing Holder and the rate specified in such
Bid; and
(C) the number of shares, if any, of such Series subject
to any Sell Order of such Existing Holder; and
(D) to the extent such Bidder is a Potential Holder of
shares of such series, the rate and number of shares of such Series
specified in such Potential Holder's Bid.
(b) If any rate specified in any Bid contains more than three
figures to the right of the decimal point, the Auction Agent shall round such
rate up to the next highest one thousandth (.001) of 1%.
(c) If an Order or Orders covering all of the Outstanding Preferred
Shares of a Series held by any Existing Holder is not submitted to the Auction
Agent prior to the Submission Deadline, the Auction Agent shall deem a Hold
Order to have been submitted by or on behalf of such Existing Holder covering
the number of Outstanding shares of such Series held by such Existing Holder and
not subject to Orders submitted to the Auction Agent; provided, however, that if
an Order or Orders covering all of the Outstanding shares of such Series held by
any Existing Holder is not submitted to the Auction Agent prior to the
Submission Deadline for an Auction relating to a Special Dividend Period
consisting of more than 91 Dividend Period days, the Auction Agent shall deem a
Sell Order to have been submitted by or on behalf of such Existing Holder
covering the number of Outstanding shares of such Series held by such Existing
Holder and not subject to Orders submitted to the Auction Agent.
(d) If one or more Orders of an Existing Holder is submitted to the
Auction Agent covering in the aggregate more than the number of Outstanding
Preferred Shares of a Series subject to an Auction held by such Existing Holder,
such Orders shall be considered valid in the following order of priority:
(i) all Hold Orders for shares of such Series shall be
considered valid, but only up to and including in the aggregate the number
of Outstanding shares of such Series held by such Existing Holder, and if
the number of shares of such Series subject to such Hold Orders exceeds
the number of Outstanding shares of such Series held by such Existing
Holder, the
A-47
number of shares subject to each such Hold Order shall be reduced pro rata
to cover the number of Outstanding shares of such Series held by such
Existing Holder;
(ii) (A) any Bid for shares of such Series shall be
considered valid up to and including the excess of the number of
Outstanding shares of such Series held by such Existing Holder over the
number of shares of such series subject to any Hold Orders referred to in
clause (i) above;
(B) subject to subclause (A), if more than one Bid of an
Existing Holder for shares of such Series is submitted to the
Auction Agent with the same rate and the number of Outstanding
shares of such Series subject to such Bids is greater than such
excess, such Bids shall be considered valid up to and including the
amount of such excess, and the number of shares of such Series
subject to each Bid with the same rate shall be reduced pro rata to
cover the number of shares of such Series equal to such excess;
(C) subject to subclauses (A) and (B), if more than one
Bid of an Existing Holder for shares of such Series is submitted to
the Auction Agent with different rates, such Bids shall be
considered valid in the ascending order of their respective rates up
to and including the amount of such excess; and
(D) in any such event, the number, if any, of such
Outstanding shares of such Series subject to any portion of Bids
considered not valid in whole or in part under this clause (ii)
shall be treated as the subject of a Bid for shares of such Series
by or on behalf of a Potential Holder at the rate therein specified;
and
(iii) all Sell Orders for shares of such Series shall be
considered valid up to and including the excess of the number of
Outstanding shares of such Series held by such Existing Holder over the
sum of shares of such Series subject to valid Hold Orders referred to in
clause (i) above and valid Bids referred to in clause (ii) above.
(e) If more than one Bid for one or more shares of a Series of
Preferred Shares is submitted to the Auction Agent by or on behalf of any
Potential Holder, each such Bid submitted shall be a separate Bid with the rate
and number of shares therein specified.
(f) Any Order submitted by a Beneficial Owner or a Potential
Beneficial Owner to its Broker-Dealer, or by a Broker-Dealer to the Auction
Agent, prior to the Submission Deadline on any Auction Date, shall be
irrevocable.
4. Determination of Sufficient Clearing Bids, Winning Bid Rate and
Applicable Rate.
