Filed pursuant to Rule 497(h) under the
Securities Act of 1933, as amended, File No. 333-113439
PROSPECTUS
$1,080,000,000
CALAMOS STRATEGIC TOTAL RETURN FUND
PREFERRED SHARES
7,040 SHARES, SERIES M
7,040 SHARES, SERIES TU
7,040 SHARES, SERIES W
7,040 SHARES, SERIES TH
7,040 SHARES, SERIES F
4,000 SHARES, SERIES A
4,000 SHARES, SERIES B
LIQUIDATION PREFERENCE $25,000 PER SHARE
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Calamos Strategic 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. Under normal circumstances, the Fund will
invest primarily in 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 35% 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. The Fund may invest up to 15% of its
managed assets in securities of foreign issuers in emerging markets. "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 Corporation, a division of The McGraw-Hill Companies ("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 22 OF THIS PROSPECTUS.
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
--------- --------------
Public Offering Price $25,000 $1,080,000,000
Sales Load $ 250 $ 10,800,000
Proceeds, before expenses, to the Fund(1) $24,750 $1,069,200,000
---------------
(1) Total expenses of issuance and distribution are estimated to be $535,000.
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 May 7,
2004.
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CITIGROUP
MERRILL LYNCH & CO.
UBS INVESTMENT BANK
May 4, 2004.
(continued from previous page)
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 May 4,
2004, 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 55 of this prospectus, by calling 1-800-582-6959 or by writing to the Fund.
You can review and copy documents the Fund has filed at the Commission's Public
Reference Room in Washington, D.C. Call 1-202-942-8090 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.
20549-0102.
The Fund is offering 7,040 shares of Series M Preferred Shares, 7,040
shares of Series TU Preferred Shares, 7,040 shares of Series W Preferred Shares,
7,040 shares of Series TH Preferred Shares, 7,040 shares of Series F Preferred
Shares, 4,000 shares of Series A Preferred Shares and 4,000 shares of Series B
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 and "AAA" from
S&P.
The dividend rate for the initial dividend period will be 1.15% for Series
M, 1.15% for Series TU, 1.15% for Series W, 1.15% for Series TH, 1.15% for
Series F, 1.15% for Series A, and 1.15% for Series B. The initial dividend
period is from the date of issuance through May 17, 2004 for Series M, May 18,
2004 for Series TU, May 19, 2004 for Series W, May 13, 2004 for Series TH, May
16, 2004 for Series F, June 2, 2004 for Series A and June 3, 2004 for Series B.
Series M, TU, W, TH and F will have initial dividend periods of 11, 12, 13, 7
and 10 days, respectively. Series A and B will have initial dividend periods of
27 and 28 days, respectively. For subsequent dividend periods, Preferred Shares
pay dividends based on a rate set at auction, usually held weekly in the case of
Series M, TU, W, TH and F or every 28 days in the case of Series A and B.
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
Trust 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 RELY ONLY ON THE INFORMATION CONTAINED 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.
------------------
TABLE OF CONTENTS
PAGE
----
Prospectus Summary.......................................... 1
Financial Highlights........................................ 12
The Fund.................................................... 13
Use of Proceeds............................................. 13
Capitalization.............................................. 14
Portfolio Composition....................................... 14
The Fund's Investments...................................... 15
Leverage.................................................... 18
Interest Rate Transactions.................................. 20
Risk Factors................................................ 22
Management of the Fund...................................... 30
Description of Preferred Shares............................. 33
The Auction................................................. 43
Description of Borrowings................................... 47
Description of Common Shares................................ 48
U.S. Federal Income Tax Matters............................. 48
Certain Provisions of the Agreement and Declaration of Trust
and By-Laws............................................... 50
Custodian, Auction Agent, Transfer Agent, Dividend Paying
Agent and Registrar....................................... 51
Underwriting................................................ 52
Legal Opinions.............................................. 53
Available Information....................................... 54
Table of Contents for Statement of Additional Information... 55
i
PROSPECTUS SUMMARY
This is only a summary. This summary may 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 Strategic Total Return Fund is a
recently organized, diversified, closed-end
management investment company. Throughout the
prospectus, we refer to Calamos Strategic 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 "CSQ." As of April 26, 2004, the
Fund had 154,514,000 common shares outstanding
and net assets of $2,198,800,041. The Fund's
principal offices are located at 1111 East
Warrenville Road, Naperville, Illinois 60563.
The Offering.................. We are offering 7,040 Series M Preferred
Shares, 7,040 Series TU Preferred Shares, 7,040
Series W Preferred Shares, 7,040 Series TH
Preferred Shares, 7,040 Series F Preferred
Shares, 4,000 Series A Preferred Shares and
4,000 Series B Preferred Shares, each at a
purchase price of $25,000 per share. The
Preferred Shares are offered through a group of
underwriters led by 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 M, TU, W, TH and
F Preferred Shares will each be seven days and
for the Series A and B Preferred Shares the
dividend period will be 28 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.
An investor should consider whether to invest
in a particular series based on the series'
rate of return, the investor's time horizon for
investment, and the investor's liquidity
preference. Investors can choose between seven
tranches.
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."
1
Investment Policies........... PRIMARY INVESTMENTS. Under normal
circumstances, the Fund will invest primarily
in 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 35% 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. The Fund may
invest up to 15% of its managed assets in
securities of foreign issuers in emerging
markets. "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. See "The
Fund's Investments -- Principal Investment
Strategies."
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."
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 stock 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. See "The Fund's
Investments -- Principal Investment
Strategies -- Equity Securities."
HIGH YIELD SECURITIES. The Fund may invest in
high yield securities for either current income
or capital appreciation or both. These
securities are 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
Asset Management, Inc. ("Calamos"), the Fund's
investment adviser. 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
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. See "The Fund's
Investments -- Principal Investment
Strategies -- High Yield Securities."
2
FOREIGN ISSUERS. Although the Fund primarily
invests in securities of U.S. issuers, the Fund
may invest up to 35% 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. The Fund may
invest up to 15% of its managed assets in
securities of foreign issuers in emerging
markets. A foreign issuer is a company
organized under the laws of a foreign country
that is principally traded in the financial
markets of a foreign country. For purposes of
these percentage limitations, foreign
securities do not include securities
represented by American Depository Receipts
("ADRs") or securities guaranteed by a U.S.
person. See "The Fund's
Investments -- Principal Investment
Strategies -- Foreign Securities."
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"). 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 SECURITIES. Calamos may
also create a "synthetic" convertible security
by combining separate securities that possess
the two principal characteristics of a true
convertible security, i.e., a fixed-income
security ("fixed-income component") and the
right to acquire an equity security
("convertible component"). The fixed-income
component is achieved by investing in
non-convertible, fixed-income securities such
as bonds, preferred stocks and money market
instruments. 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 securities created by other
parties, typically investment banks, including
convertible structured notes. 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 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 -- Synthetic Convertible
Securities."
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
3
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. 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 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. See "The
Fund's Investments -- Principal Investment
Strategies -- Zero Coupon Securities."
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 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
financial 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
4
the right to issue preferred shares and
Borrowings to the extent permitted by the
Investment Company Act of 1940 (the "1940
Act"). Since Calamos's 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 be more aggressive
and leverage the Fund. Calamos intends only to
leverage the Fund when it believes that the
potential return on such additional investments
is likely to exceed the costs incurred in
connection with the borrowing. 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, likely
will 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 obligations 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 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
5
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 March 31, 2004, Calamos
managed approximately $29 billion in assets of
individuals and institutions. Calamos is a
wholly-owned subsidiary of Calamos Holdings,
Inc. ("Holdings"). Holdings is controlled by
John P. Calamos, who has been engaged in the
investment advisory business since 1977.
Portfolio Manager............. John P. Calamos, Nick P. Calamos and John P.
Calamos, Jr. are responsible for managing the
portfolio of the Fund. During the past five
years, John P. Calamos 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.
Fund Accountant............... State Street Bank and Trust Company ("State
Street"), 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
6
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
- certain events, such as terrorist attacks
(including the terrorist attacks in the
United States on September 11, 2001), war and
other geopolitical events have led to
increased short-term market volatility and
may have long-term effects on U.S. and world
economies and markets. The Fund cannot
predict the effects of similar events in the
future on the U.S. economy or other
economies. 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.
For additional information about the risks of
investing in Preferred Shares and in the Fund,
see "Risk Factors."
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
7
securities, high yield securities and foreign
securities. These and other general risks of
the Fund are described in more detail in "Risk
Factors -- General Risks of Investing in the
Fund."
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 for the Series M, TU, W,
TH and F and every 28 days for the Series A and
B by submitting orders to a broker-dealer that
has entered into an agreement with the auction
agent and the Trust (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 each series of Preferred Shares and the day
of the week on which each subsequent auction,
if any, will normally be held for each series
of Preferred Shares. The first auction date for
each series of Preferred Shares will be the
business day before the dividend payment date
for the initial dividend period for that series
of Preferred Shares. The start date for
subsequent dividend periods will normally be
the business day 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
------ ------------------- ---------------------------------
M.... May 17 Monday
TU... May 18 Tuesday
W.... May 19 Wednesday
TH... May 13 Thursday
F.... May 14 Friday
A.... June 2 Every fourth Wednesday thereafter
B.... June 3 Every fourth Thursday thereafter
-------------------------------------------------
* All dates are 2004.
Dividends and Dividend
Periods....................... The table below shows the initial dividend
rates, the dividend payment dates and the day
of the week upon which subsequent dividends, if
any, will be paid for each series and the
number of days for the initial dividend periods
on each series of Preferred Shares offered in
this prospectus. For subsequent dividend
periods, each series of Preferred Shares will
pay dividends based on a rate set at auctions,
normally held every seven days in the case of
Series M, TU, W, TH and F and every 28 days in
the case of Series A and B. 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."
8
INITIAL DATE OF NUMBER OF DAYS
DIVIDEND ACCUMULATION DIVIDEND PAYMENT DAY FOR OF INITIAL
SERIES RATE AT INITIAL RATE* INITIAL DIVIDEND PERIOD* SUBSEQUENT DIVIDEND PAYMENT DATE DIVIDEND PERIOD
------ -------- ---------------- ---------------------------- -------------------------------- ---------------
M.... 1.15% May 7 May 18 Tuesday 11
TU... 1.15 May 7 May 19 Wednesday 12
W.... 1.15 May 7 May 20 Thursday 13
TH... 1.15 May 7 May 14 Friday 7
F.... 1.15 May 7 May 17 Monday 10
A.... 1.15 May 7 June 3 Every fourth Thursday thereafter 27
B.... 1.15 May 7 June 4 Every fourth Friday thereafter 28
-------------------
* All dates are 2004.
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 or 28 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 or S&P
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 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
9
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 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 April 26, 2004, the asset
coverage of the Preferred Shares as measured
pursuant to the 1940 Act would be approximately
303% 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 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
10
Shares -- Redemption" and "Description of
Preferred Shares -- Rating Agency Guidelines."
Liquidation Preference........ The liquidation preference for shares of each
series of 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, and the holders of the
Preferred Shares will only be entitled to elect
the Trustees so designated as being elected by
the holders of the Preferred Shares, when their
term will have expired and 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 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 Preferred Shares.
11
FINANCIAL HIGHLIGHTS (UNAUDITED)
Information contained in the table below shows the unaudited operating
performance of the Fund from the commencement of the Fund's operations on March
26, 2004 through April 14, 2004. Since the Fund was recently organized and
commenced operations on March 26, 2004, the table covers less than 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 objectives and policies. Accordingly, the information presented may
not provide a meaningful picture of the Fund's future operating performance.
FOR THE
PERIOD ENDED
APRIL 14, 2004*
---------------
(UNAUDITED)
Net asset value, beginning of period........................ $ 14.32(a)
----------
Offering costs.............................................. (0.01)
Income from investment operations:
Net investment income(b).................................. 0.02
Net realized and unrealized gain (loss) on investments and
foreign currency transactions.......................... (0.16)
----------
Total from investment operations............................ (0.14)
----------
Net asset value, end of period.............................. $ 14.17
==========
Market value, end of period................................. $ 15.00
TOTAL INVESTMENT RETURN BASED ON(C):
Net Asset Value........................................... (1.05%)
Market Value.............................................. 0.00%
RATIO TO AVERAGE NET ASSETS APPLICABLE TO COMMON
SHAREHOLDERS/SUPPLEMENTARY DATA:
Net assets applicable to common shareholders, end of period
(000's omitted)........................................... $1,991,470
Ratio of expenses to average net assets(d).................. 1.08%
Ratio of net investment income to average net assets(d)..... 3.01%
Portfolio turnover rate(d).................................. 0.00%
---------------
(a) Net of sales load and organizational fees of $0.68 per share.
