nv2za
As
filed with the Securities and Exchange Commission on
February 22, 2008
1933
Act File No. 333-146943
1940 Act File No. 811-21484
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form N-2
(Check appropriate box or boxes)
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o REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 |
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Pre-Effective Amendment No. 2
o Post-Effective Amendment No. ___
and
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o REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 |
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Amendment No. 9
CALAMOS STRATEGIC TOTAL RETURN FUND
2020 Calamos Court
Naperville, Illinois 60563
(630) 245-7200
Agent for Service
John P. Calamos, Sr.
President
Calamos Advisors LLC
2020 Calamos Court
Naperville, Illinois 60563
Copies of Communications to:
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David A. Sturms, Esq.
Vedder Price P.C.
222 N. LaSalle Street
Chicago, IL 60601 |
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Cameron S. Avery, Esq.
Bell, Boyd & Lloyd LLP
70 West Madison Street
Chicago, IL 60602 |
Approximate Date of Proposed Public Offering: From time to time after the effective date of the
Registration Statement.
If any of the securities being registered on this form are offered on a delayed or continuous basis
in reliance on Rule 415 under the Securities Act of 1933, other than securities offered in
connection with a dividend reinvestment plan, check the following
box. þ
It is proposed that this filing will become effective (check appropriate box)
o when declared effective pursuant to section 8(c)
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Proposed Maximum |
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Title of Securities |
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Amount |
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Aggregate |
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Amount of |
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Being Registered |
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Registered(1) |
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Offering Price(2) |
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Registration Fee(3) |
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Common shares, no
par value per
share; preferred
shares, no par
value per share;
debt securities |
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350,000,000 |
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10,745 |
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There are being registered hereunder a presently indeterminate number of shares of common
stock, shares of preferred stock and debt securities to be offered on an immediate, continuous
or delayed basis. |
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(2) |
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Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(o)
under the Securities Act of 1933. In no event will the aggregate initial offering price of
all securities offered from time to time pursuant to the prospectus included as a part of this
Registration Statement exceed $350,000,000. |
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(3) |
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Transmitted prior to filing. |
The Registrant hereby amends this Registration Statement on such date or dates as may be
necessary to delay its effective date until the Registrant shall file a further amendment which
specifically states that this Registration Statement shall thereafter become effective in
accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement
shall become effective on such dates as the Commission, acting pursuant to said Section 8(a), may
determine.
The information in this prospectus is not complete and may be changed. We may not sell these
securities until the registration statement filed with the Securities and Exchange Commission is
effective. This prospectus is not an offer to sell these securities and is not soliciting an offer
to buy these securities in any state where the offer or sale is not permitted.
SUBJECT
TO COMPLETION, DATED FEBRUARY 22, 2008
Base Prospectus
$350,000,000
Calamos Strategic Total Return Fund
Common Shares
Preferred Shares
Debt Securities
Calamos Strategic Total Return Fund (the Fund, we or our) is a diversified, closed-end
management investment company which commenced investment operations in March 2004. Our investment
objective is to provide total return through a combination of capital appreciation and current
income.
We may offer, on an immediate, continuous or delayed basis, up to $350,000,000 aggregate
initial offering price of our common shares (no par value per share), preferred shares (liquidation
preference of $25,000 per share) or debt securities, which we refer to in this prospectus
collectively as our securities, in one or more offerings. We may offer our common shares,
preferred shares and debt securities separately or together, in amounts, at prices and on terms set
forth in a prospectus supplement to this prospectus. You should read this prospectus and the
related prospectus supplement carefully before you decide to invest in any of our securities.
We may offer our securities directly to one or more purchasers, through agents that we or they
designate from time to time, or to or through underwriters or dealers. The prospectus supplement
relating to the particular offering will identify any agents or underwriters involved in the sale
of our securities, and will set forth any applicable purchase price, fee, commission or discount
arrangement between us and such agents or underwriters or among the underwriters or the basis upon
which such amount may be calculated. For more information about the manner in which we may offer
our securities, see Plan of Distribution. Our securities may not be sold through agents,
underwriters or dealers without delivery of a prospectus supplement.
Our
common shares are listed on the New York Stock Exchange under the
symbol CSQ. As of February 21, 2008, the last
reported sale price for our common shares was $12.87.
Investing in our securities involves certain risks. You could lose some or all of your
investment. See Risk Factors beginning on page 30 of this prospectus. You should consider
carefully these risks together with all of the other information contained in this prospectus and
any prospectus supplement before making a decision to purchase our securities.
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.
Prospectus
dated February ____, 2008
This prospectus, together with any prospectus supplement, sets forth concisely the information
that you should know before investing. You should read the prospectus and prospectus supplement,
which contain important information, before deciding whether to invest in our securities. You
should retain the prospectus and prospectus supplement for future reference. A statement of
additional information, dated February ____, 2008, as supplemented from time to time, containing
additional information, has been filed with the Securities and Exchange Commission (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 66 of this
prospectus, request a free copy of our annual and semi-annual reports, request other information or
make shareholder inquiries, by calling toll-free 1-800-582-6959 or by writing to the Fund at 2020
Calamos Court, Naperville, Illinois 60563. The Funds annual and semi-annual reports also are
available on our website at www.calamos.com, which also provides a link to the Commissions
website, as described below, where the Funds statement of additional information can be obtained.
Information included on our website does not form part of this prospectus. You can review and copy
documents we have filed at the Commissions Public Reference Room in Washington, D.C. Call
1-202-551-8090 for information. The Commission charges a fee for copies. You can get the same
information free from the Commissions website (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 Commissions Public
Reference Section, Room 1580, Washington, D.C. 20549-0102.
Our securities do not represent a deposit or obligation of, and are not guaranteed or endorsed
by, any bank or other insured depository institution and is not federally insured by the Federal
Deposit Insurance Corporation, the Federal Reserve Board or any other government agency.
Table of Contents
You should rely only on the information contained or incorporated by reference in this
prospectus and any related prospectus supplement in making your investment decisions. We have not
authorized any other person to provide you with different or inconsistent information. If anyone
provides you with different or inconsistent information, you should not rely on it. This
prospectus and any prospectus supplement do not constitute an offer to sell or solicitation of an
offer to buy any securities in any jurisdiction where the offer or sale is not permitted. The
information appearing in this prospectus and in any prospectus supplement is accurate only as of
the dates on their covers. Our business, financial condition and prospects may have changed since
such dates. We will advise investors of any material changes to the extent required by applicable
law.
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CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus, any accompanying prospectus supplement and the statement of additional
information contain forward-looking statements. Forward-looking statements can be identified by
the words may, will, intend, expect, estimate, continue, plan, anticipate, and
similar terms and the negative of such terms. Such forward-looking statements may be contained in
this prospectus as well as in any accompanying prospectus supplement. By their nature, all
forward-looking statements involve risks and uncertainties, and actual results could differ
materially from those contemplated by the forward-looking statements. Several factors that could
materially affect our actual results are the performance of the portfolio of securities we hold,
the price at which our shares will trade in the public markets and other factors discussed in our
periodic filings with the Commission.
Although we believe that the expectations expressed in our forward-looking statements are
reasonable, actual results could differ materially from those projected or assumed in our
forward-looking statements. Our future financial condition and results of operations, as well as
any forward-looking statements, are subject to change and are subject to inherent risks and
uncertainties, such as those disclosed in the Risk Factors section of this prospectus. All
forward-looking statements contained or incorporated by reference in this prospectus or any
accompanying prospectus supplement are made as of the date of this prospectus or the accompanying
prospectus supplement, as the case may be. Except for our ongoing obligations under the federal
securities laws, we do not intend, and we undertake no obligation, to update any forward-looking
statement. The forward-looking statements contained in this
prospectus, any accompanying
prospectus supplement and the statement of additional information are excluded from the safe harbor protection provided by section 27A of the
Securities Act of 1933, as amended (the 1933 Act).
Currently known risk factors that could cause actual results to differ materially from our
expectations include, but are not limited to, the factors described in the Risk Factors section
of this prospectus. We urge you to review carefully that section for a more detailed discussion of
the risks of an investment in our securities.
ii
PROSPECTUS SUMMARY
The following summary contains basic information about us and our securities. It is not
complete and may not contain all of the information you may want to consider. You should review
the more detailed information contained in this prospectus and in any related prospectus supplement
and in the statement of additional information, especially the information set forth under the
heading Risk Factors beginning on
page 30 of this prospectus.
The Fund
The Fund is a diversified, closed-end management investment company. We commenced operations
in March 2004 following our initial public offering. As of the date of this prospectus, we have
$1,080,000,000 of auction rate preferred shares (Preferred Shares) outstanding. Our fiscal year
ends on October 31. Our investment objective is to provide total return through a combination of
capital appreciation and current income.
Investment Adviser
Calamos Advisors LLC (the Adviser or Calamos) serves as our investment adviser. Calamos is responsible
on a day-to-day basis for investment of the Funds 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 Funds portfolio securities. As of December 31, 2007, Calamos managed
approximately $46.2 billion in assets of individuals and institutions. Calamos is a wholly-owned
subsidiary of Calamos Holdings, LLC (Holdings) and an indirect subsidiary of Calamos Asset
Management, Inc., a publicly traded holding company.
The Fund pays Calamos an annual fee, payable monthly, for its investment management services
equal to 1.00% of the Funds average weekly managed assets. Managed Assets means the total
assets of the Fund (including any assets attributable to any leverage that may be outstanding)
minus the sum of accrued liabilities (other than debt representing financial leverage). See
Management of the Fund.
The principal business address of the Adviser is 2020 Calamos Court, Naperville, Illinois
60563.
The Offering
We
may offer, on an immediate, continuous or delayed basis, up to
$350,000,000 of our
securities on terms to be determined at the time of the offering. Our securities will be offered
at prices and on terms to be set forth in one or more prospectus supplements to this prospectus.
Preferred shares and debt securities (collectively, senior securities) may be auction rate
securities, in which case the senior securities will not be listed on any exchange or automated
quotation system. Rather, investors generally may only buy and sell senior securities through an
auction conducted by an auction agent and participating broker-dealers.
We may offer our securities directly to one or more purchasers, through agents that we or they
designate from time to time, or to or through underwriters or dealers. The prospectus supplement
relating to the offering will identify any agents or underwriters involved in the sale of our
securities, and will set forth any applicable purchase price, fee, commission or discount
arrangement between us and such agents or underwriters or among underwriters or the basis upon
which such amount may be calculated. See Plan of Distribution. Our securities may not be sold
through agents, underwriters or dealers without delivery of a prospectus supplement describing the
method and terms of the offering of our securities.
Use of Proceeds
Unless otherwise specified in a prospectus supplement, we intend to use the net proceeds from
the sale of our securities primarily to invest in accordance with our investment objective and
policies within approximately three months of receipt of such proceeds. We also may use sale
proceeds to retire all or a portion of any short-term debt, and for working capital purposes,
including the payment of interest and operating expenses, although there is currently no intent to
issue securities primarily for this purpose.
Dividends and Distributions on Common Shares
The Fund has made regular monthly distributions to its common shareholders in amounts ranging
from $0.0750 to $0.1025 per share since June 2004. Additionally, the Fund made a distribution of $0.0398 in January 2008. The Fund
intends to distribute to common shareholders all or a portion of its net investment income monthly
and net realized capital gains, if any, at least annually.
The Fund currently intends to make monthly distributions to common shareholders at a level
rate established by the Board of Trustees. The rate may be modified by the Board of Trustees from
time to time. Monthly distributions may include net investment income, net realized short-term
capital gains and, if necessary to maintain a level distribution, return of capital. The Fund may
at times in its discretion pay out less than the entire amount of net investment income earned in
any particular period and may at times pay out such accumulated undistributed income in addition to
net investment income earned in other periods in order to permit the Fund to maintain a more stable
level of distributions. As a result, the dividends paid by the Fund to holders of common shares
for any particular period may be more or less than the amount of net investment income earned by
the Fund during such period. Net realized short-term capital gain distributed to shareholders will
be taxed as ordinary income for federal income tax purposes. In addition, one distribution per calendar year may include net
realized long-term capital gain (if any), which will be taxed for federal income tax purposes at
long-term capital gain rates. To the extent the Fund distributes an amount in excess of the Funds
current and accumulated earnings and profits, such excess, if any, will be treated by a shareholder
for federal income tax purposes as a tax-free return of capital to the extent of the shareholders
adjusted tax basis in his, her or its shares and thereafter as a gain from the sale or exchange of
such shares. Any such distributions made by the Fund will reduce the
shareholders adjusted tax basis in his, her or its shares to
the extent that the distribution constitutes a return of capital. To
date, however, none of the Funds distributions have included a
return of capital as determined on a tax basis during any calendar year. To
the extent that the Funds distributions exceed the Funds
current and accumulated earnings and profits, the distribution
payout rate will exceed the yield generated from the Funds
investments. There is no guarantee that the Fund will realize capital gain in any given year.
Pursuant to the requirements of the 1940 Act and other applicable laws, a notice would accompany
each monthly distribution with respect to the estimated source of the distribution made.
Distributions are subject to re-characterization for federal income tax purposes after the end of
the fiscal year.
In January 2004, Calamos, on behalf of itself and certain funds that it manages, filed an
exemptive application with the Commission seeking an order under the 1940 Act facilitating the
implementation of a dividend policy calling for monthly distributions of a fixed percentage of its
net asset value (Managed Dividend Policy). In March 2007, an amended and restated exemptive
application was filed with the Commission. If, and when, Calamos, on behalf of itself and other
parties, receives the requested relief, the Fund may, subject to the determination of its Board of
Trustees, implement a Managed Dividend Policy. Under a Managed Dividend Policy, if, for any
distribution, net investment income and net realized capital gains were less than the amount of the
distribution, the differences would be distributed from the Funds other assets. There can be no
assurance that the Fund will receive the requested relief.
Pursuant to the Funds Automatic Dividend Reinvestment Plan, unless a shareholder is
ineligible or elects otherwise, all dividends and capital gain distributions on common shares are
automatically reinvested in additional common shares of the Fund. However, an investor can choose
to receive dividends and distributions in cash. Since investors can participate in the
automatic dividend
2
reinvestment
plan only if their broker or nominee participates in our plan, you should contact your broker or nominee to confirm that you are eligible
to participate in the plan. See Dividends and Distributions; Automatic Dividend Reinvestment
Plan.
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.
Calamos will dynamically allocate the Funds 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. See Investment
Objective and Principal Investment StrategiesPrincipal 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). An investment in the equity securities of a company represents a proportionate
ownership interest in that company. Therefore, the Fund participates in the financial success or
failure of any company in which it has an equity interest.
High Yield Securities. The Fund may invest in high yield securities for either current income
or capital appreciation or both. These securities are rated Ba or lower by Moodys or BB or lower
by Standard & Poors or are unrated securities of comparable quality as determined by Calamos, the
Funds 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 issuers 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 Investment Objective and Principal Investment StrategiesPrincipal Investment
StrategiesHigh Yield Securities.
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 in developed and
emerging markets, including debt and equity securities of corporate issuers and debt securities of
government issuers. The Fund may invest up to 15% of its managed assets in securities of foreign
issuers in emerging markets. A foreign issuer is a foreign government or a company organized under
the laws 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 Investment Objective and Principal Investment
StrategiesPrincipal Investment StrategiesForeign 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
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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 Funds policy to invest at least 50% of its managed assets in equity securities.
See Investment Objective and Principal Investment StrategiesPrincipal Investment
StrategiesConvertible Securities.
Synthetic Convertible Securities. The Fund may invest in synthetic convertible securities.
A synthetic convertible security is a financial instrument that is designed to simulate the
characteristics of another instrument (i.e., a convertible security) through the combined features
of a collection of other securities or assets. Calamos may 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, which may be a
convertible or non-convertible security) 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 invest in synthetic convertible securities created by third parties,
typically investment banks. Synthetic convertible securities created by such parties may be
designed to simulate the characteristics of traditional convertible securities or may be designed
to alter or emphasize a particular feature. Traditional convertible securities typically offer
stable cash flows with the ability to participate in capital appreciation of the underlying common
stock. Because traditional convertible securities are exercisable at the option of the holder, the
holder is protected against downside risk. Synthetic convertible securities may alter these
characteristics by offering enhanced yields in exchange for reduced capital appreciation or less
downside protection, or any combination of these features. Synthetic convertible instruments may
include structured notes, equity-linked notes, mandatory convertibles and combinations of
securities and instruments, such as a debt instrument combined with a forward contract. The Funds
holdings of synthetic convertible securities are considered equity securities for purposes of the
Funds policy to invest at least 50% of its managed assets in equity securities. See Investment
Objective and Principal Investment StrategiesPrincipal Investment StrategiesSynthetic Convertible
Securities.
Rule 144A Securities. The Fund may invest without limit in certain securities (Rule 144A
Securities), such as convertible and debt securities, that are typically purchased in transactions
exempt from the registration requirements of the 1933 Act pursuant to Rule 144A under that act.
Rule 144A Securities may only be sold to qualified institutional buyers, such as the Fund. Any
resale of these securities must generally be effected through a sale that is registered under the
1933 Act or otherwise exempted or excepted from such registration requirements. Under the
supervision of the Funds Board of Trustees, Calamos will determine whether Rule 144A Securities
are illiquid. Typically, the Fund purchases Rule 144A Securities only if Calamos has determined
them to be liquid. If any Rule 144A Security held by the Fund should become illiquid, the value of
the security may be reduced and a sale of the security may be more difficult. See Investment
Objective and Principal Investment StrategiesPrincipal Investment StrategiesRule 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
4
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 Funds 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 Investment Objective and Principal Investment StrategiesPrincipal Investment StrategiesZero
Coupon Securities.
Options Writing. The Fund may seek to generate income from option premiums by writing (selling)
options. The Fund may write call options (i) on a portion of the equity securities (including
securities that are convertible into equity securities) in the Funds portfolio and (ii) on
broad-based securities indexes (such as the S&P 500) or certain ETFs (exchange traded funds) that
trade like common stocks but seek to replicate such market indexes.
In addition, to seek to offset some of the risk of a potential decline in value of certain long
positions, the Fund may also purchase put options on individual securities, broad-based securities
indexes (such as the S&P 500), or certain ETFs that trade like
common stocks but seek to replicate
such market indexes.
Other Securities. The Fund may invest in other securities of various types to the extent
consistent with its investment objective. 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. There are no restrictions as to the ratings of debt securities
acquired by the Fund or the portion of the Funds assets that
may be invested in debt securities in a particular ratings category. See Investment Objective
and Principal Investment StrategiesPrincipal Investment Strategies.
Use of Leverage by the Fund
The Fund currently uses, and may in the future use, financial leverage. On May 4, 2004, the
Fund issued preferred shares with an aggregate liquidation preference of $1,080,000,000. As of December 31, 2007, the aggregate liquidation preference of outstanding preferred shares represented
approximately 31.18% of the Funds total assets. The Fund may make further use of financial leverage
through the issuance of additional preferred shares or may borrow money or issue debt securities.
As a non-fundamental policy, the aggregate liquidation preference of preferred shares and the
aggregate principal amount of debt securities or borrowings may not exceed 38% of the Funds total
assets. However, the Board of Trustees reserves the right to issue preferred shares or debt
securities or borrow to the extent permitted by the 1940 Act. See Leverage.
The Fund may not be leveraged at all times and the amount of leverage, if any, may vary
depending upon a variety of factors, including Calamos outlook for the market and the costs that
the Fund would incur as a result of such leverage. Leverage involves greater risks to common
shareholders. The Funds leveraging strategy may not be successful. By leveraging its investment
portfolio, the Fund creates an opportunity for increased net income or capital appreciation.
However, the use of leverage also involves risks, which can be significant. These risks include
the possibility that the value of the assets acquired with the proceeds of leverage decreases
although the Funds liability to holders of preferred shares or other types of leverage is fixed,
greater volatility in the Funds net asset value and the market price of the Funds common shares,
and higher expenses. In addition, the rights of lenders, the holders of preferred shares and the
holders of debt securities issued by the Fund will be senior to the rights of the holders of common
shares with respect to the payment of dividends or upon liquidation. Holders of preferred shares
have voting rights in addition to, and separate from, the voting rights of common shareholders.
See Description of SecuritiesPreferred Shares and Certain Provisions of the Agreement and
Declaration of Trust and Bylaws. The holders of preferred shares, on the one hand, and the holders
of the common shares, on the other, may have interests that conflict in certain situations.
Because Calamos management fee is based upon a percentage of the Funds managed assets, which
include assets attributable to any outstanding leverage, Calamos fee is higher when the Fund is
leveraged and Calamos will have an incentive to leverage the Fund. The Fund pays and common
shareholders effectively bear any costs and expenses relating to any borrowings and to the issuance
and ongoing maintenance of preferred shares or debt securities. See Leverage and Risk
FactorsLeverage.
5
Interest Rate Transactions
In order to seek to reduce the interest rate risk inherent in the Funds underlying
investments and capital structure, the Fund, if market conditions are deemed favorable, may enter
into interest rate swap or cap transactions to attempt to protect itself from increasing dividend
or interest expenses on its leverage. The use of interest rate swaps and caps is a highly
specialized activity that involves investment techniques and risks different from those associated
with ordinary portfolio security transactions.
In an interest rate swap, the Fund would agree to pay to the other party to the interest rate
swap (which is known as the counterparty) a fixed rate payment in exchange for the counterparty
agreeing to pay to the Fund a payment at a variable rate that is expected to approximate the rate
on any variable rate payment obligation on the Funds leverage. The payment obligations would be
based on the notional amount of the swap.
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. Depending on the state of interest rates in general, the Funds use of interest rate swap or
cap transactions could enhance or harm the overall performance of the common shares. See Interest
Rate Transactions.
Conflicts of Interest
Conflicts of interest may arise from the fact that Calamos and its affiliates carry on
substantial investment activities for other clients, in which we have no interest. Calamos or its
affiliates may have financial incentives to favor certain of these accounts over us. Any of their
proprietary accounts or other customer accounts may compete with us for specific trades. Calamos
or its affiliates may give advice and recommend securities to, or buy or sell securities for, other
accounts and customers, which advice or securities recommended may differ from advice given to, or
securities recommended or bought or sold for, us, even though their investment objectives may be
the same as, or similar to, our objective.
Situations may occur when we could be disadvantaged because of the investment activities
conducted by Calamos and its affiliates for their other accounts. Such situations may be based on,
among other things, the following: (1) legal or internal restrictions on the combined size of
positions that may be taken for us or the other accounts, thereby limiting the size of our
position; or (2) the difficulty of liquidating an investment for us or the other accounts where the
market cannot absorb the sale of the combined position. See Investment Objective and Principal
Investment StrategiesConflicts of Interest.
Fund Risks
Equity Securities Risk. Equity investments are subject to greater fluctuations in market
value than other asset classes as a result of such factors as the issuers business performance,
investor perceptions, stock market trends and general economic conditions. Equity securities are
subordinated to bonds and other debt instruments in a companys capital structure in terms of
priority to corporate income and liquidation payments. See Risk FactorsFund RisksEquity Securities Risk.
High Yield Securities Risk. 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 issuers ability to pay
interest and principal and are susceptible to default or decline in market value due to adverse
economic and business
6
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; |
|
|
|
|
greater sensitivity to adverse company specific events, which are more likely to
render the issuer unable to make interest and/or principal payments; and |
|
|
|
|
if a negative perception of the high yield market develops, the price and liquidity
of high yield securities may be depressed. This negative perception could last for a
significant period of time. |
Adverse changes in economic conditions are more likely to lead to a weakened capacity of a
high yield issuer to make principal payments and interest payments than an investment grade issuer.
The principal amount of high yield securities outstanding has proliferated in the past decade as
an increasing number of issuers have used high yield securities for corporate financing. An
economic downturn could severely affect the ability of highly leveraged issuers to service their
debt obligations or to repay their obligations upon maturity.
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 Funds 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 Funds net asset value. See Risk FactorsFund RisksHigh Yield Securities Risk.
Interest Rate Risk. In addition to the risks discussed above, debt securities, including high
yield securities, are subject to certain risks, including:
|
|
|
if interest rates go up, the value of debt securities in the Funds 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 |
7
|
|
|
market interest rate, increase the securitys 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 near historically low levels. See Risk
Factors Fund RisksInterest Rate Risk. |
|
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 the default risk. See Risk FactorsFund RisksDefault Risk.
Liquidity Risk. The Fund may invest up to 15% of its managed assets in securities that, at
the time of investment, are illiquid (determined using the Commissions 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 Funds 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 Funds 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 Funds assets in illiquid securities may
restrict the Funds ability to take advantage of other market opportunities. The market price of
illiquid securities generally is more volatile than that of more liquid securities, which may
adversely affect the price that the Fund pays for or recovers upon the sale of illiquid securities.
Illiquid securities are also more difficult to value and Calamos judgment may play a greater role
in the valuation process. The risks associated with illiquid securities may be particularly acute
in situations in which the Funds 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. See Risk
FactorsLiquidity Risk.
Foreign Securities Risk. 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 Funds portfolio securities at times, in
amounts and at prices it considers reasonable; |
|
|
|
|
an adverse effect of currency exchange rates or controls on the value of the Funds
investments; |
|
|
|
|
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; |
8
|
|
|
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 Funds return. |
See Risk FactorsFund RisksForeign Securities Risk.
Convertible Securities Risk. The value of a convertible security 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. A
convertible securitys investment value tends to decline as prevailing interest rate levels
increase. Conversely, a convertible securitys investment value increases as prevailing interest
rate levels decline.
However, the convertibles market value tends to reflect the market price of the common stock
of the issuing company when that stock price is greater than the convertibles 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, the convertible security 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 companys common stockholders. Consequently, the
issuers convertible securities generally entail less risk than its common stock. See Risk
FactorsFund RisksConvertible Securities Risk.
Synthetic Convertible Securities Risk. The value of a synthetic convertible security may
respond differently to market fluctuations than a convertible security because a synthetic
convertible is composed of two or more separate securities, each with its own market value. In
addition, if the value of the underlying common stock or the level of the index involved in the
convertible component falls below the exercise price of the warrant or option, the warrant or
option may lose all value. See Risk FactorsFund RisksSynthetic Convertible Securities Risk.
Risks Associated with Options. There are several risks associated with transactions in
options. For example, there are significant differences between the securities markets and 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 Funds ability to
utilize options successfully will depend on Calamos ability to predict pertinent market movements,
which cannot be assured.
The Fund may sell call options on individual securities and securities indices. All calls
sold by the Fund must be covered. Even though the Fund will receive the option premium to help
protect it against loss, a call option sold by the Fund exposes the Fund during the term of the
option to possible loss of opportunity to realize appreciation in the market price of the
underlying security or instrument and may require the Fund to hold a security or instrument that it
might otherwise have sold. The Fund may purchase and sell put options on individual securities and
securities indices. In selling put options, there is a risk that the Fund may be required to buy
the underlying security at a disadvantageous price above the market price. See Risk
FactorsFund RisksRisks Associated with Options.
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
re-characterization 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 Funds investments or the tax treatment of the income from such investments
were successfully challenged by the Internal Revenue Service. See Certain 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.
See Risk FactorsFund RisksManagement Risk.
Antitakeover Provisions. The Funds Agreement and Declaration of Trust and Bylaws 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
9
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 SharesPreferred Shares and Certain Provisions of the
Agreement and Declaration of Trust and Bylaws. The holders of preferred shares, on the one hand,
and the holders of the common shares, on the other, may have interests that conflict in these
situations. See Risk FactorsFund RisksAntitakeover Provisions.
Market Disruption Risk. Certain events have a disruptive effect on the securities markets,
such as terrorist attacks, 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.
Additional Risks to Common Shareholders
Leverage Risk. The Fund has issued Preferred Shares and may issue additional preferred shares
or borrow money or issue debt securities. The borrowing of money or issuance of debt securities
and preferred shares, including the outstanding Preferred Shares, represents the leveraging of the
Funds common shares. As a non-fundamental policy, the aggregate liquidation preference of
preferred shares and the aggregate principal amount of debt securities or borrowings may not exceed
38% of the Funds total assets. Leverage creates risks which may adversely affect the return for
the holders of common shares, including:
|
|
|
the likelihood of greater volatility of net asset value and market price of the
Funds common shares; |
|
|
|
|
fluctuations in the dividend rates on any preferred shares or in interest rates on
borrowings and short-term debt; |
|
|
|
|
increased operating costs, which are effectively borne by common shareholders, may
reduce the Funds total return; and |
|
|
|
|
the potential for a decline in the value of an investment acquired with borrowed
funds, while the Funds obligations under such borrowing or preferred shares remain fixed. |
Leverage is a speculative technique that could adversely affect the returns to common
shareholders. Leverage can cause the Fund to lose money and can magnify the effect of any losses.
To the extent the income or capital appreciation derived from securities purchased with funds
received from leverage exceeds the cost of leverage, the Funds return 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 will be less than if leverage had not been used, and
therefore the amount available for distribution to common shareholders as dividends and other
distributions will be reduced or potentially eliminated.
The Fund will pay, and common shareholders will effectively bear, any costs and expenses
relating to any borrowings and to the issuance and ongoing maintenance of preferred shares or debt securities. Such
costs and expenses include the higher management fee resulting from the use of any such leverage,
offering and/or issuance costs, and interest and/or dividend expense and ongoing maintenance.
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 that may affect the Funds ability to pay dividends and
10
distributions on common shares in certain instances. The Fund may also be required to pledge
its assets to the lenders in connection with certain types of borrowings. The Fund may be subject
to certain restrictions on investments imposed by guidelines of one or more nationally recognized
statistical rating organizations (NRSROs) 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. See Risk
FactorsLeverage.
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 expense on its
leverage 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. See Risk FactorsInterest Rate Transactions Risk.
Market Impact Risk. The sale of our common shares (or the perception that such sales may
occur) may have an adverse effect on prices in the secondary market for our common shares by
increasing the number of shares available, which may put downward pressure on the market price for
our common shares. These sales also might make it more difficult for us to sell additional equity
securities in the future at a time and price we deem appropriate.
Dilution Risk. The voting power of current shareholders will be diluted to the extent that
such shareholders do not purchase shares in any future common share offerings or do not purchase
sufficient shares to maintain their percentage interest. In addition, if we are unable to invest
the proceeds of such offering as intended, our per share distribution may decrease (or may consist
of return of capital) and we may not participate in market advances to the same extent as if such
proceeds were fully invested as planned.
Market Discount Risk. The Funds common shares have traded both at a premium and at a
discount relative to net asset value. Common shares of closed-end investment companies frequently
trade at prices lower than their net asset value. Depending on the premium of the Funds common
shares, the Funds net asset value may be reduced immediately following an offering of the Funds
common shares by the offering expenses paid by the Fund, including the sales load. See Use of
Proceeds.
In addition to net asset value, the market price of the Funds common shares may be affected
by such factors as the Funds use of leverage, dividend stability, portfolio credit quality,
liquidity, market supply and demand of the common shares and the Funds dividends paid (which are,
in turn, affected by expenses), call protection for portfolio securities and interest rate
movements. See Leverage, Risk Factors and Description of Securities. The Funds common
shares are designed primarily for long-term investors, and you should not purchase common shares if
you intend to sell them shortly after purchase.
See Risk FactorsAdditional Risks to Common Shareholders for a more detailed discussion of
these risks.
Additional Risks to Senior Security Holders
Additional risks of investing in senior securities include the following:
Interest Rate Risk. To the extent that senior securities trade through an auction, such
securities pay dividends or interest based on short-term interest rates. If short-term interest
rates rise, dividends or interest on the auction rate senior securities may rise so that the amount
of dividends or interest due to
11
holders of auction rate senior securities would exceed the cash flow generated by our
portfolio securities. This might require that we sell portfolio securities at a time when we would
otherwise not do so, which may affect adversely our future ability to generate cash flow. In
addition, rising market interest rates could impact negatively the value of our investment
portfolio, reducing the amount of assets serving as asset coverage for the senior securities.
Senior Leverage Risk. Our preferred shares will be junior in liquidation and with respect to
distribution rights to our debt securities and any other borrowings. Senior securities
representing indebtedness may constitute a substantial lien and burden on preferred shares by
reason of their prior claim against our income and against our net assets in liquidation. We may
not be permitted to declare dividends or other distributions with respect to any series of our
preferred shares unless at such time we meet applicable asset coverage requirements and the payment
of principal or interest is not in default with respect to any borrowings.
Ratings and Asset Coverage Risk. To the extent that senior securities are rated, a rating
does not eliminate or necessarily mitigate the risks of investing in our senior securities, and a
rating may not fully or accurately reflect all of the credit and market risks associated with that
senior security. A rating agency could downgrade the rating of our preferred shares or debt
securities, which may make such securities less liquid at an auction or in the secondary market,
though probably with higher resulting interest rates. If a rating agency downgrades the rating
assigned to a senior security, we may alter our portfolio or redeem the senior security. We may
voluntarily redeem senior securities under certain circumstances.
Inflation Risk. Inflation is the reduction in the purchasing power of money resulting from an
increase in the price of goods and services. Inflation risk is the risk that the inflation
adjusted or real value of an investment in preferred shares or debt securities or the income from
that investment will be worth less in the future. As inflation occurs, the real value of the
preferred shares or debt securities and the dividend payable to holders of preferred shares or
interest payable on debt securities declines.
Auction Risk. To the extent that senior securities trade through an auction, there are
certain risks associated with participating in an auction and certain risks if you try to sell
senior securities outside of an auction in the secondary market. These risks will be described in
more detail in an applicable prospectus supplement if we issue senior securities pursuant to this
registration statement.
Decline in Net Asset Value Risk. A material decline in our net asset value (NAV) may impair our ability to
maintain required levels of asset coverage for our preferred shares or debt securities.
See Risk FactorsAdditional Risks to Senior Security Holders for a more detailed discussion
of these risks.
12
SUMMARY OF FUND EXPENSES
The following table and example contain information about the costs and expenses that common
shareholders will bear directly or indirectly. In accordance with Commission requirements, the
table below shows our expenses, including leverage costs, as a percentage of our average net assets as of
October 31, 2007, and not as a percentage of gross assets or managed assets. By showing expenses
as a percentage of average net assets, expenses are not expressed as a percentage of all of the assets we
invest. The table and example are based on our capital structure as of October 31, 2007. As of
that date, we had $1,080,000,000 in senior securities outstanding. Such senior securities
represent 29.23% of total assets as of October 31, 2007.
Shareholder Transaction Expense
|
|
|
|
|
Sales Load (as a percentage of offering price) |
|
|
4.5 |
(1) |
Offering Expenses Borne by the Fund (as a percentage of offering price) |
|
|
|
(1) |
Automatic Dividend Reinvestment Plan Fees(2) |
|
None |
|
|
|
|
|
|
|
Percentage of Net |
|
|
Assets |
|
|
Attributable to |
|
|
Common |
Annual Expenses |
|
Shareholders |
Management Fee(3) |
|
|
1.43 |
|
Leverage
Costs(4) |
|
|
.11 |
|
Other Expenses |
|
|
.08 |
|
Total Annual Expenses |
|
|
1.62 |
|
Less Expense
Reductions |
|
|
(.01 |
) |
Net Annual Expenses |
|
|
1.61 |
|
Example:
The following example illustrates the expenses that common shareholders would pay on a $1,000
investment in common shares, assuming (1) net annual expenses of 1.62% of net assets attributable
to common shares; (2) a 5% annual
return; and (3) all distributions are reinvested at net asset value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 Year |
|
3 Years |
|
5 Years |
|
10 Years |
|
Total Expenses Paid by Common Shareholders(5) |
|
$ |
16 |
|
|
$ |
51 |
|
|
$ |
88 |
|
|
$ |
192 |
|
|
The example should not be considered a representation of future expenses. Actual expenses may be
greater or less than those assumed. Moreover, our actual rate of return may be greater or less
than the hypothetical 5% return shown in the example.
|
|
|
(1) |
|
If the securities to which this prospectus relates are sold to or through underwriters, the
prospectus supplement will set forth any applicable sales load and the estimated offering
expenses borne by us. |
|
(2) |
|
Shareholders will pay a transaction fee plus brokerage charges if they direct the Plan Agent
to sell common stock held in a Plan account. See Automatic Dividend Reinvestment Plan. |
|
|
(3) |
|
The Fund pays Calamos an annual management fee, payable
monthly, for its investment management services equal to 1.00% of the
Funds average weekly managed assets. In accordance with the
requirements of the Commission, the table above shows the Funds
management fee as a percentage of average net assets. By showing the
management fee as a percentage of net assets, the management fee is
not expressed as a percentage of all of the assets the Fund intends
to invest. For purposes of the table, the management fee has been
converted to 1.43% of the Funds average daily net assets as of
October 31, 2007 by dividing the total dollar amount of the
management fee by the Funds average daily net assets (managed assets less
outstanding leverage).
|
|
|
|
(4) |
|
Leverage Costs in the table reflect the cost of auction and
rating agency fees on preferred shares, expressed as a percentage of
net assets. The table assumes outstanding Preferred Shares of $1.08
billion, which reflects leverage in an amount representing
approximately 29.23% of total assets. |
|
13
|
|
|
(5) |
|
The example does not include sales load or estimated offering costs. |
The purpose of the table and the example above is to help investors understand the fees and
expenses that they, as common shareholders, would bear directly or indirectly. For additional
information with respect to our expenses, see Management of the Fund.
14
FINANCIAL HIGHLIGHTS
The information
in this table is derived from our financial statements audited by
Deloitte & Touche LLP, whose
report on such financial statements is contained in our 2007 Annual
Report and included in the statement of additional information, both of which are available from us.
Financial Highlights
Selected data for a common share outstanding throughout each period were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 26, 2004* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
through |
|
|
For the Year Ended October 31, |
|
October 31, |
|
|
2007 |
|
2006 |
|
2005 |
|
2004 |
Net asset value, beginning of period |
|
$ |
15.71 |
|
|
$ |
14.44 |
|
|
$ |
14.23 |
|
|
$ |
14.32 |
(a) |
Income from investment operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income (loss) |
|
|
0.86 |
** |
|
|
0.89 |
|
|
|
0.93 |
|
|
|
0.51 |
|
Net realized and unrealized gain (loss) from investments, written options,
foreign currency and interest rate swaps |
|
|
1.89 |
|
|
|
1.86 |
|
|
|
0.48 |
|
|
|
(0.09 |
) |
Distributions to preferred shareholders from: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income (common share equivalent basis) |
|
|
(0.32 |
) |
|
|
(0.33 |
) |
|
|
(0.21 |
) |
|
|
(0.06 |
) |
Capital gains (common share equivalent basis) |
|
|
(0.05 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total from investment operations |
|
|
2.38 |
|
|
|
2.42 |
|
|
|
1.20 |
|
|
|
0.36 |
|
|
Less distributions to common shareholders from: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income |
|
|
(1.01 |
) |
|
|
(0.77 |
) |
|
|
(0.71 |
) |
|
|
(0.37 |
) |
Capital gains |
|
|
(0.16 |
) |
|
|
(0.38 |
) |
|
|
(0.28 |
) |
|
|
|
|
Capital charge resulting from issuance of common and preferred shares |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.08 |
) |
Net asset value, end of period |
|
$ |
16.92 |
|
|
$ |
15.71 |
|
|
$ |
14.44 |
|
|
$ |
14.23 |
|
Market value, end of period |
|
$ |
14.70 |
|
|
$ |
14.91 |
|
|
$ |
13.71 |
|
|
$ |
13.34 |
|
Total investment return based on(b): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net asset value |
|
|
16.33 |
% |
|
|
18.03 |
% |
|
|
8.95 |
% |
|
|
2.10 |
% |
Market value |
|
|
6.49 |
% |
|
|
17.99 |
% |
|
|
10.35 |
% |
|
|
(8.59 |
)% |
Ratios and supplemental data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net assets applicable to common shareholders, end of period (000s omitted) |
|
$ |
2,615,012 |
|
|
$ |
2,427,632 |
|
|
$ |
2,231,348 |
|
|
$ |
2,199,229 |
|
Preferred shares, at redemption value ($25,000 per share liquidation preference) (000s omitted) |
|
$ |
1,080,000 |
|
|
$ |
1,080,000 |
|
|
$ |
1,080,000 |
|
|
$ |
1,080,000 |
|
Ratios to average net assets applicable to common shareholders: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net expenses(c)(d) |
|
|
1.61 |
% |
|
|
1.66 |
% |
|
|
1.67 |
% |
|
|
1.61 |
% |
Gross expenses |
|
|
1.62 |
% |
|
|
1.66 |
% |
|
|
|
|
|
|
|
|
Net investment income (loss)(c)(d) |
|
|
5.30 |
% |
|
|
5.92 |
% |
|
|
6.25 |
% |
|
|
6.27 |
% |
Preferred share distributions from net investment income(c) |
|
|
1.95 |
% |
|
|
2.18 |
% |
|
|
1.40 |
% |
|
|
0.67 |
% |
Net investment income (loss), net of preferred share distributions from net
investment income(c) |
|
|
3.35 |
% |
|
|
3.74 |
% |
|
|
4.85 |
% |
|
|
5.60 |
% |
Portfolio turnover rate |
|
|
48 |
% |
|
|
48 |
% |
|
|
71 |
% |
|
|
11 |
% |
Average commission rate paid |
|
$ |
0.0283 |
|
|
$ |
0.0342 |
|
|
$ |
0.0381 |
|
|
$ |
0.0197 |
|
Asset coverage per preferred share, at end of period(e) |
|
$ |
85,552 |
|
|
$ |
81,216 |
|
|
$ |
76,667 |
|
|
$ |
75,916 |
|
15
|
|
|
|
* |
|
Commencement of operations. |
|
|
|
** |
|
Net investment income allocated based on average shares method. |
|
|
|
(a) |
|
Net of sales load of $0.675 on initial shares issued and beginning net asset value of $14.325. |
|
|
|
(b) |
|
Total investment return is calculated assuming a purchase of common shares 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 Funds dividend reinvestment plan. Total return is not annualized for periods less than
one year. Brokerage commissions are not reflected. NAV per share is determined by dividing the
value of the Funds portfolio securities, cash and other assets, less all liabilities, by the total
number of common shares outstanding. The common share market price is the price the market is
willing to pay for shares of the Fund at a given time. Common share market price is influenced by a
range of factors, including supply and demand and market conditions. |
|
|
|
(c) |
|
Annualized for periods less than one year. |
|
|
|
(d) |
|
Does not reflect the effect of dividend payments to the shareholders of Preferred Shares. |
|
|
|
(e) |
|
Calculated by subtracting the Funds total liabilities (not including Preferred Shares) from
the Funds total assets and dividing this by the number of Preferred Shares outstanding. |
|
MARKET AND NET ASSET VALUE INFORMATION
Our common shares are listed on the New York Stock Exchange (NYSE) under the symbol CSQ.
Our common shares commenced trading on the NYSE on March 25, 2004.
Our common shares have traded both at a premium and at a discount in relation to NAV. We
cannot predict whether our shares will trade in the future at a premium or discount to NAV. The
provisions of the 1940 Act generally require that the public offering price of common shares (less
any underwriting commissions and discounts) must equal or exceed the NAV per share of a companys
common stock (calculated within 48 hours of pricing). Our issuance of common shares may have an
adverse effect on prices in the secondary market for our common shares by increasing the number of
common shares available, which may put downward pressure on the market price for our common shares.
Shares of common stock of closed-end investment companies frequently trade at a discount from NAV.
See Risk FactorsAdditional Risks to Common ShareholdersMarket Discount Risk.
The following table sets forth for each of the periods indicated the high and low closing
market prices for our common shares on the NYSE, the NAV per share and the premium or discount to
NAV per share at which our common shares were trading. NAV is determined on the last
business day of each month. See Determination of Net Asset Value for information as
to the determination of our NAV.