(a) Not earlier than the Submission Deadline on each Auction Date
for shares of a Series of Preferred Shares, the Auction Agent shall assemble all
valid Orders submitted or deemed submitted to it by the Broker-Dealers in
respect of shares of such Series (each such Order as submitted or deemed
submitted by a Broker-Dealer being hereinafter referred to individually as a
"Submitted Hold Order," a "Submitted Bid" or a "Submitted Sell Order," as the
case may be, or as a "Submitted Order" and collectively as "Submitted Hold
Orders," "Submitted Bids" or "Submitted Sell Orders," as the case may be, or as
"Submitted Orders") and shall determine for such series:
A-48
(i) the excess of the number of Outstanding shares of such
Series over the number of Outstanding shares of such Series subject to
Submitted Hold Orders (such excess being hereinafter referred to as the
"Available Preferred Shares" of such series);
(ii) from the Submitted Orders for shares of such Series
whether:
(A) the number of Outstanding shares of such Series
subject to Submitted Bids of Potential Holders specifying one or
more rates equal to or lower than the Maximum Rate (for all Dividend
Periods) for shares of such series;
exceeds or is equal to the sum of
(B) the number of Outstanding shares of such Series
subject to Submitted Bids of Existing Holders specifying one or more
rates higher than the Maximum Rate (for all Dividend Periods) for
shares of such Series; and
(C) the number of Outstanding shares of such Series
subject to Submitted Sell Orders
(in the event such excess or such equality exists (other than because the
number of shares of such Series in subclauses (B) and (C) above is zero
because all of the Outstanding shares of such Series are subject to
Submitted Hold Orders), such Submitted Bids in subclause (A) above being
hereinafter referred to collectively as "Sufficient Clearing Bids" for
shares of such series); and
(iii) if Sufficient Clearing Bids for shares of such Series
exist, the lowest rate specified in such Submitted Bids (the "Winning Bid
Rate" for shares of such series) which if:
(A) (I) each such Submitted Bid of Existing Holders
specifying such lowest rate and (II) all other such Submitted Bids
of Existing Holders specifying lower rates were rejected, thus
entitling such Existing Holders to continue to hold the shares of
such Series that are subject to such Submitted Bids; and
(B) (I) each such Submitted Bid of Potential Holders
specifying such lowest rate and (II) all other such Submitted Bids
of Potential Holders specifying lower rates were accepted;
would result in such Existing Holders described in subclause (A) above
continuing to hold an aggregate number of Outstanding shares of such
Series which, when added to the number of Outstanding shares of such
Series to be purchased by such Potential Holders described in subclause
(B) above, would equal not less than the Available Preferred Shares of
such series.
(b) Promptly after the Auction Agent has made the determinations
pursuant to paragraph (a) of this Section 4, the Auction Agent shall advise the
Trust of the Maximum Rate for shares of the Series of Preferred Shares for which
an Auction is being held on the Auction Date and, based on such determination,
the Applicable Rate for shares of such Series for the next succeeding Dividend
Period thereof as follows:
(i) if Sufficient Clearing Bids for shares of such Series
exist, that the Applicable Rate for all shares of such Series for the next
succeeding Dividend Period thereof shall be equal to the Winning Bid Rate
for shares of such Series so determined;
A-49
(ii) if Sufficient Clearing Bids for shares of such Series do
not exist (other than because all of the Outstanding shares of such Series
are subject to Submitted Hold Orders), that the Applicable Rate for all
shares of such Series for the next succeeding Dividend Period thereof
shall be equal to the Maximum Rate for shares of such series; or
(iii) if all of the Outstanding shares of such Series are
subject to Submitted Hold Orders, that the Applicable Rate for all shares
of such Series for the next succeeding Dividend Period thereof shall be
the All Hold Rate.