(b) Based on average shares outstanding.
(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.
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 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.
12
THE FUND
Calamos Strategic 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 December 31, 2003, and has registered under the 1940
Act. On March 30, 2004, the Fund issued an aggregate of 140,500,000 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 19,800,000 additional common shares at
the public offering price less the sales load. On April 20, 2004, the Fund
issued an additional 14,000,000 common shares of beneficial interest in
connection with a partial exercise by the underwriters of their over-allotment
option. The underwriters may exercise the remaining portion of the
over-allotment option through May 9, 2004, however, the underwriters do not
anticipate that they will exercise any of the remaining portion of the
over-allotment option. The Fund's common shares are traded on the New York Stock
Exchange under the symbol "CSQ." The Fund's principal office is located at 1111
East Warrenville Road, Naperville, Illinois 60563-1493, and its telephone number
is 1-800-582-6959.
The following provides information about the Fund's authorized and
outstanding shares as of April 20, 2004.
AMOUNT HELD BY THE
AMOUNT FUND OR FOR ITS
TITLE OF CLASS AUTHORIZED ACCOUNT AMOUNT OUTSTANDING
-------------- ----------- ------------------ ------------------
(UNAUDITED)
Common................................. Unlimited 0 154,514,000
Preferred.............................. Unlimited 0 0
Series M............................. 7,040 0 0
Series TU............................ 7,040 0 0
Series W............................. 7,040 0 0
Series TH............................ 7,040 0 0
Series F............................. 7,040 0 0
Series A............................. 4,000 0 0
Series B............................. 4,000 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 $1,068,665,000. 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 be able to invest substantially all of the net proceeds in
securities that meet these investment objectives and policies within 3 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."
13
CAPITALIZATION (UNAUDITED)
The following table sets forth the capitalization of the Fund as of April
14, 2004, and as adjusted, to give effect to the issuance of all the Preferred
Shares offered hereby (including estimated offering expenses and sales load of
$11,335,000). The sales load and offering expenses of the Preferred Shares will
be effectively borne by common shareholders.
AS ADJUSTED FOR
4/20/04 COMMON AS ADJUSTED
ACTUAL SHARES ISSUED* 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
43,200 shares issued,
respectively)....................... $ -- $ -- $1,080,000,000
Common shares, no par value per share,
unlimited shares authorized,
140,514,000 shares outstanding**.... 2,011,132,859 2,211,682,859 2,200,347,859
Undistributed net investment income... 2,555,152 2,555,152 2,555,152
Accumulated net realized gain (loss)
on investments...................... (110,331) (110,331) (110,331)
Net unrealized appreciation
(depreciation) on investments....... (22,107,475) (22,107,475) (22,107,475)
-------------- -------------- --------------
NET ASSETS APPLICABLE TO COMMON
SHARES.............................. $1,991,470,205 $2,192,020,205 $2,180,685,205
============== ============== ==============
---------------
* On April 20, 2004, the Fund issued an additional 14,000,000 common shares of
beneficial interest in connection with a partial exercise by the underwriters
of their over-allotment option.
** None of these outstanding shares are held by or for the account of the Fund.
PORTFOLIO COMPOSITION
As of April 14, 2004, approximately 48.8% of the market value of the Fund's
portfolio was invested in equities and approximately 39.0% of the market value
was invested in convertible securities and high yield debt securities and
approximately 12.2% of the market value of the Fund's portfolio was invested in
short-term investment grade debt securities. The following table sets forth
certain information with respect to the composition of the Fund's investment
portfolio as of April 14, 2004, based on the highest rating assigned each
investment by either Moody's or S&P.
CREDIT RATING VALUE (000) PERCENT
------------- ----------- -------
Aaa/AAA..................................................... -- 0.0%
Aa/AA....................................................... -- 0.0%
A/A......................................................... $ 60,202 2.9%
Baa/BBB..................................................... 59,027 2.9%
Ba/BB....................................................... 126,105 6.1%
B/B......................................................... 432,680 21.0%
Caa/CCC..................................................... 54,728 2.6%
Ca/CC....................................................... -- 0.0%
C/C......................................................... 21,161 1.0%
Unrated+.................................................... 48,920 2.4%
Equities.................................................... 1,003,397 48.8%
Short-Term.................................................. 251,381 12.2%
---------- ------
Total..................................................... $2,057,602 100.0%
========== ======
---------------
+ Refers to securities that have not been rated by Moody's or S&P.
14
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 the 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 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 35% 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. The Fund may invest up to 15% of its managed
assets in securities of foreign issuers in emerging markets.
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.
Calamos analyzes securities for the Fund's portfolio using an approach that
focuses on assessing a total enterprise value before assessing the value of the
securities issued by a company. Calamos seeks to assess the value of an issuer's
total enterprise by studying its financial statements, including its balance
sheet. Once enterprise value is determined, Calamos seeks to assess the value of
the issuer's different types of securities, taking into account the business
risk of the issuer, its competitive position and the seniority of each type of
security relative to the rest of the issuer's capital structure. This approach
serves as the basis for the Calamos research team's design and use of
proprietary models which, along with risk management and portfolio construction
techniques, assist in determining whether a given security presents an
investment opportunity for the Fund.
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 a 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 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 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.
15
FOREIGN SECURITIES. Although the Fund primarily invests in securities of
U.S. issuers, the Fund may invest up to 35% 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. The
Fund may invest up to 15% of its managed assets in securities of foreign issuers
in emerging markets. A foreign issuer is a company organized under the laws of a
foreign country that is principally traded in the financial markets of a foreign
country. For purposes of these percentage limitations, foreign securities do not
include securities represented by American Depository Receipts ("ADRs") or
securities guaranteed by a U.S. person.
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. 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.
SYNTHETIC CONVERTIBLE SECURITIES. Calamos may also create a "synthetic"
convertible security by combining separate securities that possess the two
principal characteristics of a true convertible security, i.e., a fixed-income
security ("fixed-income component") and the right to acquire an equity security
("convertible component"). The fixed-income component is achieved by investing
in non-convertible, fixed-income securities such as bonds, preferred stocks and
money market instruments. 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 securities 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. 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
securities are considered equity securities for purposes of the Fund's policy to
invest at least 50% of its managed assets in equity securities.
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 consider whether
securities purchased under Rule 144A are illiquid and thus subject to the Fund's
limit of 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 than 15% of its 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
16
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. 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.
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 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.
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. Under unusual market or economic
conditions or for other temporary defensive purposes, the Fund 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
17
recognized statistical rating organization 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 the
court characterizes the 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.
LEVERAGE
The Fund may issue preferred shares, including Preferred Shares, or borrow
or issue short-term 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
18
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 borrowed funds than the additional costs the Fund incurs as a
result of such borrowing. 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 which 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 differing 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 total 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
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 total 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.
19
The Fund may be subject to certain restrictions on investments imposed by
guidelines of one or more nationally recognized statistical rating organizations
which may issue ratings for the preferred shares or short-term 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 to the extent that 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 likely will 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 variable rate payment 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, which 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.
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. Under certain circumstances, the Fund
may be required to pledge the assets in such segregated account to the
counterparty.
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 on 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 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
higher than the fixed rate of payment on the interest rate swap, the swap will
enhance common share net earnings. 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 swap or
20
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 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.
21
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 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 hold
orders (orders to retain Preferred Shares) at an auction only at a specified
rate, and that bid rate exceeds the rate set at the auction, you will not retain
your Preferred Shares. Additionally, if you buy shares or elect to retain shares
without specifying a rate below which you would not wish to continue to hold
those shares, and the auction sets a below-market rate, you may receive a lower
rate of return on your shares than the market rate. 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."
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 in the case of Series M, TU, W, TH and F and other than
28 days in the case of Series A and B), 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 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
22
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 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
23
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 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.
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
24
- 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 the statement of additional information for a
description of Moody's and S&P 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, 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 which 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.
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.
25
INTEREST RATE RISK. Fixed income securities, including high yield
securities, are subject to certain common risks, including:
- 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; and
- market interest rates currently are at historically low levels.
DEFAULT RISK. Default risk refers to the risk that a company who 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 cannot 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. 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 of 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. 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.
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. 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 adverse effect of currency exchange rates or controls on the
value of the Fund's investments;
26
- 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; and
- withholding and other non-U.S. taxes may decrease the Fund's return.
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 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.
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'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's
"conversion price." The conversion price is defined as the predetermined price
at which the convertible 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 SECURITIES. The value of a synthetic convertible
security may respond differently to market fluctuations than a convertible
security because a synthetic convertible is composed of
27
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.
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.
TAX RISK. The Fund may invest in certain securities, such as certain
convertible securities, for which the federal income tax treatment may not be
clear or may be subject to recharacterization by the Internal Revenue Service.
It could be more difficult for the Fund to comply with the 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 Internal Revenue Service. See "U.S. Federal
Income Tax Matters."
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 Preferred Shares" and "Certain Provisions of the Agreement and
Declaration of Trust and By-Laws." The
28
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 U.S. economy or any foreign economy.
29
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 Trust (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, 1111 E. Warrenville Road,
Naperville, IL. On March 31, 2004 Calamos managed approximately $29 billion in
assets of individuals and institutions. Calamos is a wholly-owned subsidiary of
Holdings. Holdings is controlled by John P. Calamos, who has been engaged in the
investment advisory business since 1977.
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 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: (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 accrued daily 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
30
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 and its
common shareholders.
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 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, Nick P. Calamos and John P. Calamos, Jr. are responsible
for managing the portfolio of the Fund. During the past five years, John P.
Calamos 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. 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.
FUND ACCOUNTANT
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 0.0225% for the first $3
billion of Combined Assets and 0.0150% for the Combined Assets in excess of $3
billion.
31
Calamos, rather than State Street, will provide the financial accounting
services described more fully in the statement of additional information, to the
Calamos Funds. For providing those services, Calamos will receive a fee 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 to Calamos
based on relative managed assets of each fund.
32
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 for
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 7,040 Preferred
Shares, Series M, 7,040 Preferred Shares, Series TU, 7,040 Preferred Shares,
Series W, 7,040 Preferred Shares, Series TH, 7,040 Preferred Shares, Series F,
4,000 Preferred Shares, Series A, and 4,000 Preferred Shares, Series B. 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 and rate for each series of
Preferred Shares is as set forth below:
SERIES INITIAL DIVIDEND PERIOD INITIAL DIVIDEND RATE
------ ----------------------- ---------------------
M............................................... 11 days 1.15%
TU.............................................. 12 days 1.15
W............................................... 13 days 1.15
TH.............................................. 7 days 1.15
F............................................... 10 days 1.15
A............................................... 27 days 1.15
B............................................... 28 days 1.15
Any subsequent dividend periods of Series M, TU, W, TH and F of Preferred
Shares will generally be seven or, in the case of Series A and B Preferred
Shares, 28 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 each series of 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
33
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 each series are as follows:
INITIAL DIVIDEND
SERIES PAYMENT DATE* SUBSEQUENT DIVIDEND PAYMENT DAY
------ ---------------- --------------------------------
M....................................... May 18 Tuesday
TU...................................... May 19 Wednesday
W....................................... May 20 Thursday
TH...................................... May 14 Friday
F....................................... May 17 Monday
A....................................... June 3 Every fourth Thursday thereafter
B....................................... June 4 Every fourth Friday thereafter
---------------
*All dates are 2004.
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 in the case of Series M, T, W, TH, and F Preferred Shares and
more than 28 days in the case of Series A and B Preferred Shares, 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 the first
business day after the dividend period ends. 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 May 7, 2004. 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 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
34
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 consent of the holders of Preferred Shares,
including each series, 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."
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
auction agent sufficient funds for the payment of declared dividends. The
failure to make such deposit will not result in the cancelation 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.
35
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 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);
36
- 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 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 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.