16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premium/ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Discount) To |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Asset |
|
|
Market Price(1) |
|
|
|
|
|
Value(3) |
|
|
|
|
|
|
|
|
|
|
Net Asset |
|
|
|
|
Quarter Ended |
|
High |
|
Low |
|
Value(2) |
|
High |
|
Low |
April 30, 2004 |
|
|
|
15.20 |
|
|
|
14.55 |
|
|
|
14.05 |
|
|
8.19 |
% |
|
|
3.56 |
% |
July 31, 2004 |
|
|
|
14.55 |
|
|
|
12.59 |
|
|
|
13.83 |
|
|
5.21 |
% |
|
|
-8.97 |
% |
October 31, 2004 |
|
|
|
13.93 |
|
|
|
12.79 |
|
|
|
14.23 |
|
|
-2.11 |
% |
|
|
-10.12 |
% |
January 31, 2005 |
|
|
|
14.16 |
|
|
|
13.39 |
|
|
|
14.84 |
|
|
-4.58 |
% |
|
|
-9.77 |
% |
April 30, 2005 |
|
|
|
14.24 |
|
|
|
12.65 |
|
|
|
14.42 |
|
|
-1.25 |
% |
|
|
-12.27 |
% |
July 31, 2005 |
|
|
|
14.50 |
|
|
|
13.26 |
|
|
|
15.34 |
|
|
-5.48 |
% |
|
|
-13.56 |
% |
October 31, 2005 |
|
|
|
14.49 |
|
|
|
13.18 |
|
|
|
14.44 |
|
|
0.35 |
% |
|
|
-8.73 |
% |
January 31, 2006 |
|
|
|
14.14 |
|
|
|
12.88 |
|
|
|
15.31 |
|
|
-7.64 |
% |
|
|
-15.87 |
% |
April 30, 2006 |
|
|
|
14.30 |
|
|
|
13.77 |
|
|
|
15.51 |
|
|
-7.80 |
% |
|
|
-11.22 |
% |
July 31, 2006 |
|
|
|
14.20 |
|
|
|
13.60 |
|
|
|
15.00 |
|
|
-5.33 |
% |
|
|
-9.33 |
% |
October 31, 2006 |
|
|
|
15.00 |
|
|
|
14.12 |
|
|
|
15.71 |
|
|
-4.52 |
% |
|
|
-10.12 |
% |
January 31, 2007 |
|
|
|
15.74 |
|
|
|
14.79 |
|
|
|
16.29 |
|
|
-3.38 |
% |
|
|
-9.21 |
% |
April 30, 2007 |
|
|
|
15.71 |
|
|
|
14.64 |
|
|
|
16.58 |
|
|
-5.25 |
% |
|
|
-11.70 |
% |
July 31, 2007 |
|
|
|
15.74 |
|
|
|
14.03 |
|
|
|
15.67 |
|
|
0.45 |
% |
|
|
-10.47 |
% |
October 31, 2007 |
|
|
|
14.90 |
|
|
|
13.00 |
|
|
|
16.92 |
|
|
-11.94 |
% |
|
|
-23.17 |
% |
|
|
|
Source: |
|
Bloomberg Financial and Fund Accounting Records. |
|
(1) |
|
Based on high and low closing market price during the respective quarter. |
|
(2) |
|
Based on the NAV calculated on the close of business on the last business day of each
calendar quarter. |
|
(3) |
|
Based on the Funds computations. |
The last reported sale price, NAV per common share and percentage discount to NAV per common
share on December 31, 2007 were $14.00, $15.43 and -9.27%, respectively. As of December 31, 2007, we
had 154,514,000 common shares outstanding and net assets of
approximately $3,463,870,143.
USE OF PROCEEDS
Unless otherwise specified in a prospectus supplement, we will invest the net proceeds of any
sales of securities in accordance with our investment objective and policies as described under
Investment Objective and Principal Investment Strategies within approximately three months of receipt
of such proceeds. We may also use proceeds from the sale of our securities to retire all or a
portion of any short-term debt we incur in pursuit of our investment objective and policies, and
for working capital purposes, including the payment of interest and operating expenses, although
there is currently no intent to issue securities primarily for this purpose. Such investments may
be delayed if suitable investments are unavailable at the time or for other reasons. Pending such
investment, we anticipate that we will invest the proceeds in securities issued by the U.S.
government or its agencies or instrumentalities or in high quality, short-term or long-term debt
obligations. A delay in the anticipated use of proceeds could lower returns, reduce our
distribution to common shareholders and reduce the amount of cash available to make dividend and
interest payments on preferred shares and debt securities, respectively.
17
THE FUND
Calamos Strategic Total Return Fund is a diversified, closed-end management investment company
which commenced investment operations in March 2004. The Fund was organized under the laws of the
State of Delaware on December 31, 2003, and has registered under the 1940 Act. On May 30, 2004,
the Fund issued an aggregate of 140,500,000 common shares, no par value, in an initial public
offering and commenced its operations. On April 20, 2004, the Fund issued an additional 14,000,000
common shares, in connection with exercise by the underwriters of their over-allotment option. The
net proceeds of the initial public offering and subsequent exercise of the over-allotment option
were approximately $ 2,213,413,000 million after the payment of offering expenses. On May 5, 2004, the
Fund issued Preferred Shares, liquidation preference $25,000 per share ($1,080,000,000 in the
aggregate). The Funds common shares are listed on the NYSE under the symbol CSQ. The Funds
principal office is located at 2020 Calamos Court, Naperville, Illinois 60563, and its telephone
number is 1-800-582-6959.
18
The following table provides information about our outstanding securities as of December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount |
|
|
|
|
|
|
|
|
Held by the |
|
|
|
|
Amount |
|
Fund or for |
|
Amount |
Title of Class |
|
Authorized |
|
its Account |
|
Outstanding |
Common Shares |
|
Unlimited |
|
|
0 |
|
|
|
154,514,000 |
|
Preferred Shares |
|
Unlimited |
|
|
0 |
|
|
|
43,200 |
|
Series M |
|
|
|
|
|
|
0 |
|
|
|
7,040 |
|
Series TU |
|
|
|
|
|
|
0 |
|
|
|
7,040 |
|
Series W |
|
|
|
|
|
|
0 |
|
|
|
7,040 |
|
Series TH |
|
|
|
|
|
|
0 |
|
|
|
7,040 |
|
Series F |
|
|
|
|
|
|
0 |
|
|
|
7,040 |
|
Series A |
|
|
|
|
|
|
0 |
|
|
|
4,000 |
|
Series B |
|
|
|
|
|
|
0 |
|
|
|
4,000 |
|
The following sets forth information about the Funds outstanding Preferred Shares as of the
dates indicated below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Coverage Per |
|
Average Fair Value Per |
|
|
Total Liquidation |
|
Share ($25,000 |
|
$25,000 Denomination or |
Fiscal Year Ended |
|
Preference Outstanding |
|
Liquidation Preference) |
|
Per Share Amount(a) |
October 31, 2007 |
|
$ |
1,080,000,000 |
|
|
$ |
85,552 |
|
|
$ |
25,000 |
|
October 31, 2006 |
|
$ |
1,080,000,000 |
|
|
$ |
81,216 |
|
|
$ |
25,000 |
|
October 31, 2005 |
|
$ |
1,080,000,000 |
|
|
$ |
76,667 |
|
|
$ |
25,000 |
|
October 31, 2004 |
|
$ |
1,080,000,000 |
|
|
$ |
75,916 |
|
|
$ |
25,000 |
|
|
|
|
(a) |
|
Fair value of the Preferred Shares approximates the liquidation preference because dividend
rates payable on the Preferred Shares are determined at auctions and fluctuate with changes in
current market interest rates. |
INVESTMENT OBJECTIVE AND PRINCIPAL INVESTMENT STRATEGIES
Investment Objective
The Funds investment objective is to provide total return through a combination of capital
appreciation and current income. The Funds investment objective may be changed by the Board of
Trustees without a shareholder vote. 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.
19
Calamos
will dynamically allocate the Funds investments among multiple
asset classes (rather than maintaining a fixed or static allocation), seeking
to obtain an appropriate balance of risk and reward on a long-term
basis through all market cycles using multiple
strategies and combining them to seek to achieve favorable risk adjusted returns.
Calamos analyzes securities for the Funds 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 issuers total enterprise by studying its
financial statements, including its balance sheet. Once enterprise value is determined, Calamos
seeks to assess the value of the issuers 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 issuers capital structure. This approach serves as the basis for the
Calamos research teams 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.
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 Moodys or BB or lower by Standard & Poors 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 issuers 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 debt securities. The
Funds investments in investment grade debt securities may have fixed or variable principal
payments and all types of interest rate and dividend payment and reset terms, including fixed rate,
adjustable rate, zero coupon, contingent, deferred, payment in kind and auction rate features.
Foreign Securities. 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 in developed and
emerging markets, including debt and equity securities of corporate issuers and debt securities of
government issuers. The Fund may invest up to 15% of its managed assets in securities of foreign
issuers in emerging markets. A foreign issuer is a foreign government or a company organized under
the laws 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 Funds policy to invest at
least 50% of its managed assets in equity securities.
20
Synthetic Convertible Securities. The Fund may invest in synthetic convertible securities.
A synthetic convertible security is a financial instrument that is designed to simulate the
characteristics of another instrument (i.e., a convertible security) through the combined features
of a collection of other securities or assets. Calamos may 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, which may be a
convertible or non-convertible security) 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 convertible 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 may also invest in synthetic convertible securities created by third parties,
typically investment banks. Synthetic convertible securities created by such parties may be
designed to simulate the characteristics of traditional convertible securities or may be designed
to alter or emphasize a particular feature. Traditional convertible securities typically offer
stable cash flows with the ability to participate in capital appreciation of the underlying common
stock. Because traditional convertible securities are exercisable at the option of the holder, the
holder is protected against downside risk. Synthetic convertible securities may alter these
characteristics by offering enhanced yields in exchange for reduced capital appreciation or less
downside protection, or any combination of these features. Synthetic convertible instruments may
include structured notes, equity-linked notes, mandatory convertibles and combinations of
securities and instruments, such as a debt instrument combined with a forward contract.
Some examples of these securities include:
Preferred equity redeemable cumulative stock (PERCS) are shares that automatically convert
into one ordinary share upon maturity. They are usually issued at the prevailing share price,
convertible into one ordinary share, with an enhanced dividend yield. PERCS pay a higher dividend
than common shares, but the equity upside is capped. Above a certain share price, the conversion
ratio will fall as the stock rises, capping the upside at that level. Below this level, the
conversion ratio remains one-for-one, giving the same downside exposure as the ordinary shares,
excluding the income difference.
Dividend enhanced convertible stock (DECS) are either preference shares or subordinated
bonds. These, like PERCS, mandatorily convert into ordinary shares at maturity, if not already
converted. DECS give no significant downside protection and are very equity sensitive with minimal
direct bond characteristics and interest rate exposure. As with PERCS, some of the upside
performance is given away and in return, the investor receives an enhanced yield over the ordinary
shares. Unlike PERCS, however, the investors upside is not capped. Instead, the investor trades
a zone of flat exposure to the share price for the enhanced income.
Preferred Redeemable Increased Dividend Equity Security (PRIDES) are synthetic securities
consisting of a forward contract to purchase the issuers underlying security and an interest
bearing deposit. Interest payments are made at regular intervals, and conversion into the
underlying security is mandatory at maturity. Similar to convertible securities, PRIDES allow
investors to earn stable cash
21
flows while still participating in the capital gains of an underlying stock. This is possible
because these products are valued along the same lines as the underlying security. The Funds
holdings of synthetic convertible securities are considered equity securities for purposes of the
Funds policy to invest at least 50% of its managed assets in equity securities.
Options Writing. The Fund may seek to generate income from option premiums by writing (selling)
options. The Fund may write call options (i) on a portion of the equity securities (including
securities that are convertible into equity securities) in the Funds portfolio and (ii) on
broad-based securities indexes (such as the S&P 500) or certain ETFs (exchange traded funds) that
trade like common stocks but seek to replicate such market indexes.
In addition, to seek to offset some of the risk of a potential decline in value of certain long
positions, the Fund may also purchase put options on individual securities, broad-based securities
indexes (such as the S&P 500), or certain ETFs that trade like
common stocks but seek to replicate
such market indexes.
Rule 144A Securities. The Fund may invest without limit in 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 Funds 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 Funds 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 portfolios assets invested in illiquid securities if qualified institutional buyers
are unwilling to purchase such securities.
U.S. Government Securities. U.S. government securities in which the Fund invests include debt
obligations of varying maturities issued by the U.S. Treasury or issued or guaranteed by an agency
or instrumentality of the U.S. government, including the Federal Housing Administration, Federal
Financing Bank, Farmers Home Administration, Export-Import Bank of the United States, Small
Business Administration, Government National Mortgage Association, General Services Administration,
Central Bank for Cooperatives, Federal Farm Credit Banks, Federal Home Loan Banks, Federal Home
Loan Mortgage Corporation, Federal National Mortgage Association (FNMA), Maritime Administration,
Tennessee Valley Authority, District of Columbia Armory Board, Student Loan Marketing Association,
Resolution Fund Corporation and various institutions that previously were or currently are part of
the Farm Credit System (which has been undergoing reorganization since 1987). Some U.S. government
securities, such as U.S. Treasury bills, Treasury notes and Treasury bonds, which differ only in
their interest rates, maturities and times of issuance, are supported by the full faith and credit
of the United States. Others are supported by: (i) the right of the issuer to borrow from the
U.S. Treasury, such as securities of the Federal Home Loan Banks; (ii) the discretionary authority
of the U.S. government to purchase the agencys 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
22
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 Funds 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 Funds 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 Funds 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 Funds total assets would
be invested in any one investment company. These limitations do not apply to the purchase of
shares of money market funds or 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 Funds own operations.
Temporary Defensive Investments. Under unusual market or economic conditions or for 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 NRSRO or other fixed income securities deemed by Calamos to be consistent with a defensive posture, or may hold cash. The yield on such securities
may be lower than the yield on lower rated fixed income securities. During such periods, the Fund
may not be able to achieve its investment objective.
Repurchase Agreements. The Fund may enter into repurchase agreements with broker-dealers,
member banks of the Federal Reserve System and other financial institutions. Repurchase agreements
are arrangements under which the Fund purchases securities and the seller agrees to repurchase the
securities within a specific time and at a specific price. The repurchase price is generally
higher than the Funds purchase price, with the difference being income to the Fund. The
counterpartys 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 Funds 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
23
security, the Fund may be required to return the security to the sellers 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 Funds 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.
Conflicts of Interest
Conflicts of interest may arise from the fact that Calamos and its affiliates carry on
substantial investment activities for other clients, in which we have no interest, some of which
may have similar investment strategies as us. Calamos or its affiliates may have financial
incentives to favor certain of such accounts over us. Any of their proprietary accounts and other
customer accounts may compete with us for specific trades. Calamos or its affiliates may give
advice and recommend securities to, or buy or sell securities for, us which advice or securities
may differ from advice given to, or securities recommended or bought or sold for, other accounts
and customers, even though their investment objectives may be the same as, or similar to, our
objectives. When two or more clients advised by Calamos or its affiliates seek to purchase or sell
the same publicly traded securities, the securities actually purchased or sold will be allocated
among the clients on a good faith equitable basis by Calamos in its discretion and in accordance
with the clients various investment objectives and the Calamos procedures. In some cases, this
system may adversely affect the price or size of the position we may obtain or sell. In other
cases, our ability to participate in volume transactions may produce better execution for us.
Calamos will evaluate a variety of factors in determining whether a particular investment
opportunity or strategy is appropriate and feasible for the relevant account at a particular time,
including, but not limited to, the following: (1) the nature of the investment opportunity taken
in the context of the
24
other investments at the time; (2) the liquidity of the investment relative to the needs of
the particular entity or account; (3) the availability of the opportunity (i.e., size of obtainable
position); (4) the transaction costs involved; and (5) the investment or regulatory limitations
applicable to the particular entity or account. Because these considerations may differ when
applied to us and relevant accounts under management in the context of any particular investment
opportunity, our investment activities, on the one hand, and other managed accounts, on the other
hand, may differ considerably from time to time. In addition, our fees and expenses will differ
from those of the other managed accounts. Accordingly, investors should be aware that our future
performance and future performance of other accounts of Calamos may vary.
Situations may occur when we could be disadvantaged because of the investment activities
conducted by Calamos and its affiliates for its other funds or accounts. Such situations may be
based on, among other things, the following: (1) legal or internal restrictions on the combined
size of positions that may be taken for us or the other accounts, thereby limiting the size of our
position; (2) the difficulty of liquidating an investment for us or the other accounts where the
market cannot absorb the sale of the combined position; or (3) limits on co-investing in negotiated
transactions under the 1940 Act, as discussed further below.
Calamos and its principals, officers, employees, and affiliates may buy and sell securities or
other investments for their own accounts and may have actual or potential conflicts of interest
with respect to investments made on our behalf. As a result of differing trading and investment
strategies or constraints, positions may be taken by principals, officers, employees, and
affiliates of Calamos that are the same as, different from, or made at a different time than
positions taken for us.
LEVERAGE
The Fund may issue preferred shares or debt securities or borrow to increase its assets
available for investment. The Fund has Preferred Shares outstanding with an aggregate liquidation
preference representing approximately 31.18% of the Funds total assets as of December 31, 2007. As a
non-fundamental policy, the aggregate liquidation of preferred shares and the aggregate principal
amount of debt securities or borrowings may not exceed 38% of the Funds total assets. However,
the Board of Trustees reserves the right to issue preferred shares or debt securities or borrow to
the extent permitted by the 1940 Act. The Fund generally will not issue preferred shares or debt
securities or borrow unless Calamos expects that the Fund will achieve a greater return on such
leverage than the additional costs the Fund incurs as a result of such leverage. The Fund also may
borrow money as a temporary measure for extraordinary or emergency purposes, including the payment
of dividends and the settlement of securities transactions, which otherwise might require untimely
dispositions of the Funds 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 leverage because
Calamos fees are calculated based on the Funds managed assets, which include the proceeds of the
issuance of preferred shares or debt securities or any outstanding borrowings. Consequently, the
Fund and Calamos may have differing interests in determining whether
to leverage the Funds assets. The Funds Board of Trustees
monitors any potential conflicts of interest on an ongoing basis.
The Funds use of leverage is premised upon the expectation that the Funds leverage costs
will be lower than the return the Fund achieves on its investments with the leverage proceeds.
Such difference in return may result from the Funds higher credit rating or the short-term nature
of its borrowing compared to the long-term nature of its investments. Because Calamos seeks to
invest the Funds total assets (including the assets obtained from leverage) in the higher yielding
portfolio investments or portfolio investments with the potential for capital appreciation, the
holders of common shares will be the
25
beneficiaries of any 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 without a corresponding increase in the yield on the Funds
portfolio investments or the Fund otherwise incurs losses on its investments, the Funds net asset
value attributable to its common shares will reflect the decline in the value of portfolio holdings
resulting therefrom.
Leverage creates risks which may adversely affect the return for the holders of common shares,
including:
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the likelihood of greater volatility of net asset value and market price of common
shares; |
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fluctuations in the dividend rates on any preferred shares or in interest rates on
borrowings and short-term debt; |
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increased operating costs, which are effectively borne by common shareholders, may
reduce the Funds total return; and |
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the potential for a decline in the value of an investment acquired with borrowed
funds, while the Funds obligations under such borrowing remains fixed. |
Leverage is a speculative technique that could adversely affect the returns to common
shareholders. Leverage can cause the Fund to lose money and can magnify the effect of any losses.
To the extent the income or capital appreciation derived from securities purchased with funds
received from leverage exceeds the cost of leverage, the Funds return 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 will be less than if leverage had not been used, and
therefore the amount available for distribution to common shareholders as dividends and other
distributions will be reduced or potentially eliminated (or will consist of return of capital).
Calamos may determine to maintain the Funds leveraged position if it expects that the
long-term benefits to the Funds common shareholders of maintaining the leveraged position will
outweigh the current reduced return. Capital raised through the issuance of preferred shares or
debt securities or borrowing will be subject to dividend payments or interest costs that may or may
not exceed the income and appreciation on the assets purchased. The issuance of additional classes
of preferred shares involves offering expenses and other costs and may limit the Funds freedom to
pay dividends on common shares or to engage in other activities. 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. The Fund will pay (and common shareholders will bear) any costs and
expenses relating to any borrowings and to the issuance and ongoing maintenance of preferred shares
or debt securities (for example, distribution related expenses such as a participation fee paid at
an annual rate of 0.25% of preferred share liquidation preference to broker-dealers successfully
participating in preferred share auctions, the higher management fee resulting from the use of any
such leverage, and interest and/or dividend expense and ongoing maintenance). Net asset value will
be reduced immediately following any additional offering of preferred shares or debt securities by
the costs of that offering paid by the Fund.
Under the 1940 Act, the Fund is not permitted to issue preferred shares unless immediately
after such issuance the Fund has an asset coverage of at least 200% of the liquidation value of the
aggregate amount of outstanding preferred shares (i.e., such liquidation value may not exceed 50%
of the value of
26
the Funds total assets). Under the 1940 Act, the Fund may only issue one class of senior
securities representing equity. So long as preferred shares are outstanding, additional senior
equity securities must rank on a parity with the preferred shares. 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 Funds portfolio (determined after deducting
the amount of such dividend or distribution) is at least 200% of such liquidation value. 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 Funds total
assets). Under the 1940 Act, the Fund may only issue one class of senior securities representing
indebtedness. Additionally, under the 1940 Act, the Fund may not declare any dividend or other
distribution upon any class of its shares, or purchase any such shares, unless the aggregate
indebtedness of the Fund has, at the time of the declaration of any such dividend or distribution
or at the time of any such purchase, an asset coverage of at least 300% after deducting the amount
of such dividend, distribution, or purchase price, as the case may be.
The Fund is subject to certain restrictions on investments imposed by guidelines of Moodys
Investor Services, Inc. (Moodys) and Standard & Poors Corporation (S&P), which have issued
ratings for the Preferred Shares and may do so for any debt
securities or preferred shares issued by the Fund in the future. These
guidelines impose asset coverage and 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 that may affect the Funds
ability to pay dividends and distributions on common shares in certain instances. The Fund also
may be required to pledge its assets to the lenders in connection with certain types of borrowings.
Calamos does not anticipate that these covenants or restrictions will adversely affect its ability
to manage the Funds portfolio in accordance with the Funds 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.
The extent to which the Fund employs leverage will depend on many factors, the most important
of which are investment outlook, market conditions and interest rates. Successful use of a
leveraging strategy depends on Calamos ability to predict correctly interest rates and market
movements. There is no assurance that a leveraging strategy will be successful during any period
in which it is employed.
Effects of Leverage
On May 4, 2004, the Fund issued Preferred Shares with an aggregate liquidation preference of
$1,080,000,000. The aggregate liquidation preference of Preferred Shares represented approximately
31.18% of the Funds total assets as of December 31, 2007. Asset coverage with respect to Preferred
Shares was 320.73% as of that date. The dividend rate payable by the Fund on the Preferred Shares
varies based on auctions normally held every 7 or 28 days. As of December 31, 2007, a dividend rate of
5.91%, 6.01%, 5.50%, 5.96%, 5.94%, 5.89%, and 6.20% per year was in effect for Series M, TU, W, TH, F, A
and B preferred shares, respectively.
The following table illustrates the hypothetical effect on the return to a holder of the
Funds common shares of the leverage obtained by issuing preferred shares with a liquidation value
equal to 33% of the Funds total assets, assuming hypothetical annual returns of the Funds
portfolio of minus 10% to plus 10% and dividends on preferred shares at an annual dividend rate of
5.92%. The purpose of the table is to assist you in understanding the effects of leverage. As
the table shows, leverage generally increases the return to shareholders when portfolio return is
positive and greater than the cost of leverage
27
and decreases the return when the portfolio return is negative or less than the cost of
leverage. The figures appearing in the table are hypothetical and actual returns may be greater or
less than those appearing in the table.
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Assumed Portfolio Return (Net of Expenses) |
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(10 |
)% |
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(5 |
)% |
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0 |
% |
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5 |
% |
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10 |
% |
Corresponding Common Share Return |
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-17.96 |
% |
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-10.46 |
% |
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-2.96 |
% |
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4.54 |
% |
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12.04 |
% |
For further information about leveraging, see Risk FactorsAdditional Risks to Common ShareholdersLeverage.
INTEREST RATE TRANSACTIONS
In order to reduce the interest rate risk inherent in the Funds underlying investments and
capital structure, the Fund, if market conditions are deemed favorable, may enter into interest
rate swap or cap transactions to attempt to protect itself from increasing dividend or interest
expenses on its leverage and to hedge portfolio securities from interest rate changes. Interest
rate swaps involve the Funds agreement with the swap counterparty to pay a fixed rate payment in
exchange for the counterparty agreeing to pay the Fund a payment at a variable rate that is
expected to approximate the rate of any variable rate payment obligation on the Funds 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
counterparty and would entitle it, to the extent that a specified variable rate index exceeds a
predetermined fixed rate, to receive from the counterparty payment of the difference based on the
notional amount of such cap. The Fund would use interest rate swaps or caps only with the intent
to reduce or eliminate the risk that an increase in short-term interest rates could have on common
share net earnings as a result of leverage.
The Fund will usually enter into swaps or caps on a net basis; that is, the two payment
streams will be netted out in a cash settlement on the payment date or dates specified in the
instrument, with the Fund receiving or paying, as the case may be, only the net amount of the two
payments. The Fund intends to segregate with its custodian cash or liquid securities having a
value at least equal to the Funds 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 Funds use of interest rate
swaps or caps could enhance or harm the overall performance of the Funds common shares. To the
extent that there is a decline in interest rates for maturities equal to the remaining maturity on
the Funds fixed rate payment obligation under the interest rate swap or equal to the remaining
term of the interest rate cap, the value of the swap or cap (which initially has a value of zero)
could decline, and could result in a decline in the net asset value of the common shares. If, on
the other hand, such rates were to increase, the value of the swap or cap could increase, and
thereby increase the net asset value of the common shares. As interest rate swaps or caps approach
their maturity, their positive or negative value due to interest rate changes will approach zero.
In addition, if the short-term interest rates effectively received by the Fund during the term
of an interest rate swap are lower than the Funds fixed rate of payment on the swap, the swap will
increase the Funds operating expenses and reduce common share net earnings. For example, if the
Fund were to (A) issue Preferred Shares representing 33% of the Funds total assets and (B) enter
into one or more interest
28
rate swaps in a notional amount equal to 75% of its outstanding Preferred Shares under which
the Fund would receive a short-term swap rate of 5.12% and pay a fixed swap rate of 5.35% over the
term of the swap, the swap would effectively increase Fund expenses and reduce Fund common share
net earnings by approximately 0.09% as a percentage of net assets attributable to common shares and
approximately 0.06% as a percentage of managed assets. If, on the other hand, the short-term
interest rates effectively received by the Fund are higher than the Funds fixed rate of payment on
the interest rate swap, the swap would enhance common share net earnings. In either case, the swap
would have the effect of reducing fluctuations in the Funds cost of leverage due to changes in
short-term interest rates during the term of the swap. The example above is purely for
illustrative purposes and is not predictive of the actual percentage of the Funds leverage that
will be hedged by a swap, the actual fixed rates that the Fund will pay under the swap (which will
depend on market interest rates for the applicable maturities at the time the Fund enters into
swaps) or the actual short-term rates that the Fund will receive on any swaps (which fluctuate
frequently during the term of the swap, and may change significantly from initial levels), or the
actual impact such swaps will have on the Funds expenses and common share net earnings.
Buying interest rate caps could enhance the performance of the Funds common shares by
providing a maximum leverage expense. Buying interest rate caps could also increase the operating
expenses of the Fund and 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 on its preferred shares due to increases in short-term interest rates during the
term of the cap had it not entered into the cap agreement. The Fund has no current intention of
selling an interest rate swap or cap. The Fund will monitor any interest rate swaps or caps with a
view to ensuring that it remains in compliance with the federal
income tax requirements for qualification as a regulated investment
company.
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 and caps 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 Funds 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.
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 Funds 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 Funds
common shares.
The Fund may choose or be required to redeem some or all preferred shares or prepay any
borrowings. This redemption or prepayment would likely result in the Fund seeking to terminate
early all or a portion of any swap or cap transaction. Such early termination of a swap could
result in a termination payment by or to the Fund. An early termination of a cap could result in a
termination payment to the Fund.
29
RISK FACTORS
Investing in any of our securities involves risk, including the risk that you may receive
little or no return on your investment or even that you may lose part or all of your investment.
Therefore, before investing in any of our securities you should consider carefully the following
risks, as well as any risk factors included in the applicable prospectus supplement.
Fund Risks
General. The Fund is a diversified, closed-end management investment company designed
primarily as a long-term investment and not as a trading tool. The Fund invests in a diversified
portfolio of common and preferred stocks and income producing securities such as investment grade
and below investment grade debt securities. An investment in the Funds common shares may be
speculative and it involves a high degree of risk. The Fund should not constitute a complete
investment program. Due to the uncertainty in all investments, there can be no assurance that the
Fund will achieve its investment objective.
Equity Securities Risk. Equity investments are subject to greater fluctuations in market
value than other asset classes as a result of such factors as the issuers business performance,
investor perceptions, stock market trends and general economic conditions. Equity securities are
subordinated to bonds and other debt instruments in a companys capital structure in terms of
priority to corporate income and liquidation payments.
High Yield Securities Risk. 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 issuers 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:
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increased price sensitivity to changing interest rates and to a deteriorating
economic environment; |
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greater risk of loss due to default or declining credit quality; |
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adverse company specific events are more likely to render the issuer unable to make
interest and/or principal payments; and |
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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
Moodys means that the issue so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing. Standard & Poors 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
30
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
Moodys and Standard & Poors 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 Funds 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 issuers 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 Funds 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 Funds net asset value.
Because 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.
Interest Rate Risk. Fixed income securities, including high yield securities, are subject to
certain common risks, including:
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if interest rates go up, the value of debt securities in the Funds portfolio
generally will decline; |
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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; |
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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 securitys 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 |
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market interest rates currently are near 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.
Liquidity Risk. The Fund may invest up to 15% of its managed assets in securities that, at
the time of investment, are illiquid (determined using the Commissions 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 Funds 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 Funds 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 Funds assets in illiquid securities may
restrict the Funds ability to take advantage of market opportunities. The market price of
illiquid securities generally is more volatile than that of more liquid securities, which may
adversely affect the price that the Fund pays for or recovers upon the sale of illiquid securities.
Illiquid securities are also more difficult to value and Calamos judgment may play a greater role
in the valuation process. The risks associated with illiquid securities may be particularly acute
in situations in which the Funds 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 Risk. 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:
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less information about non-U.S. issuers or markets may be available due to less
rigorous disclosure or accounting standards or regulatory practices; |
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many non-U.S. markets are smaller, less liquid and more volatile. In a changing
market, Calamos may not be able to sell the Funds portfolio securities at times, in
amounts and at prices it considers reasonable; |
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the adverse effect of currency exchange rates or controls on the value of the Funds
investments; |
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the economies of non-U.S. countries may grow at slower rates than expected or may
experience a downturn or recession; |
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economic, political and social developments may adversely affect the securities
markets, including expropriation and nationalization; |
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the difficulty in obtaining or enforcing a court judgment in non-U.S. countries; |
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restrictions on foreign investments in non-U.S. jurisdictions; |
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difficulties in effecting the repatriation of capital invested in non-U.S.
countries; and |
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withholding and other non-U.S. taxes may decrease the Funds 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 Funds investments and the availability to
the Fund of additional investments in such countries.
Convertible Securities Risk. The value of a convertible security is influenced by both the
yield of non-convertible securities of comparable issuers and by the value of the underlying common
stocks. 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. A
convertible securitys investment value tends to decline as prevailing interest rate levels
increase. Conversely, a convertible securitys investment value increases as prevailing interest
rate levels decline.
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However, a convertible securitys market value will also be influenced by its conversion
price, which is the market value of the underlying common stock that would be obtained if the
convertible security were converted. A convertible securitys conversion price tends to increase
as the price of the underlying common stock increases, and decrease as the price of the underlying
common stock decreases. As the market price of the underlying common stock declines such that the
conversion price is substantially below the investment value of the convertible security, the price
of the convertible security tends to be influenced more by the yield of the convertible security.
Thus, the convertible security may not decline in price to the same extent as the underlying common
stock. If the market price of the underlying common stock increases to a point where the
conversion value approximates or exceeds the investment value, the price of the convertible
security tends to be influenced more by the market price of the underlying common stock. In the
event of a liquidation of the issuing company, holders of convertible securities would be paid
before the companys common stockholders. Consequently, an issuers convertible securities
generally entail less risk than its common stock.
Synthetic Convertible Securities Risk. The value of a synthetic convertible security may
respond differently to market fluctuations than a convertible security because a synthetic
convertible is composed of two or more separate securities, each with its own market value. In
addition, if the value of the underlying common stock or the level of the index involved in the
convertible component falls below the exercise price of the warrant or option, the warrant or
option may lose all value.
Risks Associated with Options. There are several risks associated with transactions in
options. For example, there are significant differences between the securities markets and 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
movements, which cannot be assured.
The Fund may sell options on individual securities and securities indices. All calls sold by
the Fund must be covered. Even though the Fund will receive the option premium to help protect it
against loss, a call option sold by the Fund exposes the Fund during the term of the option to
possible loss of opportunity to realize appreciation in the market price of the underlying security
or instrument and may require the Fund to hold a security or instrument that it might otherwise
have sold. The Fund may purchase and sell put options on individual securities and securities
indices. In selling put options, there is a risk that the Fund may be required to buy the
underlying security at a disadvantageous price above the market price.
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 federal income tax
requirements applicable to regulated investment companies if the tax characterization of the Funds
investments or the tax treatment of the income from such investments were successfully challenged
by the Internal Revenue Service. See Certain 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 Funds Agreement and Declaration of Trust and Bylaws 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 SharesPreferred
Shares and Certain Provisions of the Agreement and Declaration of Trust and Bylaws. The holders
of preferred shares, on the one hand, and the holders of the common shares, on the other, may have
interests that conflict in these situations.
Market Disruption Risk. Certain events have a disruptive effect on the securities markets,
such as terrorist attacks, 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.
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Additional Risks to Common Shareholders
Leverage Risk. The Fund has issued Preferred Shares and may issue additional preferred shares
or borrow money or issue debt securities. The Funds use of leverage creates risk. As a
non-fundamental policy, such preferred shares, borrowing or debt securities may not exceed 38% of
the Funds total assets. However, the Board of Trustees reserves the right to issue preferred
shares or borrow to the extent permitted by the 1940 Act.
Leverage creates risks which may adversely affect the return for the holders of common shares,
including:
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the likelihood of greater volatility of net asset value and market price of common
shares; |
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fluctuations in the dividend rates on any preferred shares or in interest rates on
borrowings and short-term debt; |
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increased operating costs, which are effectively borne by common shareholders, may
reduce the Funds total return; and |
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the potential for a decline in the value of an investment acquired with borrowed
funds, while the Funds obligations under such borrowing remain fixed. |
The Funds use of leverage is premised upon the expectation that the Funds preferred share
dividends or borrowing cost will be lower than the return the Fund achieves on its investments with
the proceeds of the issuance of preferred shares or debt securities or borrowing. Such difference
in return may result from the Funds higher credit rating or the short-term nature of its borrowing
compared to the long-term nature of its investments. Because Calamos seeks to invest the Funds
total assets (including the assets obtained from leverage) 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 the 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 without a corresponding increase in the
yield on the Funds portfolio investments or the Fund otherwise incurs losses on its investments,
the Funds net asset value attributable to its common shares will reflect the decline in the value
of portfolio holdings resulting therefrom.
Leverage is a speculative technique that could adversely affect the returns to common
shareholders. Leverage can cause the Fund to lose money and can magnify the effect of any losses.
To the extent the income or capital appreciation derived from securities purchased with funds
received from leverage exceeds the cost of leverage, the Funds return 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 will be less than if leverage had not been used, and
therefore the amount available for distribution to common shareholders as dividends and other
distributions will be reduced or potentially eliminated.
The Fund will pay,
and common shareholders will effectively bear, any costs and expenses relating to any borrowings and to the
issuance and ongoing maintenance of preferred shares or debt securities. Such costs and expenses include
the higher management fee resulting from the use of any such leverage, offering and/or issuance costs, and
interest and/or dividend expense and ongoing maintenance.
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 that may affect the Funds ability to pay dividends and
distributions on common shares in certain instances. The Fund may also be required to pledge its
assets to the lenders in connection with certain types of borrowings. The Fund is subject to
certain restrictions on investments imposed by guidelines of Moodys and S&P, which have issued
ratings for the Preferred
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Shares and may do so for 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.
If the Funds ability to make dividends and distributions on its common shares is limited,
such limitation could, under certain circumstances, impair the ability of the Fund to maintain its
qualification for taxation as a regulated investment company, which would have adverse tax
consequences for common shareholders. To the extent that the Fund is required, in connection with
maintaining 1940 Act asset coverage requirements or otherwise, or elects to redeem any preferred
shares or debt securities or prepay any borrowings, the Fund may need to liquidate investments to
fund such redemptions or prepayments. Liquidation at times of adverse economic conditions may
result in capital loss and reduce returns to common shareholders.
Because Calamos investment management fee is a percentage of the Funds managed assets,
Calamos fee will be higher if the Fund is leveraged and Calamos will have an incentive to be more
aggressive and leverage the Fund. Consequently, the Fund and Calamos may have differing interests
in determining whether to leverage the Funds assets. Any additional use of leverage by the Fund would require
approval by the Board of Trustees of the Fund. In considering whether to approve the use of
additional leverage, the Board would be presented with all relevant information necessary to make a
determination whether or not additional leverage would be in the best interests of the Fund,
including information regarding any potential conflicts of interest.
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
leverage 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 Funds 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
Funds 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 rating on its preferred shares or fails to
maintain other covenants with respect to the 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
segregate with its custodian cash or liquid securities having a value at least equal to the Funds
net payment obligations under any swap transaction, marked-to-market daily.
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Market Impact Risk. The sale of our common shares (or the perception that such sales may
occur) may have an adverse effect on prices in the secondary market for our common shares. An
increase in the number of common shares available may put downward pressure on the market price for
our common shares. These sales also might make it more difficult for us to sell additional equity
securities in the future at a time and price we deem appropriate.
Dilution Risk. The voting power of current shareholders will be diluted to the extent that
current shareholders do not purchase shares in any future common share offerings or do not purchase
sufficient shares to maintain their percentage interest. In addition, if we are unable to invest
the proceeds of such offering as intended, our per share distribution may decrease and we may not
participate in market advances to the same extent as if such proceeds were fully invested as
planned.
Market Discount Risk. The Funds common shares have traded both at a premium and at a
discount in relation to net asset value. Shares of closed-end investment companies frequently
trade at a discount from net asset value, but in some cases trade above net asset value. The risk
of the common shares trading at a discount is a risk separate from the risk of a decline in the
Funds net asset value as a result of investment activities.
The Funds net asset value may be reduced immediately following this offering
by the offering costs for common shares, including the sales load, which will be borne entirely by
all common shareholders.
Whether shareholders will realize a gain or loss upon the sale of the Funds common shares
depends upon whether the market value of the shares at the time of sale is above or below the price
the shareholder paid, taking into account transaction costs for the shares, and is not directly
dependent upon the Funds net asset value. Because the market value of the Funds common shares
will be determined by factors such as the relative demand for and supply of the shares in the
market, general market conditions and other factors beyond the control of the Fund, the Fund cannot
predict whether its common shares will trade at, below or above net asset value, or below or above
the public offering price for the common shares.
Additional Risks to Senior Security Holders
Generally, an investment in preferred shares or debt securities (collectively, senior
securities) is subject to the following risks:
Interest Rate Risk. Auction rate senior securities pay dividends or interest based on
short-term interest rates. If short-term interest rates rise, dividends or interest on the auction
rate senior securities may rise so that the amount of dividends or interest due to holders of
auction rate senior securities would exceed the cash flow generated by our portfolio securities.
This might require us to sell portfolio securities at a time when we would otherwise not do so,
which may affect adversely our future ability to generate cash flow. In addition, rising market
interest rates could impact negatively the value of our investment portfolio, reducing the amount
of assets serving as asset coverage for the senior securities.
Senior Leverage Risk. Preferred shares will be junior in liquidation and with respect to
distribution rights to debt securities and any other borrowings. Senior securities representing
indebtedness may constitute a substantial lien and burden on preferred shares by reason of their
prior claim against our income and against our net assets in liquidation. We may not be permitted
to declare dividends or other distributions with respect to any series of preferred shares unless
at such time we meet applicable asset coverage requirements and the payment of principal or
interest is not in default with respect to any borrowings.
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Ratings and Asset Coverage Risk. To the extent that senior securities are rated, a rating
does not eliminate or necessarily mitigate the risks of investing in our senior securities, and a
rating may not fully or accurately reflect all of the credit and market risks associated with a
security. A rating agency could downgrade the rating of our shares of preferred stock or debt
securities, which may make such securities less liquid at an auction or in the secondary market,
though probably with higher resulting interest rates. If a rating agency downgrades the rating
assigned to a senior security, we may alter our portfolio or redeem the senior security. We may
voluntarily redeem a senior security under certain circumstances.
Inflation Risk. Inflation is the reduction in the purchasing power of money resulting from an
increase in the price of goods and services. Inflation risk is the risk that the inflation
adjusted or real value of an investment in preferred stock or debt securities or the income from
that investment will be worth less in the future. As inflation occurs, the real value of the
preferred stock or debt securities and the dividend payable to holders of preferred stock or
interest payable to holders of debt securities declines. In an inflationary period, however, it is
expected that, through the auction process, dividend or interest rates would increase, tending to
offset this risk.
Auction Risk. To the extent that senior securities trade through an auction, there are
certain risks associated with participating in an auction and certain risks if you try to sell
senior securities outside of an auction in the secondary market. These risks will be described in
more detail in an applicable prospectus supplement if we issue senior securities pursuant to this
registration statement.
Decline in Net Asset Value Risk. A material decline in our NAV may impair our ability to
maintain required levels of asset coverage for our preferred shares or debt securities.
MANAGEMENT OF THE FUND
Trustees and Officers
The Funds Board of Trustees provides broad supervision over the affairs of the Fund. The
officers of the Fund are responsible for the Funds operations. There are seven Trustees of the
Fund, one of whom is an interested person of the Fund (as defined in the 1940 Act) and six 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
Funds investments are managed by Calamos, 2020 Calamos Court,
Naperville, IL. On December 31, 2007, Calamos managed approximately
$46.2 billion in assets of individuals and
institutions. Calamos is a wholly-owned subsidiary of Holdings and indirect subsidiary of Calamos
Asset Management, Inc., a publicly traded holding company whose shares are listed on the NASDAQ
exchange under the ticker symbol CLMS.
Investment Management Agreement
Subject to the overall authority of the Board of Trustees, Calamos regularly provides the Fund
with investment research, advice and supervision and furnishes continuously an investment program
for the Fund. In addition, Calamos furnishes for use of the Fund such office space and facilities
as the Fund may require for its reasonable needs, supervises the 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
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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 Funds registration statement on Form N-2 and
semi-annual reports on Form N-SAR; (d) overseeing the tabulation of proxies by the Funds transfer
agent; (e) assisting in the preparation and filing of the Funds federal, state and local tax
returns; (f) assisting in the preparation and filing of the Funds 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 Funds
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
Funds operations and consulting with the Funds independent accountants, legal counsel and the
Funds other agents as necessary in connection therewith; (m) reviewing the Funds 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 Funds business, subject to the direction and control of the Trustees.