5. Acceptance and Rejection of Submitted Bids and Submitted Sell Orders
and Allocation. Existing Holders shall continue to hold the Preferred Shares
that are subject to Submitted Hold Orders, and, based on the determinations made
pursuant to paragraph (a) of Section 4 of this Part II, the Submitted Bids and
Submitted Sell Orders shall be accepted or rejected by the Auction Agent and the
Auction Agent shall take such other action as set forth below:
(a) If Sufficient Clearing Bids for shares of a Series of Preferred
Shares have been made, all Submitted Sell Orders with respect to shares of such
Series shall be accepted and, subject to the provisions of paragraphs (d) and
(e) of this Section 5, Submitted Bids with respect to shares of such Series
shall be accepted or rejected as follows in the following order of priority and
all other Submitted Bids with respect to shares of such Series shall be
rejected:
(i) Existing Holders' Submitted Bids for shares of such series
specifying any rate that is higher than the Winning Bid Rate for shares of
such Series shall be accepted, thus requiring each such Existing Holder to
sell the Preferred Shares subject to such Submitted Bids;
(ii) Existing Holders' Submitted Bids for shares of such
series specifying any rate that is lower than the Winning Bid Rate for
shares of such Series shall be rejected, thus entitling each such Existing
Holder to continue to hold the Preferred Shares subject to such Submitted
Bids;
(iii) Potential Holders' Submitted Bids for shares of such
series specifying any rate that is lower than the Winning Bid Rate for
shares of such Series shall be accepted;
(iv) each Existing Holder's Submitted Bid for shares of such
series specifying a rate that is equal to the Winning Bid Rate for shares
of such Series shall be rejected, thus entitling such Existing Holder to
continue to hold the Preferred Shares subject to such Submitted Bid,
unless the number of Outstanding Preferred Shares subject to all such
Submitted Bids shall be greater than the number of Preferred Shares
("remaining shares") in the excess of the Available Preferred Shares of
such Series over the number of Preferred Shares subject to Submitted Bids
described in clauses (ii) and (iii) of this paragraph (a), in which event
such Submitted Bid of such Existing Holder shall be rejected in part, and
such Existing Holder shall be entitled to continue to hold Preferred
Shares subject to such Submitted Bid, but only in an amount equal to the
Preferred Shares of such Series obtained by multiplying the number of
remaining shares by a fraction, the numerator of which shall be the number
of Outstanding Preferred Shares held by such Existing Holder subject to
such Submitted Bid and the denominator of which shall be the aggregate
number of Outstanding Preferred Shares subject to such Submitted Bids made
by all such Existing Holders that specified a rate equal to the Winning
Bid Rate for shares of such series; and
(v) each Potential Holder's Submitted Bid for shares of such
series specifying a rate that is equal to the Winning Bid Rate for shares
of such Series shall be accepted
A-50
but only in an amount equal to the number of shares of such Series
obtained by multiplying the number of shares in the excess of the
Available Preferred Shares of such Series over the number of Preferred
Shares subject to Submitted Bids described in clauses (ii) through (iv) of
this paragraph (a) by a fraction, the numerator of which shall be the
number of Outstanding Preferred Shares subject to such Submitted Bid and
the denominator of which shall be the aggregate number of Outstanding
Preferred Shares subject to such Submitted Bids made by all such Potential
Holders that specified a rate equal to the Winning Bid Rate for shares of
such series.
(b) If Sufficient Clearing Bids for shares of a Series of Preferred
Shares have not been made (other than because all of the Outstanding shares of
such series are subject to Submitted Hold Orders), subject to the provisions of
paragraph (d) of this Section 5, Submitted Orders for shares of such series
shall be accepted or rejected as follows in the following order of priority and
all other Submitted Bids for shares of such Series shall be rejected:
(i) Existing Holders' Submitted Bids for shares of such series
specifying any rate that is equal to or lower than the Maximum Rate for
shares of such Series shall be rejected, thus entitling such Existing
Holders to continue to hold the Preferred Shares subject to such Submitted
Bids;
(ii) Potential Holders' Submitted Bids for shares of such
series specifying any rate that is equal to or lower than the Maximum Rate
for shares of such Series shall be accepted; and
(iii) each Existing Holder's Submitted Bid for shares of such
series specifying any rate that is higher than the Maximum Rate for shares
of such Series and the Submitted Sell Orders for shares of such Series of
each Existing Holder shall be accepted, thus entitling each Existing
Holder that submitted or on whose behalf was submitted any such Submitted
Bid or Submitted Sell Order to sell the shares of such Series subject to
such Submitted Bid or Submitted Sell Order, but in both cases only in an
amount equal to the number of shares of such Series obtained by
multiplying the number of shares of such Series subject to Submitted Bids
described in clause (ii) of this paragraph (b) by a fraction, the
numerator of which shall be the number of Outstanding shares of such
Series held by such Existing Holder subject to such Submitted Bid or
Submitted Sell Order and the denominator of which shall be the aggregate
number of Outstanding shares of such Series subject to all such Submitted
Bids and Submitted Sell Orders.