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
37
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 and the holders of the Preferred Shares shall only be entitled to elect
the trustees so designated as being elected by the holders of the 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. 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 ("Voting Period") in which the Fund has not paid
dividends on the Preferred Shares in an amount equal to two full years
dividends, 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
38
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 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 right, 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
39
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 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 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 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 April 26, 2004, and assuming the issuance of all
Preferred Shares offered hereby and the use of the proceeds as intended,
40
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 $3,267,465,041
----------------------------------------------------------------------- = -------------- = 303%
Senior securities representing indebtedness plus liquidation value of $1,080,000,000
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 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, (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 and (G) weekly if S&P's
eligible assets have an aggregate discounted value less than 1.30 times 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-G
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
41
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 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 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 not
including) the date fixed for redemption. 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. To the extent permitted under the 1940 Act and
Delaware law, the Fund at its option may without the consent of the holders of
Preferred Shares, redeem Preferred Shares having a dividend period of one year
or less, in whole or in part, 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 optional 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, 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, after giving effect thereto, (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
42
eligible assets with an aggregate discounted value at least equal to the
Preferred Shares Basic Maintenance Amount.
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 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, before any payment or
distribution is made on the common shares, an amount equal to the liquidation
preference with respect to such shares ($25,000 per share), plus an amount equal
to all dividends thereon (whether or not earned or declared by the Fund, but
excluding the interest thereon) accumulated but unpaid to and including the date
of final distribution in same-day funds 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 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 sale of all or substantially all the property or business of
the Fund, nor the merger or consolidation of the Fund into or with any other
entity nor the merger or consolidation of any other entity into or with the
Fund, will be a liquidation, dissolution or winding up, whether voluntary or
involuntary, for the 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.
43
The auction agent may terminate the auction agency agreement upon notice to
the Fund no earlier than 60 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.
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
44
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 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 prorata 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 M, TU, W, TH and F Preferred Shares will normally
be held every seven days and the auctions for Series A and B Preferred Shares
will normally be held every 28 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.
45
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 trust 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.
The following is a simplified example of how a typical auction works.
Assume that the Fund has 1,000 outstanding Preferred Shares of any series, 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 Bid order of 4.1% rate for
sell all 500 shares if 500 shares
auction rate is less than
4.1%
Existing Holder B.......... Owns 300 shares, wants to Hold order -- will take the
hold auction rate
Existing Holder C.......... Owns 200 shares, wants to Bid order of 3.9% rate for
sell all 200 shares if 200 shares
auction rate is less 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.
46
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.
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.
47
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.
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.
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 Internal Revenue Service
("IRS") retroactively or prospectively. 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 OF
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 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.
48
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.
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 in taxable years beginning on or before
2008.
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 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.
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.
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
49
correct social security number or other taxpayer identification number and
certain other 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 of approximately equal
size. The terms of the Trustees of the different classes are staggered so that
approximately one third of the Board of Trustees is elected by shareholders each
year. 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 Trust 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,
adopted or authorized 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.
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
50
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 5% or
greater holders of a class or series of shares and their associates, 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 5% or greater holder of a class or series of
shares (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; 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 the exclusion of shareholders, to make, alter or
repeal any of the By-laws (except for any By-law specified not to be amended or
repealed by the Board), subject to the requirements of the 1940 Act. 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.
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 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 or received at the principal executive offices of the Fund not less
than 90 calendar days nor more than 120 calendar days prior to the anniversary
date of the prior year's annual meeting (subject to certain exceptions). In the
case of the first annual meeting of shareholders, the notice must be given no
later than the tenth calendar day following public disclosure as specified in
the By-laws of the date of the meeting. 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 Preferred Shares.
51
UNDERWRITING
Citigroup Global Markets Inc. is acting as representative of the
underwriters named below. Subject to the terms and conditions stated in the
underwriting agreement dated the date hereof, each underwriter named below has
severally agreed to purchase, and the Fund has agreed to sell to such
underwriter, the number of Preferred Shares set forth opposite the name of such
underwriter.
NUMBER OF SHARES OF UNDERWRITER
----------------------------------------------------------------------------
UNDERWRITER SERIES M SERIES TU SERIES W SERIES TH SERIES F SERIES A SERIES B
----------- -------- --------- -------- --------- -------- -------- --------
Citigroup Global Markets Inc. ........... 3,520 3,520 3,520 3,520 3,520 2,000 2,000
Merrill Lynch, Pierce, Fenner & Smith
Incorporated................. 2,042 2,042 2,042 2,042 2,042 1,160 1,160
UBS Securities LLC....................... 1,478 1,478 1,478 1,478 1,478 840 840
----- ----- ----- ----- ----- ----- -----
Total............................. 7,040 7,040 7,040 7,040 7,040 4,000 4,000
===== ===== ===== ===== ===== ===== =====
The underwriting agreement provides that the obligations of the
underwriters to purchase the Preferred Shares included in this offering are
subject to approval of certain legal matters by counsel and to certain other
conditions. The underwriters are obligated to purchase all the Preferred Shares
if they purchase any of the Preferred Shares.
The underwriters propose 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 certain dealers at the public
offering price less a concession not in excess of $137.50 per Preferred Share.
The sales load the Fund will pay of $250 per Preferred Share is equal to 1.0% of
the initial offering price. The underwriters may allow, and such dealers may
reallow, a concession not in excess of $37.50 per Preferred Share on sales to
certain other dealers. If all of the Preferred Shares are not sold at the
initial offering price, the representatives may change the public offering price
and other selling terms. Investors must pay for any Preferred Shares purchased
on or before May 7, 2004.
The Fund and Calamos have each 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. on behalf of the underwriters, sell, contract to
sell, grant any options or warrants to purchase or otherwise dispose of, any
senior securities (as defined in the 1940 Act) of the Fund other than the
Preferred Shares, or any securities convertible into or exchangeable for senior
securities other than the Preferred Shares.
The Fund anticipates that from time to time the underwriters may act as
brokers or dealers in connection with the execution of the Fund's portfolio
transactions after they have ceased to be underwriters and, subject to certain
restrictions, may act as brokers while they are underwriters. The underwriters
are active underwriters of, and dealers in, securities and act as market makers
in a number of such securities, and therefore can be expected to engage in
portfolio transactions with, and perform services for the Fund, subject to
applicable law.
A prospectus in electronic format may be available on the website
maintained by one or more of the underwriters.
The Fund anticipates that the underwriters or one of their respective
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.
Certain underwriters have performed investment banking and advisory
services for Calamos and its affiliates from time to time, for which they have
received customary fees and expenses. Certain underwriters may, from time to
time, engage in transactions with or perform services for Calamos in the
ordinary course of business.
The underwriting agreement provides that it may be terminated in the
absolute discretion of the representative, without liability on the part of any
underwriter to the Fund or Calamos, by notice to the Fund or Calamos if, prior
to the delivery of and payment for the Preferred Shares, (i) trading in the
52
Common Shares shall have been suspended by the Commission or the New York Stock
Exchange or trading in securities generally on the New York Stock Exchange shall
have been suspended or limited or minimum prices for trading in securities
generally shall have been established on such exchange, (ii) a banking
moratorium shall have been declared by either federal or New York state
authorities, or (iii) there shall have occurred any outbreak or escalation of
hostilities, declaration by the United States of a national emergency or war, or
other calamity or crisis the effect of which on financial markets in the United
States is such as to make it, in the representative's sole judgment,
impracticable or inadvisable to proceed with the offering or delivery of the
Preferred Shares as contemplated by this prospectus.
The Fund and Calamos have agreed to indemnify the underwriters against
certain liabilities, including liabilities under the Securities Act of 1933, or
to contribute to payments the underwriters may be required to make because of
any of those liabilities. Insofar as indemnification for liability arising under
the Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the Fund pursuant to the foregoing provisions, or
otherwise, the Fund has been advised that in the opinion of the Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Fund of expenses incurred or
paid by a director, officer or controlling person of the Fund in the successful
defense of any action, suit or proceeding) is asserted by such director, officer
or controlling person in connection with the securities being registered, the
Fund will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
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 underwriters 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 on certain
matters of Delaware law.
53
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, 450 Fifth Street, N.W., 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 Trust 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 Trust's registration statement, other
documents incorporated by reference, and other information the Trust has filed
electronically with the Commission, including proxy statements and reports filed
under the Securities Exchange Act of 1934.
54
TABLE OF CONTENTS FOR STATEMENT OF ADDITIONAL INFORMATION
Use of Proceeds............................................. S-2
Investment Objective and Policies........................... S-2
Investment Restrictions..................................... S-22
Management of the Fund...................................... S-24
Portfolio Transactions...................................... S-31
Net Asset Value............................................. S-32
Additional Information Concerning the Auctions for Preferred
Shares.................................................... S-33
Repurchase of Common Shares................................. S-34
U.S. Federal Income Tax Matters............................. S-36
Custodian, Transfer Agent, Dividend Paying Agent and
Registrar................................................. S-41
Experts..................................................... S-42
Additional Information...................................... S-42
Financial Statement and Independent Auditors' Report........ F-1
Appendix A -- Statement of Preference of Preferred Shares... A-1
Appendix B -- Description of Ratings........................ B-1
55
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
$1,080,000,000
CALAMOS STRATEGIC TOTAL
RETURN FUND
PREFERRED SHARES
7,040 SHARES, SERIES M
7,040 SHARES, SERIES TU
7,040 SHARES, SERIES W
7,040 SHARES, SERIES TH
7,040 SHARES, SERIES F
4,000 SHARES, SERIES A
4,000 SHARES, SERIES B
------------
PROSPECTUS
MAY 4, 2004
------------
CITIGROUP
MERRILL LYNCH & CO.
UBS INVESTMENT BANK
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
1886
CALAMOS STRATEGIC TOTAL RETURN FUND
STATEMENT OF ADDITIONAL INFORMATION
Calamos Strategic 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 May 4, 2004. 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 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-22
Management of the Fund.......................................................... S-24
Portfolio Transactions.......................................................... S-31
Net Asset Value................................................................. S-32
Additional Information Concerning the Auctions for Preferred Shares............. S-33
Repurchase of Common Shares..................................................... S-34
U.S. Federal Income Tax Matters................................................. S-36
Custodian, Transfer Agent, Dividend Paying Agent and Registrar.................. S-41
Experts......................................................................... S-42
Additional Information.......................................................... S-42
Financial Statement and Independent Auditors' Report............................ F-1
Appendix A -- Statement of Preference of Preferred Shares....................... A-1
Appendix B -- Description of Ratings............................................ B-1
This Statement of Additional Information is dated May 4, 2004.
S-1
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 be able to 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 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 or investment in illiquid securities).
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 common and preferred stock, convertible securities and income
producing securities such as investment grade and below investment grade 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 35% 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. The Fund may invest up to 15% of its managed
assets in securities of foreign issuers in emerging markets. "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.
Calamos will dynamically allocate the Fund's investments among multiple
asset classes, 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.
Calamos analyzes securities for the Fund's portfolio using an approach
that focuses on assessing a total enterprise value before assessing the value of
the securities issued by a company. Calamos seeks to assess the value of an
issuer's total enterprise by studying its financial statements, including its
balance sheet. Once enterprise value is determined, Calamos seeks to assess the
value of the issuer's different types of securities, taking into account the
business risk of the issuer, its competitive position and the seniority of each
type of security relative to the rest of the issuer's capital structure. This
approach serves as the basis for the Calamos research team's design and use of
proprietary models which, along with risk management and portfolio construction
techniques, assist in determining whether a given security presents an
investment opportunity for the Fund.
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 a 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 tax purposes while it is not
S-2
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 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 incases when
dividends are in arrears for a specified number of periods.
Equity securities of small company 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.
HIGH YIELD SECURITIES. The high yield securities in which the Fund
invests are rated Ba or lower by Moody's or BB or lower by Standard & Poor's or
are unrated but determined by Calamos to be of comparable quality.
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 principal.
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. Standard & Poor's 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 Standard & Poor's ratings.
S-3
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 which 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 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 Standard & Poor's) 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
S-4
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 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 (SEC).
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 Standard & Poor's), 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
S-5
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.
FOREIGN SECURITIES. The Fund may invest up to 35% of its managed assets
in securities of foreign issuers. The Fund may invest up to 15% of its managed
assets in securities of foreign issuers in emerging markets. For these purposes,
foreign securities do not include American Depositary Receipts ("ADRs") or
securities guaranteed by a United States person, but may include foreign
securities in the form of European Depositary Receipts ("EDRs"), Global
Depositary Receipts ("GDRs") 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. (Seediscussion 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
S-6
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.
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 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.
S-7
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 a 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.
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.
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.
S-8
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 which 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 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.
S-9
SYNTHETIC CONVERTIBLE SECURITIES. Calamos Asset Management, Inc.