Under the investment management agreement, the Fund pays to Calamos a fee based on the average
weekly managed assets that is computed weekly and paid on a monthly basis. The fee paid by the
Fund is at the annual rate of 1.00% of managed assets. Because the fees paid to Calamos are
determined on the basis of the Funds 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 Funds
custodian or other agents of the Fund; (f) telephone, telex, facsimile, postage and other
communications expenses; (g) taxes and governmental fees; (h) fees, dues and expenses incurred by
the Fund in connection with membership in investment company trade organizations and the expense of
attendance at professional meetings of such organizations; (i) fees and expenses of accounting
agents, custodians, subcustodians, transfer agents, dividend disbursing agents and registrars;
(j) payment for portfolio pricing or valuation services to pricing agents, accountants, bankers and
other specialists, if any; (k) expenses of preparing share certificates; (l) expenses in connection
with the issuance, offering, distribution, sale, redemption or repurchase of securities issued by
the Fund; (m) expenses relating to investor and public relations provided by parties other than
Calamos; (n) expenses and fees of registering or qualifying shares of beneficial interest of the
Fund for sale; (o) interest charges, bond premiums and other insurance expenses; (p) freight,
insurance and other charges in connection with the shipment of the Funds portfolio securities;
(q) the compensation
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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 Funds shares on the NYSE or any other national
stock exchange.
Portfolio Managers
Calamos employs a team approach to portfolio management, with teams led by the Co-Chief
Investment Officers (the Co-CIOs) and comprised generally of the Co-CIOs, senior strategy
analysts, intermediate analysts and junior analysts. The Co-CIOs and senior strategy analysts are
supported by and lead a team of investment professionals whose valuable contributions create a
synergy of expertise that can be applied across many different investment strategies.
Portfolio holdings are reviewed and trading activity is discussed on a regular basis by team
members. Team members generally may make trading decisions guided by
the Funds
investment objective and strategy.
While day-to-day management of each portfolio is a team effort, the Co-CIOs, along with the
Director of Fixed Income and certain of the senior strategy analysts, have joint primary and
supervisory responsibility for the Fund and work with all team members in developing and executing
each respective portfolios investment program. The Funds portfolio investment program includes
implementation of distinct strategies, including a fixed income approach which is lead by the
Director of Fixed Income of Calamos. All team leaders are further identified below.
John P. Calamos, Sr., Co-CIO of Calamos, generally focuses on the top-down approach of
diversification by industry sector and macro-level investment themes. Nick P. Calamos, Co-CIO of
Calamos, also focuses on the top-down approach of diversification by industry sector and
macro-level investment themes and, in addition, focuses on the bottom-up approach and corresponding
research and analysis. Matthew Toms is Director of Fixed Income. John P. Calamos, Jr., John
Hillenbrand, Steve Klouda, Jeff Scudieri and Jon Vacko are each senior strategy analysts.
During the past five years, John P. Calamos, Sr. has been President and Trustee of the Fund
and chairman, CEO and Co-CIO of Calamos and its predecessor company. Nick P. Calamos has been Vice
President of the Fund and Senior Executive Vice President and Co-CIO of Calamos and its predecessor
company. Matthew Toms joined Calamos in March 2007 as Director of Fixed Income. John P.
Calamos, Jr., Executive Vice President of Calamos, joined the firm in 1985 and has held various
senior investment positions since that time. John Hillenbrand joined Calamos in 2002 and has been
a senior strategy analyst since August 2002. Steve Klouda joined Calamos in 1994 and has been a
senior strategy analyst since July 2002. Jeff Scudieri joined Calamos in 1997 and has been a
senior strategy analyst since September 2002. Jon Vacko joined Calamos in 2000 and has been a
senior strategy analyst since July 2002.
For over 20 years, the Calamos portfolio management team has managed money for its 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
40
has included investments in established as well as emerging foreign markets. The Funds
statement of additional information provides additional information about the team leaders,
including other accounts they manage, their ownership in the Calamos Family of Funds and their
compensation.
Fund Accounting
Under the arrangements with State Street to provide fund accounting services, State Street
provides certain administrative and accounting services to the Fund and such other funds advised by
Calamos that may be part of those arrangements (the Fund and such other fund 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 .009% for the first
$5.0 billion of Combined Assets, .0075% for the next $5.0 billion of Combined Assets, .005% for the
next $5.0 billion of Combined Assets and .0035% for the Combined Assets in excess of $15.0 billion.
Because the fees payable to State Street are based on the managed assets of the Calamos Funds, the
fees increase as the Calamos Funds increase their leverage.
In addition, Calamos also provides certain other financial accounting services to the Calamos
Funds described more fully in the statement of additional information. For providing those
services, Calamos receives a fee at the annual rate of .0175% on the first $1 billion of the daily
average net assets of the Calamos Funds; .0150% on the next $1 billion of the daily average net
assets of the Calamos Funds; and .0110% on the daily average net assets of the Calamos Funds 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 net assets of
each fund.
CLOSED-END FUND STRUCTURE
The Fund is a diversified, closed-end management investment company (commonly referred to as a
closed-end fund) which commenced investment operations in March 2004. Closed-end funds differ from
open-end management investment companies (which are generally referred to as mutual funds) in that
closed-end funds generally list their shares for trading on a stock exchange and do not redeem
their shares at the request of the shareholder. This means that if you wish to sell your shares of
a closed-end fund you must trade them on the market like any other stock at the prevailing market
price at that time. In a mutual fund, if the shareholder wishes to sell shares of the fund, the
mutual fund will redeem or buy back the shares at net asset value. Also, mutual funds generally
offer new shares on a continuous basis to new investors, and closed-end funds generally do not.
The continuous inflows and outflows of assets in a mutual fund can make it difficult to manage the
funds investments. By comparison, closed-end funds are generally able to stay more fully invested
in securities that are consistent with their investment objectives and also have greater
flexibility to make certain types of investments and to use certain investment strategies, such as
financial leverage and investments in illiquid securities.
Shares of closed-end funds frequently trade at a discount to their net asset value. To the
extent the common shares do trade at a discount, the Funds Board of Trustees may from time to time
engage in open-market repurchases or tender offers for shares after balancing the benefit to
shareholders of the increase in the net asset value per share resulting from such purchases against
the decrease in the assets of the Fund and potential increase in the expense ratio of expenses to
assets of the Fund. The Board of Trustees believes that in addition to the beneficial effects
described above, any such purchases or tender
41
offers may result in the temporary narrowing of any discount but will not have any long-term
effect on the level of any discount. We cannot guarantee or assure, however, that the Funds Board
of Trustees will decide to engage in any of these actions. Nor is there any guarantee or assurance
that such actions, if undertaken, would result in the shares trading at a price equal or close to
net asset value per share. The Board of Trustees might also consider converting the Fund to an
open-end mutual fund, which would also require a vote of the shareholders of the Fund. Conversion
of the Fund to an open-end mutual fund would require an amendment to the Funds Declaration of
Trust. Such an amendment would require the favorable vote of the holders of at least 75% of the
Funds outstanding shares (including any preferred shares) entitled to be voted on the matter,
voting as a single class (or a majority of such shares if the amendment were previously approved,
adopted or authorized by 75% of the total number of Trustees fixed in accordance with the Bylaws),
and, assuming preferred shares are issued, the affirmative vote of a majority of outstanding
preferred shares, voting as a separate class.
CERTAIN FEDERAL INCOME TAX MATTERS
The following is a general summary of certain federal income tax considerations affecting us
and our security holders. This discussion does not purport to be complete or to deal with all
aspects of federal income taxation that may be relevant to shareholders in light of their
particular circumstances or who are subject to special rules, such as banks, thrift institutions
and certain other financial institutions, REITs, regulated investment
companies, insurance companies, brokers and dealers in securities or currencies, certain securities
traders, tax-exempt investors, individual retirement accounts, certain tax-deferred accounts, and
foreign investors. Tax matters are very complicated, and the tax consequences of an investment in
and holding of our securities will depend on the particular facts of each investors situation.
Investors are advised to consult their own tax advisors with respect to the application to their
own circumstances of the general federal income taxation rules described below and with respect to
other federal, state, local or foreign tax consequences to them before making an investment in our
securities. Unless otherwise noted, this discussion assumes that investors are U.S. persons
and hold our securities as capital assets. More detailed information regarding the federal income
tax consequences of investing in our securities is in the statement of additional information.
Pursuant to U.S. Treasury Department Circular 230, we are informing you that (1) this
discussion is not intended to be used, was not written to be used, and cannot be used, by any
taxpayer for the purpose of avoiding penalties under the U.S. federal tax laws, (2) this discussion
was written by us in connection with the registration of our securities and our promotion or
marketing, and (3) each taxpayer should seek advice based on his, her or its particular
circumstances from an independent tax advisor.
Federal Income Taxation of the Fund
The Fund has elected to be treated, and intends 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, less 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
42
net short-term capital loss), it will be subject to U.S. federal income tax at regular
corporate federal income tax rates (currently at a 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 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 in amounts necessary to
avoid the excise tax and accordingly does not expect to be subject to this tax.
If, for any taxable year, the Fund does not qualify as a regulated investment company for U.S.
federal income tax purposes, it would be treated in the same manner as a regular 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 Funds distributions, to the extent
derived from the Funds current or accumulated earnings and profits, would generally constitute
ordinary dividends, which would generally be eligible for the dividends received deduction
available to corporate shareholders, and non-corporate shareholders would generally be able to
treat such distributions as qualified dividend income eligible for reduced rates of U.S. federal
income taxation in taxable years beginning on or before December 31, 2010.
Certain of the Funds investment practices are subject to special and complex federal income
tax provisions that may, among other things, (i) disallow, suspend or otherwise limit the allowance
of certain losses or deductions, (ii) convert tax-advantaged, long-term capital gains and qualified
dividend income into higher taxed short-term capital gain or ordinary income, (iii) convert an
ordinary loss or a deduction into a capital loss (the deductibility of which is more limited),
(iv) cause the Fund to recognize income or gain without a corresponding receipt of cash,
(v) adversely affect the timing as to when a purchase or sale of stock or securities is deemed to
occur, and (vi) adversely alter the characterization of certain complex financial transactions.
The Fund will monitor its transactions and may make certain tax elections where applicable in order
to mitigate the effect of these provisions, if possible.
Dividends, interest and some capital gains received by the Fund on foreign securities may be
subject to foreign tax withholdings or other foreign taxes. If it
meets certain requirements, the Fund may make an
election under the Code to pass through such taxes to shareholders of the Fund. If such an
election is not made, any foreign taxes paid or accrued by the Fund will represent an expense of
the Fund. If an election is made, shareholders will generally be able to claim a credit or
deduction on their federal income tax return for, and will be required to treat as part of the
amounts distributed to them, their pro rata portion of the income taxes paid by the Fund to foreign
countries (which taxes relate primarily to investment income). The Fund does not currently
anticipate that it will qualify to make such an election.
Federal Income Taxation of Common and Preferred Shares
Federal Income Tax Treatment of Common Share Distributions. Unless a shareholder is
ineligible to participate or elects otherwise, all distributions will be automatically reinvested
in additional shares of common stock of the Fund pursuant to the
Funds Automatic Dividend Reinvestment Plan (the Plan). For taxpayers subject to
U.S. federal income tax, all dividends will generally be taxable regardless of whether a
shareholder takes them in cash or they are reinvested pursuant to the Plan in additional shares of
the Fund. Distributions of the Funds investment company taxable income (determined without regard
to the deduction for dividends paid) will generally be taxable at
ordinary federal income tax rates to the
extent of the Funds current and accumulated earnings and profits. However, a portion of such
distributions derived from certain corporate dividends, if any, may qualify for either the
dividends received deduction available to corporate shareholders under Section 243 of the Code or
the reduced rates of U.S. federal income taxation for qualified dividend
43
income currently available to noncorporate shareholders under Section 1(h)(11) of the Code,
provided certain holding period and other requirements are met at both the Fund and shareholder
levels. The provisions of the Code applicable to qualified dividend income are currently
effective for taxable years beginning on or before December 31, 2010. Distributions of net capital
gain, if any, are generally taxable as long-term capital gains for U.S. federal income tax purposes
without regard to the length of time a shareholder has held shares of the Fund. A distribution of
an amount in excess of the Funds current and accumulated earnings and profits, if any, will be
treated by a shareholder as a tax-free return of capital, which is applied against and reduces the
shareholders basis in his, her or its shares. To the extent that the amount of any such
distribution exceeds the shareholders basis in his, her or its shares, the excess will be treated
by the shareholder as gain from the sale or exchange of shares. The U.S. federal income tax status
of all dividends and distributions will be designated by the Fund and reported to the shareholders
annually.
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 federal income 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 shareholders gross income and
the federal income tax deemed paid by the shareholders.
If a shareholders distributions are automatically reinvested pursuant to the Plan and the
plan agent invests the distribution in shares acquired on behalf of the shareholder in open-market
purchases, for U.S. federal income tax purposes, the shareholder will be treated as having received
a taxable distribution in the amount of the cash dividend that the shareholder would have received
if the shareholder had elected to receive cash. If a shareholders distributions are automatically
reinvested pursuant to the Plan and the plan agent invests the distribution in newly issued shares
of the Fund, the shareholder will be treated as receiving a taxable distribution equal to the fair
market value of the stock the shareholder receives.
Dividends declared by the Fund in October, November or December with
a record date in such month that are paid during the following
January will be treated for federal income tax purposes as paid by
the Fund and received by the shareholders on December 31 of the
calendar year in which they were declared.
Federal Income Tax Treatment of Preferred Share Distributions. Under present law, we are of
the opinion that our preferred shares will constitute equity, and thus distributions with respect
to preferred shares (other than distributions in redemption of preferred shares subject to
Section 302(b) of the Code) will generally constitute dividends to the extent of the Funds current
or accumulated earnings and profits, as calculated for federal income tax purposes. Except in the
case of distributions of net capital gain, such dividends generally will be taxable to holders at
ordinary federal income tax rates but may qualify for the dividends received deduction available to
corporate shareholders under Section 243 of the Code or the reduced rates of U.S. federal income
taxation under Section 1(h)(11) of the Code that apply to qualified dividend income received by
noncorporate shareholders. Distributions designated by the Fund as net capital gain distributions
will be taxable as long-term capital gain regardless of the length of time a shareholder has held
shares of the Fund. Please see the discussion above on qualified dividend income, dividends
received deductions and net capital gain.
The
Internal Revenue Service (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 dividends received deduction, if any, and qualified dividend income, if any,
in proportion to the preferred shares
44
share of total dividends paid during the year. See Federal Income Tax Matters in the
statement of additional information.
Earnings and profits are generally treated, for federal income tax purposes, as first being
used to pay distributions on the preferred shares, and then to the extent remaining, if any, to pay
distributions on the common shares. Distributions in excess of the Funds earnings and profits, if
any, will first reduce a shareholders adjusted tax basis in his or her preferred shares and, after
the adjusted tax basis is reduced to zero, will constitute capital gains to a shareholder who holds
such shares as a capital asset.
Dividends declared by the Fund in October, November or December with
a record date in such month that are paid during the following
January will be treated for federal income tax purposes as paid by
the Fund and received by the shareholders on December 31 of the
calendar year in which they were declared.
Sale of Shares. Sales and other dispositions of the Funds shares generally 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 Funds shares is properly treated as a sale or exchange for federal
income tax purposes, as the following discussion assumes, and the tax treatment of any gains or
losses recognized in such transactions. Gain or loss will generally be equal to the difference
between the amount of cash and the fair market value of other property received and the
shareholders adjusted tax basis in the shares sold or exchanged. Such gain or loss will generally
be characterized as capital gain or loss and will be long-term or short-term depending on the
shareholders holding period in the shares disposed. However, any loss realized by a shareholder
upon the sale or other disposition of shares with a federal income 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. The ability to deduct capital losses may be
limited. In addition, losses on sales or other dispositions of shares may be disallowed under the
wash sale rules in the event that substantially identical
stock or securities are acquired (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.
Backup Withholding. The Fund is required in certain circumstances to withhold federal income
tax (backup withholding) at a current rate of 28% on reportable payments including dividends,
capital gain distributions, and proceeds of sales or other dispositions of the Funds shares paid
to certain holders of the Funds shares who do not furnish the Fund with their 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
shareholders U.S. federal income tax liability, if any, provided that the required information is
furnished to the IRS.
Federal Income Taxation of Debt Securities
Federal Income Tax Treatment of Holders of Debt Securities. Under present law, we are of the
opinion that the debt securities will constitute indebtedness of the Fund for federal income tax
purposes, which the discussion below assumes. We intend to treat all payments made with respect to
the debt securities consistent with this characterization.
Taxation of Interest. Payments or accruals of interest on debt securities generally will be
taxable to you as ordinary interest income at the time such interest is received (actually or
constructively) or accrued, in accordance with your regular method of accounting for federal income
tax purposes.
Purchase, Sale and Redemption of Debt Securities. Initially, your tax basis in debt
securities acquired generally will be equal to your cost to acquire such debt securities. This
basis will increase by the amounts, if any, that you include in income under the rules governing
market discount, and will
45
decrease by the amount of any amortized premium on such debt securities, as discussed below.
When you sell or exchange any of your debt securities, or if any of your debt securities are
redeemed, you generally will recognize gain or loss equal to the difference between the amount you
realize on the transaction (less any accrued and unpaid interest,
which will be subject to federal income tax as
interest in the manner described above) and your tax basis in the debt securities relinquished.
Except as discussed below with respect to market discount, the gain or loss that you recognize
on the sale, exchange or redemption of any of your debt securities generally will be capital gain
or loss. Such gain or loss will generally be long-term capital gain or loss if the disposed debt
securities were held for more than one year and will be short-term capital gain or loss if the
disposed debt securities were held for one year or less. Net long-term capital gain recognized by
a noncorporate U.S. holder generally will be subject to federal income tax at a lower rate
(currently a maximum rate of 15%, although this rate will increase to
20% for taxable years beginning after December 31, 2010) than net
short-term capital gain or ordinary income (currently a maximum rate of 35%). For corporate
holders, capital gain is generally taxed for federal income tax
purposes at the same rate as ordinary income, that is, currently at a maximum rate
of 35%. A holders ability to deduct capital losses may be limited.
Amortizable Premium. If you purchase debt securities at a cost greater than their stated
principal amount, plus accrued interest, you will be considered to have purchased the debt
securities at a premium, and you generally may elect to amortize this premium as an offset to
interest income, using a constant yield method, over the remaining term of the debt securities. If
you make the election to amortize the premium, it generally will apply to all debt instruments that
you hold at the beginning of the first taxable year to which the
election applies, as well as any debt instruments that you subsequently
acquire. In addition, you may not revoke the election without the consent of the IRS. If you
elect to amortize the premium, you will be required to reduce your tax basis in the debt securities
by the amount of the premium amortized during your holding period. If you do not elect to amortize
premium, the amount of premium will be included in your tax basis in the debt securities.
Therefore, if you do not elect to amortize the premium and you hold the debt securities to
maturity, you generally will be required to treat the premium as a capital loss when the debt
securities are redeemed.
Market Discount. If you purchase debt securities at a price that reflects a market
discount, any principal payments on, or any gain that you realize on the disposition of the debt
securities generally will be treated as ordinary interest income to the extent of the market
discount that accrued on the debt securities during the time you held such debt securities.
Market discount is defined under the Code as, in general, the excess of the
stated redemption price at maturity over the purchase price of the debt security, except that if
the market discount is less than 0.25% of the stated redemption price at maturity multiplied by the
number of complete years to maturity, the market discount is considered to be zero. In addition,
you may be required to defer the deduction of all or a portion of any interest paid on any
indebtedness that you incurred or continued to purchase or carry the debt securities that were
acquired at a market discount. In general, market discount will be treated as accruing ratably
over the term of the debt securities, or, at your election, under a constant yield method.
You may elect to include market discount in gross income currently as it accrues (on either a
ratable or constant yield basis), in lieu of treating a portion of any gain realized on a sale of
the debt securities as ordinary income. If you elect to include market discount on a current
basis, the interest deduction deferral rule described above will not apply and you will increase
your basis in the debt security by the amount of market discount you include in gross income. If
you do make such an election, it will apply to all market discount debt instruments that you
acquire on or after the first day of the first taxable year to which the election applies. This
election may not be revoked without the consent of the IRS.
46
Information Reporting and Backup Withholding. In general, information reporting requirements
will apply to payments of principal, interest, and premium, if any, paid on debt securities and to
the proceeds of the sale of debt securities paid to U.S. holders other than certain exempt
recipients (such as certain corporations). Information reporting generally will apply to payments
of interest on the debt securities to non-U.S. Holders (as defined below) and the amount of tax, if
any, withheld with respect to such payments. Copies of the information returns reporting such
interest payments and any withholding may also be made available to the tax authorities in the
country in which the non-U.S. Holder resides under the provisions of an applicable income tax
treaty. In addition, for non-U.S. Holders, information reporting will apply to the proceeds of the
sale of debt securities within the United States or conducted through United States-related
financial intermediaries unless the certification requirements described below have been complied
with and the statement described below in Taxation of Non-U.S. Holders has been received (and the
payor does not have actual knowledge or reason to know that the holder is a United States person)
or the holder otherwise establishes an exemption.
We may be required to withhold, for U.S. federal income tax purposes, a portion of all
payments (including redemption proceeds) payable to holders of debt securities who fail to provide
us with their correct taxpayer identification number, who fail to make required certifications or
who have been notified by the IRS that they are subject to backup withholding (or if we have been
so notified). Certain corporate and other shareholders specified in the Code and
the regulations thereunder are exempt from backup withholding. Backup withholding is not an
additional tax. Any amounts withheld may be credited against the holders U.S. federal income tax
liability provided the appropriate information is furnished to the IRS. If you are a non-U.S.
Holder, you may have to comply with certification procedures to establish your non-U.S. status in
order to avoid backup withholding tax requirements. The certification procedures required to claim
the exemption from withholding tax on interest income described below will satisfy these
requirements.
Taxation of Non-U.S. Holders. If you are a non-resident alien individual or a foreign
corporation (a non-U.S. Holder), the payment of interest on the debt securities generally will be
considered portfolio interest and thus generally will be
exempt from U.S. federal
withholding tax. This exemption will apply to you provided that (1) interest paid on the debt
securities is not effectively connected with your conduct of a trade or business in the United
States, (2) you are not a bank whose receipt of interest on the debt securities is described in
Section 881(c)(3)(A) of the Code, (3) you do not actually or constructively own
10 percent or more of the combined voting power of all classes of the Funds stock entitled to
vote, (4) you are not a controlled foreign corporation that is
related, directly or indirectly, to
the Fund through stock ownership, and (5) you satisfy the certification requirements described
below.
To satisfy the certification requirements, either (1) the holder of any debt securities must
certify, under penalties of perjury, that such holder is a non-U.S. person and must provide such
owners name, address and taxpayer identification number, if any, on IRS Form W-8BEN, or (2) a
securities clearing organization, bank or other financial institution that holds customer
securities in the ordinary course of its trade or business and holds the debt securities on behalf
of the holder thereof must certify, under penalties of perjury, that it has received a valid and
properly executed IRS Form W-8BEN from the beneficial holder and comply with certain other
requirements. Special certification rules apply for debt securities held by a foreign partnership
and other intermediaries.
Interest on debt securities received by a non-U.S. Holder that is not excluded from U.S.
federal withholding tax under the portfolio interest exemption as described above generally will be
subject to withholding at a 30% rate, except where (1) the interest
is effectively connected with the conduct of a U.S. trade or business, in which case the interest will generally be subject to U.S. income tax on a net basis as applicable to U.S. holders generally or (2) a non-U.S. Holder can claim the benefits of an
applicable income tax
47
treaty to
reduce or eliminate such withholding tax. To claim the benefit of an income tax treaty or to claim an exemption from withholding because the interest is effectively connected with a U.S. trade or business, a non-U.S. Holder must timely provide the appropriate, properly executed IRS forms. These forms may be required to be periodically updated. Also, a non-U.S. Holder who is claiming the benefits of an income tax treaty may be required to obtain a
U.S. taxpayer identification number and to provide certain documentary evidence issued by foreign governmental authorities to prove residence in the foreign country.
Any capital gain that a non-U.S. Holder realizes on a sale, exchange or other disposition of
debt securities generally will be exempt from United States federal income tax, including
withholding tax. This exemption will not apply to you if your gain is effectively connected with
your conduct of a trade or business in the U.S. or you are an individual holder and are present in
the U.S. for a period or periods aggregating 183 days or more in the taxable year of the disposition and either your gain is
attributable to an office or other fixed place of business that you maintain in the U.S. or you
have a tax home in the United States.
NET ASSET VALUE
Net asset value per share is determined no less frequently than 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, or such other time as the Fund may determine. 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 Barrons, 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 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 the
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 NYSE. The value of foreign securities is generally determined at the close of
trading of the exchange on which the securities are traded or at the close of trading on the NYSE,
whichever is earlier.
If market prices are not readily available or the Funds 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 determined in accordance with procedures adopted by the Board of Trustees, which may
include a systematic fair valuation model provided by an independent service provider.
The Fund also may use fair value pricing if the value of a security it holds has been affected
by events occurring before the Funds pricing time, but after the close of the primary markets or
exchanges on which the security is traded. When fair value pricing is employed, the prices of
portfolio securities used to calculate the Funds net asset value may differ from market quotations
or official closing prices for the same securities. This means that the Fund may value those
securities higher or lower than another fund that uses market quotations or official closing
prices.
The fair value pricing procedures recognize that volatility in the U.S. markets may cause
prices of foreign securities determined at the close of the foreign market or exchange on which the
securities are traded to no longer be reliable when the Funds net asset value is determined. As a
result, at least some of
48
the Funds foreign securities may be valued at their fair value in accordance with the fair
value pricing procedures on any day the Fund calculates its net asset value.
Values of foreign securities are translated from local currencies into U.S. dollars using
current exchange rates. Trading in securities in foreign markets takes place on some days
(including some weekend days and U.S. holidays) when the NYSE is not open, and does not take place
on some days when the NYSE is open. So, the value of the Funds portfolio may be affected on days
when the Fund does not calculate its net asset value.
DIVIDENDS
AND DISTRIBUTIONS ON COMMON SHARES; AUTOMATIC DIVIDEND REINVESTMENT PLAN
Dividends
and Distributions on Common Shares
The Fund has made regular monthly distributions to its common shareholders in amounts ranging
from $0.0750 to $0.1025 per share since June 2004. Additionally, the Fund made a
distribution of $0.0398 in January 2008.
The Fund currently intends to make monthly distributions to common shareholders at a level
rate established by the Board of Trustees. The rate may be modified by the Board of Trustees from
time to time. Monthly distributions may include net investment income, net realized short-term
capital gain and, if necessary, return of capital. Net realized short-term capital gains
distributed to common shareholders will be taxed as ordinary income. In addition, one distribution
per calendar year may include net realized long-term capital gains. There is no guarantee that the
Fund will realize capital gains in any given year. Pursuant to the requirements of the 1940 Act
and other applicable laws, a notice would accompany each monthly distribution with respect to the
estimated source of the distribution made. Distributions are subject to re-characterization for
federal income tax purposes after the end of the fiscal year. The Fund may at times in its
discretion pay out less than the entire amount of net investment income earned in any particular
period and may at times pay out such accumulated undistributed income in addition to net investment
income earned in other periods in order to permit the Fund to maintain its level distribution
policy. As a result, the dividend paid by the Fund to holders of common shares for any particular
period may be more or less than the amount of net investment income earned by the Fund during such
period. In addition, in order to make such distributions, the Fund might have to sell a portion of
its investment portfolio at a time when independent investment judgment might not dictate such
action.
For U.S. federal income tax purposes, the Fund is required to distribute substantially all of
its net investment income and net realized capital gains each year to both reduce its federal income tax
liability and to avoid a potential excise tax. Accordingly, the Fund intends to distribute all or
substantially all of its net investment income and all net realized capital gains, if any.
Therefore, the Funds final distribution with respect to each calendar year would include any remaining net
investment income and net realized capital gains, if any, undistributed during the year.
If, for any calendar year, the Funds total distributions exceeded net investment income and
net realized capital gains (the Excess), the Excess, distributed from the Funds assets, would
generally be treated as dividend income to the extent of the Funds current and accumulated
earnings and profits. Thereafter, such Excess would be treated as a tax-free return of capital up
to the amount of the common shareholders tax basis in his, her or its common shares, with any
amounts exceeding such basis treated as gain from the sale of common
shares. See Certain Federal
Income Tax Matters.
In the event the Fund distributed the Excess, such distribution would decrease the Funds
total assets and, therefore, have the likely effect of increasing the Funds expense ratio. There
is a risk that the
49
Fund would not eventually realize capital gains in an amount corresponding to a distribution
of the Excess.
In January 2004, Calamos, on behalf of itself and certain funds, filed an exemptive
application with the Commission seeking an order under the 1940 Act facilitating the implementation
of the Managed Dividend Policy. In March 2007, an amended and restated exemptive application was
filed with the Commission. If, and when, Calamos, on behalf of itself and other parties, receives
the requested relief, the Fund may, subject to the determination of its Board of Trustees,
implement a Managed Dividend Policy.
Under a Managed Dividend Policy, the Fund would seek to distribute a monthly fixed percentage
of net asset value to common shareholders. If, for any distribution, net investment income and net
realized capital gains were less than the amount of the distribution, the differences would be
distributed from the Funds assets. In addition, in order to make such distributions, the Fund
might have to sell a portion of its investment portfolio at a time when independent investment
judgment might not dictate such action.
Under the 1940 Act, the Fund is not permitted to incur indebtedness unless immediately after
such incurrence the Fund has an asset coverage of at least 300% of the aggregate outstanding
principal balance of indebtedness. Additionally, under the 1940 Act, the Fund may not declare any
dividend or other distribution upon any class of its capital shares, or purchase any such capital
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.
While any preferred shares are outstanding, the Fund may not declare any dividend or other
distribution on its common shares, unless at the time of such declaration, (1) all accumulated
preferred dividends have been paid and (2) the net asset value of the Funds portfolio (determined
after deducting the amount of such dividend or other distribution) is at least 200% of the
liquidation value of the outstanding preferred shares (expected to be equal to the original
purchase price per share plus any accumulated and unpaid dividends thereon).
In addition to the limitations imposed by the 1940 Act described above, certain lenders may
impose additional restrictions on the payment of dividends or distributions on common shares in the
event of a default on the Funds borrowings. If the Funds ability to make distributions on its
common shares is limited, such limitation could, under certain circumstances, impair the ability of
the Fund to maintain its qualification for federal income taxation as a regulated investment company, which would
have adverse tax consequences for shareholders. See
Leverage and Certain Federal Income Tax
Matters.
See Automatic Dividend Reinvestment Plan for information concerning the manner in which
dividends and distributions to common shareholders may be automatically reinvested in common
shares. Dividends and distributions are taxable to shareholders for
federal income tax purposes whether they are reinvested in
shares of the Fund or received in cash.
The yield on the Funds common shares will vary from period to period depending on factors
including, but not limited to, market conditions, the timing of the Funds investment in portfolio
securities, the securities comprising the Funds portfolio, changes in interest rates including
changes in the relationship between short-term rates and long-term rates, the amount and timing of
the use of borrowings and other leverage by the Fund, the effects of leverage on the common shares
discussed above
50
under Leverage, the timing of the investment of leverage proceeds in portfolio securities,
the Funds net assets and its operating expenses. Consequently, the Fund cannot guarantee any
particular yield on its common shares and the yield for any given period is not an indication or
representation of future yields on the Funds common shares.
Automatic Dividend Reinvestment Plan
Pursuant to the Plan, unless a shareholder is
ineligible or elects otherwise, all dividend and capital gains on common
shares distributions are automatically
reinvested by The Bank of New York, as agent for shareholders in administering the Plan (Plan
Agent), in additional common shares of the Fund. Shareholders who elect not to participate in the
Plan will receive all dividends and distributions payable in cash paid by check mailed directly to
the shareholder of record (or, if the shares are held in street or other nominee name, then to such
nominee) by Plan Agent, as dividend paying agent. Such shareholders may elect not to participate
in the Plan and to receive all dividends and distributions in cash by sending written instructions
to Plan Agent, as dividend paying agent, at the address set forth below. Participation in the Plan
is completely voluntary and may be terminated or resumed at any time without penalty by giving
notice in writing to the Plan Agent; such termination will be effective with respect to a
particular dividend or distribution if notice is received prior to the record date for the
applicable distribution.
Whenever the Fund declares a dividend or distribution payable either in shares or in cash,
non-participants in the Plan will receive cash, and participants in the Plan will receive the
equivalent in shares of common shares. The shares are acquired by the Plan Agent for the
participants account, depending upon the circumstances described below, either (i) through receipt
of additional common shares from the Fund (newly issued shares) or (ii) by purchase of
outstanding common shares on the open market (open-market purchases) on the NYSE or elsewhere.
If, on the payment date, the net asset value per share of the common shares is equal to or less
than the market price per common share plus estimated brokerage commissions (such condition being
referred to herein as market premium), the Plan Agent will receive newly issued shares from the
Fund for each participants account. The number of newly issued common shares to be credited to
the participants account will be determined by dividing the dollar amount of the dividend or
distribution by the greater of (i) the net asset value per common share on the payment date, or
(ii) 95% of the market price per common share on the payment date.
If, on the payment date, the net asset value per common share exceeds the market price plus
estimated brokerage commissions (such condition being referred to herein as market discount), the
Plan Agent has until the last business day before the next date on which the shares trade on an
ex-dividend basis or in no event more than 30 days after the payment date (last purchase date)
to invest the dividend or distribution amount in shares acquired in open-market purchases. It is
contemplated that the Fund will pay monthly income dividends. Therefore, the period during which
open-market purchases can be made will exist only from the payment date on the dividend through the
date before the next ex-dividend date, which typically will be approximately ten days. The
weighted average price (including brokerage commissions) of all common shares purchased by the Plan
Agent as Plan Agent will be the price per common share allocable to each participant. If, before
the Plan Agent has completed its open-market purchases, the market price of a common share exceeds
the net asset value per share, the average per share purchase price paid by the Plan Agent may
exceed the net asset value of the Funds shares, resulting in the acquisition of fewer shares than
if the dividend had been paid in newly issued shares on the payment date. Because of the foregoing
difficulty with respect to open-market purchases, the Plan provides that if the Plan Agent is
unable to invest the full dividend amount in open-market purchases during the purchase period or if
the market discount shifts to a market premium during the purchase period, the Plan Agent will
cease making open-market purchases and will invest the uninvested portion of
51
the dividend or distribution amount in newly issued shares at the close of business on the
last purchase date.
The Plan Agent maintains all shareholders accounts in the Plan and furnishes written
confirmation of each acquisition made for the participants account as soon as practicable, but in
no event later than 60 days after the date thereof. Shares in the account of each Plan participant
will be held by the Plan Agent in non-certificated form in the Plan Agents name or that of its
nominee, and each shareholders proxy will include those shares purchased or received pursuant to
the Plan. The Plan Agent will forward all proxy solicitation materials to participants and vote
proxies for shares held pursuant to the Plan first in accordance with the instructions of the
participants then with respect to any proxies not returned by such participant, in the same
proportion as the Plan Agent votes the proxies returned by the participants.
There will be no brokerage charges with respect to shares issued directly by the Fund as a
result of dividends or distributions payable either in shares or in cash. However, each
participant will pay a pro rata share of brokerage commissions incurred with respect to the Plan
Agents open-market purchases in connection with the reinvestment of dividends or distributions.
If a participant elects to have the Plan Agent sell part or all of his or her common shares and
remit the proceeds, such participant will be charged his or her pro rata share of brokerage
commissions on the shares sold, plus a $15 transaction fee.
The automatic reinvestment of dividends and distributions will not relieve participants of any
federal, state or local income tax that may be payable (or required to be withheld) on such
dividends. See Certain Federal Income Tax Matters.
Shareholders participating in the Plan may receive benefits not available to shareholders not
participating in the Plan. If the market price plus commissions of the Funds shares is higher
than the net asset value, participants in the Plan will receive shares of the Fund at less than
they could otherwise purchase them and will have shares with a cash value greater than the value of
any cash distribution they would have received on their shares. If the market price plus
commissions is below the net asset value, participants receive distributions of shares with a net
asset value greater than the value of any cash distribution they would have received on their
shares. However, there may be insufficient shares available in the market to make distributions in
shares at prices below the net asset value. Also, since the Fund does not redeem its shares, the
price on resale may be more or less than the net asset value. See
Certain Federal Income Tax
Matters for a discussion of federal income tax consequences of the Plan.
Experience under the Plan may indicate that changes are desirable. Accordingly, the Fund
reserves the right to amend or terminate the Plan if in the judgment of the Board of Trustees such
a change is warranted. The Plan may be terminated by the Plan Agent or the Fund upon notice in
writing mailed to each participant at least 60 days prior to the effective date of the termination.
Upon any termination, the Plan Agent will cause a certificate or certificates to be issued for the
full shares held by each participant under the Plan and cash adjustment for any fraction of a
common share at the then current market value of the common shares to be delivered to him or her.
If preferred, a participant may request the sale of all of the common shares held by the Plan Agent
in his or her Plan account in order to terminate participation in the Plan. If such participant
elects in advance of such termination to have the Plan Agent sell part or all of his shares, the
Plan Agent is authorized to deduct from the proceeds a $15.00 fee plus the brokerage commissions
incurred for the transaction. If a participant has terminated his or her participation in the Plan
but continues to have common shares registered in his or her name, he or she may re-enroll in the
Plan at any time by notifying the Plan Agent in writing at the address above. The terms and
conditions of the Plan may be amended by the Plan Agent or the Fund at any time but, except when
necessary or appropriate to comply with applicable law or the rules or policies of the Commission
52
or any other regulatory authority, only by mailing to each participant appropriate written
notice at least 30 days prior to the effective date thereof. The amendment shall be deemed to be
accepted by each participant unless, prior to the effective date thereof, the Plan Agent receives
notice of the termination of the participants account under the Plan. Any such amendment may
include an appointment by the Plan Agent of a successor Plan Agent, subject to the prior written
approval of the successor Plan Agent by the Fund. There is no direct service charge to
participants in the Plan; however, the Fund reserves the right to amend the Plan to include a
service charge payable by the participants.
All correspondence concerning the Plan should be directed to the Plan Agent at Dividend
Reinvestment Department, P.O. Box 1958, Newark, NJ 07101-9774.
DESCRIPTION OF SECURITIES
The Fund is authorized to issue an unlimited number of common shares, without par value. The
Fund is also authorized to issue preferred shares. The Board of Trustees is authorized to classify
and reclassify any unissued shares into one or more additional
classes or series of shares. As of December 31, 2007, the Fund had 154,514,000 common shares outstanding and 43,200 Preferred Shares
outstanding. The Board of Trustees may establish such series or class 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
Bylaws to reflect the terms of any such class or series. The Fund is also authorized to issue
other securities, including debt securities.
Common Shares
Common shares, when issued and outstanding, will be legally issued, fully paid and non-assessable.
Shareholders are entitled to share pro rata 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 shares of the Funds preferred shares 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. See Leverage.
The Fund will send unaudited reports at least semiannually and audited annual financial
statements to all of its shareholders.
Other offerings of common shares, if made, will require approval of the Board of Trustees and
will be subject to the requirement of the 1940 Act that common shares may not be sold at a price
below the then-current net asset value, exclusive of underwriting discounts and commissions, except
in limited circumstances including in connection with an offering to existing shareholders.
Preferred Shares
On May 5, 2004, the Fund issued Preferred Shares, liquidation preference of $25,000 per share
($430,000,000 in the aggregate). As a non-fundamental policy, the Fund may not issue preferred
shares
53
or borrow money and issue debt securities with an aggregate liquidation preference and
aggregate principal amount exceeding 38% of the Funds total assets. However, the Board of
Trustees reserves the right to issue preferred shares to the extent permitted by the 1940 Act,
which currently limits the aggregate liquidation preference of all outstanding preferred shares to
50% of the value of the Funds total assets less the Funds liabilities and indebtedness. The
preferred shares pay dividends at dividend rates based on auctions normally held every 7 or 28
days. Under the 1940 Act, the Fund may only issue one class of preferred shares. So long as any
preferred shares are outstanding, additional issuances of preferred shares
may not have preference or priority over the outstanding preferred shares.
It is expected that any additional issuance of preferred
shares would be additional shares of an existing series of preferred shares or shares of an
additional series of preferred shares.
In the event of any voluntary or involuntary liquidation, dissolution or winding up of the
Fund, the holders of preferred shares will be entitled to receive a preferential liquidating
distribution, which is expected to equal the original purchase price per preferred share plus
accumulated and unpaid dividends, whether or not declared, before any distribution of assets is
made to holders of common shares. After payment of the full amount of the liquidating distribution
to which they are entitled, the holders of preferred shares will not be entitled to any further
participation in any distribution of assets by the Fund.
The 1940 Act requires that the holders of any preferred shares, voting separately as a single
class, have the right to elect at least two Trustees at all times. The remaining Trustees will be
elected by holders of common shares and preferred shares, voting together as a single class. In
addition, subject to the prior rights, if any, of the holders of any other class of senior
securities outstanding, the holders of any preferred shares have the right to elect a majority of
the Trustees at any time two years accumulated dividends on any preferred shares are unpaid. The
1940 Act also requires that, in addition to any approval by shareholders that might otherwise be
required, the approval of the holders of a majority of any outstanding preferred shares, voting
separately as a class, would be required to (1) adopt any plan of reorganization that would
adversely affect the preferred shares, and (2) take any action requiring a vote of security holders
under Section 13(a) of the 1940 Act, including, among other things, changes in the Funds
subclassification as a closed-end investment company or changes in its fundamental investment
restrictions. See Certain Provisions of the Agreement and Declaration of Trust and Bylaws. As a
result of these voting rights, the Funds ability to take any such actions may be impeded to the
extent that there are any preferred shares outstanding. Except as otherwise indicated in this
prospectus and except as otherwise required by applicable law, holders of preferred shares have
equal voting rights with holders of common shares (one vote per share, unless otherwise required by
the 1940 Act) and will vote together with holders of common shares as a single class.
The affirmative vote of the holders of a majority of the outstanding preferred shares, voting
as a separate class, will be required to amend, alter or repeal any of the preferences, rights or
powers of holders of preferred shares so as to affect materially and adversely such preferences,
rights or powers, or to increase or decrease the authorized number of preferred shares. The class
vote of holders of preferred shares described above will in each case be in addition to any other
vote required to authorize the action in question.
The terms of the outstanding preferred shares provide that (i) they are redeemable by the Fund
in whole or in part at the original purchase price per share plus accrued dividends per share,
(ii) the Fund may tender for or purchase preferred shares and (iii) the Fund may subsequently
resell any shares so tendered for or purchased. Any redemption or purchase of preferred shares by
the Fund will reduce the leverage applicable to the common shares, while any resale of shares by
the Fund will increase that leverage.
54
Debt Securities
General. Under Delaware law and our Agreement and Declaration of Trust, we may borrow money,
without prior approval of holders of common and preferred shares. We may issue debt securities, or
other evidence of indebtedness (including bank borrowings or commercial paper) and may secure any
such notes or borrowings by mortgaging, pledging or otherwise subjecting as security our assets to
the extent permitted by the 1940 Act or rating agency guidelines. Any borrowings will rank senior
to preferred shares and common shares.