(c) If all of the Outstanding shares of a Series of Preferred Shares
are subject to Submitted Hold Orders, all Submitted Bids for shares of such
Series shall be rejected.
(d) If, as a result of the procedures described in clause (iv) or
(v) of paragraph (a) or clause (iii) of paragraph (b) of this Section 5, any
Existing Holder would be entitled or required to sell, or any Potential Holder
would be entitled or required to purchase, a fraction of a share of a Series of
Preferred Shares on any Auction Date, the Auction Agent shall, in such manner as
it shall determine in its sole discretion, round up or down the number of
Preferred Shares of such Series to be purchased or sold by any Existing Holder
or Potential Holder on such Auction Date as a result of such procedures so that
the number of shares so purchased or sold by each Existing Holder or Potential
Holder on such Auction Date shall be whole shares of a Series of Preferred
Shares.
(e) If, as a result of the procedures described in clause (v) of
paragraph (a) of this Section 5 any Potential Holder would be entitled or
required to purchase less than a whole share of a Series of Preferred Shares on
any Auction Date, the Auction Agent shall, in such manner as it shall
A-51
determine in its sole discretion, allocate Preferred Shares of such Series for
purchase among Potential Holders so that only whole Preferred Shares of such
Series are purchased on such Auction Date as a result of such procedures by any
Potential Holder, even if such allocation results in one or more Potential
Holders not purchasing Preferred Shares of such Series on such Auction Date.
(f) Based on the results of each Auction for shares of a Series of
Preferred Shares, the Auction Agent shall determine the aggregate number of
shares of such Series to be purchased and the aggregate number of shares of such
Series to be sold by Potential Holders and Existing Holders and, with respect to
each Potential Holder and Existing Holder, to the extent that such aggregate
number of shares to be purchased and such aggregate number of shares to be sold
differ, determine to which other Potential Holder(s) or Existing Holder(s) they
shall deliver, or from which other Potential Holder(s) or Existing Holder(s)
they shall receive, as the case may be, Preferred Shares of such series.
Notwithstanding any provision of the Auction Procedures or the Settlement
Procedures to the contrary, in the event an Existing Holder or Beneficial Owner
of shares of a Series of Preferred Shares with respect to whom a Broker-Dealer
submitted a Bid to the Auction Agent for such shares that was accepted in whole
or in part, or submitted or is deemed to have submitted a Sell Order for such
shares that was accepted in whole or in part, fails to instruct its Agent Member
to deliver such shares against payment therefor, partial deliveries of Preferred
Shares that have been made in respect of Potential Holders' or Potential
Beneficial Owners' Submitted Bids for shares of such Series that have been
accepted in whole or in part shall constitute good delivery to such Potential
Holders and Potential Beneficial Owners.
(g) Neither the Trust nor the Auction Agent nor any affiliate of
either shall have any responsibility or liability with respect to the failure of
an Existing Holder, a Potential Holder, a Beneficial Owner, a Potential
Beneficial Owner or its respective Agent Member to deliver Preferred Shares of
any Series or to pay for Preferred Shares of any Series sold or purchased
pursuant to the Auction Procedures or otherwise.