("Calamos") may create a "synthetic" convertible security by combining fixed
income securities with the right to acquire equity securities. More flexibility
is possible in the assembly of a synthetic convertible security than in the
purchase of a convertible security. Although synthetic convertible securities
may be selected where the two components are issued by a single issuer, thus
making the synthetic convertible security similar to the true convertible
security, the character of a synthetic convertible security 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 security 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 security 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 security faces the risk of a
decline in the price of the security 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 security. 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 security includes the fixed-income
component as well, the holder of a synthetic convertible security 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 securities
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 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.
OPTIONS ON SECURITIES, INDEXES AND CURRENCIES. The Fund may purchase
and sell put options and call options on securities, indexes or 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, commodity, 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 protect its holdings
in the underlying instrument (or, in some cases, a similar instrument) against a
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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.
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, and are subject to a fund's limitation on investing no more
than 15% of its net assets 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 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.
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
S-11
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 which 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 and OCC issued and exchange listed
index options 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. OCC issued and exchange listed options sold by the Fund other than those
above generally 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 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 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.
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
S-12
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.
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 which 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
which 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 currency futures contract
provides for the future sale by one party and purchase by another party of a
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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 Standard & Poor's 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 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
-------------------------
(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.
S-14
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 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.
S-15
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 has claimed an exclusion from registration as a commodity pool
under the Commodity Exchange Act ("CEA") and, therefore, the Fund and its
officers and trustees are not subject to the registration requirements of the
CEA. The Fund reserves the right to engage in transactions involving futures and
options thereon to the extent allowed by Commodity Future Trading Commission
("CFTC") regulations in effect from time to time and in accordance with the
Fund's policies.
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 attempt to hedge against market risk and to
enhance income by selling short "against the box," that is: (1) entering into
short sales of securities that it currently has the right to acquire through the
conversion or exchange of other securities that it owns, or to a lesser extent,
entering into short sales of securities that it currently owns; and (2) entering
into arrangements with the broker-dealers through which such securities are sold
short to receive income with respect to the proceeds of short sales during the
period the Fund's short positions remain open. The Fund may make short sales
S-16
of securities only if at all times when a short position is open the Fund owns
an equal amount of such securities or securities convertible into or
exchangeable for, without payment of any further consideration, securities of
the same issue as, and equal in amount to, the securities sold short.
In a short sale against the box, the Fund does not deliver from its
portfolio the securities sold and does not receive immediately the proceeds from
the short sale. Instead, the Fund borrows the securities sold short from a
broker-dealer through which the short sale is executed, and the broker-dealer
delivers such securities, on behalf of the Fund, to the purchaser of such
securities. Such broker-dealer is entitled to retain the proceeds from the short
sale until the Fund delivers to such broker-dealer the securities sold short. In
addition, the Fund is required to pay to the broker-dealer the amount of any
dividends paid on shares sold short. Finally, to secure its obligation to
deliver to such broker-dealer the securities sold short, the Fund must deposit
and continuously maintain in a separate account with the Fund's custodian an
equivalent amount of the securities sold short or securities convertible into or
exchangeable for such securities without the payment of additional
consideration. 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 sale. Because the Fund ordinarily will want to
continue to hold securities in its portfolio that are sold short, 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,
rather than by delivering portfolio securities.
A short sale works the same way, except that the Fund places in the
segregated account cash or U.S. government securities equal in value to the
difference between (i) the market value of the securities sold short at the time
they were sold short and (ii) any cash or U.S. government securities required to
be deposited with the broker as collateral. In addition, so long as the short
position is open, the Fund must adjust daily the value of the segregated account
so that the amount deposited in it, plus any amount deposited with the broker as
collateral, will equal the current market value of the security sold short.
However, the value of the segregated account may not be reduced below the point
at which the segregated account, plus any amount deposited with the broker, is
equal to the market value of the securities sold short at the time they were
sold short.
Short sales may protect the Fund against the risk of losses in the
value of its portfolio securities because any unrealized losses with respect to
such portfolio securities should be wholly or partially offset by a
corresponding gain in the short position. However, any potential gains in such
portfolio securities should be wholly or partially offset by a corresponding
loss in the short position. The extent to which such gains or losses are offset
will depend upon the amount of securities sold short relative to the amount the
Fund owns, either directly or indirectly, and, in the case where the Fund owns
convertible securities, changes in the conversion premium. Short sale
transactions of the Fund involve certain risks. In particular, the imperfect
correlation between the price movements of the convertible securities and the
price movements of the underlying common stock being sold short creates the
possibility that losses on the short sale hedge position may be greater than
gains in the value of the portfolio securities being hedged. In addition, to the
extent that the Fund pays a conversion premium for a convertible security, the
Fund is generally unable to protect against a loss of such premium pursuant to a
short sale hedge. In determining the number of shares to be sold short against
the Fund's position in the convertible securities, the anticipated fluctuation
in the conversion premiums is considered. The Fund will also incur transaction
costs in connection with short sales. Certain provisions of the Internal Revenue
Code of 1986, as amended (the "Code") (and related Treasury regulations
thereunder) may limit the degree to which the Fund is able to enter into short
sales and other transactions with similar effects without triggering adverse tax
consequences, which limitations might impair the Fund's ability to achieve its
investment objective. See "U.S. Federal Income Tax Matters."
S-17
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 the Fund 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.
INTEREST RATE TRANSACTIONS. In order to seek to reduce the interest
rate rise inherent in the Fund's underlying investments and capital structure,
the Fund, if market conditions are deemed favorable, likely will 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 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 may use an interest rate cap, which 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.
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 on 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 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
higher than the fixed rate of payment on the interest rate swap, the swap will
enhance common share net earnings. 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 swap or cap.
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 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.
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 counter-party that Calamos believes does not have the financial
resources to honor its obligation under the interest rate swap or cap
transaction. Further,
S-18
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 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.
SWAPS, CAPS, FLOORS AND COLLARS. The Fund may enter into interest rate,
currency, index and other swaps and the purchase or sale of related caps, floors
and collars. The Fund expects to enter into these transactions primarily 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. 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 unsecured long-term debt of
the Counterparty, combined with any credit enhancements, is rated at least A by
S&P or Moody's or has an equivalent rating from a NRSRO or is determined to be
of equivalent credit quality by Calamos. If there is a default by the
Counterparty, the Fund may have contractual remedies pursuant to the agreements
related to the transaction. 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. See
"Investment Objective and Policies -- Synthetic Convertible Securities 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
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 not be an active trading market for
structured products. As a result, certain structured products in which the Fund
invests may be deemed illiquid and subject to its limitation on illiquid
investments.
S-19
"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 cannot 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 invest without limitation in securities that have not
been registered for public sale, but that are eligible for purchase and sale by
certain qualified institutional buyers. 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. 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. 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.
S-20
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 which 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. REITs are
not taxed on income 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.
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
S-21
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 Standard &
Poor's 500 Stock Index.
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.
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 SEC thereunder.
(2) Borrow money, except as permitted by the 1940 Act and the rules
and interpretive positions of the Commission thereunder.
S-22
(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 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
which owns all of the outstanding securities of the Fund, except directors'
qualifying shares. Currently, under interpretive positions of the SEC, the Fund
may not have on loan at any 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.
S-23
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 which 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 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 test. See "U.S. Federal Income Tax
Matters."
As a non-fundamental policy, the Fund may not issue 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
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 (11 U.S. registered investment portfolios) 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 1111 East Warrenville Road, Naperville, Illinois 60563-1493.
S-24
TERM OF OFFICE PRINCIPAL OCCUPATION DURING PAST FIVE
NAME AND AGE AT POSITIONS HELD AND LENGTH OF YEARS AND OTHER DIRECTORSHIPS HELD BY
MARCH 1, 2004 WITH THE FUND SERVICE THE TRUSTEE
------------------------- --------------------- ----------------- -------------------------------------------
INTERESTED TRUSTEES:
*John P. Calamos (63) Trustee and President Trustee since President and CEO, Calamos Holdings, Inc.,
December 15, 2003. Calamos and Calamos Financial Services,
Term expires in Inc. ("CFS").
2005.
*Nick P. Calamos (42) Trustee Trustee since Senior Executive Vice President, Calamos
December 15, 2003. Holdings, Inc., Calamos and CFS.
Term expires in
2007.
+Weston W. Marsh (53) Trustee Trustee since Partner, Freeborn & Peters (law firm).
December 15, 2003.
Term expires in
2005.
INDEPENDENT TRUSTEES:
Joe F. Hanauer (66) Trustee Trustee since Director, MAF Bancorp (banking); Director,
December 15, 2003. Homestore.com, Inc., (Internet provider of
Term expires in real estate information and products);
2006. Director, Combined Investments, L.P.
(investment management).
John E. Neal (53) Trustee Trustee since Managing Director, Bank One Capital Markets
December 15, 2003. (investment banking) (since 2000);
Term expires in Executive Vice President and Head of Real
2006. Estate Department, Bank One (1998-2000);
Director, the Brickman Group, Ltd.
William R. Rybak (53) Trustee Trustee since Retired Private Investor; Executive Vice
December 15, 2003. President and CFO, Van Kampen Investments,
Term expires in Inc. (investment manager) prior thereto;
2005. Director, Howe Barnes Investments;
Director, PrivateBancorp, Inc.
Stephen B. Timbers (58) Trustee Trustee since Retired. Private Investor; Director,
March 12, 2004. President and Chief Executive Officer, Northern
Term expires in Trust Investments, N.A. (formerly known and
2007. conducting business as Northern Trust
Investments, Inc.) (1998-2004); President,
Northern Trust Global Investments, a division
of Northern Trust Corporation and Executive
Vice President, The Northern Trust
Company; President, Chief Executive Officer
and Director, Zurich KemperInvestments
(a financial services company) (from 1996
to 1998); Trustee, Northern Mutual Fund Complex
(registered investment companies); Director,
USFreightways Corporation.
-------------------------
* John P. Calamos and Nick P. Calamos are trustees who are "interested
persons" of the Fund as defined in the 1940 Act because of their position with
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 for as long
as those underwriters serve as principal underwriters to the Fund. 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.
S-25
TERM OF OFFICE PRINCIPAL OCCUPATION DURING PAST FIVE
NAME AND AGE AT POSITIONS HELD AND LENGTH OF YEARS AND OTHER DIRECTORSHIPS HELD BY
___________ __, 2004 WITH THE FUND SERVICE THE TRUSTEE
------------------------- --------------------- ----------------- -------------------------------------------
FUND OFFICERS:
Nimish Bhatt (40) Treasurer Since March 12, Senior Vice President and Director of
2004. Serves at Operations, Calamos (since 2004); Senior
the discretion of Vice President, Alternative Investments
the Board. and Tax Services, BISYS (financial services
firm) (1996-2004).
Patrick H. Dudasik (48) Vice President Since December Executive Vice President, Chief Financial
15, 2003. Serves and Administrative Officer and Treasurer of
at the discretion Calamos Holdings, Inc., Calamos and CFS
of the Board. (since 2001); Chief Financial Officer,
David Gomez and Associates, Inc. (executive
search firm) (1998-2001).
James S. Hamman, Jr. (34) Secretary Since December Executive Vice President and General
15, 2003. Serves Counsel, Calamos Holdings, Inc., Calamos
at the discretion and CFS (since 1998).
of the Board.
Jeff Lotito (32) Assistant Since December Operations Supervisor, Calamos (since
Treasurer 15, 2003. Serves 2000); Manager-Fund Administration, Van
at the discretion Kampen Investments, Inc. (investment
of the Board. management) (1999-2000)
Supervisor-Corporate Accounting, Stein
Roe and Farnham (investment manager)
(1998-1999).
Ian J. McPheron (32) Assistant Since December Associate Counsel and Director of
Secretary 15, 2003. Serves Compliance of Calamos and CFS (since 2002);
at the discretion Associate, Gardner, Carton & Douglas (law
of the Board. firm) (2002); Vice President, Associate
General Counsel and Assistant Secretary,
Van Kampen Investments, Inc. (2000-2002);
Associate, Wildman, Harrold, Allen & Dixon
(law firm) (1997-2000).
The Fund's Board of Trustees consists of six members. The term of one
class expires each year commencing with the first annual meeting following this
public offering and no term shall continue for more than three years after the
applicable election. The terms of John P. Calamos, Weston W. Marsh and William
Rybak expire at the first annual meeting following this public offering, the
terms of Joe F. Hanauer and John E. Neal expire at the second annual meeting,
and the terms of Nick P. Calamos and Stephen B. Timbers expires 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.