Under the 1940 Act, we may only issue one class of senior securities representing
indebtedness, which in the aggregate, may represent no more than 33 1/3% of our total assets. A
prospectus supplement and indenture (a summary of the expected terms of which is attached as
Appendix A to the statement of additional information) relating to any debt securities will include
specific terms relating to the offering. These terms will include the following:
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the form and title of the security; |
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the aggregate principal amount of the securities; |
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the interest rate of the securities; |
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the maturity dates on which the principal of the securities will be payable; |
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the frequency with which auctions will be held; |
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any changes to or additional events of default or covenants; |
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any optional or mandatory redemption provisions; |
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any changes in trustees, auction agents, paying agents or security registrar; and |
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any other terms of the securities. |
Interest. Unless otherwise stated in a prospectus supplement, debt securities will bear
interest as generally determined by the results of an auction for such securities and/or by the
Board of Trustees, as more fully described in the related prospectus supplement. Interest on debt
securities shall be payable when due as described in the related prospectus supplement. If we do
not pay interest when due, it will trigger an event of default and we will be restricted from
declaring dividends and making other distributions with respect to our common shares and preferred
shares.
Limitations. Under the requirements of the 1940 Act, immediately after issuing any senior
securities representing indebtedness, we must have an asset coverage of at least 300%. Asset
coverage means the ratio which the value of our total assets, less all liabilities and indebtedness
not represented by senior securities, bears to the aggregate amount of senior securities
representing indebtedness. Other types of borrowings also may result in our being subject to
similar covenants in credit agreements.
Events of Default and Acceleration of Maturity of Debt Securities; Remedies. Unless stated
otherwise in the related prospectus supplement, any one of the following events are expected to
constitute an event of default for that series under the indenture:
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default in the payment of any interest upon a series of debt securities when it
becomes due and payable and the continuance of such default for 30 days; |
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default in the payment of the principal of, or premium on, a series of debt
securities at its stated maturity; |
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default in the performance, or breach, of any covenant or warranty of ours in the
indenture, and continuance of such default or breach for a period of 90 days after
written notice has been given to us by the trustee; |
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certain voluntary or involuntary proceedings involving us and relating to
bankruptcy, insolvency or other similar laws; |
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if, on the last business day of each of twenty-four consecutive calendar months, the
debt securities have a 1940 Act asset coverage of less than 100%; or |
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any other event of default provided with respect to a series, including a default
in the payment of any redemption price payable on the redemption date. |
Upon the occurrence and continuance of an event of default, the holders of a majority in
principal amount of a series of outstanding debt securities or the trustee may declare the
principal amount of that series of debt securities immediately due and payable upon written notice
to us. A default that relates only to one series of debt securities does not affect any other
series and the holders of such other series of debt securities are not entitled to receive notice
of such a default under the indenture. Upon an event of default relating to bankruptcy, insolvency
or other similar laws, acceleration of maturity occurs automatically with respect to all series.
At any time after a declaration of acceleration with respect to a series of debt securities has
been made, and before a judgment or decree for payment of the money due has been obtained, the
holders of a majority in principal amount of the outstanding debt securities of that series, by
written notice to us and the trustee, may rescind and annul the declaration of acceleration and its
consequences if all events of default with respect to that series of debt securities, other than
the non-payment of the principal of that series of debt securities which has become due solely by
such declaration of acceleration, have been cured or waived and other conditions have been met.
Liquidation Rights. In the event of (a) any insolvency or bankruptcy case or proceeding, or
any receivership, liquidation, reorganization or other similar case or proceeding in connection
therewith, relative to us or to our creditors, as such, or to our assets, or (b) any liquidation,
dissolution or other winding up of the Fund, whether voluntary or involuntary and whether or not
involving insolvency or bankruptcy, or (c) any assignment for the benefit of creditors or any other
marshalling of assets and liabilities of ours, then (after any payments with respect to any secured
creditor of ours outstanding at such time) and in any such event the holders of debt securities
shall be entitled to receive payment in full of all amounts due or to become due on or in respect
of all debt securities (including any interest accruing thereon after the commencement of any such
case or proceeding), or provision shall be made for such payment in cash or cash equivalents or
otherwise in a manner satisfactory to the holders of the debt securities, before the holders of any
common or preferred stock of the Fund are entitled to receive any payment on account of any
redemption proceeds, liquidation preference or dividends from such shares. The holders of debt
securities shall be entitled to receive, for application to the payment thereof, any payment or
distribution of any kind or character, whether in cash, property or securities, including any such
payment or distribution which may be payable or deliverable by reason of the payment of any other
indebtedness of ours being subordinated to the payment of the debt securities, which may be payable
or
56
deliverable in respect of the debt securities in any such case, proceeding, dissolution,
liquidation or other winding up event.
Unsecured creditors of ours may include, without limitation, service providers including
Calamos, custodian, administrator, auction agent, broker-dealers and the trustee, pursuant to the
terms of various contracts with us. Secured creditors of ours may include without limitation
parties entering into any interest rate swap, floor or cap transactions, or other similar
transactions with us that create liens, pledges, charges, security interests, security agreements
or other encumbrances on our assets.
A consolidation, reorganization or merger of the Fund with or into any other company, or a
sale, lease or exchange of all or substantially all of our assets in consideration for the issuance
of equity securities of another company shall not be deemed to be a liquidation, dissolution or
winding up of the Fund.
Voting Rights. Debt securities have no voting rights, except to the extent required by law or
as otherwise provided in the Indenture relating to the acceleration of maturity upon the occurrence
and continuance of an event of default. In connection with any other borrowings (if any), the 1940
Act does in certain circumstances grant to the lenders certain voting rights in the event of
default in the payment of interest on or repayment of principal.
Market. Unless otherwise stated in a prospectus supplement, our debt securities may be bought
or sold at an auction held periodically by submitting orders through a broker-dealer who has
entered into an agreement with us (a broker-dealer). Our debt securities are not listed on an
exchange or automated quotation system. Debt securities may be transferred outside of an auction
through a broker-dealer, but we cannot assure you that any such secondary market will exist or
whether it will provide holders of debt securities with liquidity. The details of the auction
process are further described in the related prospectus supplement.
Book-Entry, Delivery and Form. Unless otherwise stated in the related prospectus supplement,
the debt securities will be issued in book-entry form and will be represented by one or more notes
in registered global form. The global notes will be deposited with the trustee as custodian for
The Depository Trust Company (DTC) and registered in the name of Cede & Co., as nominee of DTC. DTC will maintain the notes in
designated denominations through its book-entry facilities.
Under the expected terms of the indenture, we and the trustee may treat the persons in whose
names any notes, including the global notes, are registered as the owners thereof for the purpose
of receiving payments and for any and all other purposes whatsoever. Therefore, so long as DTC or
its nominee is the registered owner of the global notes, DTC or such nominee will be considered the
sole holder of outstanding notes under the indenture. We or the trustee may give effect to any
written certification, proxy or other authorization furnished by DTC or its nominee.
A global note may not be transferred except as a whole by DTC, its successors or their
respective nominees. Interests of beneficial owners in the global note may be transferred or
exchanged for definitive securities in accordance with the rules and procedures of DTC. In
addition, a global note may be exchangeable for notes in definitive form if:
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DTC notifies us that it is unwilling or unable to continue as a depository and we do
not appoint a successor within 60 days; |
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we, at our option, notify the trustee in writing that we elect to cause the issuance
of notes in definitive form under the indenture; or |
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an event of default has occurred and is continuing. |
In each instance, upon surrender by DTC or its nominee of the global note, notes in definitive
form will be issued to each person that DTC or its nominee identifies as being the beneficial owner
of the related notes.
Under the expected terms of the indenture, the holder of any global note may grant proxies and
otherwise authorize any person, including its participants and persons who may hold interests
through DTC participants, to take any action which a holder is entitled to take under the
indenture.
RATING AGENCY GUIDELINES
The Rating Agencies, which assign ratings to our senior securities, impose asset coverage
requirements, which may limit our ability to engage in certain types of transactions and may limit
our ability to take certain actions without confirming that such action will not impair the
ratings. The outstanding preferred shares are currently rated AAA and AAA by Moodys and S&P,
respectively. Moodys and S&P, and any other agency that may rate our debt securities or preferred
shares in the future, are collectively referred to as the Rating Agencies.
We may, but are not required to, adopt any modification to the guidelines that may hereafter
be established by any Rating Agency. Failure to adopt any modifications, however, may result in a
change in the ratings described above or a withdrawal of ratings altogether. In addition, any
Rating Agency may, at any time, change or withdraw any rating. The Board may, without shareholder
approval, modify, alter or repeal certain of the definitions and related provisions which have been
adopted pursuant to each Rating Agencys guidelines (Rating Agency Guidelines) only in the event
we receive written confirmation from the Rating Agency or Agencies that any amendment, alteration
or repeal would not impair the ratings then assigned to the senior securities.
We are required to satisfy two separate asset maintenance requirements with respect to
outstanding debt securities and with respect to preferred shares: (1) we must maintain assets in
our portfolio that have a value, discounted in accordance with guidelines set forth by each Rating
Agency, at least equal to 115% of the aggregate principal amount/liquidation preference of the debt
securities/ preferred stock, respectively, plus specified liabilities, payment obligations and
other amounts (the Basic Maintenance Amount); and (2) we must satisfy the 1940 Act asset coverage
requirements.
Basic Maintenance Amounts. We must maintain, as of each valuation date on which senior
securities are outstanding, eligible assets having an aggregate discounted value at least equal to
115% of the applicable basic maintenance amount (Basic Maintenance Amount), which is calculated
separately for debt securities and preferred shares for each Rating Agency that is then rating the
senior securities and so requires. If we fail to maintain eligible assets having an aggregated
discounted value at least equal to 115% of the applicable Basic Maintenance Amount as of any
valuation date and such failure is not cured, we will be required in certain circumstances to
redeem certain of the senior securities.
The applicable Basic Maintenance Amount is defined in the Rating Agencys Guidelines. Each
Rating Agency may amend the definition of the applicable Basic Maintenance Amount from time to
time.
58
The market value of our portfolio securities (used in calculating the discounted value of
eligible assets) is calculated using readily available market quotations when appropriate, and in
any event, consistent with our valuation procedures. For the purpose of calculating the applicable
Basic Maintenance Amount, portfolio securities are valued in the same manner as we calculate our
NAV. See Determination of Net Asset Value.
Each Rating Agencys discount factors, the criteria used to determine whether the assets held
in our portfolio are eligible assets, and the guidelines for determining the discounted value of
our portfolio holdings for purposes of determining compliance with the applicable Basic Maintenance
Amount are based on Rating Agency Guidelines established in connection with rating the senior
securities. The discount factor relating to any asset, the applicable basic maintenance amount
requirement, the assets eligible for inclusion in the calculation of the discounted value of our
portfolio and certain definitions and methods of calculation relating thereto may be changed from
time to time by the applicable Rating Agency, without our approval, or the approval of our Board of
Trustees or shareholders.
A Rating Agencys Guidelines will apply to the senior securities only so long as that Rating
Agency is rating such securities. We will pay certain fees to Moodys, S&P and any other Rating
Agency that may provide a rating for the senior securities. The ratings assigned to the senior
securities are not recommendations to buy, sell or hold the senior securities. Such ratings may be
subject to revision or withdrawal by the assigning Rating Agency at any time.
1940 Act Asset Coverage. We are also required to maintain, with respect to senior securities,
as of the last business day on any month in which any senior securities are outstanding, asset
coverage of at least 300% for debt securities and 200% for preferred stock (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 shares of a closed-end investment company as a condition of
declaring dividends on its common stock). If we fail to maintain the applicable 1940 Act asset
coverage as of the last business day of any month and such failure is not cured as of the last
business day of the following month (the Asset Coverage Cure Date), we will be required to redeem
certain senior securities.
Notices. Under the current Rating Agency Guidelines, in certain circumstances, we are
required to deliver to any Rating Agency which is then rating the senior securities (1) a
certificate with respect to the calculation of the applicable Basic Maintenance Amount; (2) a
certificate with respect to the calculation of the applicable 1940 Act asset coverage and the value
of our portfolio holdings; and (3) a letter prepared by our independent accountants regarding the
accuracy of such calculations.
Notwithstanding anything herein to the contrary, the Rating Agency Guidelines, as they may be
amended from time to time by each Rating Agency will be reflected in a written document and may be
amended by each Rating Agency without the vote, consent or approval of the Fund, the Board of
Trustees or any shareholder of the Fund.
A copy of the current Rating Agency Guidelines will be provided to any holder of senior
securities promptly upon request made by such holder to the Fund by writing the Fund at 2020
Calamos Court, Naperville, Illinois 60563.
59
CERTAIN PROVISIONS OF THE AGREEMENT
AND DECLARATION OF TRUST AND BYLAWS
The Funds 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 Funds investment objective
and policies. The Board of Trustees of the Fund has considered these provisions and concluded that
they are in the best interests of the Fund.
The Board of Trustees is divided into three classes. The terms of the Trustees of the
different classes are staggered. A Trustee may be removed from office with or without cause by a
vote of at least a majority of the then Trustees if such removal is approved by the holders of at
least 75% of the shares entitled to vote with respect to the election of such Trustee and present
in person or by proxy at a meeting of shareholders called for such purpose.
In addition, the Agreement and Declaration of Trust requires the affirmative vote of at least
75% of the outstanding shares entitled to vote on the matter for the 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 Funds assets; unless such action has been approved by the
affirmative vote of at least 75% of the Trustees then in office, in which case, the affirmative
vote of a majority of the outstanding shares entitled to vote on the matter is required.
In addition, conversion of the Fund to an open-end investment company would require an
amendment to the Funds 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.
Under the 1940 Act, shareholders of an open-end investment company may require the company to
redeem their shares of common stock at any time (except in certain circumstances as authorized by
or under the 1940 Act) at their net asset value, less such redemption charge, if any, as might be
in effect at the time of a redemption. If the Fund is converted to an open-end investment company,
it could be required to liquidate portfolio securities to meet requests for redemption, and the
common shares would no longer be listed on the NYSE. Conversion to an open-end investment company
would also require changes in certain of the Funds investment policies and restrictions. In
addition, the Fund would be required to redeem all of its outstanding
preferred shares prior to
conversion to an open-end investment company.
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 certain transactions with a Principal Shareholder, unless the
transaction has been approved by at least 75% of the Trustees, in which case a majority of the
outstanding shares entitled to vote shall be required. For purposes of these provisions, a
Principal Shareholder refers to any person who, whether directly or indirectly and whether alone or
together with its affiliates and associates, beneficially owns 5%
60
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:
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the merger or consolidation of the Fund or any subsidiary of the Fund with or into
any Principal Shareholder; |
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the issuance of any securities of the Fund to any Principal Shareholder for cash
(other than pursuant to any automatic dividend reinvestment plan); or |
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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 Bylaws provide that the Board of Trustees has the
power, to the exclusion of shareholders, to make, alter or repeal any of the Bylaws, except for any
Bylaw that requires a vote of the shareholders to be amended, adopted or repealed by the terms of
the Agreement and Declaration of Trust, Bylaws or applicable law. Neither this provision of the
Agreement and Declaration of Trust, nor any of the foregoing provisions thereof requiring the
affirmative vote of 75% of outstanding shares of the Fund, can be amended or repealed except by the
vote of such required number of shares.
With respect to proposals by shareholders submitted outside the process of Rule 14a-8 of the
Securities Exchange Act of 1934, as amended (the Exchange
Act), the Funds Bylaws 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 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 mailing of the
notice for the prior years annual meeting (subject to certain exceptions). Any notice by a
shareholder must be accompanied by certain information as provided in
the Bylaws, including information regarding the shares held by the
shareholder and information regarding the candidate's background and
qualifications to serve as trustee.
PLAN OF DISTRIBUTION
We may sell our common shares, preferred shares and debt securities, and certain of our
shareholders may sell our common shares, on an immediate, continuous or delayed basis, in one or
more offerings under this prospectus and any related prospectus supplement. The aggregate amount
of securities that may be offered by us is limited to $350 million. We may offer our common
shares, preferred shares and debt securities: (1) directly to one or more purchasers; (2) through
agents; (3) through underwriters; or (4) through dealers. Each prospectus supplement relating to
an offering of securities will state the terms of the offering, including as applicable:
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any sales loads or other items constituting underwriters compensation; |
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any discounts, commissions, or fees allowed or paid to dealers or agents; |
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the public offering or purchase price of the offered securities and the net proceeds
we will receive from the sale; provided, however, that we will not receive any of the
proceeds from a sale of our common stock by any selling shareholder; and |
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any securities exchange on which the offered securities may be listed. |
Direct Sales
We may sell our common shares, preferred shares and debt securities, or certain of our
shareholders may sell our common shares, directly to, and solicit offers from, institutional
investors or others who may be deemed to be underwriters as defined in the 1933 Act for any resales
of the securities. In this case, no underwriters or agents would be involved. We, or any selling
shareholder, may use electronic media, including the Internet, to sell offered securities directly.
The terms of any of those sales will be described in a prospectus supplement.
By Agents
We may offer our common shares, preferred shares and debt securities through agents that we or
they designate. Any agent involved in the offer and sale will be named and any commissions payable
by us will be described in the prospectus supplement. Unless otherwise indicated in the prospectus
supplement, the agents will be acting on a best efforts basis for the period of their appointment.
By Underwriters
We may offer and sell securities from time to time to one or more underwriters who would
purchase the securities as principal for resale to the public, either on a firm commitment or best
efforts basis. If we sell securities to underwriters, we will execute an underwriting agreement
with them at the time of the sale and will name them in the prospectus supplement. In connection
with these sales, the underwriters may be deemed to have received compensation from us in the form
of underwriting discounts and commissions. The underwriters also may receive commissions from
purchasers of securities for whom they may act as agent. Unless otherwise stated in the prospectus
supplement, the underwriters will not be obligated to purchase the securities unless the conditions
set forth in the underwriting agreement are satisfied, and if the underwriters purchase any of the
securities, they will be required to purchase all of the offered securities. The underwriters may
sell the offered securities to or through dealers, and those dealers may receive discounts,
concessions or commissions from the underwriters as well as from the purchasers for whom they may
act as agent. Any public offering price and any discounts or concessions allowed or reallowed or
paid to dealers may be changed from time to time.
If a prospectus supplement so indicates, we may grant the underwriters an option to purchase
additional shares of common stock at the public offering price, less the underwriting discounts and
commissions, within 45 days from the date of the prospectus supplement, to cover any
overallotments.
By Dealers
We may offer and sell securities from time to time to one or more dealers who would purchase
the securities as principal. The dealers then may resell the offered securities to the public at
fixed or varying prices to be determined by those dealers at the time of resale. The names of the
dealers and the terms of the transaction will be set forth in the prospectus supplement.
62
General Information
Agents, underwriters, or dealers participating in an offering of securities may be deemed to
be underwriters, and any discounts and commission received by them and any profit realized by them
on resale of the offered securities for whom they act as agent may be deemed to be underwriting
discounts and commissions under the 1933 Act.
We may offer to sell securities either at a fixed price or at prices that may vary, at market
prices prevailing at the time of sale, at prices related to prevailing market prices, or at
negotiated prices.
Ordinarily, each series of offered securities will be a new issue of securities and will have
no established trading market.
To facilitate an offering of common stock in an underwritten transaction and in accordance
with industry practice, the underwriters may engage in transactions that stabilize, maintain, or
otherwise affect the market price of the common stock or any other security. Those transactions
may include overallotment, entering stabilizing bids, effecting syndicate covering transactions,
and reclaiming selling concessions allowed to an underwriter or a dealer.
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An overallotment in connection with an offering creates a short position in the
common stock for the underwriters own account. |
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An underwriter may place a stabilizing bid to purchase the common stock for the
purpose of pegging, fixing, or maintaining the price of the common stock. |
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Underwriters may engage in syndicate covering transactions to cover overallotments
or to stabilize the price of the common stock by bidding for, and purchasing, the
common stock or any other securities in the open market in order to reduce a short
position created in connection with the offering. |
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The managing underwriter may impose a penalty bid on a syndicate member to reclaim a
selling concession in connection with an offering when the common stock originally sold
by the syndicate member is purchased in syndicate covering transactions or otherwise. |
Any of these activities may stabilize or maintain the market price of the securities above
independent market levels. The underwriters are not required to engage in these activities, and
may end any of these activities at any time.
Any underwriters to whom the offered securities are sold for offering and sale may make a
market in the offered securities, but the underwriters will not be obligated to do so and may
discontinue any market-making at any time without notice. The offered securities may or may not be
listed on a securities exchange. We cannot assure you that there will be a liquid trading market
for the offered securities.
Under agreements entered into with us, underwriters and agents may be entitled to
indemnification by us against certain civil liabilities, including liabilities under the 1933 Act,
or to contribution for payments the underwriters or agents may be required to make.
The underwriters, agents, and their affiliates may engage in financial or other business
transactions with us and our subsidiaries in the ordinary course of business.
63
The maximum commission or discount to be received by any member of the National Association of
Securities Dealers, Inc. or independent broker-dealer will not be greater than eight percent of the
initial gross proceeds from the sale of any security being sold.
The aggregate offering price specified on the cover of this prospectus relates to the offering
of the securities not yet issued as of the date of this prospectus.
To the extent permitted under the 1940 Act and the rules and regulations promulgated
thereunder, the underwriters may from time to time act as a broker or dealer and receive fees in
connection with the execution of our portfolio transactions after the underwriters have ceased to
be underwriters and, subject to certain restrictions, each may act as a broker while it is an
underwriter.
A prospectus and accompanying prospectus supplement in electronic form may be made available
on the websites maintained by underwriters. The underwriters may agree to allocate a number of
securities for sale to their online brokerage account holders. Such allocations of securities for
internet distributions will be made on the same basis as other allocations. In addition,
securities may be sold by the underwriters to securities dealers who resell securities to online
brokerage account holders.
CUSTODIAN, TRANSFER AGENT, DIVIDEND DISBURSING AGENT AND REGISTRAR
The Funds 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 disbursing agent and
registrar for the Funds shares is also The Bank of New York.
LEGAL MATTERS
Vedder Price P.C. (Vedder Price), Chicago, Illinois, is serving as our
special counsel in connection with the offerings under this prospectus and related prospectus
supplements. Vedder Price is also counsel to Calamos. Morris,
Nichols, Arsht & Tunnell, Wilmington, Delaware (Morris
Nichols) will pass on the legality of the securities to be
offered hereby. If certain legal matters in connection with an offering of securities are passed upon by counsel for the underwriters of such
offering, such matters will be passed upon by counsel to be
identified in a prospectus supplement. Vedder Price and counsel to
the underwriters may rely on the opinion of Morris Nichols for certain
matters of Delaware law.
64
AVAILABLE INFORMATION
We are subject to the informational requirements of the Exchange Act and the 1940 Act and are
required to file reports, including annual and semi-annual reports, proxy statements and other
information with the Commission. Our most recent shareholder report filed with the Commission is
for the period ended October 31, 2007. These documents are available on the Commissions EDGAR
system and can be inspected and copied for a fee at the Commissions public reference room,
Washington, D.C. 20549-0102. Additional information about the operation of the public reference
room facilities may be obtained by calling the Commission at (202) 551-8090.
This prospectus does not contain all of the information in our 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 us can be found in our registration statement (including
amendments, exhibits, and schedules) on Form N-2 filed with the Commission. The Commission
maintains a web site (http://www.sec.gov) that contains our registration statement, other documents
incorporated by reference, and other information we have filed electronically with the Commission,
including proxy statements and reports filed under the Exchange Act.
65
TABLE OF CONTENTS
OF THE STATEMENT OF ADDITIONAL INFORMATION
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Financial Statements and Report of Independent Auditors/Accountants |
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66
$350,000,000
Common Shares
Preferred Shares
Debt Securities
Calamos Strategic Total Return Fund
February ____,
2008
The information in this prospectus supplement, which relates to an effective Registration Statement
under the Securities Act of 1933, is not complete and may be changed. We may not sell these
securities until we deliver a final prospectus supplement. This prospectus supplement and the
attached prospectus do not constitute an offer to sell these securities or a solicitation of an
offer to buy these securities in any jurisdiction where the offer or sale is not permitted.
SUBJECT TO COMPLETION, DATED __________ __, 2007
[LOGO]
FORM OF PROSPECTUS SUPPLEMENT
(To prospectus dated ___, 2007)
$___________
CALAMOS STRATEGIC TOTAL RETURN FUND
Preferred Shares
___Shares, Series ___
Liquidation Preference $25,000 per share
Calamos Strategic Total Return Fund (the Fund, we, us or our) is a diversified,
closed-end management investment company. Our investment objective is to provide total return
through a combination of capital appreciation and current income.
We are offering an additional series (Series ___) of our auction rate preferred shares
(referred to as Preferred Shares or Series ___Preferred Shares) in this prospectus supplement.
This prospectus supplement is not complete and should be read in conjunction with our prospectus
dated ___, 20___(the prospectus), which accompanies this prospectus supplement. This
prospectus supplement does not include all information that you should consider before purchasing
any Preferred Shares. You should read this prospectus supplement and our prospectus prior to
purchasing any Preferred Shares.
The Series ___Preferred Shares offered in this prospectus supplement, together with the
previously issued and currently outstanding Preferred Shares, are collectively referred to as
Preferred Shares. Individual series of Preferred Shares are referred to as a series. Except
as otherwise described in this prospectus supplement, the terms of this series and all other series
are the same. Capitalized terms used but not defined in this prospectus supplement shall have the
meanings given to such terms in Appendix ___to the Statement of Additional Information, which is
available from us upon request.
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 Funds common shares as to
distribution of assets as described in this prospectus supplement.
The dividend rate for the initial dividend period will be ___% per annum for Series ___
Preferred Shares. The initial dividend period is from the date of issuance through ___,
2007, an initial dividend period of ___days. For subsequent dividend periods, Preferred Shares
pay dividends based on a rate set at auction, usually held weekly. Dividends on the Preferred
Shares will be cumulative. Prospective purchasers should carefully review the auction procedures
described in this prospectus supplement 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.
(continued on next page)
Investing in Preferred Shares involves certain risks. See Risk Factors beginning on page ___
of the prospectus and The Auction-General beginning on page ___of this prospectus supplement.
Neither the Securities and Exchange Commission nor any state securities commission has
approved or disapproved of these securities or determined if this prospectus supplement is truthful
or complete. Any representation to the contrary is a criminal offense.
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Does not include offering expenses payable by us estimated to be $___. |
The underwriters expect to deliver the Series ___Preferred Shares in book-entry form, through
the facilities of The Depository Trust Company, to broker-dealers on or about ___, 20___.
[UNDERWRITER(S)]
___, 20___
The Preferred Shares will not be listed on an exchange. You may only buy or sell Preferred
Shares through an order placed at an auction with or through a broker-dealer that has entered into
an agreement with the auction agent and the Fund or in a secondary market maintained by certain
broker-dealers. These broker-dealers are not required to maintain this market, and it may not
provide you with liquidity. See The AuctionSecondary Market Trading and Transfer of Preferred
Shares.
This offering is conditioned upon the Series ___Preferred Shares receiving a rating of AAA
from Fitch Ratings and AAA from Standard & Poors Corporation.
The prospectus supplement has been filed with the Securities and Exchange Commission (the
SEC). Additional copies of this prospectus supplement, the prospectus, the Statement of
Additional Information dated ___, as supplemented from time to time, or the Funds annual or
semi-annual reports are available by calling (800) 582-6959 or by writing to the Fund, or you may
obtain copies (and other information regarding us) from the SECs web site (http://www.sec.gov).
The Funds annual and semi-annual reports are also available on the Funds website at
www.calamos.com, which provides a link to the SECs website where the Funds Statement of
Additional Information may be obtained. You also may e-mail requests for these documents to the
SEC at publicinfo@sec.gov or make a request in writing to the SECs Public Reference Section,
Washington, D.C. 20549-0102.
This prospectus supplement, which describes the specific terms of this offering, also adds to
and updates information contained in the accompanying prospectus and the documents incorporated by
reference in the prospectus. The prospectus gives more general information, some of which may not
apply to this offering.
If the description of this offering varies between this prospectus supplement and the
accompanying prospectus, you should rely on the information contained in this prospectus
supplement; provided that if any statement in one of these documents is inconsistent with a
statement in another document having a later date, the statement in the document having the later
date modifies or supersedes the earlier statement.
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.
TABLE OF CONTENTS
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F-__ |
Prospectus
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Prospectus Summary |
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Summary of Fund Expenses |
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Financial Highlights |
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Market and Net Asset Value Information |
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Use of Proceeds |
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The Fund |
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Investment Objective and Principal Investment Strategies |
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Leverage |
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Interest Rate Transactions |
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Risk Factors |
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Management of the Fund |
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Closed-End Fund Structure |
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Certain Federal Income Tax Matters |
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Net Asset Value |
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Dividends and Distributions; Automatic Dividend Reinvestment Plan |
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Description of Securities |
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Rating Agency Guidelines |
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Certain Provisions of the Agreement and Declaration of Trust and Bylaws |
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Plan of Distribution |
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Custodian, Transfer Agent, Dividend Disbursing Agent and Registrar |
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Legal Matters |
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Available Information |
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Table of Contents of the Statement of Additional Information |
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You should rely only on the information contained in or incorporated by reference in this
prospectus supplement. Neither we nor the underwriters have authorized anyone to provide you with
different or inconsistent 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 Series ___Preferred Shares in any jurisdiction where the offer or sale is not
permitted. You should assume that the information in this prospectus supplement is accurate only
as of the date of this prospectus supplement, and that our business, financial condition and
prospects may have changed since this date. We will amend or supplement this prospectus supplement
to reflect material changes to the information contained in this prospectus supplement to the
extent required by applicable law.
i
CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus supplement, the accompanying prospectus and the statement of additional
information contain forward-looking statements. Forward-looking statements can be identified by
the words may, will, intend, expect, estimate, continue, plan, anticipate, and
similar terms and the negative of such terms. Such forward-looking statements may be contained in
this prospectus supplement, as well as in the accompanying prospectus. By their nature, all
forward-looking statements involve risks and uncertainties, and actual results could differ
materially from those contemplated by the forward-looking statements. Several factors that could
materially affect our actual results are the performance of the portfolio of securities we hold,
the conditions in the U.S. and international financial, petroleum and other markets, the price at
which our shares will trade in the public markets and other factors discussed in our periodic
filings with the SEC.
Although we believe that the expectations expressed in our forward-looking statements are
reasonable, actual results could differ materially from those projected or assumed in our
forward-looking statements. Our future financial condition and results of operations, as well as
any forward-looking statements, are subject to change and are subject to inherent risks and
uncertainties, such as those disclosed in the Risk Factors section of the prospectus accompanying
this prospectus supplement. All forward-looking statements contained or incorporated by reference
in this prospectus supplement or the accompanying prospectus are made as of the date of this
prospectus supplement or the accompanying prospectus, as the case may be. Except for our ongoing
obligations under the federal securities laws, we do not intend, and we undertake no obligation, to
update any forward-looking statement. The forward-looking statements contained in this prospectus
supplement are excluded from the safe harbor protection provided by section 27A of the Securities
Act of 1933, as amended.
Currently known risk factors that could cause actual results to differ materially from our
expectations include, but are not limited to, the factors described in the Risk Factors section
of the prospectus accompanying this prospectus supplement as well as in Auction Risk and
Existing Holders Ability to Resell Auction Rate Securities May Be Limited in The Auction
section of this prospectus supplement. We urge you to review carefully those sections for a more
detailed discussion of the risks of an investment in the Preferred Shares.
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PROSPECTUS SUPPLEMENT SUMMARY
This summary contains basic information about us but does not contain all of the information
that is important to your investment decision. You should read this summary together with the more
detailed information contained elsewhere in this prospectus supplement and accompanying prospectus
and in the statement of additional information, especially the information set forth under the
heading Risk Factors beginning on page ___of the accompanying prospectus.
The Fund
Calamos Strategic Total Return Fund is a 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. The Funds common shares are traded on the New York Stock Exchange
under the symbol CSQ. As of ___, 2007, the Fund had ___common shares outstanding
and net assets of $___. The Funds principal offices are located at 2020 Calamos Court,
Naperville, Illinois 60563. We have a fiscal year ending October 31st.
Our investment objective is to provide total return through a combination of capital
appreciation and current income. There can be no assurance that we will achieve our investment
objective. See The Fund in the accompanying prospectus.
We commenced operations in March 2004 following our initial public offering. As of the date
of this prospectus supplement, we have $1.08 billion of Auction Rate Cumulative Preferred
Shares (Preferred Shares) outstanding.
Investment Adviser
Calamos Advisors LLC (Calamos) is the Funds investment adviser. Calamos is responsible on
a day-to-day basis for investment of the Funds 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 Funds portfolio securities. As of ___, 2007, Calamos managed
approximately $ billion in assets of individuals and institutions. Calamos is a wholly owned
subsidiary of Calamos Holdings LLC (Holdings) and an indirect subsidiary of Calamos Asset
Management, Inc., a publicly traded holding company.
The Fund pays Calamos an annual fee, payable monthly, for its investment management services
equal to ___% of the Funds average weekly managed assets. See Management of the Fund in the
accompanying prospectus.
The principal business address of the Adviser is 2020 Calamos Court, Naperville, Illinois,
60563.
The Offering
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Preferred Shares offered by the Fund
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We are offering ___Series ___
Preferred Shares, each at a
purchase price of $25,000 per
share. The Series ___Preferred
Shares are offered through
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Use of Proceeds
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The Fund estimates the net
proceeds of the offering of
Preferred Shares, after payment of
sales load and offering expenses,
will be approximately $___. |
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The Fund will invest the net proceeds of
the offering in accordance with the Funds
investment objective and policies as stated
below. It is presently anticipated that
the Fund will invest substantially all of
the net proceeds in securities that meet
its investment objective and policies
within three months after completion of
this offering. Pending such investment,
the Fund anticipates that all or a portion
of the proceeds will be invested in U.S.
government securities or high-grade,
short-term money market instruments. If
necessary, the Fund may also purchase, as
temporary investments, securities of other
open- or closed-end investment companies
that invest primarily in the types of
securities in which the Fund may invest
directly. See Investment Objective and
Principal Investment Strategies in the
accompanying prospectus. |
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Auction Agent
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[Auction Agent] |
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Broker Dealer(s)
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[Broker-Dealer(s)] |
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Risk Factors
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See Risks Factors and other information included in the accompanying prospectus, as
well as Risks-Auction Risk, Risks-Secondary Market Trading and Transfer of Preferred
Shares and Risks-Ratings and Asset Coverage Risk under The Auction in this prospectus
supplement, for a discussion of the factors you should carefully consider before deciding to
invest in the Preferred Shares. |
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USE OF PROCEEDS
The Fund estimates the net proceeds of the offering of Preferred Shares, after payment of
sales load and offering expenses, will be approximately $___. The Fund will invest the net
proceeds of the offering in accordance with the Funds investment objective and policies. It is
presently anticipated that the Fund will invest substantially all of the net proceeds in securities
that meet its investment objective and policies within three months after completion of this
offering. Pending such investment, the Fund anticipates that all or a portion of the proceeds will
be invested in U.S. government securities or high-grade, short-term money market instruments. If
necessary, the Fund may also purchase, as temporary investments, securities of other open- or
closed-end investment companies that invest primarily in the types of securities in which the Fund
may invest directly. See Investment Objective and Principal Investment Strategies in the
accompanying prospectus.
CAPITALIZATION
The following table sets forth the capitalization of the Fund as of ___, 2007, and as
adjusted, to give effect to the issuance of all the Preferred Shares offered hereby (including
estimated offering expenses and sales load of $___). The sales load and offering expenses of the
Preferred Shares will be effectively borne by common shareholders.
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As Adjusted |
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Actual |
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Preferred Shares |
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Long-Term Debt: |
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Calamos Notes, denominations of $25,000 or any multiple
thereof |
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Preferred Shares: |
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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
_____ shares issued, respectively) |
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Common Shareholders Equity: |
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Common shares, no par value per share, unlimited shares
authorized, _____ shares outstanding* |
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Undistributed net investment income |
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Accumulated net realized gain (loss) on investments |
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Net unrealized appreciation (depreciation) on investments |
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Net Assets applicable to common shareholders |
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None of these outstanding shares are held by or for the account of the Fund. |
ASSET COVERAGE REQUIREMENTS
The Fund may be subject to certain restrictions on investments imposed by guidelines of one or
more rating agencies that may issue ratings for the preferred shares or debt instruments issued by
the Fund. These guidelines may impose asset coverage or portfolio composition requirements that
are more stringent than those imposed by the 1940 Act. See The AuctionRating and Asset Coverage
Risk below. 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 Funds
portfolio in accordance with the Funds
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.
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DESCRIPTION OF PREFERRED SHARES
The following is a brief description of the terms of the Preferred Shares. For the complete
terms of the Preferred Shares, please refer to the detailed description of the Preferred Shares in
the Statement of Preferences of Auction Rate Cumulative Preferred Shares (the Statement) attached
as Appendix ___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 Funds 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 ___Preferred Shares, Series ___. 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 supplement and the accompanying prospectus, will be fully paid and
non-assessable and will have no preemptive, exchange or conversion rights. Any Preferred Shares
repurchased or redeemed by the Fund will be classified as authorized and unissued Preferred Shares.
The Board of Trustees may by resolution classify or reclassify any authorized and unissued
Preferred Shares from time to time by setting or changing the preferences, rights, voting powers,
restrictions, limitations as to dividends, qualifications or terms or conditions of redemption of
such shares. The Preferred Shares will not be subject to any sinking fund, but will be subject to
mandatory redemption under certain circumstances described below.
Dividends and Dividend Periods
The following is a general description of dividends and dividend periods for the Preferred
Shares.
Dividend Periods. The initial dividend period for the Preferred Shares is ___days and the
initial dividend rate is ___% per annum.
Any subsequent dividend periods of Series ___Preferred Shares will generally be [seven] days.
The Fund, subject to certain conditions, may change the length of subsequent dividend periods by
designating them as special dividend periods. See Designation of Special Dividend Periods
below.
Dividend Payment Dates. Dividends on the Preferred Shares will be payable, when, as and if
declared by the Board of Trustees, out of legally available funds in accordance with the Agreement
and Declaration of Trust, the Statement and applicable law. The initial dividend payment date and
the day of the week upon which subsequent dividends, if any, will be paid for the Preferred Shares
is ___, 2007 and [day of the week], respectively.
Dividend periods generally will begin on the first business day after an auction. If
dividends are payable on a day that is not a business day, then dividends will generally be payable
on the next day if such day is a business day, or as otherwise specified in the Statement. In
addition, the Fund may specify different dividend payment dates for any special dividend period of
more than seven days, provided that
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such dates shall be set forth in the notice of special dividend
period relating to such special dividend period.
[Dividends will be paid through the Depository Trust Company (DTC) on each dividend payment
date. The dividend payment date will normally be (A) the first business day after the dividend
period ends with respect to a dividend period of one year or less; provided, however, if the
dividend period is more than 91 days then on the 91st, 181st and 271st days within such period, if
applicable, and on the business day following the last day of such dividend period; and (B) with
respect to any dividend period of more than one year, on a quarterly basis on each January 1,
April 1, July 1 and October 1 within such dividend period and on the business day following the
last day of such dividend period.] DTC, in accordance with its current procedures, is expected to
distribute dividends received from the auction agent in same-day funds on each dividend payment
date to agent members (members of DTC that will act on behalf of existing or potential holders of
Preferred Shares). These agent members are in turn expected to distribute such dividends to the
persons for whom they are acting as agents. However, each of the current Broker-Dealers has
indicated to the Fund that dividend payments will be available in same-day funds on each dividend
payment date to customers that use a Broker-Dealer or a Broker-Dealers 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
___, 2007. For each dividend payment period after the initial dividend period, the dividend
will be the dividend rate determined at auction. The dividend rate that results from an auction
will not be greater than the maximum rate described below. Prior to each auction, Broker-Dealers
will notify holders of the term of the next succeeding dividend period as soon as practicable after
the Broker-Dealers have been so advised by the Fund. After each auction, on the auction date,
Broker-Dealers will notify holders of the applicable rate for the next succeeding dividend period
and as of the auction date of the next succeeding auction.
Except during a Default Period as described below, the applicable rate resulting from an
auction will not be greater than the maximum rate. The maximum rate will be the applicable
percentage of the reference rate. The Reference Rate will be the applicable LIBOR Rate (as
defined below) (for a dividend period of fewer than 365 days) or the applicable Treasury Index Rate
(as defined below) (for a dividend period of 365 days or more). The applicable percentage for any
standard dividend period will generally be determined based on the credit ratings assigned to the
Preferred Shares by Fitch and S&P on the auction date for such period (as set forth in the table
below). If Fitch and/or S&P shall not make such rating available, the rate shall be determined by
reference to equivalent ratings issued by any other rating agency.
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Fitch and/or S&P Credit Rating |
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Applicable Percentage |
AA or higher
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150 |
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A to A+
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200 |
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BBB to BBB+
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250 |
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Below BBB
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275 |
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The LIBOR Rate is the applicable London Inter-Bank Offered Rate for deposits in U.S. dollars
for the period most closely approximating the applicable dividend period for a series of Preferred
Shares.
The Treasury Index Rate is the average yield to maturity for certain U.S. Treasury
securities having substantially the same length to maturity as the applicable dividend period for a
series of Preferred Shares.
The Board of Trustees may amend the maximum rate to increase the percentage amount by which
the reference rate described above is multiplied to determine the maximum rate shown without the
vote or consent of the holders of Preferred Shares, or any shareholder of the Fund, but only with
confirmation from each rating agency then rating the Preferred Shares that such action will not
impair such agencys 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 paying agent
sufficient funds for the payment of declared dividends. The failure to make such deposit will not
result in the cancellation of any auction. The Fund does not intend to establish any reserves for
the payment of dividends.
Default Period. Subject to the applicable cure provisions, a Default Period with respect to
a particular series will commence on any date the Fund fails to deposit irrevocably in trust in
same-day funds, with the paying agent by 12:00 noon, New York City time, (A) the full amount of any
declared dividend on that series payable on the dividend payment date (a Dividend Default) or
(B) the full amount of any redemption price (the Redemption Price) payable on the date fixed for
redemption (the Redemption Date) (a Redemption Default and together with a Dividend Default,
hereinafter referred to as Default).
Subject to the applicable cure provisions, a Default Period with respect to a Dividend Default
or a Redemption Default shall end on the business day on which, by 12:00 noon, New York City time,
all unpaid dividends and any unpaid Redemption Price shall have been deposited irrevocably in trust
in same-day funds with the paying agent. In the case of a Dividend Default, the applicable rate
for each dividend period commencing during a Default Period will be equal to the default rate
described below, and each subsequent dividend period commencing after the beginning of a Default
Period shall be a standard dividend period; provided, however, that the commencement of a Default
Period will not by itself cause the commencement of a new dividend period. No Auction shall be
held during a Default Period applicable to that series.
No Default Period with respect to a Dividend Default or Redemption Default shall be deemed to
commence if the amount of any dividend or any Redemption Price due (if such default is not solely
due to the willful failure of the Fund) is deposited irrevocably in trust, in same-day funds with
the paying agent
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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 Funds 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 Funds 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 Funds obligations under any Borrowings. The term senior security also does
not include any 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:
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In the case of Fitchs coverage requirements, immediately after such transaction,
the aggregate discounted value (i.e., the aggregate value of the Funds 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); |
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In the case of S&Ps coverage requirements, immediately after such transaction, the
aggregate discounted
value (i.e., the aggregate value of the Funds portfolio
discounted |
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according to S&P criteria) would be equal to or greater than the Preferred
Shares Basic Maintenance Amount; |
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Immediately after such transaction, the 1940 Act Preferred Shares Asset Coverage (as
defined in this Prospectus under Rating Agency Guidelines below) is met; |
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Full cumulative dividends on the Preferred Shares due on or prior to the date of the
transaction have been declared and paid in full or have been declared and sufficient
funds for the payment thereof deposited with the auction agent; and |
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The Fund has redeemed the full number of Preferred Shares required to be redeemed by
any provision for mandatory redemption contained in the Statement. |
The Fund generally will not declare, pay or set apart for payment any dividend on any shares
of the Fund ranking, as to the payment of dividends, on a parity with Preferred Shares unless the
Fund has declared and paid or contemporaneously declares and pays full cumulative dividends on the
Preferred Shares through its most recent dividend payment date. However, if the Fund has not paid
dividends in full on the Preferred Shares through the most recent dividend payment date or upon any
shares of the Fund ranking, as to the payment of dividends, on a parity with Preferred Shares
through their most recent respective dividend payment dates, the amount of dividends shall be
declared pro rata so that the amount of dividends declared per share on Preferred Shares and such
other class or series of shares will in all cases bear to each other the same ratio that
accumulated dividends per share on the Preferred Shares and such other class or series of shares
bear to each other.