6. Transfer of Preferred Shares. Unless otherwise permitted by the Trust,
a Beneficial Owner or an Existing Holder may sell, transfer or otherwise dispose
of Preferred Shares only in whole shares and only pursuant to a Bid or Sell
Order placed with the Auction Agent in accordance with the procedures described
in this Part II or to a Broker-Dealer; provided, however, that (a) a sale,
transfer or other disposition of Preferred Shares from a customer of a
Broker-Dealer who is listed on the records of that Broker-Dealer as the holder
of such shares to that Broker-Dealer or another customer of that Broker-Dealer
shall not be deemed to be a sale, transfer or other disposition for purposes of
this Section 6 if such Broker-Dealer remains the Existing Holder of the shares
so sold, transferred or disposed of immediately after such sale, transfer or
disposition and (b) in the case of all transfers other than pursuant to
Auctions, the Broker-Dealer (or other Person, if permitted by the Trust) to whom
such transfer is made shall advise the Auction Agent of such transfer.
[Remainder of page left blank]
A-52
IN WITNESS WHEREOF, CALAMOS GLOBAL TOTAL RETURN FUND has caused these
presents to be signed in its name and on its behalf by its Secretary and
witnessed by its Assistant Secretary as of this _____ day of December, 2005.
CALAMOS GLOBAL TOTAL RETURN FUND
By: ________________________________
Name: James S. Hamman, Jr.
Title: Secretary
WITNESS:
By: _______________________________
Name:
Title: Assistant Secretary
APPENDIX B -- DESCRIPTION OF RATINGS(2)
MOODY'S PRIME RATING SYSTEM
Moody's short-term ratings are opinions of the ability of issuers to
honor senior financial obligations and contracts. Such obligations generally
have an original maturity not exceeding one year, unless explicitly noted.
Moody's employs the following designations, all judged to be investment grade,
to indicate the relative repayment ability of rated issuers:
PRIME-1: Issuers rated Prime-1 (or supporting institutions) have a
superior ability for repayment of senior short-term debt obligations. Prime-1
repayment ability will often be evidenced by many of the following
characteristics:
Leading market positions in well-established industries. High rates of
return on funds employed. Conservative capitalization structure with moderate
reliance on debt and ample asset protection. Broad margins in earnings coverage
of fixed financial charges and high internal cash generation. Well-established
access to a range of financial markets and assured sources of alternate
liquidity.
PRIME-2: Issuers (or supporting institutions) rated Prime-2 have a
strong ability to repay senior short-term debt obligations. This will normally
be evidenced by many of the characteristics cited above, but to a lesser degree.
Earnings trends and coverage ratios, while sound, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
PRIME-3: Issuers (or supporting institutions) rated Prime-3 have an
acceptable ability for repayment of senior short-term obligations. The effect of
industry characteristics and market compositions may be more pronounced.
Variability in earnings and profitability may result in changes in the level of
debt-protection measurements and may require relatively high financial leverage.
Adequate alternate liquidity is maintained.
NOT PRIME: Issuers rated Not Prime do not fall within any of the Prime
rating categories.
In addition, in certain countries the prime rating may be modified by
the issuer's or guarantor's senior unsecured long-term debt rating.
MOODY'S DEBT RATINGS
Aaa: Bonds and preferred stock which are rated Aaa are judged to be of
the best quality. They carry the smallest degree of investment risk and are
generally referred to as "gilt edged." Interest payments are protected by a
large or by an exceptionally stable margin and principal is secure. While the
various protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position of such
issues.
------------------------------
(2)The ratings indicated herein are believed to be the most recent ratings
available at the date of this prospectus for the securities listed. Ratings are
generally given to securities at the time of issuance. While the rating agencies
may from time to time revise such ratings, they undertake no obligation to do
so, and the ratings indicated do not necessarily represent ratings which will be
given to these securities on the date of the fund's fiscal year-end.
B-1
Aa: Bonds and preferred stock which are rated Aa are judged to be of
high quality by all standards. Together with the Aaa group they comprise what
are generally known as high-grade bonds.
They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present which make
the long-term risk in Aa-rated securities appear somewhat larger than those
securities rated Aaa.
A: Bonds and preferred stock which are rated A possess many favorable
investment attributes and are to be considered as upper-medium-grade
obligations. Factors giving security to principal and interest are considered
adequate, but elements may be present which suggest a susceptibility to
impairment some time in the future.