S-26
COMMITTEES OF THE BOARD OF TRUSTEES. The Fund's Board of Trustees
currently has three standing committees:
Executive Committee. Messrs. John Calamos and Nick Calamos 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.
Audit Committee. Messrs. Hanauer, Neal, Rybak and Timbers each a
non-interested Trustee, serve on the Audit Committee. The Audit Committee
approves the selection of the independent auditors to the Trustees, 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.
Governance Committee. Messrs. Hanauer, Neal, Rybak and Timbers, each a
non-interested Trustee, serve on the Governance Committee. The Governance
Committee oversees the independence and effective functioning of the Board of
Trustees and endeavors to be informed about good practices for fund boards. The
members of the Governance Committee make recommendations to the Board of
Trustees regarding candidates for election as non-interested Trustees. The
Governance Committee will not consider shareholder recommendations regarding
candidates for election as Trustees.
In addition to the above committees, there is a Board of Trustee
directed pricing committee comprised of officers of the Fund and employees of
Calamos. The Fund's Agreement and Declaration of Trust provides that the Fund
will indemnify the Trustees and officers against liabilities and expenses
incurred in connection with any claim in which they may be involved because of
their offices with the Fund, unless it is determined in the manner specified in
the Agreement and Declaration of Trust that they have not acted in good faith in
the reasonable belief that their actions were in the best interests of the Fund
or that such indemnification would relieve any officer or Trustee of any
liability to the Fund or its shareholders by reason of willful misfeasance, bad
faith, gross negligence or reckless disregard of his or her duties.
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. The following table sets forth certain information with
respect to the compensation paid to each Trustee 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, 2003.
TOTAL
ESTIMATED COMPENSATION
AGGREGATE FROM
COMPENSATION CALAMOS FUND
NAME OF TRUSTEE FROM FUND COMPLEX(1)*
------------------------------- ------------ ------------
John P. Calamos................ $ 0 $ 0
Nick P. Calamos................ 0 0
Richard J. Dowen(2)............ 0 45,000
Joe F. Hanauer................. 2,583 45,000
Weston W. Marsh................ 2,583 45,000
John E. Neal................... 2,583 45,000
William Rybak.................. 2,583 45,000
Stephen B. Timbers............. 1,937 0
-------------------------
(1) Includes fees that may have been 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
S-27
one or more of the Calamos Funds selected by the trustee. As of
December 31, 2003, the values of Mr. Neal's deferred compensation
accounts was $102,377.
(2) Mr. Dowen resigned effective January 1, 2004.
* The Calamos Fund Complex consists of five investment companies and each
applicable series thereunder including the Fund, Calamos Investment
Trust, Calamos Advisors Trust, Calamos Convertible Opportunities and
Income Fund and Calamos Convertible and High Income Fund.
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 Fund in order to defer payment of
income taxes or for other reasons. The deferred compensation payable to the
participating Trustee is credited to 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, 2003. 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.
AGGREGATE DOLLAR RANTE OF EQUITY
DOLLAR RANGE OF SECURITIES IN ALL REGISTERED
EQUITY SECURITIES INVESTMENT COMPANIES IN THE
NAME OF TRUSTEE IN THE FUND CALAMOS FUND COMPLEX
------------------------------------ ----------------- --------------------------------
INTERESTED TRUSTEES:
John P. Calamos..................... None Over $100,000
Nick P. Calamos..................... None Over $100,000
Weston W. Marsh..................... None None
NON-INTERESTED TRUSTEES:
Joe F. Hanauer...................... None None
John E. Neal........................ None Over $100,000
William Rybak....................... None $50,001-100,000
Stephen B. Timbers.................. None
CODE OF ETHICS. The Fund and Calamos have adopted a code of ethics
under Rule 17j-1 of the 1940 Act which 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 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
S-28
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 202-942-8090. 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, 450 5th Street, N.W.,
Washington, DC 20549-0102 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' 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.
You may obtain a copy of 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, 1111 East Warrenville Road,
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 accrued daily 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 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
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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, 2005. 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.
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 enjoy high quality investment management services at a cost
which they deem appropriate, reasonable and in the best interests of the Fund.
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 and their personnel, operations and financial
condition. The Independent Trustees discussed with representatives of Calamos
the Fund's operations and Calamos' ability to provide advisory and other
services to the Fund. The Independent Trustees also reviewed, among other
things:
- the investment performance of other Calamos funds with similar
investment strategies;
- the proposed fees to be charged by Calamos for investment management
services;
- the Fund's projected total operating expenses;
- the investment performance, fees and total expenses of investment
companies with similar objectives and strategies managed by other
investment advisers; and
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- the experience of the investment advisory and other personnel
providing services to the Fund and the historical quality of the
services provided by Calamos.
The independent trustees considered the following as relevant to their
recommendations: (1) the favorable history, reputation, qualification,
investment process and background of Calamos, as well as the qualifications of
its personnel, resources available and its financial condition; (2) the
magnitude of Calamos' fees and the estimated expense ratio of the Fund in
relation to the nature and quality of services expected to be provided and the
fees and expense ratios of comparable investment companies; (3) the relative
performance of other funds managed by Calamos with similar objectives compared
to the results of other comparable investment companies and unmanaged indices;
and (4) other factors that the Independent Trustees deemed relevant. The
independent trustees deemed each of these factors to be relevant to their
consideration of the Agreement, and concluded that the terms of the Agreement
and the services to be provided were reasonable and appropriate, and that the
Agreement was in the best interests of the Funds.
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.
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") 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.
FUND ACCOUNTANT. 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.
State Street receives a fee at the annual rate of 0.0225% for the first
$3 billion of Combined Assets and 0.0150% for the Combined Assets in excess of
$3 billion.
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.
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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.
The Trustees have determined that portfolio transactions for the Fund
may be executed through Calamos Financial Services, Inc. ("CFS"), an affiliate
of Calamos, if, in the judgment of Calamos, the use of CFS is likely to result
in prices and execution at least as favorable to the Funds as those available
from other qualified brokers and if, in such transactions, CFS charges the Fund
commission rates consistent with those charged by CFS to comparable unaffiliated
customers in similar transactions. The Board of Trustees, including a majority
of the Trustees who are not "interested" trustees, has adopted procedures that
are reasonably designed to provide that any commissions, fees or other
remuneration paid to CFS are consistent with the foregoing standard. The Fund
will not effect principal transactions with CFS.
Consistent with the Rules of Fair Practice of the National Association
of Securities Dealers, Inc. and subject to seeking the most favorable
combination of net price and execution available and such other policies as the
Trustees may determine, Calamos may consider sales of shares of the Fund as a
factor in the selection of broker-dealers to execute portfolio transactions for
that Fund.
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's 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 ("Exchange Act"), Calamos may cause the Fund to
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.
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.
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
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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.
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
S-33
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 Trust 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 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
S-34
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 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.
S-35
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, and the excess of any
net short-term capital gains over net long-term capital losses 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.
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 income" eligible for reduced
rates of federal income taxation in taxable years beginning on or before 2008.
Under the Code, the Fund will 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.
S-36
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 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 (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) 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.
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)(ll) 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
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. 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 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, and the maximum individual tax rate on
long-term capital gains will increase to 20%, 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.
S-37
If the Fund acquires any equity interest (under proposed Treasury
regulations, 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 to a significant extent 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 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 the nondeductible 4% 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
S-38
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 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 shares 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 gain 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.
S-39
Sales and other dispositions of the Preferred Shares are 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 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, 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, will make the appropriate tax elections, 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 in order to mitigate the effect of these rules, prevent
disqualification of the Fund as a regulated investment company and 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 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
S-40
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. The
Fund does not expect to satisfy the requirements for passing through to its
shareholders their prorata shares of qualified foreign taxes paid by the Fund,
with the result that shareholders will not include such taxes in their gross
incomes and will not be entitled to a tax deduction or credit for such taxes on
their own tax returns.
Under Treasury regulations, if a shareholder recognizes a loss with
respect to shares of $2 million or more for an individual shareholder or $10
million or more for a corporate shareholder in any single taxable year (or a
greater loss over a combination of years), the shareholder must file with the
IRS a disclosure statement on Form 8886. Direct shareholders of 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 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
withhold U.S. federal withholding tax at the rate of 30% (or such lower rate as
prescribed by an applicable tax treaty) on amounts treated as ordinary dividends
from the Fund and, unless an effective IRS Form W-8BEN, or other authorized
withholding certificate is on file, to backup withholding on certain other
payments from 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 shares is
also The Bank of New York.
S-41
EXPERTS
The financial statement of the Fund as of March 15, 2004 appearing in
this Statement of Additional Information has been audited by Deloitte & Touche
LLP independent auditors, 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.
S-42
FINANCIAL STATEMENT AND REPORT OF INDEPENDENT AUDITORS
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholders of
Calamos Strategic Total Return Fund:
We have audited the accompanying statement of assets and liabilities of Calamos
Strategic Total Return Fund (the "Fund"), as of March 15, 2004, and the related
statement of operations for the period from December 31, 2003 (date of
organization) through March 15, 2004. These financial statements are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
March 15, 2004, by correspondence with the Fund's custodian. An audit also
includes 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 referred to above present fairly, in
all material respects, the financial position of Calamos Strategic Total Return
Fund as of March 15, 2004 and the results of its operations for the period from
December 31, 2003 (date of organization) through March 15, 2004 in conformity
with accounting principles generally accepted in the United States of America.
DELOITTE & TOUCHE LLP /S/
Chicago, Illinois
March 24, 2004
F-1
CALAMOS STRATEGIC TOTAL RETURN FUND
STATEMENT OF ASSETS AND LIABILITIES
MARCH 15,2004
Assets:
Cash ................................................................................................. $ 200,130
Deferred offering costs .............................................................................. 1,790,132
-----------
Total assets ......................................................................................... 1,990,262
-----------
LIABILITIES:
Accrued offering costs ............................................................................... 1,790,132
Accrued organizational expenses ...................................................................... 96,729
-----------
1,886,861
-----------
Net assets (14,000 shares of beneficial interest issued and outstanding;
unlimited shares authorized) ........................................................... $ 103,401
===========
Net asset value per share ............................................................................ $ 7.386
===========
------------------------------------------------------------------------
STATEMENT OF OPERATIONS
FOR THE PERIOD FROM DECEMBER 31, 2003 (DATE OF ORGANIZATION)
THROUGH MARCH 15, 2004
Investment income .................................................................................... $ --
-----------
Organizational expenses .............................................................................. 96,729
Less: reimbursement from investment advisor .......................................................... --
-----------
Net expenses ......................................................................................... 96,729
-----------
Net investment income ................................................................................ $ (96,729)
-----------
------------------------------------------------------------------------
NOTES
1. ORGANIZATION
Calamos Strategic Total Return Fund (the "Fund") is a diversified,
closed-end management investment company, organized on December 31, 2003 which
has had no operations other than the sale and issuance of 14,000 shares of
beneficial interest at an aggregate purchase price of $200,130 to Calamos Asset
Management, Inc. (the "Investment Adviser" or "Calamos"). The Fund estimates
that it will offer 170,000,000 common shares in its initial offering. The
Investment Adviser has agreed to reimburse the amount by which the aggregate of
all of the Fund's organizational expenses and all offering costs (other than the
sales load) exceeds $0.03 per share. Accordingly, the Fund's share of offering
costs will be recorded as a reduction of the proceeds from the sale of its
Common Shares upon the commencement of the Fund's operations. Estimated offering
costs to be borne by the Fund total $1,790,132. Estimated organizational costs
of $96,729 are accrued and expensed in the accompanying financial statements.
The Fund currently anticipates that it will issue Preferred Shares as soon as
practicable after the closing of the initial offering of common shares. If the
Fund completes an offering of Preferred Shares, the Fund will also pay, and
common shareholders will effectively bear, the offering costs in connection with
such offering and expenses related to the ongoing maintenance of such shares.
2. ACCOUNTING POLICIES
The preparation of the financial statements in accordance with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities at the date of the financial statements and the reported
amounts of income and expenses during the reporting period. Actual results could
differ from these estimates.
3. AGREEMENTS
The Fund has entered into an Investment Advisory Agreement with Calamos,
which provides for payment of a monthly fee computed at the annual rate of 1.00%
of the Fund's average weekly Total Managed Assets. "Total Managed Assets" means
the total assets of the Fund (including any assets attributable to leverage)
minus accrued liabilities (other than liabilities representing leverage). For
purposes of calculating "Total Managed Assets," the liquidation preference of
any preferred shares outstanding is not considered a liability.