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 Fitchs or S&Ps or any substitute
rating agencys 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
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determination not to proceed with such special dividend period, in which latter event the
succeeding dividend period shall be a standard dividend period. No later than 3:00 P.M., New York
City time, on the second business day next preceding the first day of any proposed special dividend
period, the Fund shall deliver to the auction agent, who will promptly deliver to the
Broker-Dealers and existing holders, either:
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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 |
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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 standard dividend periods of one or more
series of Preferred Shares on a permanent basis.
Voting Rights
Except as noted below, the Funds common shares and Preferred Shares have equal voting rights
of one vote per share and vote together as a single class. In elections of trustees, the holders
of Preferred Shares, as a separate class, vote to elect two trustees. The Board of Trustees will
determine to which class or classes the trustees elected by the holders of Preferred Shares will be
assigned. The holders of the Preferred Shares shall only be entitled to elect the trustees so
designated when their term shall have expired. Such trustees appointed by the holders of Preferred
Shares will be allocated as evenly as possible among the classes of trustees. The holders of the
common shares and holders of Preferred Shares vote together as a single class to elect the
remaining trustees. In addition, during any period in which the Fund has not paid dividends on the
Preferred Shares in an amount equal to two full years dividends (Voting Period), the holders of
Preferred Shares, voting as a single class, are entitled to elect (in addition to the two trustees
set forth above) the smallest number of additional trustees as is necessary to ensure that a
majority of the trustees has been elected by the holders of Preferred Shares. The holders of
Preferred Shares will continue to have these rights until all dividends in arrears have been paid
or otherwise provided for.
In an instance when the Fund has not paid dividends as set forth in the immediately preceding
paragraph, the terms of office of all persons who are trustees of the Fund at the time of the
commencement of a Voting Period will continue, notwithstanding the election by the holders of the
Preferred Shares of the number of trustees that such holders are entitled to elect. The persons
elected by the holders of the Preferred Shares, together with the incumbent trustees, will
constitute the duly elected trustees of the Fund. When all dividends in arrears on the Preferred
Shares have been paid or provided for, the terms of office of the additional trustees elected by
the holders of the Preferred Shares will terminate.
So long as any of the Preferred Shares are outstanding, the Fund will not, without the
affirmative vote of the holders of a majority of the outstanding Preferred Shares, (i) institute
any proceedings to be adjudicated bankrupt or insolvent, or consent to the institution of
bankruptcy or insolvency proceedings
against it, or file a petition seeking or consenting to reorganization or relief under any
applicable federal or state law relating to bankruptcy or insolvency, or consent to the appointment
of a receiver, liquidator,
S-9
assignee, trustee, sequestrator (or other similar official) of the Fund
or a substantial part of its property, or make any assignment for the benefit of creditors, or,
except as may be required by applicable law, admit in writing its inability to pay its debts
generally as they become due or take any corporate action in furtherance of any such action;
(ii) create, incur or suffer to exist, or agree to create, incur or suffer to exist, or consent to
cause or permit in the future (upon the happening of a contingency or otherwise) the creation,
incurrence or existence of any material lien, mortgage, pledge, charge, security interest, security
agreement, conditional sale or trust receipt or other material encumbrance of any kind upon any of
the Funds 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 Funds 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 Funds
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 Funds fundamental investment restrictions described under Investment Restrictions in the
Statement of Additional Information and changes in the Funds 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 Funds shares of beneficial interest. For purposes of the foregoing, no matter will be deemed
to adversely affect any rights, preference or power unless such matter (i) alters or abolishes any
preferential right of such series; (ii) creates, alters or abolishes any right in respect of
redemption of such series; or (iii) creates or alters (other than to abolish) any restriction on
transfer applicable to such series. The vote of holders of any series described in this paragraph
will in each case be in addition to a separate vote of the requisite percentage of common shares
and/or preferred shares necessary to authorize the action in question.
The common shares and the Preferred Shares also will vote separately to the extent otherwise
required under Delaware law or the 1940 Act as in effect from time to time. The class votes of
holders of Preferred Shares described above will in each case be in addition to any separate vote
of the requisite percentage of common shares and Preferred Shares, voting together as a single
class, necessary to authorize the action in question.
For the 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
S-10
outstanding for quorum purposes, as the case may be, a notice of redemption
was given in respect of those Preferred Shares and sufficient deposit securities for the redemption
of those Preferred Shares were deposited.
Rating Agency Guidelines
The Fund is required under Fitch and S&P guidelines to maintain assets having in the aggregate
a discounted value at least equal to the Preferred Shares Basic Maintenance Amount (as defined
below). Fitch and S&P have each established separate guidelines for determining discounted value.
To the extent any particular portfolio holding does not satisfy the applicable rating agencys
guidelines, all or a portion of such holdings 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 Funds overall portfolio. The Preferred Shares Basic
Maintenance Amount means as of any valuation date the dollar amount equal to:
|
(i) |
|
the sum of (A) the product of the number of Preferred Shares outstanding on
such date multiplied by $25,000 (plus the product of the number of shares of any other
series of preferred shares outstanding on such date multiplied by the liquidation
preference of such shares), plus any redemption premium applicable to the Preferred
Shares (or other preferred shares) then subject to redemption; (B) the aggregate amount
of dividends that will have accumulated at the respective applicable rates (whether or
not earned or declared) to (but not including) the first respective dividend payment
dates for Preferred Shares outstanding that follow such valuation date (plus the
aggregate amount of dividends, whether or not earned or declared, that will have
accumulated in respect of other outstanding preferred shares to, but not including, the
first respective dividend payment dates for such other shares that follow such
valuation date); (C) the aggregate amount of dividends that would accumulate on shares
of each series of Preferred Shares outstanding from such first respective dividend
payment date therefore through the 42nd day after such valuation date, at the maximum
rate (calculated as if such valuation date were the auction date for the dividend
period commencing on such dividend payment date) for a standard
dividend period of shares of such series to commence on such dividend payment date, assuming, solely for
purposes of the foregoing, that if on such valuation date the Fund shall have delivered
a notice of special dividend period to the auction agent pursuant to Section 4(b) of
Part I of the Statement with respect to shares of such series, such maximum rate shall
be the maximum rate for the special dividend period of shares of such series to
commence on such dividend payment date (except that (1) if such valuation date occurs
at a time when a failure to deposit (or, in the case of preferred shares other than
Preferred Shares, a failure 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 |
S-11
|
|
|
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 Funds 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 Funds assets and liabilities as of ___, 2007, and assuming the issuance of all
Preferred Shares offered hereby and the use of the proceeds as intended, the 1940 Act Preferred
Shares Asset Coverage with respect to Preferred Shares would be computed as follows:
Value of Fund
assets less
liabilities not
constituting senior
securities = $ = %
|
Senior securities
representing
indebtedness plus
liquidation value
of 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.
S-12
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 Funds cure of a
failure to meet the Preferred Shares Basic Maintenance Amount test, (E) any day that common shares
or Preferred Shares are redeemed, and (F) any day the Fitch eligible assets have an aggregate
discounted value less than or equal to 110% of the Preferred Shares Basic Maintenance Amount. Such
Preferred Shares Basic Maintenance Certificate shall be delivered in the case of (A) above on or
before the seventh business day after the date of original issue and in the case of (B)(F) above
on or before the seventh business day after the relevant valuation date or asset coverage cure
date.
The Fund shall deliver to the auction agent and each rating agency a certificate which sets
forth a determination regarding the 1940 Act Preferred Shares Asset Coverage (a 1940 Act Preferred
Shares Asset Coverage Certificate) (i) as of the date of original issue, and (ii) as of (A) the
last valuation date of each quarter thereafter, and (B) as of a business day on or before any asset
coverage cure date relating to the failure to meet the 1940 Act Preferred Shares Asset Coverage.
Such 1940 Act Preferred Shares Asset Coverage Certificate shall be delivered in the case of clause
(i) on or before the seventh business day after the date of original issue and in the case of
clause (ii) on or before the seventh business day after the relevant valuation date or the asset
coverage cure date. The certificates required by the Statement may be combined into a single
certificate.
Within ten business days of the date of original issue, the Fund shall deliver to the Auction
Agent and each Rating Agency a letter prepared by the Funds independent auditors (an Auditors
Certificate) regarding the accuracy of the calculations made by the Fund in the Preferred Shares
Basic Maintenance Certificate and the 1940 Act Preferred Shares Asset Coverage Certificate required
to be delivered by the Fund on or before the seventh business day after the date of original issue.
Within ten business days after delivery of the Preferred Shares Basic Maintenance Certificate and
the 1940 Act Preferred Shares Asset Coverage Certificate relating to the last valuation date of
each fiscal year of the Fund, the Fund will deliver to the auction agent and each rating agency an
Auditors 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 Auditors 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 Auditors Certificate shows that an error was made in any such
report, the calculation or determination made by the Funds 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 and in certain cases a redemption premium. Any such
S-13
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, pro rata 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 pro rata, by lot or other method that
it deems fair and equitable.
Optional Redemption. After the initial dividend period, to the extent permitted under the
1940 Act and Delaware law, the Fund may, at its option, redeem, in whole or in part, Preferred
Shares having a dividend period of one year or less on the business day after the last day of such
dividend period upon not less than 15 calendar days and not more than 40 calendar days prior
notice. The redemption price per share will be $25,000 per share, plus an amount equal to
accumulated but unpaid dividends thereon (whether or not earned or declared) to the date fixed for
redemption. Preferred Shares having a dividend period of more than one year are redeemable at the
option of the Fund, in whole or in part, on any business day prior to the end of the relevant
dividend period upon not less than 15 calendar days and not more than 40 calendar days prior
notice, subject to any specific redemption provisions, which may include the payment of redemption
premiums to the extent required under any applicable specific redemption provisions. The Fund will
not make any optional redemption unless (i) the Fund has available certain deposit securities with
maturities or tender dates not later than the day preceding the applicable redemption date and
having a value not less than the amount (including any applicable premium) due to holders of the
Preferred Shares by reason of the redemption of the Preferred Shares on such date fixed for the
redemption and (ii) the Fund has eligible assets with an aggregate discounted value at least equal
to the Preferred Shares Basic Maintenance Amount immediately subsequent to such redemption.
Notwithstanding the foregoing, Preferred Shares may not be redeemed at the option of the Fund
unless all dividends in arrears on the outstanding Preferred Shares, and any other outstanding
preferred shares, have been or are being contemporaneously paid or set aside for payment. This
would not prevent the lawful purchase or exchange offer for Preferred Shares made on the same terms
to holders of all outstanding preferred shares.
Liquidation
Subject to the rights of holders of any series or class or classes of shares ranking on a
parity with Preferred Shares with respect to the distribution of assets upon liquidation of the
Fund, upon a liquidation, dissolution or winding up of the affairs of the Fund, whether voluntary
or involuntary, the holders of Preferred Shares then outstanding will be entitled to receive and to
be paid out of the assets of the Fund available for distribution to its shareholders, after claims
of creditors but before any payment or distribution is made on the common shares or any other
shares of beneficial interest of the Fund ranking junior to the Preferred Shares, an amount equal
to the liquidation preference with respect to such shares ($25,000 per share), plus an amount equal
to all unpaid dividends thereon (whether or not declared by the Fund, but excluding the interest
thereon) accrued to and including the date fixed for such distribution in connection with the
liquidation of the Fund. After the payment to the holders of Preferred Shares of the full
preferential amounts provided for as described herein, the holders of Preferred Shares as such will
have no right or claim to any of the remaining assets of the Fund.
If, upon any such liquidation, dissolution or winding up of the affairs of the Fund, whether
voluntary or involuntary, the assets of the Fund available for distribution among the holders of
all
outstanding Preferred Shares, including each series, shall be insufficient to permit the
payment in full to
S-14
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 consolidation nor merger of the Fund with or into any other business entity, nor
the sale, lease, exchange or transfer by the Fund of all or substantially all of its property and
assets, shall be deemed to be a liquidation, dissolution or winding up of the Fund for purposes of
the foregoing paragraph.
THE AUCTION
General
The Statement provides that, except as otherwise described in this prospectus supplement or in
the accompanying prospectus, the applicable rate for the Preferred Shares for each dividend period
after the initial dividend period will be the rate that results from an auction conducted as set
forth in the Statement and summarized below. In such an auction, persons determine to hold or
offer to sell or, based on dividend rates bid by them, offer to purchase or sell Preferred Shares.
See the Statement included in the Statement of Additional Information for a more complete
description of the auction process.
Auction Agency Agreement. The Fund will enter into an auction agency agreement with the
auction agent (currently, The Bank of New York) which provides, among other things, that the
auction agent will follow the auction procedures to determine the applicable rate for Preferred
Shares, so long as the applicable rate for Preferred Shares is to be based on the results of an
auction.
The auction agent may terminate the auction agency agreement upon notice to the Fund no
earlier than 45 days after the delivery of such notice. If the auction agent should resign, the
Fund will use its best efforts to enter into an agreement with a successor auction agent containing
substantially the same terms and conditions as the auction agency agreement. The Fund may remove
the auction agent provided that, prior to such removal, the Fund has entered into such an agreement
with a successor auction agent.
Broker-Dealer Agreements. Each auction requires the participation of one or more
Broker-Dealers. The auction agent will enter into agreements with several Broker-Dealers selected
by the Fund, which provide for the participation of those Broker-Dealers in auctions for Preferred
Shares.
The auction agent will pay to each Broker-Dealer after each auction from funds provided by the
Fund, a service charge at the annual rate of 1/4 of 1% of the liquidation preference ($25,000 per
share) of the Preferred Shares held by that Broker-Dealers 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
S-15
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 Orderindicating its desire to hold Preferred Shares without regard to the
applicable rate for the next dividend period. |
|
|
2. |
|
Bidindicating 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 Orderindicating 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 BrokerDealer will ordinarily be deemed to have submitted
a hold order to its Broker-Dealer. However, if a beneficial owner fails to submit an order for
some or all of its shares to its Broker-Dealer for an auction relating to a dividend period of more
than 91 days, such beneficial owner will be deemed to have submitted a sell order for such shares
to its Broker-Dealer. A sell order constitutes an irrevocable offer to sell the Preferred Shares
subject to the sell order. A beneficial owner that offers to become the beneficial owner of
additional Preferred Shares is, for the purposes of such offer, a potential holder as discussed
below.
A potential holder is either a customer of a Broker-Dealer that is not a beneficial owner of
Preferred Shares but that wishes to purchase shares of such series or that is a beneficial owner of
shares of such series that wishes to purchase additional shares of such series. A potential holder
may submit bids to its Broker-Dealer in which it offers to purchase shares of such series at
$25,000 per share if the applicable rate for the next dividend period is not less than the
specified rate in such bid. A bid placed by a potential holder specifying a rate higher than the
maximum rate for shares of such series on the auction date will not be accepted.
The Broker-Dealers in turn will submit the orders of their respective customers who are
beneficial owners and potential holders to the auction agent. They will designate themselves
(unless otherwise permitted by the Fund) as existing holders of shares subject to orders submitted
or deemed submitted to them by beneficial owners. They will designate themselves as potential
holders of shares subject to orders submitted to them by potential beneficial owners. However,
neither the Fund nor the auction agent will be responsible for a Broker-Dealers 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 owners 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
S-16
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 pro rata allocation of shares for purchase and sale which may
result in an existing holder continuing to hold or selling, or a potential holder purchasing, a
number of Preferred Shares that is different than the number of shares specified in its order. To
the extent the allocation procedures have that result, Broker-Dealers that have designated
themselves as existing holders or potential holders in respect of customer orders will be required
to make appropriate pro rata 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 DTCs normal procedures,
which now provide for payment against delivery by their agent members in same-day funds.
The auctions for Series ___Preferred Shares will normally be held every [seven] days. Each
subsequent dividend period will normally begin on the following business day.
If an auction date is not a business day because the New York Stock Exchange is closed for
business for more than three consecutive business days due to an act of God, natural disaster, act
of war, civil or military disturbance, act of terrorism, sabotage, riots or a loss or malfunction
of utilities or communications services, or the auction agent is not able to conduct an auction in
accordance with the auction procedures for any reason, then the applicable rate for the next
dividend period will be the applicable rate determined on the previous auction date.
If a dividend payment date is not a business day because the New York Stock Exchange is closed
for business for more than three consecutive business days due to an act of God, natural disaster,
act of war, civil or military disturbance, act of terrorism, sabotage, riots or a loss or
malfunction of utilities or communications services, or the dividend payable on such date cannot be
paid for any such reason, then:
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|
|
the dividend payment date for the affected dividend period will be the next business
day on which the Fund and its paying agent, if any, can pay the dividend; |
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|
|
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. |
S-17
The following is a simplified example of how a typical auction works. Assume that the Fund
has 1,000 outstanding Preferred Shares and three existing holders. The three existing holders and
three potential holders submit orders through Broker-Dealers at the auction:
|
|
|
|
|
Existing Holder A
|
|
Owns 500 shares, wants to
sell all 500 shares if
auction rate is less than
4.1%
|
|
Bid order of 4.1% rate for 500 shares |
|
|
|
|
|
Existing Holder B
|
|
Owns 300 shares, wants to hold
|
|
Hold orderwill take the auction rate |
|
|
|
|
|
Existing Holder C
|
|
Owns 200 shares, wants to
sell all 200 shares if
auction rate is less than
3.9%
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Bid order of 3.9% rate for 200 shares |
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Potential Holder D
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Wants to buy 200 shares
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Places order to buy at or above 4.0% |
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Potential Holder E
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Wants to buy 300 shares
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Places order to buy at or above 3.9% |
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Potential Holder F
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Wants to buy 200 shares
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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 As dividend
rate bid was higher than the dividend rate. Potential holder D will buy 200 shares and potential
holder E will buy 300 shares because their bid rates were at or below the dividend rate. Potential
holder F will not buy any shares because its bid rate was above the dividend rate.
Secondary Market Trading and Transfer of Preferred Shares.
The underwriters are not required to make a market in the Preferred Shares. The
Broker-Dealers (including the underwriters) may maintain a secondary trading market for outside of
auctions, but they are not required to do so. There can be no assurance that a secondary trading
market for Preferred Shares will develop or, if it does develop, that it will provide owners with
liquidity of investment. Preferred Shares will not be registered on any stock exchange or on the
Nasdaq market.
Investors who purchase Preferred Shares in an auction for a special dividend period should
note that because the dividend rate on such shares will be fixed for the length of that dividend
period, the value of such shares may fluctuate in response to the changes in interest rates, and
may be more or less than their original cost if sold on the open market in advance of the next
auction thereof, depending on market conditions.
A beneficial owner or an existing holder may sell, transfer or otherwise dispose of Preferred
Shares only in whole shares and only:
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pursuant to a bid or sell order placed with the auction agent in accordance with the
auction procedures; |
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to a Broker-Dealer; or |
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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. |
S-18
Further description of the auction procedures can be found in the Statement.
Risks
Auction Risk. You may not be able to sell your Preferred Shares at an auction if the auction
fails; that is, if there are more Preferred Shares offered for sale than there are buyers for those
shares. Also, if you place a bid order to retain Preferred Shares at an auction only at a
specified rate, and that specific rate exceeds the rate set at the auction, you will not retain
your Preferred Shares. If you submit a hold order for Preferred Shares (orders to retain Preferred
Shares without specifying a minimum rate) and the auction sets a below-market rate, you may receive
a below-market rate of return on your Preferred Shares.
If there are more Preferred Shares offered for sale than there are buyers for those Preferred
Shares in any auction, the auction will fail and you may not be able to sell some or all of your
Preferred Shares at that time. The relative buying and selling interest of market participants in
your Preferred Shares and in the auction rate securities market as a whole will vary over time, and
such variations may be affected by, among other things, news relating to the Fund, the
attractiveness of alternative investments, the perceived risk of owning the security (whether
related to credit, liquidity or any other risk), the tax treatment accorded the instruments, the
accounting treatment accorded Preferred Shares, including recent clarifications of U.S. generally
accepted accounting principles relating to the treatment of auction rate securities, reactions to
regulatory actions or press reports, financial reporting cycles and market sentiment generally.
Shifts of demand in response to any one or simultaneous particular events cannot be predicted and
may be short-lived or exist for longer periods.
A Broker-Dealer may submit orders in auctions for its own account. Any Broker-Dealer
submitting an order for its own account in any auction will have an advantage over other bidders in
that it would have knowledge of other orders placed through it in that auction (but it would not
have knowledge of orders submitted by other Broker-Dealers, if any). As a result of the
Broker-Dealer bidding, the auction clearing rate may be higher or lower than the rate that would
have prevailed if the Broker-Dealer had not bid. A Broker-Dealer may also bid in order to prevent
what would otherwise be a failed auction, or an auction clearing at a rate that the Broker-Dealer
believes does not reflect the market for such securities at the time of the auction.
Broker-Dealers may, but are not obligated to, advise holders of the Preferred Shares that the rate
that will apply in an all hold auction is often a lower rate than would apply if holders submit
bids, and such advice, if given, may facilitate the submission of bids by existing holders that
would avoid the occurrence of an all hold auction. A Broker-Dealer may, but is not obligated to,
encourage additional or revised investor bidding in order to prevent an all hold auction.
Finally, the dividend periods for the Preferred Shares may be changed by the Fund, subject to
certain conditions with notice to the holders of Preferred Shares, which could also affect the
liquidity of your investment. See Description of Preferred Shares and The AuctionAuction
Procedures.
[The underwriter has advised the Fund that the underwriter and various other Broker-Dealers
and other firms that participate in the auction rate securities market received letters from the
staff of the Commission in the spring of 2004. The letters requested that each of these firms
voluntarily conduct an investigation regarding its respective practices and procedures in that
market. Pursuant to these requests, the underwriter conducted its own voluntary review and
reported its findings to the Commission staff. At the Commission staffs request, the underwriter
is engaging in discussions with the Commission staff concerning its inquiry. Neither the
underwriter nor the Fund can predict the ultimate outcome of the inquiry or how that outcome will
affect the market for auction rate securities or the auctions.]
Secondary Market Risk. If you try to sell your Preferred Shares between auctions, you may not
be able to sell any or all of your shares, or you may not be able to sell them for $25,000 per
share or $25,000 per share plus accumulated dividends. If the Fund has designated a special
dividend period (a
S-19
dividend period other than [7] days), changes in interest rates could affect the price you
would receive if you sold your shares in the secondary market. Broker-Dealers that maintain a
secondary trading market for 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 Funds auction agent, The Bank of New
York, and the Fund or such other persons as the Fund permits. If you sell your Preferred Shares to
a broker-dealer between auctions, you may receive less than the price you paid for them, especially
if market interest rates have risen since the last auction. Accumulated Preferred Shares
dividends, however, should at least partially compensate for the increased market interest rates.
Ratings and Asset Coverage Risk. Although it is expected that Fitch will assign a rating of
AAA to the Preferred Shares and S&P will assign a rating of AAA to the Preferred Shares, such
ratings do not eliminate or necessarily mitigate the risks of investing in Preferred Shares. Fitch
or S&P could downgrade its rating of the Preferred Shares or withdraw its rating of the Preferred
Shares at any time, which may make your shares less liquid at an auction or in the secondary
market. If Fitch or S&P downgrades the Preferred Shares, the Fund may alter its portfolio or
redeem Preferred Shares in an effort to improve the rating, although there is no assurance that it
will be able to do so to the extent necessary to restore the prior rating. If the Fund fails to
satisfy the asset coverage ratios discussed under Description of Preferred SharesRating 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 SharesVoting 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 SharesRating Agency Guidelines. See
Description of Preferred SharesRating Agency Guidelines for a description of the asset
maintenance tests the Fund must meet.
S-20
UNDERWRITING
[TO BE ADDED BY UNDERWRITERS AT TIME OF OFFERING]
WHERE YOU CAN FIND MORE 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
SECs public reference room, Washington, D.C. 20549-0102, and at the SECs Chicago Regional Office,
Suite 1400, Northwestern Atrium Center, 500 West Madison Street, Chicago, Illinois 60661-2511.
Reports, proxy statements, and other information about the Fund can be inspected at the offices of
the New York Stock Exchange, 20 Broad Street, New York, New York 10005.
This prospectus supplement and the accompanying prospectus do not contain all of the
information in the Funds registration statement, including amendments, exhibits, and schedules.
Statements in this prospectus supplement and the accompanying 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 Funds
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 Funds registration
statement, other documents incorporated by reference, and other information the Fund has filed
electronically with the Commission, including proxy statements and reports filed under the
Securities Exchange Act of 1934.
LEGAL MATTERS
___, ___, ___, serves as counsel to the Fund and to the
non-interested Trustees. Vedder Price P.C. (Vedder Price), Chicago,
Illinois, which is serving as special counsel to the Fund in connection with the offering, will
pass on the legality of the shares offered hereby. Vedder Price is also counsel to Calamos.
Certain matters will be passed upon for the underwriter by ___, [city], [state]. Vedder
Price and ___may rely on the opinion of ___, ___, Delaware for
certain matters of Delaware law.
S-21
[UNAUDITED] FINANCIAL STATEMENTS AS OF ________, 200__
F-1
$_________
Calamos Strategic Total Return Fund
Preferred Shares
___Shares, Series ___
PROSPECTUS SUPPLEMENT
___, 20___
[Underwriters]
The information in this prospectus supplement, which relates to an effective Registration Statement
under the Securities Act of 1933, is not complete and may be changed. We may not sell these
securities until we deliver a final prospectus supplement. This prospectus supplement and the
attached prospectus do not constitute an offer to sell these securities or a solicitation of an
offer to buy these securities in any jurisdiction where the offer or sale is not permitted.
SUBJECT TO COMPLETION, DATED ___________ __, 2007
FORM OF PROSPECTUS SUPPLEMENT
(To prospectus dated ___, 2007)
$__________
CALAMOS STRATEGIC TOTAL RETURN FUND
Auction Rate Senior Notes (Calamos Notes)
$___Series ___, Due ___, 20___
$___Denominations
Calamos Strategic Total Return Fund (the Fund, we, us or our) is a diversified,
closed-end management investment company. Our investment objective is to provide total return
through a combination of capital appreciation and current income.
We are offering an aggregate principal amount of $___Series ___Calamos Notes in this
prospectus supplement. This prospectus supplement is not complete and should be read in
conjunction with our prospectus dated ___, 20___(the prospectus), which accompanies this
prospectus supplement. This prospectus supplement does not include all information that you should
consider before purchasing any Calamos Notes. You should read this prospectus supplement and our
prospectus prior to purchasing any Calamos Notes.
The notes offered in this prospectus supplement are referred to as Calamos Notes. Individual
series of Calamos Notes are referred to as a series. Except as otherwise described in this
prospectus supplement, the terms of this series and all other series are the same. Capitalized
terms used but not defined in this prospectus supplement shall have the meanings given to such
terms in Appendix ___to the Statement of Additional Information, which is available from us upon
request.
The Calamos Notes will be issued without coupons in denominations of $___and any
integral multiple thereof. The principal amount of the Series ___Calamos Notes will be due and
payable on ___, 20___(the Stated Maturity). There is no sinking fund with respect to the
Calamos Notes. The Calamos Notes will be our unsecured obligations and, upon our liquidation,
dissolution or winding up, will rank: (1) senior to all of our outstanding common stock and any
outstanding preferred stock; (2) on a parity with any of our unsecured creditors and any unsecured
senior securities representing our indebtedness, including other series of Calamos Notes; and
(3) junior to any of our secured creditors. We may redeem the Calamos Notes prior to their Stated
Maturity in certain circumstances described in this prospectus supplement.
Holders of the Calamos Notes will be entitled to receive cash interest payments at an annual
rate that may vary for each rate period. The initial rate period for the Series ___Calamos Notes
is from the issue date through ___, 20___. The interest rate for the initial rate period from
and including the issue date through ___, 20___, will be ___% per year for the Series ___
Calamos Notes. For each subsequent rate period, the interest rate will be determined by an auction
conducted in accordance with the procedures described in this prospectus supplement. Generally,
following the initial rate period, each rate period will be ___(___) days for the Series ___
Calamos Notes.
The Calamos Notes will not be listed on any exchange or automated quotation system.
Generally, you may only buy and sell Calamos Notes through an order placed at an auction with or
through a broker-dealer that has entered into an agreement with the auction agent or in a secondary
market that those broker-dealers may maintain. These broker-dealers are not required to maintain a
market in the Calamos Notes, and a secondary market, if one develops, may not provide you with
liquidity. See The AuctionCertain Considerations Affecting Auction Rate SecuritiesExisting
Holders Ability to Resell Auction Rate Securities May Be Limited.
Investing in Calamos Notes involves certain risks. See Risk Factors beginning on page ___of
the accompanying prospectus and The AuctionAuction Risk beginning on page ___of this
prospectus supplement.
Neither the Securities and Exchange Commission nor any state securities commission has
approved or disapproved of these securities or determined if this prospectus supplement or
accompanying prospectus is truthful or complete. Any representation to the contrary is a criminal
offense.
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Amount of _________ Notes |
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Public offering price
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Sales load
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(1) |
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Does not include offering expenses payable by us, estimated to be $___. |
The underwriters expect to deliver the Series ___Calamos Notes in book-entry form, through the
facilities of The Depository Trust Company, to broker-dealers on or about ___, 20___.
[Underwriter(s)]
___, 200___
The offering is conditioned upon the Series ___Calamos Notes receiving a rating of ___ from
Fitch Ratings and ___ from S&P.
This prospectus supplement has been filed with the Securities and Exchange Commission (the
SEC). Additional copies of this prospectus supplement, the prospectus, the Statement of
Additional Information dated ___, as supplemented from time to time, or the Funds annual or
semi-annual reports are available by calling (800) 582-6959 or by writing to the Fund, or you may
obtain copies (and other information regarding us) from the SECs web site (http://www.sec.gov).
The Funds annual and semi-annual reports are also available on the Funds website at
www.calamos.com, which provides a link to the SECs website where the Funds Statement of
Additional Information may be obtained. You also may e-mail requests for these documents to the
SEC at publicinfo@sec.gov or make a request in writing to the SECs Public Reference Section,
Washington, D.C. 20549-0102.
This prospectus supplement, which describes the specific terms of this offering, also adds to
and updates information contained in the accompanying prospectus and the documents incorporated by
reference in the prospectus. The prospectus gives more general information, some of which may not
apply to this offering.
If the description of this offering varies between this prospectus supplement and the
accompanying prospectus, you should rely on the information contained in this prospectus
supplement; provided that if any statement in one of these documents is inconsistent with a
statement in another document having a later date, the statement in the document having the later
date modifies or supersedes the earlier statement.
The Calamos Notes 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.
TABLE OF CONTENTS
Prospectus Supplement
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Prospectus
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Prospectus Summary |
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Summary of Fund Expenses |
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Financial Highlights |
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Market and Net Asset Value Information |
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Use of Proceeds |
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The Fund |
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Investment Objective and Principal Investment Strategies |
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Leverage |
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Interest Rate Transactions |
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Risk Factors |
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Management of the Fund |
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Closed-End Fund Structure |
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Certain Federal Income Tax Matters |
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Net Asset Value |
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Dividends and Distributions; Automatic Dividend Reinvestment Plan |
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Description of Securities |
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Rating Agency Guidelines |
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Certain Provisions of the Agreement and Declaration of Trust and Bylaws |
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Plan of Distribution |
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Custodian, Transfer Agent, Dividend Disbursing Agent and Registrar |
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Legal Matters |
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Available Information |
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Table of Contents of the Statement of Additional Information |
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You should rely on the information contained in or incorporated by reference in this
prospectus supplement in making an investment decision. Neither we nor the underwriters have
authorized anyone to provide you with different or inconsistent 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 notes in any jurisdiction where the offer or
sale is not permitted. You should assume that the information in this prospectus supplement is
accurate only as of the date of this prospectus supplement, and that our business, financial
condition and prospects may have changed since this date. We will amend or supplement this
prospectus supplement to reflect material changes to the information contained in this prospectus
supplement to the extent required by applicable law.
i
CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus supplement, the accompanying prospectus and the statement of additional
information contain forward-looking statements. Forward-looking statements can be identified by
the words may, will, intend, expect, estimate, continue, plan, anticipate, and
similar terms and the negative of such terms. Such forward-looking statements may be contained in
this prospectus supplement, as well as in the accompanying prospectus. By their nature, all
forward-looking statements involve risks and uncertainties, and actual results could differ
materially from those contemplated by the forward-looking statements. Several factors that could
materially affect our actual results are the performance of the portfolio of securities we hold,
the conditions in the U.S. and international financial, petroleum and other markets, the price at
which our shares will trade in the public markets and other factors discussed in our periodic
filings with the SEC.
Although we believe that the expectations expressed in our forward-looking statements are
reasonable, actual results could differ materially from those projected or assumed in our
forward-looking statements. Our future financial condition and results of operations, as well as
any forward-looking statements, are subject to change and are subject to inherent risks and
uncertainties, such as those disclosed in the Risk Factors section of the prospectus accompanying
this prospectus supplement. All forward-looking statements contained or incorporated by reference
in this prospectus supplement or the accompanying prospectus are made as of the date of this
prospectus supplement or the accompanying prospectus, as the case may be. Except for our ongoing
obligations under the federal securities laws, we do not intend, and we undertake no obligation, to
update any forward-looking statement. The forward-looking statements contained in this prospectus supplement are excluded from the safe harbor protection provided by Section 27A of the Securities Act of 1933, as amended.
Currently known risk factors that could cause actual results to differ materially from our
expectations include, but are not limited to, the factors described in the Risk Factors section
of the prospectus accompanying this prospectus supplement as well as in Auction Risk and
Existing Holders Ability to Resell Auction Rate Securities May Be Limited in The Auction
section of this prospectus supplement. We urge you to review carefully those sections for a more
detailed discussion of the risks of an investment in the Calamos Notes.
ii
PROSPECTUS SUPPLEMENT SUMMARY
This summary contains basic information about us but does not contain all of the information
that is important to your investment decision. You should read this summary together with the more
detailed information contained elsewhere in this prospectus supplement and accompanying prospectus
and in the statement of additional information, especially the information set forth under the
heading Risk Factors beginning on page ___of the accompanying prospectus.
The Fund
Calamos Strategic Total Return Fund is a 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 Funds common shares are traded on the New York
Stock Exchange under the symbol CSQ. As of ___, 2007, the Fund had ___common
shares outstanding and net assets of $___. The Funds principal offices are located at 2020
Calamos Court, Naperville, Illinois 60563. We have a fiscal year ending October 31st.
Our investment objective is to provide total return through a combination of capital
appreciation and current income. There can be no assurance that we will achieve our investment
objective. See The Fund in the accompanying prospectus.
We commenced operations in March 2004 following our initial public offering. As of the date
of this prospectus, we have $1.08 billion of Auction Rate Cumulative Preferred Shares (Preferred
Shares) outstanding.
Investment Adviser
Calamos Advisors LLC (Calamos) is the Funds investment adviser. Calamos is responsible on
a day-to-day basis for investment of the Funds 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 Funds portfolio securities. As of ___, 2007, Calamos managed
approximately $ billion in assets of individuals and institutions. Calamos is a wholly owned
subsidiary of Calamos Holdings LLC (Holdings) and an indirect subsidiary of Calamos Asset
Management, Inc., a publicly traded holding company.
The Fund pays Calamos an annual fee, payable monthly, for its investment management services
equal to ___% of the Funds average weekly managed assets. See Management of the Fund in the
accompanying prospectus.
The principal business address of the Adviser is 2020 Calamos Court, Naperville, Illinois
60563.
The Offering
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Calamos Notes offered by the Fund
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$___aggregate principal
amount of Series ___Calamos Notes.
Series ___Calamos Notes will be sold
in denominations of $___and
any integral multiple thereof. The
Series ___Calamos Notes are being
offered by ___and
___, as underwriters. See
Underwriting. |
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Use of proceeds
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The Fund estimates the net proceeds
of the offering of Series ___Calamos
Notes, after payment of sales load
and offering expenses, will be
approximately $___. The Fund
will invest the net proceeds of the
offering in accordance with the
Funds investment objective and
policies as stated below. It is
presently anticipated that the Fund
will invest substantially all of the
net proceeds in securities that meet
its investment objective and policies
within three months after completion
of this offering. Pending such
investment, the Fund anticipates that
all or a portion of the proceeds will
be invested in U.S. government
securities or high-grade, short-term
money market instruments. If
necessary, the Fund may also
purchase, as temporary investments,
securities of other open- or
closed-end investment companies that
invest primarily in the types of
securities in which the Fund may
invest directly. See Investment
Objectives and Principal Investment
Strategies in the accompanying
prospectus. |
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Auction Agent
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[Auction Agent] |
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Broker Dealer(s)
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[Broker-Dealer(s)] |
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Risk factors
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See Risk Factors and other
information included in the
accompanying prospectus, as well as
Risk-Auction Risk, Risks-Secondary
Market Trading and Transfer of
Calamos Notes and Risks-Ratings and
Asset Coverage Risk under The
Auction in this prospectus
supplement, for a discussion of
factors you should carefully consider
before deciding to invest in the
Calamos Notes. |
S-2
USE OF PROCEEDS
The Fund estimates the net proceeds of the offering of Calamos Notes, after payment of sales
load and offering expenses, will be approximately $___. The Fund will invest the net
proceeds of the offering in accordance with the Funds investment objective and policies. It is
presently anticipated that the Fund will invest substantially all of the net proceeds in securities
that meet its investment objective and policies within three months after completion of this
offering. Pending such investment, the Fund anticipates that all or a portion of the proceeds will
be invested in U.S. government securities or high-grade, short-term money market instruments. If
necessary, the Fund may also purchase, as temporary investments, securities of other open- or
closed-end investment companies that invest primarily in the types of securities in which the Fund
may invest directly. See Investment Objectives and Principal Investment Strategies in the
accompanying prospectus.
CAPITALIZATION
The following table sets forth the capitalization of the Fund as of ___, 2007, and as
adjusted, to give effect to the issuance of all the Calamos Notes offered hereby (including
estimated offering expenses and sales load of $___). The sales load and offering expenses of the
Calamos Notes will be effectively borne by common shareholders.
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As Adjusted |
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Calamos Notes |
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Long-Term Debt: |
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Calamos Notes, denominations of $25,000 or any multiple thereof |
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Preferred Shares: |
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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
_____ shares issued, respectively) |
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Common Shareholders Equity: |
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Common shares, no par value per share, unlimited shares
authorized, _____ shares outstanding* |
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None of these outstanding shares are held by or for the account of the Fund. |
ASSET COVERAGE REQUIREMENTS
The Fund may be subject to certain restrictions on investments imposed by guidelines of one or
more rating agencies that may issue ratings for the preferred shares or debt instruments issued by
the Fund. These guidelines may impose asset coverage or portfolio composition requirements that
are more stringent than those imposed by the 1940 Act. See The AuctionRating and Asset Coverage
Risk below. 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 Funds
portfolio in accordance with the Funds 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.
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DESCRIPTION OF CALAMOS NOTES
Calamos Notes of each series will rank on a parity with any other series of Calamos Notes as
to the payment of interest and distribution of assets upon liquidation. All Calamos Notes rank
senior to our common and preferred shares as to the payment of interest and distribution of assets
upon liquidation. Under the 1940 Act, we may only issue one class of senior securities
representing indebtedness.
The Series ___Calamos Notes will be issued pursuant to the Original Indenture and a
Supplemental Indenture dated as of ___, ___(referred to herein collectively with the
Original Indenture as the Indenture). The following summaries of certain significant provisions
of the Indenture are not complete and are qualified in their entirety by the provisions of the
Indenture, a more detailed summary of which is contained in Appendix ___to the statement of
additional information, which is on file with the SEC. Whenever defined terms are used, but not
defined in this prospectus supplement, the terms have the meaning given to them in Appendix ___to
the statement of additional information.
General
The Board of Directors has authorized us to issue the Series ___Calamos Notes representing
indebtedness pursuant to the terms of the Indenture. Currently, the Indenture provides for the
issuance of up to $___aggregate principal amount of Series ___Calamos Notes. The principal
amount of the Series ___Calamos Notes is due and payable on ___, 20___. The Series ___Calamos
Notes, when issued and sold pursuant to the terms of the Indenture, will be issued in fully
registered form without coupons and in denominations of $___and any integral multiple
thereof, unless otherwise provided in the Indenture. The Series ___Calamos Notes will be unsecured
obligations of ours and, upon our liquidation, dissolution or winding up, will rank: (1) senior to
our outstanding common stock and any outstanding preferred stock, including the Preferred Shares;
(2) on a parity with any of our unsecured creditors, including any other series of Calamos Notes;
and (3) junior to any of our secured creditors. The Calamos Notes are subject to optional and
mandatory redemption as described below under Redemption, and acceleration of maturity, as
described in the accompanying prospectus under Description of SecuritiesDebt SecuritiesEvents of
Default and Acceleration of Maturity of Debt Securities; Remedies.
While serving as the Auction Agent in connection with the Auction Procedures described below,
the Auction Agent generally will serve merely as our agent, acting in accordance with our
instructions.
We have the right (to the extent permitted by applicable law) to purchase or otherwise acquire
any Calamos Notes outside of an auction, so long as: (1) we are current in the payment of interest
on such Calamos Notes and on any other series of Calamos Notes, (2) there is no arrearage in the
mandatory or optional redemption price respecting any Calamos Notes for which a Notice of
Redemption has been given, and (3) we are in compliance with the 1940 Act Calamos Notes Asset
Coverage requirements and other applicable asset requirements. See Redemption below.
The Calamos Notes have no voting rights, except to the extent required by law or as otherwise
provided in the Indenture relating to the acceleration of maturity upon the occurrence and
continuance of an event of default.
Unsecured Investment
The Calamos Notes represent an unsecured obligation of ours to pay interest and principal,
when due. We cannot assure you that we will have sufficient funds or that we will be able to
arrange for additional financing to pay interest on the Calamos Notes when due or to repay the
Calamos Notes at the
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Stated Maturity. Our failure to pay interest on the Calamos Notes when due or to repay the
Calamos Notes upon the Stated Maturity would, subject to the cure provisions under the Indenture,
constitute an event of default under the Indenture and could cause a default under other agreements
that we may enter into from time to time. There is no sinking fund with respect to the Calamos
Notes, and at the Stated Maturity, the entire outstanding principal amount of the Calamos Notes
will become due and payable.
Securities Depository
The nominee of the Securities Depository is expected to be the sole record Holder of the
Calamos Notes. Accordingly, each purchaser of Calamos Notes must rely on (1) the procedures of the
Securities Depository and, if such purchaser is not a member of the Securities Depository, such
purchasers Agent Member, to receive interest payments and notices and (2) the records of the
Securities Depository and, if such purchaser is not a member of the Securities Depository, such
purchasers Agent Member, to evidence its ownership of the Calamos Notes.