Baa: Bonds and preferred stock which are rated Baa are considered as
medium-grade obligations (i.e., they are neither highly protected nor poorly
secured). Interest payments and principal security appear adequate for the
present but certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. Such bonds lack
outstanding investment characteristics and in fact have speculative
characteristics as well.
Ba: Bonds and preferred stock which are rated Ba are judged to have
speculative elements; their future cannot be considered as well-assured. Often
the protection of interest and principal payments may be very moderate, and
thereby not well safeguarded during both good and bad times over the future.
Uncertainty of position characterizes bonds in this class.
B: Bonds and preferred stock which are rated B generally lack
characteristics of the desirable investment. Assurance of interest and principal
payments or of maintenance of other terms of the contract over any long period
of time may be small.
Caa: Bonds and preferred stock which are rated Caa are of poor
standing. Such issues may be in default or there may be present elements of
danger with respect to principal or interest.
Ca: Bonds and preferred stock which are rated Ca represent obligations
which are speculative in a high degree. Such issues are often in default or have
other marked shortcomings.
C: Bonds and preferred stock which are rated C are the lowest rated
class of bonds, and issues so rated can be regarded as having extremely poor
prospects of ever attaining any real investment standing.
Moody's assigns ratings to individual debt securities issued from
medium-term note (MTN) programs, in addition to indicating ratings to MTN
programs themselves. Notes issued under MTN programs with such indicated ratings
are rated at issuance at the rating applicable to all pari passu notes issued
under the same program, at the program's relevant indicated rating, provided
such notes do not exhibit any of the characteristics listed below. For notes
with any of the following characteristics, the rating of the individual note may
differ from the indicated rating of the program:
1) Notes containing features which link the interest or principal
to the credit performance of any third party or parties.
2) Notes allowing for negative coupons, or negative principal.
3) Notes containing any provision which could obligate the
investor to make any additional payments.
4) Notes containing provisions that subordinate the claim.
B-2
Market participants must determine whether any particular note is
rated, and if so, at what rating level.
Note: Moody's applies numerical modifiers 1, 2, and 3 in each generic
rating classification from Aa through Caa. The modifier 1 indicates that the
obligation ranks in the higher end of its generic rating category; the modifier
2 indicates a mid-range ranking; and the modifier 3 indicates a ranking in the
lower end of that generic rating category.
STANDARD & POOR'S SHORT-TERM ISSUE CREDIT RATINGS
A-1: A short-term obligation rated A-1 is rated in the highest category
by Standard & Poor's. The obligor's capacity to meet its financial commitment on
the obligation is strong. Within this category, certain obligations are
designated with a plus sign (+). This indicates that the obligor's capacity to
meet its financial commitment on these obligations is extremely strong.
A-2: A short-term obligation rated A-2 is somewhat more susceptible to
the adverse effects of changes in circumstances and economic conditions than
obligations in higher rating categories. However, the obligor's capacity to meet
its financial commitment on the obligation is satisfactory.
A-3: A short-term obligation rated A-3 exhibits adequate protection
parameters. However, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity of the obligor to meet its financial
commitment on the obligation.
B: A short-term obligation rated B is regarded as having significant
speculative characteristics. The obligor currently has the capacity to meet its
financial commitment on the obligation; however, it faces major ongoing
uncertainties which could lead to the obligor's inadequate capacity to meet its
financial commitment on the obligation.
C: A short-term obligation rated C is currently vulnerable to
nonpayment and is dependent upon favorable business, financial, and economic
conditions for the obligor to meet its financial commitment on the obligation.
D: A short-term obligation rated D is in payment default. The D rating
category is used when payments on an obligation are not made on the date due
even if the applicable grace period has not expired, unless Standard & Poor's
believes that such payments will be made during such grace period. The D rating
also will be used upon the filing of a bankruptcy petition or the taking of a
similar action if payments on an obligation are jeopardized.
STANDARD & POOR'S LONG-TERM ISSUE CREDIT RATINGS
Issue credit ratings are based, in varying degrees, on the following
considerations:
- Likelihood of payment-capacity and willingness of the obligor
to meet its financial commitment on an obligation in
accordance with the terms of the obligation;
- Nature of and provisions of the obligation;
- Protection afforded by, and relative position of, the
obligation in the event of bankruptcy, reorganization, or
other arrangement under the laws of bankruptcy and other laws
affecting creditors' rights.