The Fund and such other funds advised by Calamos that may be a part of
these arrangements (the Fund and such other funds are collectively referred to
as the "Calamos Funds") have entered into a Fund Accounting Servicing Agreement
with State Street Bank & Trust Co. ("State Street"). The Calamos Funds will pay
State Street a monthly fee based on combined managed assets of the Calamos Funds
("Combined Assets") at the annual rate of 0.0225% for the first $3 billion of
Combined Assets and 0.0150% for the Combined Assets that exceed $3 billion.
The Calamos Funds (including the Fund) have also entered into a Financial
Accounting Servicing Agreement with Calamos. The Calamos Funds will pay Calamos
a monthly fee based on Combined Assets 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 that exceed $2 billion. Each fund of the
Calamos Funds will pay its pro-rata share of the fees payable to State Street
and Calamos based on relative managed assets of each fund.
4. FEDERAL INCOME TAXES
The Fund intends to qualify as a "regulated investment company" and as such
(and by complying with the applicable provisions of the Internal Revenue Code of
1986, as amended) will not be subject to Federal income tax on taxable income
(including realized capital gains) that is distributed to shareholders.
F-2
CALAMOS STRATEGIC TOTAL RETURN FUND
SCHEDULE OF INVESTMENTS APRIL 14, 2004 (UNAUDITED)
PRINCIPAL PRINCIPAL
AMOUNT VALUE AMOUNT VALUE
---------------------------------------------------------------- -------------------------------------------------------------------
Corporate Bonds
(25.5%) CONSUMER CYCLICAL (3.5%)
BASIC INDUSTRIES (3.3%) $ 3,800,000 Central Garden & Pet Company
Boise Cascade Corp. 9.125%, 02/01/13 $ 4,246,500
$ 2,000,000 7.350%, 02/01/16 $ 2,062,524 8,500,000 GBP EMI Group, PLC
2,000,000 7.000%, 11/01/13 2,114,940 9.750%, 05/20/08 16,394,129
15,730,000 Freeport-McMoRan Copper 5,000,000 IMAX Corp. (b)
& Gold, Inc. 9.625%, 12/01/10 5,150,000
10.125%, 02/01/10 17,794,563 Intrawest Corp.
5,000,000 Ipsco, Inc. 4,500,000 7.500%, 10/15/13 4,612,500
8.750%, 06/01/13 5,725,000 1,750,000 10.500%, 02/01/10 1,916,250
8,500,000 Ispat International NV (b) 12,000,000 Mandalay Resort Group
9.750%, 04/01/14 8,861,250 10.250%, 08/01/07 14,040,000
4,000,000 Jarden Corp. 17,000,000 RH Donnelley Financial Corp.
9.750%, 05/01/12 4,520,000 10.875%, 12/15/12 20,400,000
10,000,000 Phelps Dodge Corp. Warner Music Group (b)
9.500%, 06/01/31 14,036,884 2,500,000 GBP 8.125%, 04/15/14 4,510,531
500,000 7.375%, 04/15/14 507,500
2,175,000 Steel Dynamics, Inc. -----------
71,777,410
9.500%, 03/15/09 2,430,563 -----------
Union Carbide Corp. CONSUMER GROWTH STAPLES (4.1%)
6,650,000 7.500%, 06/01/25 6,151,250 5,000,000 Alpharma, Inc. (b)
1,600,000 7.875%, 04/01/23 1,528,000 8.625%, 05/01/11 5,237,500
------------ 5,000,000 Ameripath, Inc.
65,224,974
------------ 10.500%, 04/01/13 5,050,000
CAPITAL GOODS - INDUSTRIAL (1.8%)
5,000,000 Asbury Automotive Group, Inc. (b) 1,605,000 Bausch & Lomb, Inc.
8.000%, 03/15/14 4,975,000 7.125%, 08/01/28 1,641,905
8,500,000 CNH Global, NV (b) Charter Communications, Inc.
9.250%, 08/01/11 9,583,750 11,050,000 9.625%, 11/15/09 9,558,250
8,500,000 Imco Recycling, Inc. 10,000,000 11.125%, 01/15/11 8,950,000
10.375%, 10/15/10 9,180,000 3,000,000 10.000%, 04/01/09 2,640,000
5,000,000 Jacuzzi Brands, Inc. 10,000,000 WH Intermediate Holdings, Ltd.
9.625%, 07/01/10 5,600,000 11.750%, 07/15/10 11,600,000
5,000,000 Manitowoc Company, Inc. 5,000,000 Quintiles Transisional Corp. (b)
10.500%, 08/01/12 5,700,000 10.000%, 10/01/13 5,175,000
------------ Rite Aid Corp.
35,038,750
------------ 5,250,000 11.250%, 07/01/08 5,853,750
CAPITAL GOODS - TECHNOLOGY (2.6%)
8,500,000 Avnet, Inc. 4,000,000 6.875%, 08/15/13 3,820,000
9.750%, 02/15/08 9,902,500 4,000,000 Service Corp. (b)
5,000,000 Monitronics International, Inc. (b) 6.750%, 04/01/16 4,070,000
11.750%, 09/01/10 5,300,000 8,500,000 Spanish Broadcasting System, Inc.
2,000,000 Orbital Sciences Corp. 9.625%, 11/01/09 9,010,000
9.000%, 07/15/11 2,210,000 9,000,000 Steinway Musical Instruments, Inc.
8.750%, 04/15/11 9,765,000
3,000,000 Rayovac Corp. -----------
82,371,405
8.500%, 10/01/13 3,225,000 -----------
12,000,000 Sanmina-Sci Corp. CREDIT CYCLICALS (1.4%)
10.375%, 01/15/10 14,250,000 9,000,000 Hovnanian Enterprises, Inc.
1,000,000 Stoneridge, Inc. 7.750%, 05/15/13 9,562,500
11.500%, 05/01/12 1,195,000 3,500,000 Meritage Group
7.000%, 05/01/14 3,438,260
5,000,000 Stratus Technologies, Inc. (b) Standard Pacific Corp.
5,000,000 9.250%, 04/15/12 5,575,000
10.375%, 12/01/08 5,050,000 2,790,000 9.500%, 09/15/10 3,110,850
10,000,000 Xerox Corp. 5,000,000 Texas Industries, Inc.
7.625%, 06/15/13 10,575,000 10.250%, 06/15/11 5,700,000
------------ -----------
51,707,500 27,386,610
------------ -----------
ENERGY (2.5%)
5,000,000 KCS Energy, Inc. (b)
7.125%, 04/01/12 5,025,000
10,000,000 Paramount Resources, Ltd.
7.875%, 11/01/10 10,025,000
CALAMOS STRATEGIC TOTAL RETURN FUND
SCHEDULE OF INVESTMENTS APRIL 14, 2004 (UNAUDITED)
PRINCIPAL PRINCIPAL
AMOUNT VALUE AMOUNT VALUE
--------------------------------------------------------------- -----------------------------------------------------------------
Petroleo Brasileiro S.A. - Petrobras CAPITAL GOODS - TECHNOLOGY (3.9%)
$ 6,000,000 9.125%, 07/02/13 $ 6,345,000 $ 33,000,000 Advanced Micro Devices, Inc.
3,000,000 8.375%, 12/10/18 3,000,000 4.750%, 02/01/22 $ 35,681,250
6,325,000 Swift Energy Company 16,000,000 Fairchild Semiconductor
9.375%, 05/01/12 7,068,188 International, Inc.
5,000,000 Tesoro Petroleum Corp. 5.000%, 11/01/08 17,560,000
9.625%, 04/01/12 5,687,500 22,000,000 LSI Logic Corp.
1,100,000 Western Gas Resources, Inc. 4.000%, 05/15/10 25,135,000
------------
10.000%, 06/15/09 1,166,000 78,376,250
------------
10,000,000 Williams Companies, Inc. ENERGY (0.9%)
8.125%, 03/15/12 11,000,000 15,000,000 Repsol Ypf SA
-----------
49,316,688 4.500%, 01/26/11 17,006,250
----------- ------------
FINANCIAL (2.5%) 17,006,250
------------
Dow Jones TRAC-X North America High FINANCIAL (0.4%)
Yield Series 2 March 2009 Trust 3 (b) 8,700,000 Host Marriott Corp.
20,000,000 10.125%, 03/25/09 20,000,000 3.250%, 03/15/24 8,493,375
------------
20,000,000 8.000%, 03/25/09 19,950,000 8,493,375
------------
8,500,000 Senior Housing Properties Trust TELECOMMUNICATIONS (0.4%)
8.625%, 01/15/12 9,562,500 7,700,000 Nextel Communications, Inc.
-----------
49,512,500 6.000%, 06/01/11 8,585,500
----------- ------------
TELECOMMUNICATIONS (1.7%) 8,585,500
------------
17,000,000 AT&T Corp.
8.500%, 11/15/31 19,319,667 TOTAL CONVERTIBLE BONDS
8,500,000 General Cable Corp. (b) (Cost $153,284,626) 152,083,025
9.500%, 11/15/10 9,328,750
5,000,000 Nextel Communications, Inc. NUMBER OF
7.375%, 08/01/15 5,337,500 SHARES VALUE
----------- ----------------------------------------------------------------
33,985,917 PREFERRED STOCKS (7.1%)
-----------
UTILITIES (2.1%) CAPITAL GOODS - INDUSTRIAL (0.7%)
Calpine Corp. 80,000 Cummins, Inc.
25,600,000 8.500%, 05/01/08 18,880,000 7.000%, 06/15/31 5,950,000
19,500,000 8.500%, 02/15/11 14,332,500 160,000 Ford Motor Company Capital Trust II
4,865,000 7.750%, 04/15/09 3,575,775 6.500%, 01/15/32 8,336,000
-----------
5,000,000 Edison International 14,286,000
-----------
9.875%, 04/15/11 5,250,000 CAPITAL GOODS - TECHNOLOGY (1.7%)
-----------
42,038,275 255,000 Xerox Corp.
-----------
6.250%, 07/01/06 33,435,600
-----------
TOTAL CORPORATE BONDS 33,435,600
-----------
(Cost $511,555,579) 508,360,029 CONSUMER GROWTH STAPLES (1.7%)
===========
635,000 Baxter International, Inc.
CONVERTIBLE BONDS (7.6%) 3.500%, 02/16/06 33,997,900
-----------
BASIC INDUSTRIES (0.8%) 33,997,900
-----------
10,700,000 Freeport-McMoRan Copper & Gold, Inc. ENERGY (0.9%)
7.000%, 02/11/11 16,103,500 140,000 Amerada Hess Corp.
-----------
16,103,500 3.500%, 12/01/06 8,736,000
-----------
CAPITAL GOODS - INDUSTRIAL (1.2%) 150,000 Southern Union Company
280,000 General Motors Corp. 2.875%, 08/16/06 9,041,250
-----------
6.250%, 07/15/33 8,324,400 17,777,250
-----------
13,000,000 Kaydon Corp. FINANCIAL (1.3%)
4.000%, 05/23/23 15,193,750 300,000 Chubb Corp.