Purchasers of Calamos Notes will not receive certificates representing their ownership
interest in such securities. DTC initially will act as Securities Depository for the Agent Members
with respect to the Calamos Notes.
Interest and Rate Periods
General. Calamos Notes will bear interest at the Applicable Rate determined as set forth
below under Determination of Interest Rate. Interest on the Calamos Notes shall be payable when
due as described below. If we do not pay interest when due, it will trigger an event of default
under the Indenture (subject to the cure provisions), and we will be restricted from declaring
dividends and making other distributions with respect to our common stock and preferred stock.
On the Business Day next preceding each Interest Payment Date, we are required to deposit with
the Paying Agent sufficient funds for the payment of interest. We do not intend to establish any
reserves for the payment of interest.
All moneys paid to the Paying Agent for the payment of interest shall be held in trust for the
payment of such interest to the Holder. Interest will be paid by the Paying Agent to the Holder as
its name appears on our securities ledger or securities records, which Holder is expected to be the
nominee of the Securities Depository. The Securities Depository will credit the accounts of the
Agent Members of the Beneficial Owners in accordance with the Securities Depositorys normal
procedures. The Securities Depositorys current procedures provide for it to distribute interest
in same-day funds to Agent Members who are, in turn, expected to distribute such interest to the
persons for whom they are acting as agents. The Agent Member of a Beneficial Owner will be
responsible for holding or disbursing such payments on the applicable Interest Payment Date to such
Beneficial Owner in accordance with the instructions of such Beneficial Owner.
Interest in arrears for any past Rate Period may be subject to a Default Rate of interest
(described below) and may be paid at any time, without reference to any regular Interest Payment
Date, to the Holder as its name appears on our securities ledger or securities records on such
date, not exceeding fifteen (15) days preceding the payment date thereof, as may be fixed by the
Board of Directors. Any interest payment shall first be credited against the earliest accrued but
unpaid interest. No interest will be payable in respect of any payment or payments which may be in
arrears. See Default Period below.
The amount of interest payable on each Interest Payment Date (or in respect of interest on
another date in connection with a redemption during such Rate Period) shall be computed by
multiplying the
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Applicable Rate (or the Default Rate) for such Rate Period (or a portion thereof) by a
fraction, the numerator of which will be the number of days in such Rate Period (or portion
thereof) that such Calamos Notes were outstanding and for which the Applicable Rate or the Default
Rate was applicable and the denominator of which will be 360, multiplying the amount so obtained by
the applicable principal amount, and rounding the amount so obtained to the nearest cent.
Determination of Interest Rate. The interest rate for the initial Rate Period for Series ___
Calamos Notes (i.e., the period from and including the Original Issue Date to and including the
initial Auction Date) and the initial Auction Date are set forth on the cover page of this
prospectus supplement. After the initial Rate Period, subject to certain exceptions, the Series ___
Calamos Notes will bear interest at the Applicable Rate that the Auction Agent advises us has
resulted from an Auction.
The initial Rate Period for the Series ___Calamos Notes will be ___(___) days. Rate Periods
after the initial Rate Period shall either be Standard Rate Periods or, subject to certain
conditions and with notice to the Holder, Special Rate Periods.
A Special Rate Period will not be effective unless, among other things, Sufficient Clearing
Bids exist at the Auction in respect of such Special Rate Period (that is, in general, the
aggregate amount of a series of Calamos Notes subject to Buy Orders by Potential Holders is at
least equal to the aggregate amount of that series of Calamos Notes subject to Sell Orders by
Existing Holders).
Interest will accrue at the Applicable Rate from the Original Issue Date and shall be payable
on each Interest Payment Date thereafter. For Rate Periods of less than 30 days, Interest Payment
Dates shall occur on the first Business Day following such Rate Period and, if greater than 30
days, then on a monthly basis on the first Business Day of each month within such Rate Period, not
including the initial Rate Period, and on the Business Day following the last day of such Rate
Period. Interest will be paid through the Securities Depository on each Interest Payment Date.
Except during a Default Period as described below, the Applicable Rate resulting from an
Auction will not be greater than the Maximum Rate, which is equal to the Applicable Percentage of
the Reference Rate, subject to upward but not downward adjustment in the discretion of the Board of
Directors after consultation with the Broker-Dealers. The Applicable Percentage will be determined
based on the lower of the credit ratings assigned on that date to a series of Calamos Notes by
Moodys and Fitch, as follows:
|
|
|
|
|
Moodys Credit |
|
Fitch Credit |
|
Applicable |
Rating |
|
Rating |
|
Percentage |
|
|
|
|
|
The Reference Rate is the greater of (1) the applicable AA Composite Commercial Paper Rate
(for a Rate Period of fewer than 184 days) or the applicable Treasury Index Rate (for a Rate Period
of 184 days or more), or (2) the applicable LIBOR. For Standard Rate Periods or less only, the
Applicable Rate resulting from an Auction will not be less than the Minimum Rate, which is 70% of
the applicable AA Composite Commercial Paper Rate. No Minimum Rate is specified for Auctions in
respect to Rate Periods of more than the Standard Rate Period.
The Maximum Rate for a series of Calamos Notes will apply automatically following an Auction
for the Calamos Notes in which Sufficient Clearing Bids have not been made (other than because all
Calamos Notes were subject to Submitted Hold Orders). If an Auction for any subsequent Rate Period
is
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not held for any reason, including because there is no Auction Agent or Broker-Dealer, then
the Interest Rate on a series of Calamos Notes for any such Rate Period shall be the Maximum Rate
(except for circumstances in which the Interest Rate is the Default Rate, as described below).
The All Hold Rate will apply automatically following an Auction in which all of the
outstanding Calamos Notes of a series are subject to (or are deemed to be subject to) Submitted
Hold Orders. The All Hold Rate is 80% of the applicable AA Composite Commercial Paper Rate.
Prior to each Auction, Broker-Dealers will notify Holders and the Trustee of the term of the
next succeeding Rate Period as soon as practicable after the Broker-Dealers have been so advised by
us. After each Auction, on the Auction Date, Broker-Dealers will notify Holders of the Applicable
Rate for the next succeeding Rate Period and of the Auction Date of the next succeeding Auction.
Notification of Rate Period. We will designate the duration of subsequent Rate Periods for
each series of the Calamos Notes; provided, however, that no such designation is necessary for a
Standard Rate Period and, provided further, that any designation of a Special Rate Period shall be
effective only if (1) notice thereof shall have been given as provided herein, (2) any failure to
pay in a timely manner to the Trustee the full amount of any interest on, or the redemption price
of, a series of Calamos Notes shall have been cured as provided above, (3) Sufficient Clearing Bids
shall have existed in an Auction held on the Auction Date immediately preceding the first day of
such proposed Special Rate Period, (4) if we shall have mailed a Notice of Redemption with respect
to any Calamos Notes, the redemption price with respect to such Calamos Notes shall have been
deposited with the Paying Agent, and (5) we have confirmed that as of the Auction Date next
preceding the first day of such Special Rate Period, we have Eligible Assets with an aggregate
Discounted Value at least equal to the Calamos Notes Basic Maintenance Amount, and we have
consulted with the Broker-Dealers and have provided notice of such designation and otherwise
complied with the Rating Agency Guidelines.
Designation of a Special Rate Period. If we propose to designate any Special Rate Period, not
fewer than seven (7) (or two (2) Business Days in the event the duration of the Rate Period prior
to such Special Rate Period is fewer than eight (8) days) nor more than thirty (30) Business Days
prior to the first day of such Special Rate Period, notice shall be (1) made by press release and
(2) communicated by us by telephonic or other means to the Trustee and confirmed in writing
promptly thereafter. Each such notice shall state (A) that we propose to exercise our option to
designate a succeeding Special Rate Period, specifying the first and last days thereof and (B) that
we will by 3:00 p.m., New York City time, on the second Business Day next preceding the first day
of such Special Rate Period, notify the Auction Agent and the Trustee, who will promptly notify the
Broker-Dealers, of either (x) our determination, subject to certain conditions, to proceed with
such Special Rate Period, subject to the terms of any Specific Redemption Provisions, or (y) our
determination not to proceed with such Special Rate Period, in which latter event the succeeding
Rate Period shall be a Standard Rate 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 Rate Period, we will deliver to the Trustee and the Auction
Agent, who will promptly deliver to the Broker-Dealers and Existing Holders, either:
(1) a notice stating (A) that we have determined to designate the next succeeding Rate
Period as a Special Rate Period, specifying the first and last days thereof and (B) the
terms of any Specific Redemption Provisions; or
(2) a notice stating that we have determined not to exercise our option to designate a
Special Rate Period.
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If we fail to deliver either such notice with respect to any designation of any proposed
Special Rate Period to the Auction Agent and the Auction Agent is unable to make the confirmation
described above by 3:00 p.m., New York City time, on the second Business Day next preceding the
first day of such proposed Special Rate Period, we shall be deemed to have delivered a notice to
the Auction Agent with respect to such Rate Period to the effect set forth in clause (2) above,
thereby resulting in a Standard Rate Period.
Default Period. Subject to cure provisions, a Default Period with respect to a particular
series of Calamos Notes will commence on any date on which, when required to do so, we fail 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 accrued interest on that series payable on the Interest
Payment Date (an Interest 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
an Interest Default, hereinafter referred to as Default).
Subject to cure provisions, a Default Period with respect to an Interest Default or a
Redemption Default shall end on the Business Day on which, by 12:00 noon, New York City time, all
unpaid interest and any unpaid Redemption Price, respectively, shall have been deposited
irrevocably in trust in same-day funds with the Paying Agent. In the case of an Interest Default,
the Applicable Rate for each Rate Period commencing during a Default Period will be equal to the
Default Rate, and each subsequent Rate Period commencing after the beginning of a Default Period
shall be a Standard Rate Period; provided, however, that the commencement of a Default Period will
not by itself cause the commencement of a new Rate Period.
No Auction shall be held during a Default Period with respect to an Interest Default
applicable to that series of Calamos Notes. No Default Period with respect to an Interest Default
or Redemption Default shall be deemed to commence if the amount of any interest or any Redemption
Price due (if such default is not solely due to our willful failure) 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 Interest 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.
Redemption
Optional Redemption. To the extent permitted under the 1940 Act and Delaware law, we may, at
our option, redeem Calamos Notes having a Rate Period of one year or less, in whole or in part, out
of funds legally available therefor, on any Interest Payment Date, upon not less than 15 days and
not more than 40 days prior notice. This optional redemption is not available during the initial
Rate Period or during other limited circumstances. The optional redemption price shall be equal to
the aggregate principal amount of the Calamos Notes to be redeemed, plus an amount equal to accrued
but unpaid interest to the date fixed for redemption. Calamos Notes having a Rate Period of more
than one year are redeemable at our option, in whole or in part, out of funds legally available
therefor, prior to the end of the relevant Rate Period, upon not less than 15 days, and not more
than 40 days, prior notice, subject to any Specific Redemption Provisions, which may include the
payment of redemption premiums in the sole discretion of the Board of Directors. We shall not
effect any optional redemption unless after giving effect thereto (1) we have available on such
date fixed for the redemption certain Deposit Securities with maturity or tender dates not later
than the day preceding the applicable redemption date and having a
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value not less than the amount (including any applicable premium) due to Holders of a series
of Calamos Notes by reason of the redemption of a series of Calamos Notes and (2) we would have
Eligible Assets with an aggregate Discounted Value at least equal to the Calamos Notes Basic
Maintenance Amount immediately subsequent to such redemption. Although we ordinarily will not
redeem the Calamos Notes prior to their Stated Maturity, we may voluntarily redeem Calamos Notes
if, for example, the Board of Directors determines that we could obtain more favorable interest
rates from an alternative source of financing.
Mandatory Redemption. If we fail to maintain Eligible Assets with an aggregate Discounted
Value at least equal to the Calamos Notes Basic Maintenance Amount as of any Valuation Date or,
fail to satisfy the 1940 Act Calamos Notes Asset Coverage as of the last Business Day of any month,
and such failure is not cured within ten Business Days following such Valuation Date, in the case
of a failure to maintain the Calamos Notes Basic Maintenance Amount, or on the last Business Day of
the following month, in the case of a failure to maintain the 1940 Act Calamos Notes Asset Coverage
as of such last Business Day (each an Asset Coverage Cure Date), the Calamos Notes will be
subject to mandatory redemption out of funds legally available therefor. See Rating Agency
Guidelines in the accompanying prospectus.
The principal amount of Calamos Notes to be redeemed under these circumstances will be equal
to the lesser of (1) the minimum principal amount of Calamos Notes 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 our having Eligible Assets with an aggregated Discounted Value at least
equal to the Calamos Notes Basic Maintenance Amount or sufficient to satisfy the 1940 Act Calamos
Notes 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 principal amount of Calamos Notes the redemption
of which would have such result, all Calamos Notes then outstanding will be redeemed), and (2) the
maximum principal amount of Calamos Notes that can be redeemed out of funds expected to be
available therefor on the Mandatory Redemption Date (as defined below) at the Mandatory Redemption
Price (as defined below).
Any redemption of less than all of the outstanding Calamos Notes of a series will be made from
Calamos Notes designated by us. We shall designate Calamos Notes to be redeemed on a pro rata
basis among the Holders in proportion to the principal amount of Calamos Notes they hold, by lot or
such other method as we shall deem equitable. No optional or mandatory redemption of less than all
outstanding Calamos Notes of a series will be made unless the aggregate principal amount of Calamos
Notes to be redeemed is equal to $___or integral multiples thereof. Any redemption of less than
all Calamos Notes outstanding will be made in such a manner that all Calamos Notes outstanding
after such redemption are in authorized denominations.
We are required to effect such a mandatory redemption not later than 40 days after the Asset
Coverage Cure Date, as the case may be (the Mandatory Redemption Date), except that if we do not
have funds legally available for the redemption of, or are not otherwise legally permitted to
redeem, all of the outstanding Calamos Notes of a series that are subject to mandatory redemption,
or we otherwise are unable to effect such redemption on or prior to such Mandatory Redemption Date,
we will redeem those Calamos Notes on the earliest practicable date on which we will have such
funds available, upon notice to record owners of Calamos Notes and the Paying Agent. Our ability
to make a mandatory redemption may be limited by the provisions of the 1940 Act or ___law.
The redemption price per Calamos Note in the event of any mandatory redemption will be the
principal amount, plus an amount equal to accrued but unpaid interest to the date fixed for
redemption, plus (in the case of a Rate Period of more than one year) a redemption premium, if any,
determined by the Board of Directors in its sole discretion after consultation with the
Broker-Dealers and set forth in any applicable Specific Redemption Provisions (the Mandatory
Redemption Price).
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Redemption Procedure. Pursuant to Rule 23c-2 under the 1940 Act, we will file a notice of our
intention to redeem with the SEC so as to provide at least the minimum notice required by such Rule
or any successor provision (notice currently must be filed with the SEC generally at least 30 days
prior to the redemption date). We shall deliver a notice of redemption to the Auction Agent and
the Trustee containing the information described below one Business Day prior to the giving of
notice to Holders in the case of an optional redemption and on or prior to the 30th day preceding
the Mandatory Redemption Date in the case of a mandatory redemption. The Trustee will use its
reasonable efforts to provide notice to each Holder of Calamos Notes called for redemption by
electronic means not later than the close of business on the Business Day immediately following the
Business Day on which the Trustee determines the principal amount of Calamos Notes to be redeemed
(or, during a Default Period with respect to such Calamos Notes, not later than the close of
business on the Business Day immediately following the day on which the Trustee receives notice of
redemption from us). Such notice will be confirmed promptly by the Trustee in writing not later
than the close of business on the third Business Day preceding the redemption date by providing the
notice to each Holder of record of Calamos Notes called for redemption, the Paying Agent (if
different from the Trustee) and the Securities Depository (Notice of Redemption). The Notice of
Redemption will be addressed to the registered owners of the Calamos Notes at their addresses
appearing on our books or share records. Such notice will set forth (1) the redemption date,
(2) the principal amount and identity of Calamos Notes to be redeemed, (3) the redemption price
(specifying the amount of accrued interest to be included therein and the amount of the redemption
premium, if any), (4) that interest on the Calamos Notes to be redeemed will cease to accrue on
such redemption date, and (5) the 1940 Act 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 less than all of the outstanding Calamos Notes of a series are redeemed on any date, the
amount per Holder to be redeemed on such date will be selected by us on a pro rata basis in
proportion to the principal amount of Calamos Notes held by such Holder, by lot or by such other
method as is determined by us to be fair and equitable, subject to the terms of any Specific
Redemption Provisions and subject to maintaining authorized denominations as described above.
Calamos Notes may be subject to mandatory redemption as described herein notwithstanding the terms
of any Specific Redemption Provisions. The Auction Agent will give notice to the Securities
Depository, whose nominee will be the record Holder of all of the Calamos Notes, and the Securities
Depository will determine the Calamos Notes to be redeemed from the account of the Agent Member of
each Beneficial Owner. Each Agent Member will determine the principal amount of Calamos Notes to
be redeemed from the account of each Beneficial Owner for which it acts as agent. An Agent Member
may select for redemption Calamos Notes from the accounts of some Beneficial Owners without
selecting for redemption any Calamos Notes from the accounts of other Beneficial Owners. In this
case, in selecting the Calamos Notes to be redeemed, the Agent Member will select by lot or by
other fair and equitable method. Notwithstanding the foregoing, if neither the Securities
Depository nor its nominee is the record Holder of all of the Calamos Notes, the particular
principal amount to be redeemed shall be selected by us by lot, on a pro rata basis between each
series or by such other method as we shall deem fair and equitable, as contemplated above.
If Notice of Redemption has been given, then upon the deposit of funds with the Paying Agent
sufficient to effect such redemption, interest on such Calamos Notes will cease to accrue and such
Calamos Notes will no longer be deemed to be outstanding for any purpose and all rights of the
holders of the Calamos Notes so called for redemption will cease and terminate, except the right of
the holders of such Calamos Notes to receive the redemption price, but without any interest or
additional amount. We 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 (1) the aggregate
redemption price of the Calamos Notes called for redemption on such date and (2) such other
amounts, if any, to which owners of Calamos Notes called for redemption may be entitled. We will
be entitled to receive, from time to time after the date
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fixed for redemption, from the Paying Agent the interest, if any, earned on such funds
deposited with the Paying Agent and the owners of Calamos Notes so redeemed will have no claim to
any such interest. Any funds so deposited which are unclaimed two years after such redemption date
will be paid, to the extent permitted by law, by the Paying Agent to us upon our request. After
such payment, Holders of Calamos Notes called for redemption may look only to us for payment.
So long as any Calamos Notes are held of record by the nominee of the Securities Depository,
the redemption price for such Calamos Notes will be paid on the redemption date to the nominee of
the Securities Depository. The Securities Depositorys normal procedures provide for it to
distribute the amount of the redemption price to Agent Members who, in turn, are expected to
distribute such funds to the persons for whom they are acting as agent.
Notwithstanding the provisions for redemption described above, no Calamos Notes may be
redeemed unless all interest in arrears on the Outstanding Calamos Notes, and any of our
indebtedness ranking on a parity with the Calamos Notes, have been or are being contemporaneously
paid or set aside for payment, except in connection with our liquidation, in which case all Calamos
Notes and all indebtedness ranking on a parity with the Calamos Notes must receive proportionate
amounts. At any time we may purchase or acquire all the Outstanding Calamos Notes pursuant to the
successful completion of an otherwise lawful purchase or exchange offer made on the same terms to,
and accepted by, Holders of all Outstanding Calamos Notes.
Except for the provisions described above, nothing contained in the Indenture limits any legal
right of ours to purchase or otherwise acquire Calamos Notes 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 interest on or the mandatory or optional redemption price with respect to, any Calamos
Notes for which Notice of Redemption has been given, and we are in compliance with the 1940 Act
Calamos Notes Asset Coverage and have Eligible Assets with an aggregate Discounted Value at least
equal to the Calamos Notes Basic Maintenance Amount after giving effect to such purchase or
acquisition on the date thereof. If less than all outstanding Calamos Notes are redeemed or
otherwise acquired by us, we shall give notice of such transaction to the Auction Agent, in
accordance with the procedures agreed upon by the Board of Directors.
Payment of Proceeds Upon Dissolution, Etc.
In the event of (a) any insolvency or bankruptcy case or proceeding, or any receivership,
liquidation, reorganization or other similar case or proceeding in connection therewith, relative
to us or to our creditors, as such, or to our assets, or (b) our liquidation, dissolution or other
winding up, whether voluntary or involuntary and whether or not involving insolvency or bankruptcy,
or (c) our assignment for the benefit of creditors or any other marshalling of assets and
liabilities, then (after any payments with respect to our secured creditor outstanding at such
time) and in any such event the holders of Calamos Notes shall be entitled to receive payment in
full of all amounts due or to become due on or in respect of all Calamos Notes (including any
interest accruing thereon after the commencement of any such case or proceeding), or provision
shall be made for such payment in cash or cash equivalents or otherwise in a manner satisfactory to
the holders of the Calamos Notes, before the holders of any of our common or preferred stock are
entitled to receive any payment on account of any redemption proceeds, liquidation preference or
dividends from such shares, and to that end the holders of Calamos Notes shall be entitled to
receive, for application to the payment thereof, any payment or distribution of any kind or
character, whether in cash, property or securities, including any such payment or distribution
which may be payable or deliverable by reason of the payment of any of our other indebtedness being
subordinated to the
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payment of the Calamos Notes, which may be payable or deliverable in respect of the Calamos
Notes in any such case, proceeding, dissolution, liquidation or other winding up event.
Unsecured creditors of ours may include, without limitation, service providers including the
Adviser, Custodian, Auction Agent, Broker-Dealers and Trustee, pursuant to the terms of various
contracts with us. Secured creditors of ours may include without limitation parties entering into
any interest rate swap, floor or cap transactions, or other similar transactions with us that
create liens, pledges, charges, security interests, security agreements or other encumbrances on
our assets.
Our consolidation, reorganization or merger with or into any other company, or a sale, lease
or exchange of all or substantially all of our assets of in consideration for the issuance of
equity securities of another company shall not be deemed to be a liquidation, dissolution or
winding up of the Fund.
THE AUCTION
Role of Auction Agent
Auction Agency Agreement. The Auction Agency Agreement between us and the Auction Agent
(currently, The Bank of New York) (the Auction Agency Agreement) provides, among other things,
that the Auction Agent will follow the Auction Procedures for purposes of determining the
Applicable Rate for the Series ___Calamos Notes so long as the Applicable Rate for the Series ___
Calamos Notes is to be based on the results of an Auction. The Auction Agent acts as a
non-fiduciary agent for us in connection with Auctions. In the absence of bad faith 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 and will not be liable for any error of judgment made in good faith unless the
Auction Agent will have been grossly negligent in ascertaining the pertinent facts.
The Auction Agent may terminate the Auction Agency Agreement upon notice to us on a date no
earlier than 60 days after the notice. If the Auction Agent should resign, we will use our best
efforts to enter into an agreement with a successor Auction Agent containing substantially the same
terms and conditions as the Auction Agency Agreement. We may remove the Auction Agent provided
that prior to such removal we shall have entered into such an agreement with a successor Auction
Agent.
Auction Procedures
Beneficial Owners. Prior to the Submission Deadline on each Auction Date for a series of
Calamos Notes, each 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 Calamos Notes of such series (a Beneficial
Owner) may submit orders (Orders) with respect to Calamos Notes of such series to that
Broker-Dealer as follows:
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Hold Order indicating its desire to hold Calamos Notes of such series without
regard to the Applicable Rate for Calamos Notes of such series for the next Rate Period
thereof. |
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Bid indicating its desire to sell the principal amount of Outstanding Calamos
Notes, if any, of such series held by such Beneficial Owner which such Beneficial Owner
offers to sell if the Applicable Rate for Calamos Notes of such series for the next
succeeding Rate Period of Calamos Notes of such series shall be less than the rate per
annum specified by such Beneficial Owner (also known as a hold at rate order). |
S-12
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Sell Order indicating its desire to sell the principal amount of Outstanding
Calamos Notes, if any, of such series held by such Beneficial Owner which such
Beneficial Owner offers to sell without regard to the Applicable Rate for Calamos Notes
of such series for the next succeeding Rate Period of Calamos Notes of such series. |
Orders submitted (or the failure to do so) by Beneficial Owners under certain circumstances
will have the effects described below. A Beneficial Owner of Calamos Notes of such series that
submits a Bid with respect to Calamos Notes of such series to its Broker-Dealer having a rate
higher than the Maximum Rate for Calamos Notes of such series on the Auction Date therefore will be
treated as having submitted a Sell Order with respect to such Calamos Notes. A Beneficial Owner of
Calamos Notes of such series that fails to submit an Order with respect to such Calamos Notes to
its Broker-Dealer will be deemed to have submitted a Hold Order with respect to such Calamos Notes
of such series; provided, however, that if a Beneficial Owner of Series ___Calamos Notes fails to
submit an Order with respect to Series ___Calamos Notes to its Broker-Dealer for an Auction
relating to a Special Rate Period of more than ___(___) days, such Beneficial Owner will be
deemed to have submitted a Sell Order with respect to such Calamos Notes. A Sell Order shall
constitute an irrevocable offer to sell the Calamos Notes subject thereto. A Beneficial Owner that
offers to become the Beneficial Owner of additional Calamos Notes is, for purposes of such offer, a
Potential Beneficial Owner as discussed below.
Potential Beneficial Owners. A customer of a Broker-Dealer that is not a Beneficial Owner of
a series of Calamos Notes but that wishes to purchase Calamos Notes of such series, or that is a
Beneficial Owner of Calamos Notes of such series that wishes to purchase additional Calamos Notes
of such series (in each case, a Potential Beneficial Owner), may submit Bids to its Broker-Dealer
in which it offers to purchase such principal amount of Outstanding Calamos Notes of such series
specified in such Bid if the Applicable Rate for Calamos Notes of such series determined on such
Auction Date shall be higher than the rate specified in such Bid. A Bid placed by a Potential
Beneficial Owner of Calamos Notes of such series specifying a rate higher than the Maximum Rate for
Calamos Notes of such series on the Auction Date therefor will not be accepted.
The Auction Process. Each Broker-Dealer shall submit in writing, which shall include a
writing delivered via e mail or other electronic means, to the Auction Agent, prior to the
Submission Deadline on each Auction Date, all Orders for Calamos Notes of a series subject to an
Auction on such Auction Date obtained by such Broker-Dealer, designating itself (unless otherwise
permitted by us) as an Existing Holder in respect of Calamos Notes subject to Orders submitted or
deemed submitted to it by Beneficial Owners and as a Potential Holder in respect of Calamos Notes
subject to Orders submitted to it by Potential Beneficial Owners. However, neither we nor the
Auction Agent will be responsible for a Broker-Dealers failure to comply with the foregoing. 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 in the same manner as an Order placed with a Broker-Dealer by a
Beneficial Owner or Potential Beneficial Owner. Similarly, any failure by a Broker-Dealer to submit
to the Auction Agent an Order in respect of Calamos Notes held by it or customers who are
Beneficial Owners will be treated in the same manner as a Beneficial Owners failure to submit to
its Broker-Dealer an Order in respect of Calamos Notes 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 ours.
If Sufficient Clearing Bids for a series of Calamos Notes exist (that is, the aggregate
principal amount of Outstanding Calamos Notes of such series subject to Submitted Bids of Potential
Holders specifying one or more rates between the Minimum Rate (for Standard Rate Periods or less,
only) and the Maximum Rate (for all Rate Periods) for Calamos Notes of such series exceeds or is
equal to the sum of the aggregate principal amount of Outstanding Calamos Notes of such series
subject to Submitted Sell Orders), the Applicable Rate for Calamos Notes of such series for the
next succeeding Rate Period thereof
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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 aggregate principal
amount of Calamos Notes of such series available for purchase in the Auction (such rate, the
Winning Bid Rate). If Sufficient Clearing Bids for a series of Calamos Notes do not exist (other
than because all of the Outstanding Calamos Notes of such series are subject to Submitted Hold
Orders), then the Applicable Rate for all Calamos Notes of such series for the next succeeding Rate
Period thereof will be equal to the Maximum Rate for Calamos Notes of such series. In such event,
Holders of Calamos Notes of such series that have submitted or are deemed to have submitted Sell
Orders may not be able to sell in such Auction all aggregate principal amount of Calamos Notes of
such series subject to such Sell Orders. In any particular Auction, if all outstanding Calamos
Notes of a series are the subject of Submitted Hold Orders, the Applicable Rate for such series of
Calamos Notes for the next succeeding Auction Period will be the All Hold Rate (such a situation is
called an All Hold Auction).
The Auction Procedures include a pro rata allocation of Calamos Notes for purchase and sale,
which may result in an Existing Holder continuing to hold or selling, or a Potential Holder
purchasing, a number of Calamos Notes that is less than the number of Calamos Notes 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 pro rata allocations among their respective customers.
Settlement of purchases and sales will be made on the next Business Day (also an Interest
Payment Date) after the Auction Date through the Securities Depository. Purchasers will make
payment through their Agent Members in same-day funds to the Securities Depository against delivery
to their respective Agent Members. The Securities Depository will make payment to the sellers
Agent Members in accordance with the Securities Depositorys normal procedures, which now provide
for payment against delivery by their Agent Members in same-day funds.
Certain Considerations Affecting Auction Rate Securities
Role of Broker-Dealer. [Broker-Dealer] (the Broker-Dealer) has been appointed by the
issuers or obligors of various auction rate securities to serve as a dealer in the auctions for
those securities and is paid by the issuers or obligors for its services. [Broker-Dealer] receives
broker-dealer fees from such issuers or obligors at an agreed upon annual rate that is applied to
the principal amount of securities sold or successfully placed through them in such auctions.
A Broker-Dealer is designated in the Broker-Dealer Agreement as the Broker-Dealer to contact
Existing Holders and Potential Holders and solicit Bids for the Calamos Notes. The Broker-Dealer
will receive Broker-Dealer Fees from us with respect to the Calamos Notes sold or successfully
placed through it in Auctions. The Broker-Dealer may share a portion of such fees with other
dealers that submit Orders through it that are filled in the Auction.
Bidding by Broker-Dealer. The Broker-Dealer is permitted, but not obligated, to submit Orders
in Auctions for its own account either as a buyer or seller and routinely does so in the auction
rate securities market in its sole discretion. If the Broker-Dealer submits an Order for its own
account, it would have an advantage over other Potential Beneficial Owners because the
Broker-Dealer would have knowledge of the other Orders placed through it in that Auction and thus,
could determine the rate and size of its Order so as to increase the likelihood that (i) its Order
will be accepted in the Auction and (ii) the Auction will clear at a particular rate. For this
reason, and because the Broker Dealer is appointed and paid by us to serve as a Broker-Dealer in
the Auction, the Broker-Dealers interests in serving as Broker-Dealer in an Auction may differ
from those of Existing Holders and Potential Holders who
S-14
participate in Auctions. See Role of Broker-Dealer. The Broker Dealer would not have
knowledge of Orders submitted to the Auction Agent by any other firm that is, or may in the future
be, appointed to accept Orders pursuant to a Broker Dealer Agreement.
Where the Broker-Dealer is the only Broker-Dealer appointed by us to serve as Broker-Dealer in
the Auction, and as long as that remains the case, it will be the only Broker-Dealer that submits
Orders to the Auction Agent in that Auction. As a result, in such circumstances, the Broker-Dealer
may discern the clearing rate before the Orders are submitted to the Auction Agent and set the
clearing rate with its Order.
The Broker-Dealer may place one or more Bids in an Auction for its own account to acquire
securities for its inventory, to prevent an Auction Failure or to prevent Auctions from clearing at
a rate that the Broker-Dealer believes does not reflect the market for the Calamos Notes. The
Broker-Dealer may place such Bids even after obtaining knowledge of some or all of the other Orders
submitted through it. When bidding in an Auction for its own account, the Broker-Dealer also may
Bid inside or outside the range of rates that it posts in its Price Talk (as defined herein). See
Price Talk.
The Broker-Dealer also may encourage bidding by others in Auctions, including to prevent an
Auction Failure or to prevent an Auction from clearing at a rate that the Broker-Dealer believes
does not reflect the market for the Calamos Notes. The Broker-Dealer may encourage such Bids even
after obtaining knowledge of some or all of the other Orders submitted through it.
Bids by the Broker-Dealer or by those it may encourage to place Bids are likely to affect
(i) the Applicable Rateincluding preventing the Applicable Rate from being set at the Maximum Rate
or otherwise causing Potential Beneficial Owners to receive a lower rate than they might have
received had the Broker-Dealer not Bid (or not encouraged others to Bid) and (ii) the allocation of
the Calamos Notes being auctioned, including displacing some Potential Beneficial Owners who may
have their Bids rejected or receive fewer Calamos Notes than they would have received if the
Broker-Dealer had not Bid (or encouraged others to Bid). Because of these practices, the fact that
an Auction clears successfully does not mean that an investment in the Calamos Notes involves no
significant liquidity or credit risk. The Broker-Dealer is not obligated to continue to place such
Bids (or to continue to encourage other Bidders to do so) in any particular Auction to prevent an
Auction Failure or an Auction from clearing at a rate the Broker-Dealer believes does not reflect
the market for the Calamos Notes. Investors should not assume that the Broker-Dealer will place
Bids or encourage others to do so or that Auction Failures will not occur. Investors should also
be aware that Bids by the Broker-Dealer (or by those it may encourage to place Bids) may cause
lower Applicable Rates to occur.
The statements herein regarding Bidding by a Broker-Dealer apply only to a Broker-Dealers
auction desk and any other business units of the Broker-Dealer that are not separated from the
auction desk by an information barrier designed to limit inappropriate dissemination of bidding
information.
In any particular Auction, if all outstanding Calamos Notes of a series are the subject of
Submitted Hold Orders, the Applicable Rate for the next succeeding Auction Period will be the All
Hold Rate (such a situation is called an All Hold Auction). If the Broker-Dealer holds any
Calamos Notes of a series for its own account on an Auction Date, it is the Broker-Dealers
practice to submit a Sell Order into the Auction with respect to such Calamos Notes, which would
prevent that Auction from being an All Hold Auction. The Broker-Dealer may, but is not obligated
to, submit Bids for its own account in that same Auction, as set forth above.
Price Talk. Before the start of an Auction, the Broker-Dealer, in its discretion, may make
available to its customers who are Existing Holders and Potential Holders the Broker-Dealers good
faith judgment of the range of likely clearing rates for the Auction based on market and other
information.
S-15
This is known as Price Talk. Price Talk is not a guaranty that the Applicable Rate
established through the Auction will be within the Price Talk, and Existing Holders and Potential
Holders are free to use it or ignore it. The Broker-Dealer occasionally may update and change the
Price Talk based on changes in our credit quality or macroeconomic factors that are likely to
result in a change in interest rate levels, such as an announcement by the Federal Reserve Board of
a change in the Federal Funds rate or an announcement by the Bureau of Labor Statistics of
unemployment numbers. Potential Holders should confirm with the Broker-Dealer the manner by which
the Broker-Dealer will communicate Price Talk and any changes to Price Talk.
All-or-Nothing Bids. The Broker-Dealer will not accept all-or-nothing Bids (i.e., Bids
whereby the bidder proposes to reject an allocation smaller than the entire quantity Bid) or any
other type of Bid that allows the bidder to avoid Auction Procedures that require the pro rata
allocation of Calamos Notes of a series where there are not sufficient Sell Orders to fill all Bids
at the Winning Bid Rate.
No Assurances Regarding Auction Outcomes. The Broker-Dealer provides no assurance as to the
outcome of any Auction. The Broker-Dealer also does not provide any assurance that any Bid will be
successful, in whole or in part, or that the Auction will clear at a rate that a bidder considers
acceptable. Bids may be only partially filled, or not filled at all, and the Applicable Rate on
any Calamos Notes purchased or retained in the Auction may be lower than the market rate for
similar investments.
The Broker-Dealer will not agree before an Auction to buy Calamos Notes of any series from, or
sell Calamos Notes of any series to, a customer after the Auction.
Deadlines. Each particular Auction has a formal deadline by which all Bids must be submitted
by the Broker-Dealer to the Auction Agent. This deadline is called the Submission Deadline. To
provide sufficient time to process and submit customer Bids to the Auction Agent before the
Submission Deadline, the Broker-Dealer imposes an earlier deadline, called the Internal Submission
Deadline, by which bidders must submit Bids to the Broker-Dealer. The Internal Submission
Deadline is subject to change by the Broker-Dealer. Potential Owners should consult with the
Broker-Dealer as to its Internal Submission Deadline. The Broker-Dealer may allow for correction
of clerical errors after the Internal Submission Deadline and prior to the Submission Deadline.
The Broker-Dealer may submit Bids for its own account at any time until the Submission Deadline.
The Auction Procedures provide that for a period of up to one hour after the Auction Agent
completes the dissemination of the results of an Auction, new Orders can be submitted to the
Auction Agent if such Orders were received by the Broker-Dealer or generated by the Broker-Dealer
for its own account prior to the Submission Deadline and the failure to submit such Orders prior to
the Submission Deadline was the result of force majeure, a technological failure or a clerical
error. In addition a Broker-Dealer may modify or withdraw an Order submitted to the Auction Agent
prior the Submission Deadline if the Broker-Dealer determines that such Order contained a clerical
error. In the event of such a submission, modification or withdrawal the Auction Agent will rerun
the Auction, if necessary, taking into account such submission, modification or withdrawal.
Existing Holders Ability to Resell Auction Rate Securities May Be Limited. An Existing
Holder may sell, transfer or dispose of a Calamos Note of a series (i) in an Auction, only pursuant
to a Bid or Sell Order in accordance with the Auction Procedures, or (ii) outside an Auction, only
to or through a Broker-Dealer.
Existing Holders will be able to sell all of the Calamos Notes of a series that are the
subject of their Submitted Sell Orders only if there are bidders willing to purchase all those
Calamos Notes in the Auction. If Sufficient Clearing Bids have not been made, Existing Holders
that have submitted Sell Orders will not be able to sell in the Auction all, and may not be able to
sell any, of the Calamos Notes of such series subject to such Submitted Sell Orders. As discussed
above (see Bidding by Broker-Dealer),
S-16
the Broker-Dealer may submit a Bid in an Auction to avoid an Auction Failure, but it is not
obligated to do so. There may not always be enough bidders to prevent an Auction Failure in the
absence of bidding by Broker-Dealer in the Auction for its own account or encouraging others to
Bid. Therefore, Auction Failures are possible, especially if our credit were to deteriorate, if a
market disruption were to occur or if, for any reason, the Broker-Dealer were unable or unwilling
to Bid.
Between Auctions, there can be no assurance that a secondary market for the Calamos Notes of
any series will develop or, if it does develop, that it will provide Existing Holders the ability
to resell the Calamos Notes of such series on the terms or at the times desired by an Existing
Holder. The Broker-Dealer, in its own discretion, may decide to buy or sell the Calamos Notes of a
series in the secondary market for its own account from or to investors at any time and at any
price, including at prices equivalent to, below, or above par for the Calamos Notes of such series.
However, the Broker-Dealer is not obligated to make a market in the Calamos Notes of a series and
may discontinue trading in the Calamos Notes of such series without notice for any reason at any
time. Existing Holders who resell between Auctions may receive an amount less than par, depending
on market conditions.
If an Existing Holder purchased a Calamos Note through a dealer which is not the Broker-Dealer
for the securities, such Existing Holders ability to sell its security may be affected by the
continued ability of its dealer to transact trades for the Calamos Notes through the Broker-Dealer.
The ability to resell the Calamos Notes of any series will depend on various factors affecting
the market for the Calamos Notes, including news relating to us, the attractiveness of alternative
investments, investor demand for short term securities, the perceived risk of owning the Calamos
Notes (whether related to credit, liquidity or any other risk), the tax or accounting treatment
accorded the Calamos Notes (including U.S. generally accepted accounting principles as they apply
to the accounting treatment of auction rate securities), reactions of market participants to
regulatory actions (such as those described in Securities and Exchange Commission Settlements
below) or press reports, financial reporting cycles and market conditions generally. Demand for
the Calamos Notes may change without warning, and declines in demand may be short-lived or continue
for longer periods.
Resignation of the Broker-Dealer Could Impact the Ability to Hold Auctions. The Broker-Dealer
Agreement provides that the Broker-Dealer thereunder may resign upon five days notice and does not
require, as a condition to the effectiveness of such resignation, that a replacement Broker-Dealer
be in place. For any Auction Period during which there is no duly appointed Broker-Dealer, it will
not be possible to hold Auctions for the Calamos Notes, with the result that the dividend rate on
the Calamos Notes will be determined as described in the supplemental indenture.
Securities and Exchange Commission Settlements. On May 31, 2006, the U.S. Securities and
Exchange Commission (the SEC) announced that it had settled its investigation of fifteen firms,
including [Broker-Dealer], that participate in the auction rate securities market regarding their
respective practices and procedures in this market. The SEC alleged in the settlement that the
firms had managed auctions for auction rate securities in which they participated in ways that were
not adequately disclosed or that did not conform to disclosed auction procedures. As part of the
settlement, [Broker-Dealer] agreed to pay a civil penalty. In addition, [Broker-Dealer], without
admitting or denying the SECs allegations, agreed to provide to customers written descriptions of
its material auction practices and procedures, and to implement procedures reasonably designed to
detect and prevent any failures by [Broker-Dealer] to conduct the auction process in accordance
with disclosed procedures. No assurance can be provided as to how the settlement may affect the
market for auction rate securities or the Calamos Notes.
In addition on January 9, 2007, the SEC announced that it had settled its investigation of
three banks, including [Auction Agent] (the Settling Auction Agents), that participate as auction
agents in the
S-17
auction rate securities market, regarding their respective practices and procedures in this
market. The SEC alleged in the settlement that the Settling Auction Agents allowed broker-dealers
in auctions to submit bids or revise bids after the submission deadlines and allowed broker-dealers
to intervene in auctions in ways that affected the rates paid on the auction rate securities. As
part of the settlement, the Settling Auction Agents agreed to pay civil penalties. In addition,
each Settling Auction Agent, without admitting or denying the SECs allegations, agreed to provide
to broker-dealers and issuers written descriptions of its material auction practices and procedures
and to implement procedures reasonably designed to detect and prevent any failures by that Settling
Auction Agent to conduct the auction process in accordance with disclosed procedures. No assurance
can be offered as to how the settlement may affect the market for auction rate securities or the
Calamos Notes.
Risks
Auction Risk. You may not be able to sell your Calamos Notes at an Auction if the Auction
fails; that is, if there are more Calamos Notes offered for sale than there are buyers for those
Calamos Notes. Also, if you place hold orders (orders to retain Calamos Notes) at an Auction only
at a specified rate, and that bid rate exceeds the rate set at the Auction, you will not retain
your Calamos Notes. Finally, if you buy Calamos Notes or elect to retain Calamos Notes without
specifying a rate below which you would not wish to buy or continue to hold those Calamos Notes,
and the Auction sets a below-market rate, you may receive a lower rate of return on your Calamos
Notes than the market rate.
Secondary Market Risk. If you try to sell your Calamos Notes 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.
Broker-Dealers that maintain a secondary trading market for Calamos Notes 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. Calamos Notes 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 Funds auction
agent, The Bank of New York, and the Fund or such other persons as the Fund permits. If you sell
your Calamos Notes 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.