The issue rating definitions are expressed in terms of default risk. As
such, they pertain to senior obligations of an entity. Junior obligations are
typically rated lower than senior obligations, to reflect the
B-3
lower priority in bankruptcy, as noted above. (Such differentiation applies when
an entity has both senior and subordinated obligations, secured and unsecured
obligations, or operating company and holding company obligations.) Accordingly,
in the case of junior debt, the rating may not conform exactly with the category
definition.
AAA: An obligation rated AAA has the highest rating assigned by
Standard & Poor's. The obligor's capacity to meet its financial commitment on
the obligation is extremely strong.
AA: An obligation rated AA differs from the highest rated obligations
only in small degree. The obligor's capacity to meet its financial commitment on
the obligation is very strong.
A: An obligation rated A is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than obligations in
higher rated categories. However, the obligor's capacity to meet its financial
commitment on the obligation is still strong.
BBB: An obligation rated BBB exhibits adequate protection parameters.
However, adverse economic conditions or changing circumstances are more likely
to lead to a weakened capacity of the obligor to meet its financial commitment
on the obligation.
Obligations rated BB, B, CCC, CC, and C are regarded as having
significant speculative characteristics. BB indicates the least degree of
speculation and C the highest. While such obligations will likely have some
quality and protective characteristics, these may be outweighed by large
uncertainties or major exposures to adverse conditions.
BB: An obligation rated BB is less vulnerable to nonpayment than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to the
obligor's inadequate capacity to meet its financial commitment on the
obligation.
B: An obligation rated B is more vulnerable to nonpayment than
obligations rated BB, but the obligor currently has the capacity to meet its
financial commitment on the obligation. Adverse business, financial, or economic
conditions will likely impair the obligor's capacity or willingness to meet its
financial commitment on the obligation.
CCC: An obligation rated CCC is currently vulnerable to nonpayment, and
is dependent upon favorable business, financial, and economic conditions for the
obligor to meet its financial commitment on the obligation. In the event of
adverse business, financial, or economic conditions, the obligor is not likely
to have the capacity to meet its financial commitment on the obligation.
CC: An obligation rated CC is currently highly vulnerable to
nonpayment.
C: A subordinated debt or preferred stock obligation rated C is
CURRENTLY HIGHLY VULNERABLE to nonpayment. The C rating may be used to cover a
situation where a bankruptcy petition has been filed or similar action taken,
but payments on this obligation are being continued. A C also will be assigned
to a preferred stock issue in arrears on dividends or sinking fund payments, but
that is currently paying.
D: An obligation rated D is in payment default. The D rating category
is used when payments on an obligation are not made on the date due even if the
applicable grace period has not expired, unless Standard & Poor's believes that
such payments will be made during such grace period. The D rating also will be
used upon the filing of a bankruptcy petition or the taking of a similar action
if payments on an obligation are jeopardized.
B-4
PLUS (+) OR MINUS (-): The ratings from AA to CCC may be modified by
the addition of a plus or minus sign to show relative standing within the major
rating categories.
r: This symbol is attached to the ratings of instruments with
significant noncredit risks. It highlights risks to principal or volatility of
expected returns which are not addressed in the credit rating.
N.R.: This indicates that no rating has been requested, that there is
insufficient information on which to base a rating, or that Standard & Poor's
does not rate a particular obligation as a matter of policy.
LOCAL CURRENCY AND FOREIGN CURRENCY RISKS
Country risk considerations are a standard part of Standard & Poor's
analysis for credit ratings on any issuer or issue. Currency of repayment is a
key factor in this analysis. An obligor's capacity to repay foreign currency
obligations may be lower than its capacity to repay obligations in its local
currency due to the sovereign government's own relatively lower capacity to
repay external versus domestic debt. These sovereign risk considerations are
incorporated in the debt ratings assigned to specific issues. Foreign currency
issuer ratings are also distinguished from local currency issuer ratings to
identify those instances where sovereign risks make them different for the same
issuer.
B-5