-----------
23,518,150 1.750%, 08/16/06 8,634,000
-----------
CALAMOS STRATEGIC TOTAL RETURN FUND
SCHEDULE OF INVESTMENTS APRIL 14, 2004 (UNAUDITED)
NUMBER OF NUMBER OF
SHARES VALUE SHARES VALUE
---------------------------------------------------------------- -----------------------------------------------------------------
220,000 National Australia Bank, Ltd. CONSUMER STAPLES (2.0%)
7.875%, 12/31/49 $ 8,360,000 1,600,000 GBP Enterprise Inns, PLC $ 18,292,215
35,000 State Street Corp. 650,000 Sara Lee Corp. 14,371,500
13.500%, 02/15/06 8,312,500 210,000 Supervalu, Inc. 6,199,200
----------- --------------
25,306,500 38,862,915
----------- --------------
TELECOMMUNICATIONS (0.4%) CREDIT CYCLICALS (2.5%)
170,000 ALLTEL Corp. 130,000 Independence Community Bank Corp. 4,867,200
3.875%, 05/17/05 8,627,500 484,100 New York Community Bancorp, Inc. 13,821,055
-----------
8,627,500 800,000 Washington Mutual, Inc. 31,600,000
----------- --------------
UTILITIES (0.4%) 50,288,255
--------------
200,000 Calpine Capital Trust III ENERGY (3.7%)
5.000%, 08/01/30 8,950,000 400,000 Chevrontexaco Corp. 36,400,000
-----------
8,950,000 250,000 Conocophillips 18,015,000
-----------
29,000 EUR OMV, AG 5,560,166
TOTAL PREFERRED STOCKS 270,000 PetroChina Company, Ltd. 13,154,400
--------------
(Cost $144,313,840) 142,380,750 73,129,566
=========== --------------
FINANCIAL (8.8%)
COMMON STOCKS (50.5%) 295,900 Allstate Corp. 13,919,136
BASIC INDUSTRIES (0.9%) 335,000 Bank Of America Corp. 26,830,150
210,000 3M Company 17,358,600 665,000 Citigroup, Inc. 33,881,750
-----------
17,358,600 230,000 Federal National Mortgage
----------- Association 16,744,000
CAPITAL GOODS - INDUSTRIAL (4.9%) 150,000 Fidelity National Corp. 5,427,000
215,000 Caterpillar, Inc. 17,421,450 549,700 General Growth Properties, Inc. 15,034,295
1,275,000 Ford Motor Company 16,881,000 120,000 Jefferson-Pilot Corp. 6,529,200
560,000 General Electric Company 17,068,800 307,600 Mills Corp. 13,002,252
365,000 General Motors Corp. 16,775,400 300,000 Morgan Stanley 16,005,000
920,000 Waste Management, Inc. 27,572,400 81,900 UnionBanCal Corp. 4,054,869
-----------
95,719,050 585,000 Wachovia Corp. 26,120,250
----------- --------------
CAPITAL GOODS - TECHNOLOGY (4.3%) 177,547,902
--------------
280,000 Emerson Electric Company 17,063,200 TELECOMMUNICATIONS (7.0%)
945,000 Intel Corp. 25,893,000 1,265,000 Bellsouth Corp. 33,180,950
280,000 International Business Machines Corp. 26,236,000 420,000 QUALCOMM, Inc. 28,282,800
495,000 Rockwell Automation, Inc. 16,830,000 2,100,000 SBC Communications, Inc. 50,736,000
-----------
86,022,200 710,000 Verizon Communications, Inc. 26,326,800
----------- --------------
CONSUMER CYCLICAL (5.4%) 138,526,550
--------------
980,000 Saks, Inc. (a) 16,689,400
300,000 Eaton Corp. 17,562,000 TOTAL COMMON STOCK
280,000 Kimberly-Clark Corp. 17,936,800 Cost ($1,019,132,372) 1,003,397,061
==============
500,000 May Department Stores Company 16,625,000
335,000 Maytag Corp. 10,160,550 PRINCIPAL
165,000 Procter & Gamble Company 17,458,650 AMOUNT VALUE
-----------------------------------------------------------------
240,000 Sears Roebuck & Co. 10,125,600 SHORT TERM INVESTMENTS (12.6%)
-----------
106,558,000 $151,381,000 Exxon Mobil Corporation
-----------
CONSUMER GROWTH STAPLES (11.0%) 0.800%, 04/15/04 151,381,000
2,000,000 AUD APN News & Media, Ltd. 5,609,416 100,000,000 UBS Finance, Inc.
2,835,000 Bristol-Myers Squibb Company 69,457,500 0.800%, 04/15/04 100,000,000
--------------
440,000 Gillette Company 17,054,400 TOTAL SHORT TERM
35,000 CHF Givaudan, SA 17,831,307 INVESTMENTS
540,000 Johnson & Johnson 28,404,000 (Cost $251,381,000) 251,381,000
==============
1,200,000 Merck & Company, Inc. 54,528,000
740,000 Pfizer, Inc. 26,499,400 TOTAL INVESTMENTS (103.3%)
-----------
219,384,023 (Cost $2,079,667,417) 2,057,601,865
----------- ==============
LIABILITIES, LESS OTHER (66,131,660)
--------------
ASSETS (-3.3%)
NET ASSETS (100.0%) $1,991,470,205
==============
NOTES TO SCHEDULE OF INVESTMENTS
(a) Non-Income producing security.
(b) 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
Portfolio. 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 April 14,
2004 the market value of 144A securities that can not currently be
exchanged to the registered form is $121,217,656 or 6.1% of net assets of
the Portfolio.
FOREIGN CURRENCY ABBREVIATIONS
AUD: Australian Dollar
CHF: Swiss Franc
EUR: European Monentary Unit
GBP: British Pound Sterling
Note: Market values for securities denominated in Foreign currencies are shown
in U.S. dollars.
CALAMOS STRATEGIC TOTAL RETURN FUND
STATEMENT OF ASSET AND LIABILITIES
APRIL 14, 2004 (UNAUDITED)
ASSETS
Investments, at value (Cost: $2,079,667,417) ...................................................... $ 2,057,601,865
Cash with custodian (interest bearing) ............................................................ 15,369
Accrued and purchased interest and dividends receivable ........................................... 16,235,385
---------------
Total Assets ................................................................................. 2,073,852,619
---------------
LIABILITIES AND NET ASSETS
Payable for investments purchased ................................................................. 79,712,939
Payable for offering and organizational fees ...................................................... 1,826,175
Payable to investment advisor ..................................................................... 769,582
Accrued expense and other liabilities ............................................................. 73,718
---------------
Total Liabilities ............................................................................ 82,382,414
---------------
NET ASSETS ........................................................................................ $ 1,991,470,205
===============
ANALYSIS OF NET ASSETS
Common stock, no par value, unlimited shares
authorized, 140,514,000 shares issued and outstanding .......................................... 2,011,132,859
Undistributed net investment income ............................................................... 2,555,152
Accumulated net realized gain (loss) on investments and
foreign currency transactions .................................................................. (110,331)
Unrealized appreciation (depreciation) of investments and
foreign currency transactions .................................................................. (22,107,475)
---------------
NET ASSETS ........................................................................................ $ 1,991,470,205
===============
Net asset value per share of common stock:
($1,991,470,205/140,514,000 shares of common
stock issued and outstanding) .................................................................. $ 14.17
===============
See accompanying Notes to Financial Statements.
CALAMOS STRATEGIC TOTAL RETURN FUND
STATEMENT OF OPERATIONS
FOR THE PERIOD ENDED APRIL 14, 2004 * (UNAUDITED)
INVESTMENT INCOME
Interest ................................................................................................. $ 1,384,257
Dividends ................................................................................................ 2,220,813
------------
Total Investment Income .................................................................... 3,605,070
------------
EXPENSES
Investment advisory fees ................................................................................. 879,471
Fund accounting fees ..................................................................................... 19,792
Shareholder reports ...................................................................................... 10,416
Administration fees ...................................................................................... 10,116
Custodian fees ........................................................................................... 6,480
Audit and legal fees ..................................................................................... 4,736
Registration fees ........................................................................................ 4,544
Transfer agent fees ...................................................................................... 1,312
Trustees' fees ........................................................................................... 880
Other .................................................................................................... 15,442
------------
Total Expenses ............................................................................. 953,189
------------
NET INVESTMENT INCOME .................................................................................... 2,651,881
------------
UNREALIZED GAIN (LOSS)
Net realized gain (loss) on investments and foreign currency transactions ................................ (110,331)
Change in net unrealized appreciation/depreciation
on investments and forward foreign currency transactions ............................................ (22,107,475)
------------
NET GAIN (LOSS) ON INVESTMENTS ........................................................................... (22,217,806)
------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS ........................................................................... $(19,565,925)
============
* March 26, 2004 (commencement of operations)
See accompanying Notes to Financial Statements.
CALAMOS STRATEGIC TOTAL RETURN FUND
STATEMENT OF CHANGES IN NET ASSETS (UNAUDITED)
FOR THE
PERIOD ENDED
APRIL 14, 2004 *
(UNAUDITED)
----------------
CHANGE IN NET ASSETS:
Net investment income .............................................................................. $ 2,651,881
Net realized gain (loss) on investments and foreign currency transactions .......................... (110,331)
Change in net unrealized appreciation/depreciation
on investments and forward foreign currency contract ............................................ (22,107,475)
---------------
Net Increase (Decrease) in net assets resulting from operations .................................... (19,565,925)
---------------
CAPITAL TRANSACTIONS
Proceeds from initial offering ..................................................................... 2,012,662,500
Offering costs ..................................................................................... (1,729,771)
---------------
TOTAL INCREASE (DECREASE) IN NET ASSETS ............................................................. 1,991,366,804
---------------
NET ASSETS
Beginning of period ................................................................................ 103,401
End of period ...................................................................................... $ 1,991,470,205
===============
Undistributed net investment income ................................................................ $ 2,555,152
===============
* March 26, 2004 (commencement of operations)
See accompanying Notes to Financial Statements.
CALAMOS STRATEGIC TOTAL RETURN FUND
FINANCIAL HIGHLIGHTS
Selected data for a common share outstanding throughout the period was as
follows:
FOR THE PERIOD
ENDED APRIL 14,
2004 *
(UNAUDITED)
-----------------
Net asset value, beginning of period ..................................................... $ 14.32 (a)
----------------
Offering costs ........................................................................... (0.01)
Income from investment operations:
Net investment income (b) ............................................................. 0.02
Net realized and unrealized gain (loss) on investments
and foreign currency transactions ................................................ (0.16)
----------------
Total from investment operations ......................................................... (0.14)
----------------
Net asset value, end of period ........................................................... $ 14.17
================
Market value, end of period .............................................................. $ 15.00
TOTAL INVESTMENT RETURN BASED ON(C):
Net Asset Value ..................................................................... (1.05)%
Market Value ........................................................................ 0.00%
RATIO TO AVERAGE NET ASSETS APPLICABLE TO COMMON
SHAREHOLDERS/SUPPLEMENTARY DATA:
Net assets applicable to common shareholders, end of period (000's omitted) .............. $ 1,991,470
Ratio of expenses to average net assets (d) .............................................. 1.08%
Ratio of net investment income to average net assets (d) ................................. 3.01%
Portfolio turnover rate (d) .............................................................. 0.00%
(a) Net of sales load and organizational fees of $0.68 per share.
(b) Based on average shares outstanding.
(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.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION - CALAMOS Strategic Total Return Fund (the "Fund"), was organized
as a Delaware Statutory Trust on December 30, 2003 and is registered under the
Investment Company Act of 1940 as a diversified, closed-end management
investment company. The Fund commenced operations on March 26, 2004.
The Fund's investment objective is to provide total return, through a
combination of capital appreciation and current income.
PORTFOLIO VALUATION - In computing the net asset value of the Fund, securities,
including options, that are traded on a national securities exchange are valued
at the last reported sales price. 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, the last current reported sale price
as of the time of valuation. Securities traded in the over-the-counter market
and listed securities for which no sales were reported are valued at the mean of
the most recently quoted bid and asked prices. Short-term obligations 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 valued at a fair value following procedures approved by the Board of
Trustees or a committee thereof. These procedures may utilize valuations
furnished by pricing services approved by the Board of Trustees or a committee
thereof, 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.
Securities that are principally traded in a foreign market are valued 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.
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 October
31st and April 30th, which are recorded on trade date. Realized gains and
losses from investment transactions are recorded 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 -- Values of investments denominated in foreign
currencies are converted into U.S. dollars using the spot market rate of
exchange at the time of valuation. Purchases and sales of investments and
dividend and interest income are translated into U.S. dollars using the spot
market rate of exchange prevailing on the respective dates of such transaction.
Realized foreign exchange losses of $110,331, and unrealized foreign exchange
losses of $41,923 are included as a component of net realized gain/loss on
investments, options, and forward foreign currency contracts and change in net
unrealized appreciation/depreciation on investments, options, and forward
foreign currency contracts, respectively.
FEDERAL INCOME TAXES -- No provision has been made for Federal income taxes
since the Portfolio is taxed as a "regulated investment company" under
Subchapter M of the Internal Revenue Code of 1986.
NOTES TO FINANCIAL STATEMENTS
DIVIDENDS -- Dividends payable to shareholders are recorded on the ex-dividend
date. Income and capital gain dividends are determined in accordance with income
tax regulations, which may differ from accounting principles generally accepted
in the United States. These differences are primarily due to differing
treatments for foreign currency transactions and contingent payment debt
instruments.
USE OF ESTIMATES -- The preparation of financial statements in conformity with
accounting principles generally accepted in the United States 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.