Ratings and Asset Coverage Risk. Although it is expected that Fitch will assign a rating of
___ to the Calamos Notes and S&P will assign a rating of ___ to the Calamos Notes, such
ratings do not eliminate or necessarily mitigate the risks of investing in Calamos Notes. Fitch or
S&P could downgrade its rating of the Calamos Notes or withdraw its rating of the Calamos Notes at
any time, which may make your shares less liquid at an auction or in the secondary market. If
Fitch or S&P downgrades the Calamos Notes, the Fund may alter its portfolio or redeem Calamos Notes
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 Calamos NotesRating Agency Guidelines, the Fund will be
required to redeem a sufficient number of Calamos Notes in order to return to compliance with the
asset coverage ratios. The Fund may be required to redeem Calamos Notes 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 Calamos Notes 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 Calamos Notes voting as a separate class as discussed under Description of
the Calamos NotesVoting 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 Calamos Notes, in whole or in part, provided that the Fund
continued to comply with the asset coverage ratios discussed under Description of Calamos Notes
S-18
Rating Agency Guidelines. See Description of Calamos NotesRating Agency Guidelines for a
description of the asset maintenance tests the Fund must meet.
S-19
UNDERWRITING
[TO BE ADDED BY UNDERWRITERS AT TIME OF OFFERING]
WHERE YOU CAN FIND MORE INFORMATION
We are subject to the informational requirements of the Securities Exchange Act of 1934, as
amended (the 1934 Act) and the 1940 Act and are required to file reports, including annual and
semi-annual reports, proxy statements and other information with the SEC. We voluntarily file
quarterly shareholder reports. Our most recent shareholder report filed with the SEC is for the
period ended ___, 200___. These documents are available on the SECs EDGAR system and can be
inspected and copied for a fee at the SECs public reference room, Washington, D.C. 20549-0102.
Additional information about the operation of the public reference room facilities may be obtained
by calling the SEC at (202) 551-8090.
This prospectus supplement and the accompanying prospectus do not contain all of the
information in our registration statement, including amendments, exhibits, and schedules.
Statements in this prospectus supplement and the accompanying 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 us can be found in our 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 our Registration Statement, other documents incorporated by
reference, and other information we have filed electronically with the SEC, including proxy
statements and reports filed under the Exchange Act.
LEGAL MATTERS
___(___), ___, ___,
serves as counsel to the Fund and to the non-interested Trustees. Vedder Price P.C. (Vedder Price), Chicago, Illinois, which is serving as our
special counsel in connection with the offering under this prospectus supplement and accompanying
prospectus. Certain legal matters in connection with the securities offered hereby will be passed
upon for us by ______. Vedder Price is also counsel to Calamos. Vedder Price may rely on the opinion of ___, ___,
___, on certain matters of Delaware law. ___, ___, ___,
is serving as counsel to the underwriters.
S-20
[UNAUDITED] FINANCIAL STATEMENTS AS OF ________, 200__
F-1
$_________
Calamos Strategic Total Return Fund
Auction Rate Senior Notes (Calamos Notes)
$___Series ___Due ___, 20___
PROSPECTUS SUPPLEMENT
___, 20___
[Underwriter]
SUBJECT
TO COMPLETION, DATED FEBRUARY 22,
2008
THE
INFORMATION IN THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT
COMPLETE AND MAY BE CHANGED. WE
MAY NOT SELL THESE SECURITIES UNTIL
THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND
EXCHANGE
COMMISSION (SEC) IS EFFECTIVE. THIS
STATEMENT OF ADDITIONAL
INFORMATION IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT
SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE
WHERE THE
OFFER OR SALE IS NOT PERMITTED.
CALAMOS STRATEGIC TOTAL RETURN FUND
STATEMENT OF ADDITIONAL INFORMATION
Calamos Strategic Total Return Fund (the Fund) is a diversified, closed-end management
investment company. This Statement of Additional Information relates to the offering, on an
immediate, continuous or delayed basis, of up to $350,000,000 aggregate initial offering price of
common shares, preferred shares and debt securities in one or more offerings. This Statement of
Additional Information does not constitute a prospectus, but should be read in conjunction with the
prospectus relating thereto dated February ____, 2008 and any related prospectus supplement.
This Statement of Additional Information does not include all information that a prospective
investor should consider before purchasing any of the Funds securities, and investors should
obtain and read the prospectus and any related prospectus supplement prior to purchasing such
securities. A copy of the prospectus and any related prospectus supplement may be obtained without
charge by calling 1-800-582-6959. You may also obtain a copy of the prospectus and any related
prospectus supplement on the Securities and Exchange Commissions 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 and any related prospectus supplement.
TABLE OF CONTENTS FOR STATEMENT OF ADDITIONAL INFORMATION
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Use of Proceeds |
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Investment Objective and Policies |
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Investment Restrictions |
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Management of the Fund |
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Portfolio Transactions |
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Net Asset Value |
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Repurchase of Common Shares |
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Federal Income Tax Matters |
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Custodian, Transfer Agent, Dividend Disbursing Agent and Registrar |
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Independent Registered Public Accounting Firm |
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Additional Information |
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Additional Information Concerning the Agreement and Declaration of Trust |
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Financial Statements and Report of Independent Auditors/Accountants |
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Appendix A Form of Calamos Strategic Total Return Fund Statement of Preferences of Auction Rate Cumulative Preferred Shares |
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Appendix B Summary of Certain Provisions of the Indenture and Form of Supplemental Indenture |
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Appendix B-I Auction Procedures |
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B-I-1 |
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Appendix C Description of Ratings |
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This
Statement of Additional Information is dated February ____, 2008.
USE OF PROCEEDS
The Fund will invest the net proceeds of the offering in accordance with the Funds investment
objective and policies as stated below and in the prospectus. It is presently anticipated that the
Fund will invest substantially all of the net proceeds in securities that meet the investment
objective and policies within three months after completion of the offering. Pending such
investment,
we anticipate that we will invest the proceeds in securities issued by the U.S. government or its agencies or instrumentalitics or in high quality,
short-term or long-term debt obligations.
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.
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 Funds prospectus and provides
additional information on the Funds investment policies or restrictions. Restrictions or policies
stated as a maximum percentage of the Funds assets are only applied immediately after a portfolio
investment to which the policy or restriction is applicable (other than the limitations on
borrowing). Accordingly, any later increase or decrease resulting from a change in values, managed
assets or other circumstances will not be considered in determining whether the investment complies
with the Funds 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 the preferred shares will not constitute a liability.
Calamos will dynamically allocate the Funds 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 Funds 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 issuers total enterprise by studying its
financial statements, including its balance sheet. Once enterprise value is determined, Calamos
seeks to assess the value of the issuers 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 issuers capital structure. This approach serves as the basis for the
Calamos research teams 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.
S-2
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 companys business
performance, investor perceptions, stock market trends and general economic conditions. Equity
securities are subordinated to bonds and other debt instruments in a companys 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 Funds
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 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 issuers 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 Moodys or BB or
lower by Standard & Poors 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 issuers capacity to pay interest and
repay principal.
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 issuers ability to pay interest and principal and 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:
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increased price sensitivity to changing interest rates and to a deteriorating
economic environment; |
S-3
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greater risk of loss due to default or declining credit quality; |
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adverse company specific events are more likely to render the issuer unable to make
interest and/or principal payments; and |
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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
Moodys means that the issue so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing. Standard & Poors 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 C to this Statement of
Additional Information for a description of Moodys and Standard & Poors ratings.
Adverse changes in economic conditions are more likely to lead to a weakened capacity of a
high yield issuer to make principal payments and interest payments than an investment grade issuer.
The principal amount of high yield securities outstanding has proliferated in the past decade as
an increasing number of issuers have used high yield securities for corporate financing. An
economic downturn could severely affect the ability of highly leveraged issuers to service their
debt obligations or to repay their obligations upon maturity. Similarly, down-turns in
profitability in specific industries could adversely affect the ability of high yield issuers in
that industry to meet their obligations. The market values of lower quality debt securities tend
to reflect individual developments of the issuer to a greater extent than do higher quality
securities, which react primarily to fluctuations in the general level of interest rates. Factors
having an adverse impact on the market value of lower quality securities may have an adverse effect
on the Funds 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 issuers 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 Funds 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 Funds net asset value.
Because 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
S-4
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 Moodys or CC
or lower by Standard & Poors) 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 Funds 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 obligors 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 Funds
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
S-5
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
borrowers 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 or the Commission).
As in the case of other high yield investments, such corporate loans may be rated in the lower
rating categories of the established rating services (Ba or lower by Moodys or BB or lower by
Standard & Poors), 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
borrowers bondholders. These arrangements are designed to give corporate loan investors
preferential treatment over high yield investors in the event of a deterioration in the credit
quality of the issuer. Even when these arrangements exist, however, there can be no assurance that
the borrowers of the corporate loans will repay principal and/or pay interest in full. Corporate
loans generally bear interest at rates set at a margin above a generally recognized base lending
rate that may fluctuate on a day-to-day basis, in the case of the prime rate of a U.S. bank, or
which may be adjusted on set dates, typically 30 days but generally not more than one year, in the
case of the London Interbank Offered Rate. Consequently, the value of corporate loans held by the
Fund may be expected to fluctuate significantly less than the value of other fixed rate high yield
instruments as a result of changes in the interest rate environment. On the other hand, the
secondary dealer market for certain corporate loans may not be as well developed as the secondary
dealer market for high yield bonds, and therefore presents increased market risk relating to
liquidity and pricing concerns.
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. A foreign issuer is a foreign government or corporation organized under the laws of a
foreign country. 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.
S-6
To the extent positions in portfolio securities are denominated in foreign currencies, the
Funds investment performance is affected by the strength or weakness of the U.S. dollar against
those currencies. For example, if the dollar falls in value relative to the Japanese yen, the
dollar value of a Japanese stock held in the portfolio will rise even though the price of the stock
remains unchanged. Conversely, if the dollar rises in value relative to the yen, the dollar value
of the Japanese stock will fall. (See discussion of transaction hedging and portfolio hedging
below under Currency Exchange Transactions.)
Investors should understand and consider carefully the risks involved in foreign investing.
Investing in foreign securities, which are generally denominated in foreign currencies, and
utilization of forward foreign currency exchange contracts involve certain considerations
comprising both risks and opportunities not typically associated with investing in U.S. securities.
These considerations include: fluctuations in exchange rates of foreign currencies; possible
imposition of exchange control regulation or currency restrictions that would prevent cash from
being brought back to the United States less public information with respect to issuers of
securities; less governmental supervision of stock exchanges, securities brokers, and issuers of
securities; lack of uniform accounting, auditing and financial reporting standards; lack of uniform
settlement periods and trading practices; less liquidity and frequently greater price volatility in
foreign markets than in the United States; possible imposition of non - U.S. withholding or other taxes; and sometimes less
advantageous legal, operational and financial protections applicable to foreign sub-custodial
arrangements.
Although the Fund intends to invest primarily 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 issuers located in emerging market countries. The
securities markets of emerging countries are substantially smaller, less developed, less liquid and
more volatile than the securities markets of the U.S. and other more developed countries.
Disclosure and regulatory standards in many respects are less stringent than in the U.S. and other
major markets. There also may be a lower level of monitoring and regulation of emerging markets
and the activities of investors in such markets, and enforcement of existing regulations has been
extremely limited. Economies in individual emerging markets may differ favorably or unfavorably
from the U.S. economy in such respects as growth of gross domestic product, rates of inflation,
currency depreciation, capital reinvestment, resource self-sufficiency and balance of payments
positions. Many emerging market countries have experienced high rates of inflation for many years,
which has had and may continue to have very negative effects on the economies and securities
markets of those countries.
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
S-7
these currencies and the U.S. dollar. 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 Funds custodian will segregate liquid assets
of the Fund having a value equal to the Funds 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 the Fund to purchase
additional currency on the spot market (and bear the expense of such purchase) if the market value
of the security is less than the amount of currency the Fund is obligated to deliver and if a
decision is made to sell the security and make delivery of the currency. Conversely, it may be
necessary to sell on the spot market some of the currency received upon the sale of the portfolio
security if its market value exceeds the amount of currency the Fund is obligated to deliver.
If the Fund retains the portfolio security and engages in an offsetting transaction, the Fund
will incur a gain or a loss to the extent that there has been movement in forward contract prices.
If the Fund engages in an offsetting transaction, it may subsequently enter into a new forward
contract to sell the currency. Should forward prices decline during the period between the Funds
entering into a forward contract for the sale of a currency and the date it enters into an
offsetting contract for the purchase of the currency, the Fund will realize a gain to the extent
the price of the currency it has agreed to sell exceeds the price of the currency it has agreed to
purchase. Should forward prices increase, the Fund will suffer a loss to the extent the price of
the currency it has agreed to purchase exceeds the price of the currency it has agreed to sell. A
default on the contract would deprive the Fund of unrealized profits or force the Fund to cover its
commitments for purchase or sale of currency, if any, at the current market price.
Hedging against a decline in the value of a currency does not eliminate fluctuations in the
value of a portfolio security traded in that currency or prevent a loss if the value of the
security declines. Hedging transactions also preclude the opportunity for gain if the value of the
hedged currency should rise. Moreover, it may not be possible for the Fund to hedge against a
devaluation that is so generally
S-8
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.
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. The Fund currently does not intend to invest a
significant amount of its assets in synthetic foreign money market
positions.
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 debtors 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 debtors policy toward its principal international lenders and local
political constraints. Sovereign debtors may also be dependent on expected disbursements from
non-U.S. governments, multilateral agencies and other entities to reduce principal and interest
arrearages on their debt. The failure of a sovereign debtor to implement economic reforms, achieve
specified levels of economic performance or repay principal or interest when due may result in the
cancellation of third-party commitments to lend funds to the sovereign debtor, which may further
impair such debtors 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
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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.
Synthetic Convertible Securities
Calamos Advisors, LLC (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 Funds 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
S-10
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 Funds 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 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 Funds purchase of a call option on a security,
financial future, index, currency or other instrument might be
S-11
intended to protect the 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 the Fund at a formula price within
seven days. The Fund expects generally to enter into OTC options that have cash settlement
provisions, although it is not required to do so. The staff of the SEC currently takes the
position that OTC options purchased by a fund, and portfolio securities covering the amount of a
funds obligation pursuant to an OTC option sold by it (or the amount of assets equal to the
formula price for the repurchase of the option, if any, less the amount by which the option is in
the money) are illiquid.
The Fund may also purchase and sell options on securities indices and other financial indices, which
may include purchasing and selling options on stocks, indices, rates, credit spreads or currencies. 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 convertible into the needed securities without additional consideration) or to
segregate cash or liquid assets sufficient to purchase and deliver the securities if the call is
exercised. A call option sold by the Fund on an index will require the Fund to own portfolio
securities 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
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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 will generally realize a short-term 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, which may be
short-term or long-term depending on the Funds holding period for the option.
Prior to the earlier of exercise or expiration, an option may be closed out by an offsetting
purchase or sale of an option of the same series (type, exchange, underlying security or index,
exercise price and expiration). There can be no assurance, however, that a closing purchase or
sale transaction can be effected when the Fund desires.
The Fund will realize a short-term capital gain from a closing purchase transaction if the
cost of the closing option is less than the premium received from writing the option, or, if it is
more, the Fund will generally realize a short-term 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, which in each case
may be long-term or short-term depending on the Funds holding period for the option. 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
S-13
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 Funds ability to close out its position as a purchaser or seller of an OCC or exchange
listed put or call option is dependent, in part, upon the liquidity of the option market. Among
the possible reasons for the absence of a liquid option market on an exchange are:
(i) insufficient trading interest in certain options; (ii) restrictions on transactions imposed by
an exchange; (iii) trading halts, suspensions or other restrictions imposed with respect to
particular classes or series of options or underlying securities including reaching daily price
limits; (iv) interruption of the normal operations of the OCC or an exchange; (v) inadequacy of the
facilities of an exchange or OCC to handle current trading volume; or (vi) a decision by one or
more exchanges to discontinue the trading of options (or a particular class or series of options),
in which event the relevant market for that option on that exchange would cease to exist, although
outstanding options on that exchange would generally continue to be exercisable in accordance with
their terms. If the Fund were unable to close out an option that it has purchased on a security,
it would have to exercise the option in order to realize any profit or the option would expire and
become worthless. If the Fund were unable to close out a covered call option that it had written
on a security, it would not be able to sell the underlying security until the option expired. As
the writer of a covered call option on a security, the Fund foregoes, during the options 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 options 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 the Fund or fails to make a cash settlement
payment due in accordance with the terms of that option, the Fund will lose any premium it paid for
the option as well as any anticipated benefit of the transaction. Accordingly, Calamos must assess
the creditworthiness of each such Counterparty or any guarantor or credit enhancement of the
Counterpartys 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
Moodys 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 the Fund to hold a security or instrument which it might otherwise
have sold. As described more fully in the accompanying prospectus, this results in the potential
for net asset value erosion. The Fund may purchase and sell put options on securities indices and
currencies. In selling put options, there is a
S-14
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 specified quantity of a financial
instrument or the cash value of an index1 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 & Poors 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 Funds securities or the price of the securities that the Fund intends to purchase. Although
other techniques could be used to reduce or increase the Funds 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 Calamos 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 Funds return might have been better had
the transaction not been attempted; however, in the absence of the ability to use futures
contracts, Calamos 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 Funds broker may require margin deposits in excess
of the minimum required by the exchange. The initial margin is in the nature of
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1 |
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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-15
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 one would owe the other if the futures
contract had expired at the close of the previous day. In computing 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
Funds 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 Funds 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 days 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
S-16
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.
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 Funds 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 Futures Trading Commission
regulations in effect from time to time and in accordance with the Funds 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
warrants 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.
S-17
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. 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 taxed at ordinary income tax rates 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 Funds short positions
remain open. The Fund may make short sales 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 Funds 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.
S-18
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 Funds 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
Funds ability to achieve its investment objective. See Federal Income Tax Matters.
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 Funds short positions remain
open.
Interest Rate Transactions
In order to seek to reduce the interest rate risk inherent in the Funds underlying
investments and capital structure, the Fund, if market conditions are deemed favorable, may enter
into interest rate swap or cap transactions to attempt to protect itself from increasing dividend
or interest expenses on its leverage. Interest rate swaps involve the Funds 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 Funds 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 Funds 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 Funds 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
S-19
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 Funds 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 Funds 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, 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 Funds
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 Funds
common shares.
The Fund may choose or be required to redeem some or all of the preferred shares or prepay any
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. 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.
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
S-20
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 securities (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 Commissions 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 Funds 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 Funds 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 Funds
assets in illiquid securities may restrict the Funds ability to take advantage of market
opportunities. The risks associated with illiquid securities may be particularly acute in
situations in which the Funds operations require cash and could result in the Fund borrowing to
meet its short-term needs or incurring losses on the sale of illiquid securities.
The Fund may invest in bonds, corporate loans, convertible securities, preferred stocks and
other securities that lack a secondary trading market or are otherwise considered illiquid.
Liquidity of a security relates to the ability to easily dispose of the security and the price to
be obtained upon disposition of the security, which may be less than would be obtained for a
comparable more liquid security. Such investments may affect the Funds 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 in securities with remaining maturities of less than one year, cash equivalents or cash. 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.
S-21
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 Funds 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 subject to federal
income tax on income and gains 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 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 REITs investment in fixed rate obligations can be expected to rise.
Conversely, when interest rates rise, the value of a REITs 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 REITs 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.
S-22
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 & Poors 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 Funds investment objective and policies and permissible under
the Investment Company Act of 1940, as amended (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 Funds 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
Funds total assets would be invested in any one investment company. These limitations do not
apply to the purchase of shares of money market funds or 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 Funds own operations.
INVESTMENT RESTRICTIONS
The following are the Funds fundamental investment restrictions. These restrictions may not
be changed without the approval of the holders of a majority of the Funds 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). As long as preferred shares
are outstanding, the investment restrictions can 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:
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(1) |
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Issue senior securities, except as permitted by the 1940 Act
and the rules and interpretive positions of the Commission thereunder. |
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(2) |
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Borrow money, except as permitted by the 1940 Act and the rules
and interpretive positions of the Commission thereunder. |
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(3) |
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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. |
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(4) |
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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. |
S-23
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(5) |
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Invest in physical commodities or contracts relating to
physical commodities. |
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(6) |
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Act as an underwriter, except as it may be deemed to be an
underwriter in a sale of securities held in its portfolio. |
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(7) |
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Make any investment inconsistent with the Funds classification
as a diversified investment company under the 1940 Act and the rules and
interpretive positions of the Commission thereunder. |
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(8) |
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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 Funds 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 Funds 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 Funds 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 Funds portfolio (determined after
deducting the amount of such dividend or distribution) is at least 200% of such liquidation value
plus any senior securities representing indebtedness. 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 Funds 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.
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
S-24
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. These limitations, however, do
not apply to the purchase of shares of money market funds. As a shareholder in any investment
company, the Fund will bear its ratable share of that investment companys expenses, and would
remain subject to payment of the Funds 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
Risks, 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 Funds investments will be limited by both an income and an asset test.
See 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 Funds total assets.
MANAGEMENT OF THE FUND
Trustees and Officers
The Funds Board of Trustees provides broad oversight over the Funds affairs. The officers
of the Fund are responsible for the Funds operations. The Funds 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
(17 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 2020 Calamos Court, Naperville, Illinois 60563.
Trustees Who Are Interested Persons of the Fund:
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Position(s) with |
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Principal Occupation(s) and Other |
Name and Age |
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Fund |
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Portfolios Overseen |
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Directorships |
John P. Calamos, Sr., 67* |
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Trustee and President |
|
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19 |
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Chairman, CEO, and Co-Chief
Investment Officer, Calamos
Asset Management, Inc. (CAM),
Calamos Holdings LLC (CHLLC)
and Calamos Advisors LLC and its
predecessor (Calamos
Advisors), and President and
Co-Chief Investment Officer,
Calamos Financial Services LLC
and its predecessor (CFS);
Director, CAM |
S-25
Trustees Who Are Not Interested Persons of the Fund:
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Position(s) with |
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Principal Occupation(s) and Other |
Name and Age |
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Fund |
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Portfolios Overseen |
|
Directorships |
Joe F. Hanauer, 70 |
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Trustee (since inception) |
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19 |
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Private investor; Director, MAF
Bancorp (bank holding company);
Chairman and Director, Move,
Inc. (internet provider of real
estate information and
products); Director, Combined
Investments, L.P. (investment
management) |
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Weston W. Marsh, 57 |
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Trustee (since inception) |
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19 |
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Of Counsel, Partner, Freeborn &
Peters (law firm) |
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John E. Neal, 57 |
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Trustee (since inception) |
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19 |
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Private investor; Managing
Director, Banc One Capital
Markets, Inc. (investment
banking) (2000-2004); Director,
Focused Health Services (private
disease management company),
Equity Residential
(publicly-owned REIT), Ranir LLC
(oral products company) and CBA
Commercial (commercial mortgage
securitization company);
Partner, Private Perfumery LLC
(private label perfume company)
and Linden LLC (health care
private equity) |
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William R. Rybak, 56 |
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Trustee (since inception) |
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19 |
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Private investor; formerly
Executive Vice President and
Chief Financial Officer, Van
Kampen Investments, Inc. and
subsidiaries (investment
manager); Director, Howe Barnes
Hoefer Arnett, Inc. (investment
services firm) and
PrivateBancorp, Inc. (bank
holding company); Trustee, JNL
Series Trust, JNL Investors
Series Trust, JNL Variable Fund
LLC and JNLNY Variable Fund I
LLC** |
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Stephen B. Timbers, 63 |
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Trustee (since inception) |
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19 |
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Private investor; formerly Vice
Chairman, Northern Trust
Corporation (bank holding
company); formerly President and
Chief Executive Officer,
Northern Trust Investments, N.
A. (investment manager);
formerly President, Northern
Trust Global Investments, a
division of Northern Trust
Corporation and Executive Vice
President, The Northern Trust
Corporation; formerly, Director,
Northern Trust Securities, Inc. |
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David D. Tripple, 63 |
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Trustee (since 2006) |
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19 |
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Private investor; Trustee,
Century Shares Trust and Century
Small Cap Select Fund*** |
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* |
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Mr. Calamos is an interested person of the Trust as defined in the 1940 Act because he is
an affiliate of Calamos Advisors and Calamos Financial Services LLC. |
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** |
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Overseeing 94 portfolios in fund complex.
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*** |
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Overseeing two portfolios in fund complex. |
The address of the Trustees is 2020 Calamos Court, Naperville, Illinois 60563.
S-26
Officers. The preceding table gives information about Mr. John Calamos, who is president of
the Fund. The following table sets forth each other officers name and age as of the date of this
statement of additional information, position with the Fund and date first appointed to that
position, and principal occupation(s) during the past five years. 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.
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Principal Occupation(s) and |
Name and Age |
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Position(s) with Fund |
|
Other Directorships |
Nimish S. Bhatt, 44
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Vice President and Chief
Financial Officer
(since 2008)
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Senior Vice President and
Director of Operations, CAM,
CHLLC, Calamos Advisors and
CFS (since 2004); Treasurer of the Fund (2004-2008); Senior
Vice President, Alternative
Investments and Tax
Services, The BISYS Group,
Inc., prior thereto |
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Nick P. Calamos, 46
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Vice President (since inception)
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Senior Executive Vice
President and Co-Chief
Investment Officer, CAM,
CHLLC, Calamos Advisors and
CFS |
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Patrick H. Dudasik, 52
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Vice President (since inception)
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Executive Vice President,
Chief Financial Officer,
Chief Operating Officer and
Treasurer, CAM and CHLLC
(since 2004), Calamos
Advisors and CFS (2001-2005) |
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Cheryl
L. Hampton, 38
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Treasurer (since 2007)
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Vice President, Calamos Advisors (since March 2007); Tax Director, PricewaterhouseCoopers LLP
(1999 2007) |
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Stathy
Darcy, 41
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Secretary (since 2007)
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Vice President and Associate Counsel,
Calamos Advisors (since 2006); prior
thereto, Partner, Chapman and Cutler LLP
(law firm) |
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Mark J. Mickey, 56
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Chief Compliance Officer (since 2005)
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Chief Compliance Officer,
Calamos Funds (since 2005)
and Chief Compliance
Officer, Calamos Advisors
(2005-2006); Director of
Risk Assessment and Internal
Audit, Calamos Advisors
(2003-2005); President, Mark
Mickey Consulting
(2002-2003) |
The address of each officer is 2020 Calamos Court, Naperville, Illinois 60563.
The Funds Board of Trustees consists of seven members. In accordance with the Funds
Agreement and Declaration of Trust, the Board of Trustees is divided into three classes of
approximately equal size. The terms of the trustees of the different classes are staggered. The
terms of John P. Calamos, Weston W. Marsh and William R. Rybak will expire at the annual meeting of
shareholders in 2008. The terms of Joe F. Hanauer, John E. Neal and David D. Tripple will expire
at the annual meeting of shareholders in 2009. The term of Stephen B. Timbers will expire at the
annual meeting of shareholders in 2010. Messrs. Rybak and Timbers are the Trustees who represent
the holders of preferred shares. Such classification of the Trustees may prevent the replacement
of a majority of the Trustees for up to a two year period. Each of the Funds officers serves
until his or her successor is chosen and qualified or until his or her resignation or removal by
the Board of Trustees.
Committees of the Board of Trustees. The Funds Board of Trustees currently has four standing
committees:
Executive Committee. Messrs. John Calamos and Stephen B. Timbers are members of the
Executive Committee, which has authority during intervals between meetings of the Board of Trustees
to exercise the powers of the Board, with certain exceptions.
Audit Committee. Stephen B. Timbers, Joe F. Hanauer, John E. Neal, William R. Rybak,
Weston W. Marsh and David D. Tripple, each a non-interested Trustee, serve on the Audit Committee.
S-27
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 Funds audit, determines whether to recommend to the Board that the Funds audited
financial statements be included in the Funds annual report and responds to other matters deemed
appropriate by the Board of Trustees.
Governance Committee. Stephen B. Timbers, Joe F. Hanauer, John E. Neal, William R.
Rybak, Weston W. Marsh and David D. Tripple, 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 consider shareholder
recommendations regarding potential candidates for nomination as Trustees properly submitted to the
Governance Committee for its consideration. A Fund shareholder who wishes to nominate a candidate
to the Funds Board of Trustees must submit any such recommendation in writing via regular mail to
the attention of the Funds Secretary, at the address of the Funds principal executive offices.
The shareholder recommendation must include:
|
|
|
the number and class of all Fund shares owned beneficially and of record by the
nominating shareholder at the time the recommendation is submitted and the dates on
which such shares were acquired, specifying the number of shares owned beneficially; |
|
|
|
|
a full listing of the proposed candidates education, experience (including
knowledge of the investment company industry, experience as a director or senior
officer of public or private companies, and directorships on other boards of other
registered investment companies), current employment, date of birth, business and
residence address, and the names and addresses of at least three professional
references; |
|
|
|
|
information as to whether the candidate is, has been or may be an interested
person (as such term is defined in the 1940 Act) of the Fund, Calamos or any of its
affiliates, and, if believed not to be or have been an interested person, information
regarding the candidate that will be sufficient for the Committee to make such
determination; |
|
|
|
|
the written and signed consent of the candidate to be named as a nominee and to
serve as a Trustee of the Fund, if elected; |
|
|
|
|
a description of all arrangements or understandings between the nominating
shareholder, the candidate and/or any other person or persons (including their names)
pursuant to which the shareholder recommendation is being made, and if none, so
specify; |
|
|
|
|
the class or series and number of all shares of the Fund owned of record or
beneficially by the candidate, as reported by the candidate; and |
|
|
|
|
such other information that would be helpful to the Governance Committee in
evaluating the candidate. |
The Governance Committee may require the nominating shareholder to furnish other information
it may reasonably require or deem necessary to verify any information furnished pursuant to the
procedures delineated above or to determine the qualifications and eligibility of the candidate
proposed by the nominating shareholder to serve as a Trustee. If the nominating shareholder fails
to provide such
S-28
additional information in writing within seven days of receipt of a written request from the
Governance Committee, the recommendation of such candidate as a nominee will be deemed not properly
submitted for consideration, and the Governance Committee is not required to consider such
candidate. During periods when the Governance Committee is not actively recruiting new Trustees,
shareholder recommendations will be kept on file until active recruitment is under way. After
consideration of a shareholder recommendation, the Governance Committee may dispose of the
shareholder recommendation.
Dividend Committee. Mr. Calamos serves as the sole member of the dividend committee.
The dividend committee is authorized to declare distributions on the Funds shares including, but
not limited to, regular dividends, special dividends and short- and long-term capital gains
distributions.
Valuation Committee. David D. Tripple, Stephen B. Timbers and Weston W. Marsh, each a
non-interested Trustee, serve on the Valuation Committee. The Valuation Committee oversees the
implementation of the valuation procedures adopted by the Board of Trustees. The members of the
Valuation Committee make recommendations to the Board of Trustees regarding valuation matters
relating to the Fund.
In addition to the above committees, there is a Board of Trustees directed pricing committee
comprised of officers of the Fund and employees of Calamos.
The
following table identifies the number of meetings the Board of
Trustees and each committee held during the fiscal year ended October
31, 2007.
|
|
|
|
|
|
|
Number of Meetings During
Fiscal Year Ended October 31, 2007 |
Board of Trustees |
|
|
6 |
Executive Committee |
|
|
0 |
Audit Committee |
|
|
5 |
Governance Committee |
|
|
2 |
Dividend Committee |
|
|
0 |
Valuation Committee |
|
|
3 |
The Funds 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, 2006].
|
|
|
|
|
|
|
|
|
|
|
Estimated Aggregate |
|
Total Compensation From |
Name of Trustee |
|
Compensation From Fund |
|
Calamos Fund Complex(1)* |
John P. Calamos, Sr. |
|
$ |
0 |
|
|
$ |
0 |
|
Joe F. Hanauer |
|
$ |
11,795 |
|
|
$ |
131,000 |
|
Weston W. Marsh |
|
$ |
13,173 |
|
|
$ |
146,000 |
|
John E. Neal |
|
$ |
13,909 |
|
|
$ |
154,000 |
|
William R. Rybak |
|
$ |
12,989 |
|
|
$ |
144,000 |
|
Steve B. Timbers |
|
$ |
16,853 |
|
|
$ |
186,000 |
|
David D. Tripple |
|
$ |
14,093 |
|
|
$ |
156,000 |
|
|
|
|
(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 one or more of the portfolios of the
Calamos Investment Trust selected by the Trustee. |
|
* |
|
The Calamos Fund Complex consists of seven investment companies and each applicable series
thereunder including the Fund, Calamos Investment Trust, Calamos Advisors Trust, Calamos
Convertible Opportunities and Income Fund, Calamos Convertible and High Income Fund, Calamos
Global Dynamic Income Fund and Calamos Global Total Return 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
S-29
of income taxes or for other reasons. The deferred compensation payable to the participating
Trustee is credited to Trustees deferral account as of the business day such compensation would
have been paid to the Trustee. The value of a Trustees 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 Trustees 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, 2007. The value of the shares held, are
stated in ranges in accordance with the requirements of the Commission. The table reflects the
Trustees beneficial ownership of shares of the Calamos Fund Complex. Beneficial ownership is
determined in accordance with the rules of the Commission.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate Dollar Range of Equity |
|
|
|
|
|
|
Securities in all Registered |
|
|
Dollar Range of Equity |
|
Investment Companies in the |
Name of Trustee |
|
Securities in the Fund |
|
Calamos Funds |
Interested Trustees: |
|
|
|
|
|
|
|
|
John P. Calamos |
|
Over $100,000 |
|
Over $100,000 |
|
|
|
|
|
|
|
|
|
Non-Interested Trustees: |
|
|
|
|
|
|
|
|
Joe F. Hanauer |
|
None |
|
Over $100,000 |
Weston W. Marsh |
|
$50,001100,000 |
|
Over $100,000 |
John E. Neal |
|
Over $100,000 |
|
Over $100,000 |
William Rybak |
|
None |
|
Over $100,000 |
Stephen B. Timbers |
|
Over $100,000 |
|
Over $100,000 |
David D. Tripple |
|
$50,001100,000 |
|
Over $100,000 |
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 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 Commissions
internet web site at www.sec.gov. You may review and copy the code of ethics by visiting the
Commissions Public Reference Room in Washington, D.C. Information on the operation of the Public
Reference Room may be obtained by calling the Commission at 202-551-8090. In addition, copies
S-30
of the code of ethics may be obtained, after mailing the appropriate duplicating fee, by
writing to the Commissions Public Reference Section, 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 Funds portfolio securities for which the Fund has voting authority consistent with
the Funds 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 companys management and board have interests
sufficiently aligned with the Funds interest, Calamos will vote in favor of proposals recommended
by a companys 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 companys 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-takeover 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.
The
Fund is required to file with the SEC its complete proxy voting
record for the twelve-month period ending June 30, by no later
than August 31 of each year. The Funds proxy voting record
for the most recent twelve-month period ending June 30 is
available by August 31 of each year (1) on the SECs
website at www.sec.gov and (2) without charge, upon request, by
calling 800-582-6959.
You may obtain a copy a Calamos Policies by calling 800.582.6959, by visiting the Funds
website at www.calamos.com, by writing Calamos at: Calamos Investments, Attn: Client Services,
2020 Calamos Court, Naperville, IL 60563, and on the
Commissions website at www.sec.gov.
S-31
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 Funds 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 Funds transfer agent; (v) assisting in the preparation and filing of
the Funds federal, state and local tax returns; (vi) assisting in the preparation and filing of
the Funds 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 Funds 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 Funds operations and consulting with the
Funds independent accountants, legal counsel and the Funds other agents as necessary in
connection therewith; (xiii) reviewing the Funds 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 Funds
business, subject to the direction and control of the Trustees.
Under the investment management agreement, the Fund pays 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 management fee paid to Calamos is
based upon a percentage of the Funds managed assets, the fee paid to Calamos is higher when the
Fund is leveraged; thus, Calamos will have an incentive to use leverage.
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 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
Funds custodian or other agents of the Fund; (f) telephone, telex, facsimile, postage and other
communications expenses; (g) taxes and governmental fees; (h) fees, dues and expenses incurred by
the Fund in connection with membership in investment company trade organizations and the expense of
attendance at professional meetings of such organizations; (i) fees and expenses of accounting
agents, custodians, subcustodians, transfer agents,
S-32
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 Funds 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 Funds shares on the New York Stock Exchange or any other national stock exchange.
For the fiscal years ended October 31, 2004, October 31, 2005,
October 31, 2006, and October 31, 2007, the Fund paid $17,903,542,
$33,816,296, $34,049,644, and $35,897,921, respectively, in advisory
fees.
The investment management agreement had an initial term ending August 1, 2005 and continues in
effect from year to year thereafter 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.
A discussion regarding the basis for the Board of Trustees decision to approve the renewal of
the Investment Management Agreement is available in the Funds Annual Report to shareholders for
the fiscal year ended October 31, 2007.
The use of the name Calamos in the name of the Fund is pursuant to licenses granted by
Calamos, and the Fund has agreed to change the names to remove those references if Calamos ceases
to act as investment adviser to the Fund.
Portfolio Managers
Calamos employs a team approach to portfolio management, with teams comprised generally of the
Co-Chief Investment Officers (the Co-CIOs), senior strategy analysts, intermediate analysts and
junior analysts. The Co-CIOs, directors and senior strategy analysts are supported by and
lead a team of investment professionals whose valuable contributions create a synergy of expertise
that can be applied across many different investment strategies. John P. Calamos, Sr., Co-CIO of
Calamos, generally focuses on the top-down approach of diversification by industry sector and
macro-level investment themes, Nick P. Calamos, Co-CIO of Calamos, also focuses on the top-down
approach of diversification by industry sector and macro-level investment themes and, in addition,
focuses on the bottom-up approach and corresponding research and analysis. John P. Calamos, Jr.,
John Hillenbrand, Steve Klouda, Jeff Scudieri and Jon Vacko are each senior strategy analysts, and
Matthew Toms is
S-33
Director of Fixed Income. The Co-CIOs, directors and senior strategy analysts are referred to
collectively as Team Leaders.
The Team Leaders also have responsibility for the day-to-day management of accounts other than
the Fund. Information regarding these other accounts is set forth below:
The Funds Team Leaders are responsible for managing the Fund and other accounts, including
separate accounts and unregistered funds.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Other Accounts Managed and Assets by Account Type as of October 31, 2007* |
|
|
Registered Investment |
|
Other Pooled Investment |
|
|
Portfolio Manager |
|
Companies |
|
Vehicles |
|
Other Accounts |
|
|
Accounts |
|
Assets |
|
Accounts |
|
Assets |
|
Accounts |
|
Assets |
John P. Calamos |
|
|
22 |
|
|
$ |
35,149,492,739 |
|
|
|
4 |
|
|
$ |
297,610,723 |
|
|
|
22,371 |
|
|
$ |
11,308,779,683 |
|
Nick P. Calamos |
|
|
22 |
|
|
$ |
35,149,492,739 |
|
|
|
4 |
|
|
$ |
297,610,723 |
|
|
|
22,371 |
|
|
$ |
11,308,779,683 |
|
John P.
Calamos, Jr. |
|
|
20 |
|
|
$ |
34,678,281,091 |
|
|
|
4 |
|
|
$ |
297,610,723 |
|
|
|
22,371 |
|
|
$ |
11,308,779,683 |
|
John Hillenbrand |
|
|
19 |
|
|
$ |
33,129,883,529 |
|
|
|
3 |
|
|
$ |
242,155,204 |
|
|
|
22,371 |
|
|
$ |
11,308,779,683 |
|
Steve Klouda |
|
|
19 |
|
|
$ |
33,129,883,529 |
|
|
|
3 |
|
|
$ |
242,155,204 |
|
|
|
22,371 |
|
|
$ |
11,308,779,683 |
|
Jeff Scudieri |
|
|
19 |
|
|
$ |
33,129,883,529 |
|
|
|
3 |
|
|
$ |
242,155,204 |
|
|
|
22,371 |
|
|
$ |
11,308,779,683 |
|
Jon Vacko |
|
|
19 |
|
|
$ |
33,129,883,529 |
|
|
|
3 |
|
|
$ |
242,155,204 |
|
|
|
22,371 |
|
|
$ |
11,308,779,683 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Accounts Managed and Assets for Which Advisory Fee is Performance Based as of October 31, 2007* |
|
|
Registered Investment |
|
Other Pooled Investment |
|
|
Portfolio Manager |
|
Companies |
|
Vehicles |
|
Other Accounts |
|
|
Accounts |
|
Assets |
|
Accounts |
|
Assets |
|
Accounts |
|
Assets |
John P. Calamos |
|
|
1 |
|
|
$ |
565,845,779 |
|
|
|
2 |
|
|
$ |
148,730,762 |
|
|
|
0 |
|
|
|
|
|
Nick P. Calamos |
|
|
1 |
|
|
$ |
565,845,779 |
|
|
|
2 |
|
|
$ |
148,730,762 |
|
|
|
0 |
|
|
|
|
|
John P.
Calamos, Jr. |
|
|
1 |
|
|
$ |
565,845,779 |
|
|
|
2 |
|
|
$ |
148,730,762 |
|
|
|
0 |
|
|
|
|
|
John Hillenbrand |
|
|
1 |
|
|
$ |
565,845,779 |
|
|
|
1 |
|
|
$ |
93,275,243 |
|
|
|
0 |
|
|
|
|
|
Steve Klouda |
|
|
1 |
|
|
$ |
565,845,779 |
|
|
|
1 |
|
|
$ |
93,275,243 |
|
|
|
0 |
|
|
|
|
|
Jeff Scudieri |
|
|
1 |
|
|
$ |
565,845,779 |
|
|
|
1 |
|
|
$ |
93,275,243 |
|
|
|
0 |
|
|
|
|
|
Jon Vacko |
|
|
1 |
|
|
$ |
565,845,779 |
|
|
|
1 |
|
|
$ |
93,275,243 |
|
|
|
0 |
|
|
|
|
|
|
|
|
* |
|
Each Team Leader may invest for his own benefit in securities held in brokerage and mutual
fund accounts. The information shown in the table does not include information about those
accounts where the Team Leader or members of his family have beneficial or pecuniary interest
because no advisory relationship exists with Calamos or any of its affiliates. |
|
** |
|
Matthew Toms joined Calamos in March 2007 and information regarding the number of accounts
managed by Mr. Toms is not yet available. |
Other than potential conflicts between investment strategies, the side-by-side management of
both the Fund and other accounts may raise potential conflicts of interest due to the interest held
by Calamos in an account and certain trading practices used by the portfolio managers (e.g.,
cross-trades between the Fund and another account and allocation aggregated trades). Calamos has
developed policies and procedures reasonably designed to mitigate those conflicts. For example,
Calamos will only place cross-trades in securities held by the Fund in accordance with the rules
promulgated under the 1940 Act and has adopted policies designed to ensure the fair allocation of
securities purchased on an aggregated basis. The allocation methodology employed by Calamos varies
depending on the type of securities sought to be bought or sold and the type of client or group of
clients. Generally, however, orders are placed first for those clients that have given Calamos
brokerage discretion (including the ability to step out a portion of trades), and then to clients
that have directed Calamos to execute trades through a specific broker. However, if the directed
broker allows Calamos to execute with other brokerage firms, which then book the transaction
directly with the directed broker, the order will be placed as if the client had given
S-34
Calamos full brokerage discretion. Calamos and its affiliates
frequently use a rotational method of placing and aggregating client orders and will build and
fill a position for a designated client or group of clients before placing orders for other
clients. A client account may not receive an allocation of an order if: (a) the client would
receive an unmarketable amount of securities based on account size; (b) the client has precluded
Calamos from using a particular broker; (c) the cash balance in the client account will be
insufficient to pay for the securities allocated to it at settlement; (d) current portfolio
attributes make an allocation inappropriate; and (e) account specific guidelines, objectives and
other account specific factors make an allocation inappropriate. Allocation methodology may be
modified when strict adherence to the usual allocation is impractical or leads to inefficient or
undesirable results. Calamos head trader must approve each instance that the usual allocation
methodology is not followed and provide a reasonable basis for such instances and all modifications
must be reported in writing to the Director of Compliance on a monthly basis.