NOTE 2 -- INVESTMENT ADVISOR AND TRANSACTIONS WITH AFFILIATES
The Fund has entered into an Investment Advisory Agreement with Calamos, which
provides for payment of a monthly fee computed at the annual rate of 1.00% of
the Fund's average weekly Total Managed Assets. "Total Managed Assets" means
the total assets of the Fund (including any assets attributable to leverage)
minus accrued liabilities (other than liabilities representing leverage).
For purposes of calculating "Total Managed Assets," the liquidation preference
of any preferred shares outstanding is not considered a liability.
The Fund and such other funds advised by Calamos that may be a part of these
arrangements (the Fund and such other funds are collectively referred to as the
"Calamos Funds") has entered into a Fund Accounting Servicing Agreement with
State Street Bank & Trust Co. ("State Street"). The Calamos Funds will pay
State Street a monthly fee based on combined managed assets of the Calamos
Funds ("Combined Assets") at the annual rate of 0.0225% for the first $3
billion of Combined Assets and 0.0150% for the Combined Assets that exceed $3
billion.
The Calamos Funds (including the Fund) have also entered into a Financial
Accounting Servicing Agreement with Calamos. The Calamos Funds will pay
Calamos a monthly fee based on Combined Assets 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 that exceed $2 billion. Each
fund of the Calamos Funds will pay its pro-rate share of the fees payable to
State Street and Calamos based on relative managed assets of each fund.
Certain portfolio transactions for the Portfolio can be executed through CALAMOS
FINANCIAL SERVICES, INC. ("CFS") as broker, consistent with the Portfolio's
policy of obtaining best price and execution. During the period ended April 14,
2004, the Portfolio paid no brokerage commissions to CFS on purchases and sales
of portfolio securities.
Certain officers and trustees of the Trust are also officers and directors of
CFS and CAM. All officers and affiliated trustees serve without direct
compensation from the Trust.
The Fund has adopted a deferred compensation plan (the "Plan"). Under the Plan,
a Trustee who is not an "interested person" of CAM and has elected to
participate in the Plan (a "participating trustee") may defer receipt of all or
a portion of his compensation from the Portfolio. 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 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.
NOTE 3 -- INVESTMENTS
Purchases and sales of investments other than short-term obligations for the
period ended April 14, 2004 were as follows:
Purchases $ 1,828,281,209
Proceeds from sales -
The following information is presented on an income tax basis as of April 14,
2004. Differences between amounts for financial statements and Federal income
tax purposes are due to timing differences. The cost basis of investments for
Federal income tax purposes at April 14, 2004 was as follows:
Cost basis of investments $2,079,667,417
Gross unrealized appreciation 11,407,470
Gross unrealized depreciation (33,514,945)
Net unrealized appreciation (22,107,475)
NOTES TO FINANCIAL STATEMENTS
NOTE 4 -- FORWARD FOREIGN CURRENCY CONTRACTS
The Fund may engage in portfolio hedging with respect to change in currency
exchange rates by entering into 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 movement in the value of the foreign
currency relative to the U.S. dollar and the ability to 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 April 14, 2004.
NOTE 5 -- INTEREST BEARING CASH DEPOSIT WITH CUSTODIANS
The Fund earns interest on its average daily balance deposited with it
custodian. During the period ended April 14, 2004, the fund earned $2.19.
NOTE 6 -- CAPITAL
Of the 140,514,000 shares of the common stock outstanding, as April 14, 2004 CAM
owned 14,000 shares of the Fund.
NOTE 7 -- SECURITIES LENDING
The Fund may lend 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 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 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 generally
would call the loan in an attempt to permit voting of the securities. 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, the investment manager
will monitor the creditworthiness of the firms to which the Fund lends
securities. For the period ended April 14, 2004, the Fund did not loan any of
its securities to broker-dealers and banks.
APPENDIX A
CALAMOS STRATEGIC TOTAL RETURN FUND
STATEMENT OF PREFERENCES OF
AUCTION RATE CUMULATIVE PREFERRED SHARES ("PREFERRED SHARES")
DESIGNATION......................................................................................................1
PART I: TERMS OF PREFERRED SHARES...............................................................................2
1. Number of Shares; Ranking...............................................................................2
2. Dividends...............................................................................................3
3. Redemption..............................................................................................6
4. Designation of Dividend Period..........................................................................9
5. Restrictions on Transfer...............................................................................10
6. Voting Rights..........................................................................................10
7. Liquidation Rights.....................................................................................15
8. Auction Agent..........................................................................................16
9. 1940 Act Preferred Shares Asset Coverage...............................................................16
10. Preferred Shares Basic Maintenance Amount..............................................................16
11. Certain Other Restrictions.............................................................................16
12. Compliance Procedures for Asset Maintenance Tests......................................................17
13. Notices................................................................................................18
14. Waiver.................................................................................................18
15. Termination............................................................................................19
16. Amendment..............................................................................................19
17. Definitions............................................................................................19
18. Interpretation.........................................................................................44
PART II: AUCTION PROCEDURES....................................................................................45
1. Certain Definitions....................................................................................45
2. Orders.................................................................................................46
3. Submission of Orders by Broker-Dealers to Auction Agent................................................47
4. Determination of Sufficient Clearing Bids, Winning Bid Rate and Applicable Rate........................49
5. Acceptance and Rejection of Submitted Bids and Submitted Sell Orders and Allocation....................51
6. Transfer of Preferred Shares...........................................................................53
i
Calamos Strategic 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, 43,200 shares of the preferred shares (no par
value) and has further classified 7,040 of such shares as "Series M Preferred
Shares", liquidation preference $25,000 per share, 7,040 of such shares as
"Series TU Preferred Shares", liquidation preference $25,000 per share, 7,040 of
such shares as "Series W Preferred Shares", liquidation preference $25,000 per
share, 7,040 of such shares as "Series TH Preferred Shares", liquidation
preference $25,000 per share, 7,040 of such shares as "Series F Preferred
Shares", liquidation preference $25,000 per share, 4,000 of such shares as
"Series A Preferred Shares", liquidation preference $25,000 per share, and 4,000
of such shares as "Series B Preferred Shares", liquidation preference $25,000
per share (together with any additional series of Preferred Shares which may be
designated by the Board of Trustees, 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 M Preferred Shares: a Series of 7,040 Preferred Shares, no par
value, liquidation preference $25,000 per share, is hereby designated "Series M
Preferred Shares" ("Series M Preferred Shares"). Each share of Series M
Preferred Shares shall have an initial dividend rate per annum equal to ____%
and an initial Dividend Payment Date of ______ __, 2004 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 M Preferred Shares shall constitute a separate Series of
Preferred Shares of the Trust.
Series TU Preferred Shares: a Series of 7,040 Preferred Shares, no par
value, liquidation preference $25,000 per share, is hereby designated "Series TU
Preferred Shares" ("Series TU Preferred Shares"). Each share of Series TU
Preferred Shares shall have an initial dividend rate per annum equal to ____%
and an initial Dividend Payment Date of ______ __, 2004 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 TU Preferred Shares shall constitute a separate Series of
Preferred Shares of the Trust.
Series W Preferred Shares: a Series of 7,040 Preferred Shares, no par
value, liquidation preference $25,000 per share, is hereby designated "Series W
Preferred Shares" ("Series W Preferred Shares"). Each share of Series W
Preferred Shares shall have an initial dividend rate per annum equal to ____%
and an initial Dividend Payment Date of ______ __, 2004 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 W Preferred Shares shall constitute a separate Series of
Preferred Shares of the Trust.
Series TH Preferred Shares: a Series of 7,040 Preferred Shares, no par
value, liquidation preference $25,000 per share, is hereby designated "Series TH
Preferred Shares" ("Series TH Preferred Shares"). Each share of Series TH
Preferred Shares shall have an initial dividend rate per annum equal to ____%
and an initial Dividend Payment Date of ______ __, 2004 and have such other
preferences, rights,
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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 TH
Preferred Shares shall constitute a separate Series of Preferred Shares of the
Trust.
Series F Preferred Shares: a Series of 7,040 Preferred Shares, no par
value, liquidation preference $25,000 per share, is hereby designated "Series F
Preferred Shares" ("Series F Preferred Shares"). Each share of Series F
Preferred Shares shall have an initial dividend rate per annum equal to ____%
and an initial Dividend Payment Date of ______ __, 2004 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 F Preferred Shares shall constitute a separate Series of
Preferred Shares of the Trust.
Series A Preferred Shares: a Series of 4,000 Preferred Shares, no par
value, liquidation preference $25,000 per share, is hereby designated "Series A
Preferred Shares" ("Series A Preferred Shares"). Each share of Series A
Preferred Shares shall have an initial dividend rate per annum equal to ____%
and an initial Dividend Payment Date of ______ __, 2004 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 A Preferred Shares shall constitute a separate Series of
Preferred Shares of the Trust.
Series B Preferred Shares: a Series of 4,000 Preferred Shares, no par
value, liquidation preference $25,000 per share, is hereby designated "Series B
Preferred Shares" ("Series B Preferred Shares"). Each share of Series B
Preferred Shares shall have an initial dividend rate per annum equal to ____%
and an initial Dividend Payment Date of ______ __, 2004 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 B 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 M Preferred Shares is 7,040 shares, Series TU Preferred Shares is 7,040
shares, Series W Preferred Shares is 7,040 shares, Series TH Preferred Shares is
7,040 shares, Series F Preferred Shares is 7,040 shares, Series A Preferred
Shares is 4,000 shares and Series B Preferred Shares is 4,000 shares. No
fractional shares of any Series shall be issued.
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(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 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
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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.
(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
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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 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
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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.
(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
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
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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
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
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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 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
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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 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
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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
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.
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(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 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
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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 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
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(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 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 amend, alter or repeal any or all of the
definitions contained herein, add 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 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.
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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.
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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.
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
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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.
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
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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);
(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 and
(G) weekly if S&P Eligible Assets have an aggregate Discounted Value less than
1.30 times 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
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"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 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
A-18
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.
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.
A-19
"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 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.
A-20
"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.
"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.
A-21
(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.
TERM TO MATURITY OF CORPORATE
DEBT SECURITY UNRATED(1) NOT
RATED
OR
BELOW
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-22
NOT
RATED
PREFERRED SECURITY(1) OR
BELOW
AAA AA A BBB BB BB
Taxable Preferred............. 130.58% 133.19% 135.91% 138.73% 153.23% 161.08%
Dividend-Received Deduction 163.40% 163.40% 163.40% 163.40% 201.21% 201.21%
(DRD) Preferred............
--------------------------
(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-23
"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-24
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.
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
A-25
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.
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:
SECURITY MAXIMUM MAXIMUM MINIMUM
RATED SINGLE SINGLE ISSUE SIZE
AT LEAST ISSUER(1) INDUSTRY(1)(2) ($ IN
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 41 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-26
(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 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
A-27
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.
"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 Asset Management, Inc.
"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
A-28
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.
"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 as follows:
The values of the securities in the Trust 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 or Nasdaq National Market are
valued at the last quoted sale priced on the day the valuation is made. 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 the Trust 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 Trust'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.
"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.
A-29
"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 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
A-30
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 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 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)
(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.
A-31
"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%
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%
A-32
DISCOUNT
FACTOR FOR
TYPE OF S&P ELIGIBLE ASSET AAA RATING
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 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.
A-33
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;
(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
A-34
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.
(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
A-35
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 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.
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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.
(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.
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(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;
(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
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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 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
A-39
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 (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.
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(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
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;
A-41
(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
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);
A-42
(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 M, T, W, TH, and F Preferred Shares and twenty-eight days in the
case of Series A and B Preferred Shares unless such seventh day or twenty-eighth
day is not a Business Day, then the number of days ending on the Business Day
next Business Day following such seventh day or twenty-eighth 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.
"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.
A-43
"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.
A-44
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.
A-45
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-46
(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-47
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-48
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-49
(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-50
(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-51
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-52
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-53
IN WITNESS WHEREOF, CALAMOS STRATEGIC 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 _________, 2004.
CALAMOS STRATEGIC TOTAL RETURN FUND
By:________________________________
Name: James S. Hamman, Jr.
Title: Secretary
WITNESS:
By:__________________________________
Name: Ian J. McPheron
Title: Assistant Secretary
APPENDIX B -- DESCRIPTION OF RATINGS(1)
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 than is the case for Prime-2 securities. 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.
------------------------
(1) 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 cash flow and/or market
value 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.
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