The Team Leaders advise certain accounts under a performance fee arrangement. A performance
fee arrangement may create an incentive for a Team Leader to make investments that are riskier or
more speculative than would be the case in the absence of performance fees. A performance fee
arrangement may result in increased compensation to the Team Leaders from such accounts due to
under-realized appreciation as well as realized gains in the clients account.
As of October 31, 2007, Team Leaders John P. Calamos, Sr., Nick P. Calamos and John P.
Calamos, Jr. receive all of their compensation from Calamos Asset Management, Inc. Each has
entered into employment agreements that provide for compensation in the form of an annual base
salary and a discretionary target bonus, each payable in cash. Their discretionary target bonus is
set at a percentage of the respective base salary, ranging from 300% to 600%, with a maximum annual
bonus opportunity of 150% of the target bonus. For example, the
discretionary target bonus for a Team Leader who earns $100,000 would
range from $300,000 to $600,000 and the Team Leader's maximum annual
bonus opportunity would range from $450,000 to $900,000. Also, due to the ownership and executive management
positions with Calamos and its parent company, additional multiple corporate objectives are
utilized to determine the discretionary target bonus for John P. Calamos, Sr., Nick P. Calamos and
John P. Calamos, Jr. For 2007, the additional corporate objectives were: marketing effectiveness,
as measured by redemption rate compared to an absolute target; advisory fee revenues, measured by
growth in revenues; operating efficiencies, as measured by operating margin percentage compared to
a ranking of the top operating margins of companies in the industry; and stock price performance.
As of October 31, 2007, John Hillenbrand, Steve Klouda, Jeff Scudieri and Jon Vacko, and, as
of March 2007, Matthew Toms, receive all of their compensation from Calamos. They each receive
compensation in the form of an annual base salary and a discretionary target bonus, each payable in
cash. Their discretionary target bonus is set at a percentage of the respective base salary.
The amounts paid to all Team Leaders and the criteria utilized to determine the amounts are
benchmarked against industry specific data provided by third party analytical agencies. The Team
Leaders compensation structure does not differentiate between the funds and other accounts managed
by the Team Leaders, and is determined on an overall basis, taking into consideration the
performance of the various strategies managed by the Team Leaders. Portfolio performance, as
measured by risk-adjusted portfolio performance, is utilized to determine the discretionary target
bonus, as well as overall performance of Calamos.
All Team Leaders are eligible to receive annual equity awards under a long-term incentive
compensation program. With respect to John P. Calamos, Sr., Nick P. Calamos and John P.
Calamos, Jr., the target annual equity awards are set at a percentage of base salary. With
respect to John Hillenbrand, Steve Klouda, Jeff Scudieri, Matthew Toms and Jon Vacko, the
target annual equity awards are each set at a percentage of the respective base salaries.
S-35
Historically, the annual equity awards granted under the long-term incentive compensation
program have been comprised of stock options and restricted stock units. The stock options and
restricted stock units issued to date have vested annually in one-third installments beginning in
the fourth year after the grant date and each award has been subject to accelerated vesting under
certain conditions. Unless terminated early, the stock options have a ten-year term.
At
October 31, 2007, each portfolio manager beneficially owned (as determined pursuant to
Rule 16a-1a(a)(2) under the 1934 Act) shares of the Fund having value within the indicated dollar
ranges.
|
|
|
|
|
|
|
Fund |
John P. Calamos |
|
|
Over $100,000 |
|
Nick P. Calamos |
|
|
Over $100,000 |
|
John P. Calamos, Jr. |
|
|
None |
|
John Hillenbrand |
|
|
None |
|
Steve Klouda |
|
|
None |
|
Jeff Scudieri |
|
|
None |
|
Matthew Toms |
|
|
None |
|
Jon Vacko |
|
|
None |
|
Fund Accountant
Under the arrangements with State Street Bank and Trust Company (State Street) to provide
fund accounting services, State Street provides certain administrative and accounting services
including providing daily reconciliation of cash, trades and positions; maintaining general ledger
and capital stock accounts; preparing daily trial balance; calculating net asset value; providing
selected general ledger reports; preferred share compliance; calculating total returns; and
providing monthly distribution analysis to the Fund and such other funds advised by Calamos that
may be part of those arrangements (the Fund and such other funds are collectively referred to as
the Calamos Funds). For the services rendered to the Calamos Funds, State Street receives fees
based on the combined managed assets of the Calamos Funds (Combined Assets). State Street
receives a fee at the annual rate of 0.009% for the first $5.0 billion of Combined Assets, 0.0075%
for the next $5.0 billion of Combined Assets, 0.005% for the next $5.0 billion of Combined Assets
and 0.0035% for the Combined Assets in excess of $15.0 billion. Each fund of the Calamos Funds
pays its pro-rata share of the fees payable to State Street described below based on relative
managed assets of each fund.
Calamos, and not State Street, will provide the following financial accounting services to
Calamos Funds: 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; calculate 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, Calamos will receive a fee payable monthly at the annual rate of 0.0175% on
the first $1 billion of the average daily net assets of the Calamos Funds; 0.0150% on the next
$1 billion of the average daily net assets of the Calamos Funds; and 0.0110% on the average daily
net assets of the Calamos Funds above $2 billion (financial accounting service fee). Each fund
of the
S-36
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.
PORTFOLIO TRANSACTIONS
Portfolio transactions on behalf of the Fund effected on stock exchanges involve the payment
of negotiated brokerage commissions. There is generally no stated commission in the case of
securities traded in the over-the-counter markets, but the price paid by the Fund usually includes
an undisclosed dealer commission or mark-up. In underwritten offerings, the price paid by the Fund
includes a disclosed, fixed commission or discount retained by the underwriter or dealer.
In executing portfolio transactions, Calamos uses its best efforts to obtain for the Fund the
most favorable combination of price and execution available. In seeking the most favorable
combination of price and execution, Calamos considers all factors it deems relevant, including
price, the size of the transaction, the nature of the market for the security, the amount of
commission, the timing of the transaction taking into account market prices and trends, the
execution capability of the broker-dealer and the quality of service rendered by the broker-dealer
in other transactions.
The Trustees have determined that portfolio transactions for the Fund may be executed through
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 Funds 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 firms analysts for consultation. Although Calamos believes
these services have substantial value, they are considered supplemental to Calamos own efforts in
the performance of its duties under the management agreement. As permitted by Section 28(e) of the
Securities Exchange Act of 1934 (1934 Act), Calamos may 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.
The
Fund paid $0, $0, $0, and $0 in aggregate brokerage commissions for the fiscal years ended
October 31, 2004, October 31, 2005, October 31, 2006,
and October 31, 2007, including $0, $0, $0, and $0 to CFS, which
represented 0%, 0%, $0, and 0% of the Funds aggregate brokerage
fees paid for the respective fiscal year, and 0%, 0%, 0%, and 0% of the
Funds aggregate dollar amount of transactions involving
brokerage commissions for the respective fiscal year.
S-37
Portfolio Turnover
Our annual portfolio turnover rate may vary greatly from year to year. Although we cannot
accurately predict our annual portfolio turnover rate, it is not expected to exceed 100% under
normal circumstances. For the fiscal years ended October 31, 2004, October 31, 2005, October 31,
2006, and October 31, 2007, the
portfolio turnover rate was 11%, 71%, 48%, and 48%, respectively. However, portfolio turnover rate is
not considered a limiting factor in the execution of investment decisions for us. A higher turnover
rate results in correspondingly greater brokerage commissions and other transactional expenses that
are borne by us. High portfolio turnover also may 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. See Federal Income Tax Matters.
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 Barrons, 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 (the NOCP),
as determined by NASDAQ, or lacking an NOCP, at the last current reported sale price as of the time
of valuation. Bonds and other fixed-income securities that are traded over the counter and on an
exchange will be valued according to the broadest and most representative market, and it is
expected this will ordinarily be the over-the-counter market. The foreign securities held by the
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 Funds 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.
S-38
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 Funds common shares trade in the
open market at a price that is 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 Funds 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 private transactions, 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 Funds 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 Funds portfolio (determined after deducting
the acquisition price of the common shares) is at least 200% of the liquidation value of the
outstanding preferred shares (expected to equal the original purchase price per share plus any
accrued and unpaid dividends thereon). Any service fees incurred in connection with any tender
offer made by the Fund will be borne by the Fund and will not reduce the stated consideration to be
paid to tendering shareholders.
Subject to its investment restrictions, the Fund may borrow to finance the repurchase of
shares or to make a tender offer. Interest on any borrowings to finance share repurchase
transactions or the accumulation of cash by the Fund in anticipation of share repurchases or
tenders will reduce the Funds net income. Any share repurchase, tender offer or borrowing that
might be approved by the Funds Board of Trustees would have to
comply with the 1934 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 Funds status as a regulated investment
company under the Code (which would make the Fund a taxable entity, causing the Funds 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 Funds
investment objective and policies in order to
repurchase shares; or (3) there is, in the boards 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.
S-39
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
Funds shares trading at a price equal to their net asset value. Nevertheless, the fact that the
Funds 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 Funds total
managed assets which would likely have the effect of increasing the Funds 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 Funds Board of Trustees would likely consider all relevant factors, including the extent and
duration of the discount, the liquidity of the Funds 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 Funds 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.
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 the Funds securities. This
discussion only addresses certain 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,
regulated investment companies, insurance companies, brokers and dealers in
securities or foreign currencies, certain securities traders, 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 Statement of
Additional Information, 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.
Pursuant to U.S. Treasury Department
Circular 230, we are informing you that (1) this discussion is not intended to be used, was not written
to be used, and cannot be used, by any taxpayer for the purpose of avoiding penalties under the U.S.
federal tax laws, (2) this discussion was written by us in connection with the registration of our
securities and our promotion or marketing, and (3) each taxpayer should seek advice based on his, her
or its particular circumstances from an independent tax advisor.
Federal Income Taxation of the Fund
The Fund has elected to be treated, and intends 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
(determined without regard to the deduction for dividends paid) 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
S-40
other things, dividends, taxable interest, and the excess of any net short-term capital gains over net long-term capital losses,
less 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, if any, 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 a regular 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 Funds distributions, to the extent
derived from the Funds 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 under Section 243 of the Code, and noncorporate shareholders of
the Fund 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
December 31, 2010 under Section 1(h)(11) of the Code, as described below.
Under the Code, the Fund will be subject to a nondeductible 4% federal excise tax on its
undistributed ordinary income for a calendar year and its capital gains for the one-year period
generally ending on October 31 of such calendar 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 in an amount sufficient to avoid such tax and accordingly does not expect to be subject to this
excise tax.
In order to qualify as a regulated investment company under Subchapter M of the Code, the Fund
must, among other things, derive at least 90% of its gross income for each taxable year from
(i) dividends, interest, payments with respect to securities loans, gains from the sale or other
disposition of stock, securities or foreign currencies, or other income (including gains from
options, futures and forward contracts) derived with respect to its business of investing in such
stock, securities or currencies and (ii) net income derived from interests in certain publicly
traded partnerships that derive less than 90% of their gross income from the items described in (i)
above (each, a Qualified Publicly Traded Partnership) (the 90% income test). For purposes of
the 90% income test, the character of income earned by certain entities in which the Fund invests
that are not treated as corporations (e.g., partnerships other than Qualified Publicly Traded
Partnerships) for U.S. federal income tax purposes will generally pass through to the Fund.
Consequently, the Fund may be required to limit its equity
investments in certain such entities.
In addition to the 90% income test, the Fund must also diversify its holdings (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 Funds 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 Funds 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 (other than U.S. government securities or securities of other regulated
investment companies) of any one issuer or of two or more issuers controlled by the Fund and
engaged in the same, similar or related trades or businesses or in the securities of one or more
Qualified Publicly Traded Partnerships.
S-41
Foreign exchange gains and losses realized by the Fund in connection with certain transactions
involving foreign currency-denominated debt securities, certain options and futures contracts
relating to foreign currency, foreign currency forward contracts, foreign currencies, or payables
or receivables denominated in a foreign currency are subject to Section 988 of the Code, which
generally causes such gains and losses to be treated as ordinary income and losses and may affect
the amount, timing and character of distributions to shareholders.
If the Fund acquires any equity interest (generally including not only stock but also an
option to acquire stock such as is inherent in a convertible bond) in certain foreign corporations
that receive at least 75% of their annual gross income from passive sources (such as interest,
dividends, certain rents and royalties, or capital gains) or that hold at least 50% of their assets
in investments held for the production of 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 equity interests
in such companies, even if all income or gain actually received by the Fund is timely distributed
to its shareholders. These investments could also result in the
treatment as ordinary income of associated gains on the sale of the
investment. The Fund would not be able to pass through to its shareholders any
credit or deduction for such tax. Tax elections 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 (which would be subject to the distribution requirements described above) without
the concurrent receipt of cash. The Fund may limit and/or manage its holdings in passive foreign
investment companies to limit its U.S. federal income tax liability or maximize its return from
these investments.
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 investment company taxable 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.
The Fund may acquire market discount bonds.
A market discount bond is a security acquired in the secondary market at a price below its redemption
value (or its adjusted issue price if it is also an original issue discount bond). If the Fund invests
in a market discount bond, it will be required to treat any gain recognized on the disposition of such
market discount bond as ordinary income (instead of capital gain) to the extent of the accrued market
discount, unless the Fund elects to include the market discount in income as it accrues as discussed above.
Such market discount will not constitute qualified dividend income.
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. The U.S. federal income tax laws 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.
The Fund may engage in various transactions utilizing options, futures contracts, forward
contracts, hedge instruments, straddles, swaps and other similar transactions. Such transactions
may be subject to special provisions of the Code that, among other things, affect the character of
any income realized by the Fund from such investments, accelerate recognition of income to the
Fund, defer Fund losses, affect the holding period of the Funds securities, affect whether
distributions will be eligible for the dividends received deduction or be treated as qualified
dividend income and affect the determination
S-42
of whether capital gain and loss is characterized as
long-term or short-term capital gain or loss. These rules could therefore affect the character,
amount and timing of distributions to shareholders. These provisions may also require the Fund to
mark-to-market certain types of the positions in its portfolio (i.e., treat them as if they were
closed out), which may cause the Fund to recognize income without receiving cash with which to make
distributions in amounts necessary to satisfy the distribution requirements for avoiding U.S.
federal income and excise taxes. The Fund will monitor its transactions and will make the
appropriate entries in its books and records when it acquires an option, futures contract, forward
contract, hedge instrument, swap or other similar investment, and if the Fund deems it advisable,
will make appropriate elections in order to mitigate the effect of these rules, prevent
disqualification of the Fund as a regulated investment company and minimize the imposition of U.S.
federal income and excise taxes.
The Funds transactions in broad based equity index futures contracts, exchange traded options
on such indices and certain other futures contracts are generally considered Section 1256
contracts for federal income tax purposes. Any unrealized gains or losses on such Section 1256
contracts are treated as though they were realized at the end of each taxable year. The resulting
gain or loss is treated as sixty percent long-term capital gain or loss and forty percent
short-term capital gain or loss. Gain or loss recognized on actual sales of Section 1256 contracts
is treated in the same manner. As noted below, distributions of net short-term capital gain are
taxable to shareholders as ordinary income while distributions of net long-term capital gain are
taxable to shareholders as long-term capital gain, regardless of how long the shareholder has held
shares of the Fund.
The Funds entry into a short sale transaction, an option or certain other contracts could be
treated as the constructive sale of an appreciated financial position, causing the Fund to realize
gain, but not loss, on the position.
The Fund may invest in REITs that hold residual interests in real estate mortgage investment
conduits (REMICs). Under a notice issued by the IRS, a portion of the Funds income from a REIT
that is attributable to the REITs 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. This
notice also provides that excess inclusion income of a regulated investment company, such as
the Fund, will be allocated to shareholders of the regulated investment company in proportion to
the dividends received by such shareholders, with the same consequences as if the shareholders held
the related REMIC residual interest directly. In general, excess inclusion income allocated to
shareholders (i) cannot be offset by net operating losses (subject to a limited exception for
certain thrift institutions), (ii) will constitute unrelated business taxable income to entities
(including a qualified pension plan, an individual retirement account, a 401(k) plan, a Keogh plan
or other tax-exempt entity) subject to federal income 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 federal income 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
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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 pro rata
shares of qualified foreign taxes paid by the Fund, with the result
that shareholders will not be required to include such taxes in their gross incomes and will not be entitled to a tax deduction or credit for
such taxes on their own federal income tax returns.
Common Shares and Preferred Shares
Common Share Distributions. Unless a shareholder is ineligible to participate or elects
otherwise, all distributions on common shares will be automatically reinvested in additional common shares of the
Fund pursuant to the Automatic Dividend Reinvestment Plan (the
Dividend Reinvestment Plan). For U.S. federal income tax
purposes, dividends are generally taxable whether a shareholder takes them in cash or they are
reinvested pursuant to the Dividend Reinvestment Plan in additional shares of the Fund.
Distributions of investment company taxable income (determined without regard to the deduction
for dividends paid), which includes dividends, taxable interest, 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
Funds 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
under Section 1(h)(11) of the Code that applies to qualified dividend income received by noncorporate
shareholders. For taxable years beginning on or before December 31, 2010, qualified dividend income
received by noncorporate shareholders is taxed at rates equivalent to long-term capital gain tax
rates, which currently reach a maximum of 15%. Qualified dividend income generally includes
dividends from domestic corporations and dividends from foreign corporations that meet certain
specified criteria, although dividends paid by REITs will not generally be eligible for treatment 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 and other requirements with respect to 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 shareholders investment in the Fund for
the dividends received by the shareholder to be eligible for such treatment. 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 for taxable years beginning on or after December 31, 2010. Thereafter, unless Congress enacts
legislation providing otherwise, qualified dividend income will no
longer be taxed at the rates applicable to long-term capital gains, but rather will be taxed at
ordinary federal income tax rates, which reach a current maximum rate of 35%. Distributions 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. A distribution of an amount in excess of the Funds
current and accumulated earnings and profits, if any, will be treated by a shareholder as a
tax-free return of capital which is applied against and reduces the shareholders basis in his or
her shares. To the extent that the amount of any such distribution exceeds the shareholders basis
in his or her shares, the excess will be treated by the shareholder as gain from the sale or
exchange of shares. The U.S. federal income tax status of all distributions will be designated by
the Fund and reported to the shareholders annually.
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 federal income 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
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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 shareholders gross income and the federal income tax deemed paid by
the shareholder.
If a shareholders distributions are automatically reinvested pursuant to the Dividend Reinvestment Plan and the
plan agent invests the distribution in shares acquired on behalf of the shareholder in open-market
purchases, for U.S. federal income tax purposes, the shareholder will be treated as having received
a taxable distribution in the amount of the cash dividend that the shareholder would have received
if the shareholder had elected to receive cash. If a shareholders distributions are automatically
reinvested pursuant to the Dividend Reinvestment Plan and the plan agent invests the distribution in newly issued shares
of the Fund, the shareholder will be treated as receiving a taxable distribution equal to the fair
market value of the shares the shareholder receives.
At the time of an investors purchase of the Funds shares, a portion of the purchase price
may be attributable to realized or unrealized appreciation in the Funds portfolio or undistributed
taxable income of the Fund. Consequently, subsequent distributions by the Fund with respect to
these shares from such appreciation or income may be taxable to such investor even if the net asset
value of the investors shares is, as a result of the distributions, reduced below the investors
cost for such shares and the distributions economically represent a return of a portion of the
investment.
Any dividend declared by the Fund in October, November or December with a record date in such
a month and paid during the following January will be treated for U.S. federal income tax purposes
as paid by the Fund and received by shareholders on December 31 of the calendar year in which it is
declared.
Preferred Share Distributions. 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 for federal
income tax purposes, and thus distributions with respect to the preferred shares (other than
distributions in redemption of the preferred shares subject to Section 302(b) of the Code) will
generally constitute dividends to the extent of the Funds current or accumulated earnings and
profits, as calculated for U.S. federal income tax purposes. Except in the case of net capital
gain distributions, such dividends generally will be taxable at ordinary income tax rates to
holders of preferred shares but may qualify for the dividends received deduction available to
corporate shareholders under Section 243 of the Code and the reduced rates of federal income
taxation that apply to qualified dividend income received by noncorporate shareholders under
Section 1(h)(11) of the Code. Distributions designated by the Fund as net capital gain
distributions will be taxable as long-term capital gain regardless of the length of time a
shareholder has held shares of the Fund. Please see the discussion above on qualified dividend
income, dividends received deductions and net capital gain.
The character of the Funds income will not affect the amount of dividends to which the
holders of preferred shares are entitled to receive. Holders of 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 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 preferred shares as consisting
of particular types of income (e.g., net capital gain and ordinary income), in accordance with each
class proportionate share of the total dividends paid to both classes. Thus, each year the Fund
will designate dividends qualifying for the corporate dividends
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received deduction, qualified
dividend income, ordinary income and net capital gains in a manner that allocates such income
between the preferred shares and common shares in proportion to the total dividends made to each
class with respect to such taxable year, or otherwise as required by applicable law. In addition,
solely for the purpose of satisfying the 90% distribution requirement and the distribution requirement
for avoiding income taxes, certain distributions made after the close of a taxable year of the Fund may
be spilled back and treated as paid during such taxable year. In such case, shareholders will be
treated as having received such dividends in the taxable year in which the distribution was actually made.
The IRS has ruled privately that dividends paid following the close of the taxable year that are treated for
federal income tax purposes as derived from income from the prior year will be treated as dividends paid
in the prior year for purposes of determining the proportionate share of a particular type of income for
each class. Accordingly, the Fund intends to treat any such dividends that are paid following the close
of a taxable year as paid in the prior year for purposes of determining a class proportionate share of
a particular type of income. However, the private ruling is not binding on the IRS, and there can be no
assurance that the IRS will respect such treatment. Each
shareholder will be notified of the allocation within 60 days after the end of the year.
Although the Fund is required to distribute annually at least 90% of its investment company
taxable income (determined without regard to the deduction for dividends paid), the Fund is not
required to distribute net capital gains to the shareholders. The Fund may retain and reinvest
such gains and pay federal income taxes on such gains (the net undistributed capital gain). Please see the discussion above on undistributed capital gains.
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 or an opinion of counsel 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 preferred shares outstanding. Such
distribution will affect the tax character but not the amount of dividends to which holders of
preferred shares are entitled.
Although dividends
generally will be treated as distributed when paid, dividends declared in October, November or December with
a record date in such months, and paid in January of the following year, will be treated as having been
distributed by the Fund and received by the shareholders on December 31 of the year in which the dividend
was declared.
Earnings and profits are generally treated, for federal income tax purposes, as first being
used to pay distributions on preferred shares, and then to the extent remaining, if any, to pay
distributions on the common 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 shareholders
basis in the shares and, after the adjusted basis is reduced to zero, will be treated as capital
gain to a shareholder who holds such shares as a capital asset.
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 Funds
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
Funds qualification as a regulated investment company and/or might subject the Fund to a
nondeductible 4% federal excise tax. Upon any failure to meet the asset coverage requirements
imposed by the 1940 Act, the Fund may, in its sole discretion and to the extent permitted under the
1940 Act, purchase or redeem preferred shares in order to maintain or restore the requisite asset
coverage and avoid the adverse consequences to the Fund and its shareholders of failing to meet the
distribution requirements. There can be no assurance, however, that any such action would achieve
these objectives. The Fund will endeavor to avoid restrictions on its ability to distribute
dividends.
Sales of Fund Shares. Sales and other dispositions of the Funds shares are taxable events
for shareholders that are subject to federal income tax. Selling shareholders will generally
recognize gain or loss in an amount equal to the difference between the amount received for such
shares and their adjusted
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tax basis in the shares sold. If such shares are held as a capital asset
at the time of sale, the gain or loss will generally be a long-term
capital gain or loss if the shares have been held for more than one
year and, if not held for such period, a short-term capital gain or
loss. Similarly, a
redemption (including a redemption by the Fund resulting from liquidation of the Fund), if any, of
all of the shares (common and preferred) actually and constructively held by a shareholder
generally will give rise to capital gain or loss under Section 302(b) of the Code if the
shareholder does not own (and is not regarded under certain federal income tax law rules of
constructive ownership as owning) any common or preferred shares of
the Fund and provided that the
redemption proceeds do not represent declared but unpaid dividends. Other redemptions may also
give rise to capital gain or loss, if several conditions imposed by Section 302(b) of the Code are
satisfied.
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) or other
substantially identical stock or securities within a period of 61 days beginning 30 days before and
ending 30 days after a sale or other disposition of shares. In such a case, the disallowed portion
of any loss generally would be included in the U.S. federal income tax basis of the shares
acquired. Shareholders should consult their own tax advisors regarding their individual
circumstances to determine whether any particular transaction in the Funds shares is properly
treated as a sale for U.S. federal income tax purposes and the tax treatment of any gains or
losses recognized in such transactions.
Federal Income Tax Withholding. 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 Funds shares paid to shareholders who have not
complied with IRS regulations. 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 backup withhold if it receives notice from the IRS or a
broker that the number provided is incorrect or backup withholding is applicable.
Other Matters. Treasury regulations provide that if a shareholder recognizes a loss with
respect to shares of $2 million or more in a single taxable year (or $4 million or more in any
combination of taxable years) for a shareholder who is an individual, S corporation or trust or $10
million or more for a corporate shareholder in any single taxable year (or $20 million or more in
any 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 taxpayers 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.
The description of certain federal income 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 resident aliens or
U.S. corporations, partnerships, trusts or estates who are subject to U.S. federal income tax on a
net income basis). Investors other than U.S. persons, including non-resident alien individuals,
may be subject to different U.S. federal income tax treatment. With respect to such persons, the
Fund must generally withhold U.S. federal withholding tax at the rate of 30% (or, if the Fund
receives certain certifications
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from such non-U.S. shareholder, such lower rate as prescribed by an
applicable tax treaty) on amounts treated as ordinary dividends from the Fund. However, effective
for taxable years of the Fund beginning before January 1, 2008, the Fund will generally not be
required to withhold tax on any amounts paid to a non-U.S. person with respect to dividends
attributable to qualified short-term gain (i.e., the excess of net short-term capital gain over
net long-term capital loss) designated as such by the Fund and dividends attributable to certain
U.S. source interest income that would not be subject to federal withholding tax if earned directly
by a non-U.S. person, provided such amounts are properly designated by the Fund. SHAREHOLDERS
SHOULD CONSULT THEIR OWN TAX ADVISORS ON THESE MATTERS AND ON ANY SPECIFIC QUESTION OF U.S.
FEDERAL, STATE, LOCAL, FOREIGN AND OTHER APPLICABLE TAX LAWS BEFORE MAKING AN INVESTMENT IN THE
FUND.
Debt Securities
Under present law, it is anticipated that our debt securities will constitute indebtedness
for federal income tax purposes, which the discussion below assumes. We intend to treat all
payments made with respect to the debt securities consistent with this characterization.
Payments or accruals of interest on debt securities generally will be taxable to you as
ordinary interest income at the time such interest is received (actually or constructively) or
accrued, in accordance with your regular method of accounting for federal income tax purposes.
Initially, your tax basis in debt securities acquired generally will be equal to your cost to
acquire such debt securities. This basis will increase by the amounts, if any, that you include in
income under the rules governing market discount, and will decrease by the amount of any amortized
premium on such debt securities, as discussed below. When you sell or exchange any of your debt
securities, or if any of your debt securities are redeemed, you generally will recognize gain or
loss equal to the difference between the amount you realize on the transaction (less any accrued
and unpaid interest, which will be subject to federal income tax as interest in the manner described above) and
your tax basis in the debt securities relinquished.
Except as discussed below with respect to market discount, the gain or loss that you recognize
on the sale, exchange or redemption of any of your debt securities generally will be capital gain
or loss. Such gain or loss will generally be long-term capital gain or loss if the disposed debt
securities were held for more than one year and will be short-term capital gain or loss if the
disposed debt securities were held for one year or less. Net long-term capital gain recognized by
a noncorporate U.S. holder generally will be subject to federal income tax at a lower rate
(currently a maximum rate of 15%, although this rate will increase to
20% for taxable years beginning after December 31, 2010) than net
short-term capital gain or ordinary income (currently a maximum rate of 35%). For corporate
holders, capital gain is generally taxed for federal income tax
purposes at the same rate as ordinary income, that is, currently at
a maximum rate of 35%. A holders ability to deduct capital losses may be limited.
If you purchase debt securities at a cost greater than their stated principal amount, plus
accrued interest, you will be considered to have purchased the debt securities at a premium, and
you generally may elect to amortize this premium as an offset to interest income, using a constant
yield method, over the remaining term of the debt securities. If you make the election to amortize
the premium, it generally will apply to all debt instruments that you
hold at the beginning of the first taxable year to which the election
applies, as well as any debt instruments that you subsequently acquire. In addition, you may not
revoke the election without the consent of the IRS. If you elect to amortize the premium, you will
be required to reduce your tax basis in the debt securities by the amount of the premium amortized
during your holding period. If you do not elect to amortize premium, the amount of premium will be
included in your tax basis in the debt securities. Therefore, if you do not elect to amortize the
premium and you hold the debt securities to maturity, you generally will be required to treat the
premium as a capital loss when the debt securities are redeemed.
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If you purchase debt securities at a price that reflects a market discount, any principal
payments on, or any gain that you realize on the disposition of, the debt securities generally will
be treated as ordinary interest income to the extent of the market discount that accrued on the
debt securities during the time you held such debt securities. Market discount is defined under
the Code as, in general, the excess of the stated redemption price at maturity
over the purchase price of the debt security, except that if the market discount is less than 0.25%
of the stated redemption price at maturity multiplied by the number of complete years to maturity,
the market discount is considered to be zero. In addition, you may be required to defer the
deduction of all or a portion of any interest paid on any indebtedness that you incurred or
continued to purchase or carry the debt securities that were acquired at a market discount. In
general, market discount will be treated as accruing ratably over the term of the debt securities,
or, at your election, under a constant yield method.
You may elect to include market discount in gross income currently as it accrues (on either a
ratable or constant yield basis), in lieu of treating a portion of any gain realized on a sale of
the debt securities as ordinary income. If you elect to include market discount on a current
basis, the interest deduction deferral rule described above will not apply and you will increase
your basis in the debt security by the amount of market discount you include in gross income. If
you do make such an election, it will apply to all market discount debt instruments that you
acquire on or after the first day of the first taxable year to which the election applies. This
election may not be revoked without the consent of the IRS.
Information Reporting and Backup Withholding. In general, information reporting requirements
will apply to payments of principal, interest, and premium, if any, paid on debt securities and to
the proceeds of the sale of debt securities paid to U.S. holders other than certain exempt
recipients (such as certain corporations). Information reporting generally will apply to payments
of interest on the debt securities to non-U.S. Holders (as defined below) and the amount of tax, if
any, withheld with respect to such payments. Copies of the information returns reporting such
interest payments and any withholding may also be made available to the tax authorities in the
country in which the non-U.S. Holder resides under the provisions of an applicable income tax
treaty. In addition, for non-U.S. Holders, information reporting will apply to the proceeds of the
sale of debt securities within the United States or conducted through United States-related
financial intermediaries unless the certification requirements described below have been complied
with and the statement described below in Taxation of Non-U.S. Holders has been received (and the
payor does not have actual knowledge or reason to know that the holder is a United States person)
or the holder otherwise establishes an exemption.
We may be required to withhold, for U.S. federal income tax purposes, a portion of all
payments (including redemption proceeds) payable to holders of debt securities who fail to provide
us with their correct taxpayer identification number, who fail to make required certifications or
who have been notified by the IRS that they are subject to backup withholding (or if we have been
so notified). Certain corporate and other shareholders specified in the Code and
the regulations thereunder are exempt from backup withholding. Backup withholding is not an
additional tax. Any amounts withheld may be credited against the holders U.S. federal income tax
liability provided the appropriate information is furnished to the IRS. If you are a non-U.S.
Holder, you may have to comply with certification procedures to establish your non-U.S. status in
order to avoid backup withholding tax requirements. The certification procedures required to claim
the exemption from withholding tax on interest income described below will satisfy these
requirements.
Taxation of Non-U.S. Holders. If you are a non-resident alien individual or a foreign
corporation (a non-U.S. Holder), the payment of interest on the debt securities generally will be
considered portfolio interest and thus generally will be
exempt from U.S. federal
withholding tax. This
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exemption will apply to you provided that (1) interest paid on the debt
securities is not effectively connected with your conduct of a trade or business in the United
States, (2) you are not a bank whose receipt of interest on the debt securities is described in
Section 881(c)(3)(A) of the Code, (3) you do not actually or constructively own
10 percent or more of the combined voting power of all classes of our stock entitled to vote,
(4) you are not a controlled foreign corporation that is
related, directly or indirectly, to us
through stock ownership, and (5) you satisfy the certification requirements described below.
To satisfy the certification requirements, either (1) the holder of any debt securities must
certify, under penalties of perjury, that such holder is a non-U.S. person and must provide such
owners name, address and taxpayer identification number, if any, on IRS Form W-8BEN, or
(2) a securities clearing organization, bank or other financial institution that holds
customer securities in the ordinary course of its trade or business and holds the debt securities
on behalf of the holder thereof must certify, under penalties of perjury, that it has received a
valid and properly executed IRS Form W-8BEN from the beneficial holder and comply with certain
other requirements. Special certification rules apply for debt securities held by a foreign
partnership and other intermediaries.
Interest on debt securities received by a non-U.S. Holder that is not excluded from U.S.
federal withholding tax under the portfolio interest exemption as described above generally will be
subject to withholding at a 30% rate, except where (1) the interest is effectively connected with the conduct of a U.S. trade or business, in which case the interest will be subject to U.S.
income tax on a net basis as applicable to U.S. holders generally or (2) a non-U.S. Holder can claim the benefits of an
applicable income tax treaty to reduce or eliminate such withholding
tax. To claim the benefit of an income tax treaty or to claim an exemption from
withholding because the interest is effectively connected with a U.S. trade or business,
a non-U.S. Holder must timely provide the appropriate, properly executed IRS forms.
These forms may be required to be periodically updated. Also, a non-U.S. Holder who
is claiming the benefits of an income tax treaty may be required to obtain a U.S.
taxpayer identification number and to provide certain documentary evidence issued by
foreign governmental authorities to prove residence in the foreign country.
Any capital gain that a non-U.S. Holder realizes on a sale, exchange or other disposition of
debt securities generally will be exempt from United States federal income tax, including
withholding tax. This exemption will not apply to you if your gain is effectively connected with
your conduct of a trade or business in the U.S. or you are an individual holder and are present in
the U.S. for 183 days or more in the taxable year of the disposition and either your gain is
attributable to an office or other fixed place of business that you maintain in the U.S. or you
have a tax home in the United States.
CUSTODIAN, TRANSFER AGENT, DIVIDEND DISBURSING AGENT AND REGISTRAR
The Funds 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 disbursing agent and
registrar for the Funds shares is also The Bank of New York.
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Deloitte
& Touche LLP, 111 S. Wacker Drive, Chicago, Illinois 60606, serves as our independent registered public accounting firm. Deloitte
& Touche LLP provides
audit and audit-related services, and consultation in
connection with the review of our filing with the SEC.
ADDITIONAL INFORMATION
A Registration Statement on Form N-2, including amendments thereto, relating to
the securities
offered hereby, has been filed by the Fund with the SEC, Washington, D.C. The prospectus,
prospectus supplement 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
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respect to the Fund and the securities offered hereby, reference is made
to the Registration Statement. Statements contained in the prospectus, prospectus supplement 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 SECs principal office in Washington, D.C., and copies of all or
any part thereof may be obtained from the SEC upon the payment of certain fees prescribed by the
SEC.
ADDITIONAL INFORMATION CONCERNING THE AGREEMENT
AND DECLARATION OF TRUST
The Funds Agreement and Declaration of Trust provides that the Funds Trustees shall have the
power to cause each shareholder to pay directly, in advance or arrears, for charges of the Funds
custodian or transfer, shareholder servicing or similar agent, an amount fixed from time to time by
the Trustees, by setting off such charges due from such shareholder from declared but unpaid
dividends owed such shareholder and/or by reducing the number of shares in the account of such
shareholder by that number of full and/or fractional shares which represents the outstanding amount
of such charges due from such shareholder. The Fund has no present intention of relying on this
provision of the Agreement and Declaration of Trust and would only do so if consistent with the
1940 Act or the rules and regulations or interpretations of the Commission thereunder.
S-51
Report of Independent Registered Public Accounting Firm
To the Board of Trustees and Shareholders of CALAMOS Strategic Total Return Fund
We have audited the accompanying statement of assets and liabilities, including the schedule of
investments, of Calamos Strategic Total Return Fund (the Fund) as of October 31, 2007, the
related statement of operations for the year then ended, the statements of changes in net assets
for each of the two years then ended, and the financial highlights for each of the three years then
ended and for the period from March 26, 2004 (commencement of operations) through October 31, 2004.
These financial statements and financial highlights are the responsibility of the Funds
management. Our responsibility is to express an opinion on these financial statements and financial
highlights based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements and financial highlights are free of
material misstatement. The Fund is not required to have, nor were we engaged to perform, an audit
of its internal control over financial reporting. Our audits included consideration of internal
control over financial reporting as a basis for designing audit procedures that are appropriate in
the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the
Funds internal control over financial reporting. Accordingly, we express no such opinion. An audit
also includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation. Our procedures
included confirmation of securities owned as of October 31, 2007, by correspondence with the Funds
custodian and brokers; where replies were not received from brokers, we performed other auditing
procedures. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to above present fairly,
in all material respects, the financial position of the Fund as of October 31, 2007, the results of
its operations for the year then ended, the changes in its net assets for each of the two years
then ended, and the financial highlights for each of the three years then ended and for the period
from March 26, 2004 (commencement of operations) through October 31, 2004, in conformity with
accounting principles generally accepted in the United States of America.
Chicago, Illinois
December 14, 2007
F-1
Statement of Assets and Liabilities
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October 31, 2007 |
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ASSETS |
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Investments, at value* (cost $3,633,366,816) |
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$ |
4,012,939,878 |
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Investments in affiliated fund (cost $85,775,441) |
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85,775,441 |
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Cash with custodian (interest bearing) |
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1,871 |
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Restricted cash for open options (interest bearing) |
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150,000 |
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Foreign currency (cost $26) |
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26 |
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Accrued interest and dividends receivable |
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34,760,770 |
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Unrealized appreciation on interest rate swaps |
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607,322 |
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Prepaid expenses |
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85,462 |
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Other assets |
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84,753 |
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Total assets |
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4,134,405,523 |
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LIABILITIES |
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Cash collateral for securities on loan |
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399,080,000 |
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Payables: |
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Investments purchased |
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35,735,670 |
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Affiliates: |
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Investment advisory fees |
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3,101,565 |
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Financial accounting fees |
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35,344 |
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Deferred compensation to Trustees |
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84,753 |
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Trustee fees and officer compensation |
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2,540 |
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Accounts payable and accrued liabilities |
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499,908 |
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Total liabilities |
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438,539,780 |
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PREFERRED SHARES |
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$25,000 liquidation value per share applicable to 43,200 shares, including dividends payable |
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1,080,853,711 |
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NET ASSETS APPLICABLE TO COMMON SHAREHOLDERS |
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$ |
2,615,012,032 |
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COMPOSITION OF NET ASSETS APPLICABLE TO COMMON SHAREHOLDERS |
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Common stock, no par value, unlimited shares authorized 154,514,000 shares issued and outstanding |
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$ |
2,200,733,859 |
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Undistributed net Investment income (loss) |
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(5,921,060 |
) |
Accumulated net realized gain (loss) on investments, written options, foreign currency transactions, and interest rate swaps |
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39,936,381 |
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Net unrealized appreciation (depreciation) on investments, written options, foreign currency translations,and interest rate
swaps |
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380,262,852 |
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NET ASSETS APPLICABLE TO COMMON SHAREHOLDERS |
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$ |
2,615,012,032 |
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Net asset value per common share based on 154,514,000 shares issued and outstanding |
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$ |
16.92 |
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* |
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Including securities on loan with a value of $391,072,384. |
See accompanying Notes to Financial Statements.
F-2
Statement of Operations
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Year Ended October 31, 2007 |
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INVESTMENT INCOME |
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Interest |
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$ |
97,513,547 |
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Dividends (net of foreign taxes withheld of $293,568) |
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73,967,913 |
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Dividends from affiliates |
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1,201,461 |
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Securities lending income |
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777,613 |
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Total investment income |
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173,460,534 |
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EXPENSES |
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Investment advisory fees |
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35,897,921 |
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Financial accounting fees |
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406,251 |
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Auction agent and rating agency fees |
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2,768,892 |
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Printing and mailing fees |
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397,857 |
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Audit and legal fees |
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213,430 |
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Accounting fees |
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189,728 |
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Registration fees |
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136,765 |
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Trustees fees and officer compensation |
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101,035 |
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Custodian fees |
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117,244 |
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Transfer agent fees |
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33,124 |
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Investor support services |
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145,385 |
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Other |
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170,987 |
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Total expenses |
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40,578,619 |
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Less expense reductions |
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(100,277 |
) |
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Net expenses |
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40,478,342 |
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NET INVESTMENT INCOME(LOSS) |
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132,982,192 |
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REALIZED AND UNREALIZED GAIN(LOSS) FROM INVESTMENTS,
WRITTEN OPTIONS, FOREIGN CURRENCY AND INTEREST RATE SWAPS |
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Net realized gain (loss) from: |
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Investments |
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132,614,714 |
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Written options |
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(3,608,492 |
) |
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Foreign currency transactions |
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511,288 |
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Interest rate swaps |
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3,796,913 |
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Change in net unrealized appreciation/depreciation on: |
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Investments |
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163,383,536 |
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Foreign currency translations |
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60,298 |
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Interest rate swaps |
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(4,101,678 |
) |
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NET REALIZED AND UNREALIZED GAIN (LOSS) FROM INVESTMENTS,
WRITTEN OPTIONS, FOREIGN CURRENCY AND INTEREST RATE SWAPS |
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292,656,579 |
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NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS |
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425,638,771 |
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DISTRIBUTIONS TO PREFERRED SHAREHOLDERS FROM |
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Net investment income |
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(49,014,744 |
) |
Capital gains |
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(8,462,889 |
) |
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NET INCREASE (DECREASE) IN NET ASSETS APPLICABLE TO COMMON
SHAREHOLDERS RESULTING FROM OPERATIONS |
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$ |
368,161,138 |
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See accompanying Notes to Financial Statements.
F-3
Statements of Changes in Net Assets
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Year Ended October 31, |
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2007 |
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2006 |
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OPERATIONS |
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Net investment income (loss) |
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$ |
132,982,192 |
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$ |
137,603,943 |
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Net realized gain (loss) from investments, written options, foreign
currency transactions and interest rate swaps |
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133,314,423 |
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|
82,747,989 |
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Change in net unrealized appreciation/depreciation on investments, written
options, foreign currency translations and
interest rate swaps |
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159,342,156 |
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204,396,753 |
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Distributions to preferred shareholders from: |
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Net investment income |
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(49,014,744 |
) |
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(50,773,343 |
) |
Capital gains |
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(8,462,889 |
) |
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Net increase (decrease) in net assets applicable to common shareholders
resulting from operations |
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368,161,138 |
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373,975,342 |
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DISTRIBUTIONS TO COMMON SHAREHOLDERS FROM |
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Net investment income |
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(156,383,628 |
) |
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(118,970,833 |
) |
Capital gains |
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(24,397,762 |
) |
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(58,720,277 |
) |
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Net decrease in net assets from distributions to common shareholders |
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