AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 3, 2003
1933 ACT FILE NO. 333-
1940 ACT FILE NO. 811-21319
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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-2
(CHECK APPROPRIATE BOXES)
[X] REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
[ ] PRE-EFFECTIVE AMENDMENT NO.
[ ] POST-EFFECTIVE AMENDMENT NO.
AND/OR
[ ] REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF
1940
[X] AMENDMENT NO. 3
CALAMOS CONVERTIBLE AND HIGH INCOME FUND
Exact Name of Registrant as Specified in Charter
1111 East Warrenville Road, Naperville, Illinois 60563-1493
Address of Principal Executive Offices (Number, Street, City, State, ZIP Code)
(630) 245-7200
Registrant's Telephone Number, including Area Code
James S. Hamman, Jr.,
Secretary
Calamos Asset Management, Inc.
1111 East Warrenville Road
Naperville, Illinois 60563-1493
Name and Address (Number, Street, City, State, ZIP Code) of Agent for Service
COPIES OF COMMUNICATIONS TO:
David A. Sturms Cameron S. Avery Cynthia G. Cobden
Vedder, Price, Kaufman & Bell, Boyd & Lloyd, LLC Simpson Thacher & Bartlett LLP
Kammholz 70 West Madison Street, Suite 425 Lexington Avenue
222 North LaSalle Street 3300 New York, New York 10017
Chicago, Illinois 60601-1003 Chicago, Illinois 60602-4207
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING: As soon as practicable after
the effective date of this Registration Statement
If any of the securities being registered on this Form will be offered on a
delayed or continuous basis in reliance on Rule 415 under the Securities Act of
1933, as amended (the "Securities Act"), other than securities offered in
connection with a dividend or interest reinvestment plan, check the following
box. [ ]
It is proposed that this filing will become effective (check appropriate
box)
[ ] when declared effective pursuant to section 8(c).
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
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PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF SECURITIES AMOUNT BEING OFFERING PRICE AGGREGATE REGISTRATION
BEING REGISTERED REGISTERED PER UNIT OFFERING PRICE(1) FEE(2)
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Preferred Shares (no par
value)..................... 40 shares $25,000 $1,000,000 $80.90
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(1) Estimated solely for the purpose of calculating the registration fee.
(2) 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 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON
SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY
DETERMINE.
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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 , 2003
PROSPECTUS
$
CALAMOS CONVERTIBLE AND HIGH INCOME FUND
PREFERRED SHARES
SHARES, SERIES
SHARES, SERIES
SHARES, SERIES
SHARES, SERIES
SHARES, SERIES
SHARES, SERIES
LIQUIDATION PREFERENCE $25,000 PER SHARE
----------------------
Calamos Convertible and High Income Fund (the "Fund") is a recently
organized, diversified, closed-end management investment company. The Fund's
investment objective is to provide total return through a combination of capital
appreciation and current income. Under normal circumstances, the Fund will
invest at least 80% of its managed assets in a diversified portfolio of
convertible securities and below investment grade (high yield/high risk) non-
convertible debt securities. The portion of the Fund's assets invested in
convertible securities and below investment grade (high yield/high risk)
non-convertible debt securities will vary from time to time consistent with the
Fund's investment objective, changes in equity prices and changes in interest
rates and other economic and market factors, although, under normal
circumstances, the Fund will invest at least 20% of its managed assets in
convertible securities and at least 20% of its managed assets in below
investment grade (high yield/high risk) non-convertible debt securities (so long
as the combined total equals at least 80% of the Fund's managed assets).
"Managed assets" means the total assets of the Fund (including any assets
attributable to any leverage that may be outstanding) minus the sum of accrued
liabilities (other than debt representing financial leverage). For this purpose,
the liquidation preference on any preferred shares will not constitute a
liability. Below investment grade (high yield/high risk) securities are rated Ba
or lower by Moody's Investors Service, Inc. ("Moody's") or BB or lower by
Standard & Poor's Corporation, a division of The McGraw-Hill Companies
("Standard & Poor's") or are unrated securities of comparable quality as
determined by the Fund's investment adviser. Below investment grade securities
are commonly referred to as "junk bonds" and are considered speculative with
respect to the issuer's capacity to pay interest and repay principal. They
involve greater risk of loss, are subject to greater price volatility and are
less liquid, especially during periods of economic uncertainty or change, than
higher rated securities. There can be no assurance that the Fund will achieve
its investment objective.
----------------------
INVESTING IN THE FUND'S PREFERRED SHARES INVOLVES RISKS THAT ARE DESCRIBED
IN "RISK FACTORS" BEGINNING ON PAGE OF THIS PROSPECTUS.
Neither the Securities and Exchange Commission nor any State Securities
Commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
----------------------
PER SHARE TOTAL
--------- -----
Public Offering Price....................................... $25,000
Sales Load..................................................
Proceeds, before expenses, to the Fund(1)...................
(1) Total expenses of issuance and distribution are estimated to be
$ .
The underwriters are offering the Preferred Shares subject to various
conditions. The Preferred Shares will be ready for delivery in book-entry form
only, through the facilities of The Depository Trust Company on or about
, 2003.
----------------------
----------------------
, 2003.
(continued from previous page)
You should read this prospectus, which contains important information about
the Fund, before deciding whether to invest in the Preferred Shares and retain
it for future reference. A statement of additional information, dated
, 2003, containing additional information about the Fund, has been
filed with the Securities and Exchange 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 of this prospectus, by calling 1-800-582-6959 or by writing to the Fund.
You can review and copy documents the Fund has filed at the Securities and
Exchange Commission's Public Reference Room in Washington, D.C. Call
1-202-942-8090 for information. The Commission charges a fee for copies. You can
get the same information free from the Commission's EDGAR database on the
Internet (http://www.sec.gov). You may also e-mail requests for these documents
to publicinfo@sec.gov or make a request in writing to the Commission's Public
Reference Section, Washington, D.C. 20549-0102.
The Fund is offering shares of Series Preferred Shares,
shares of Series Preferred Shares, shares of Series
Preferred Shares, shares of Series Preferred Shares,
shares of Series Preferred Shares and shares of Series Preferred
Shares. The shares are referred to in this prospectus as "Preferred Shares." The
Preferred Shares have a liquidation preference of $25,000 per share, plus any
accumulated, unpaid dividends. The Preferred Shares also have priority over the
Fund's common shares as to distribution of assets as described in this
prospectus. It is a condition of closing this offering that the Preferred Shares
be offered with a rating of "Aaa" from Moody's and "AAA" from Fitch Ratings
("Fitch").
The dividend rate for the initial dividend rate period will be % for
Series , % for Series , % for Series , % for Series
, % for Series and % for Series . The initial rate period is
from the date of issuance through, , 2003 for Series , ,
2003 for Series , , 2003 for Series , , 2003 for Series
, , 2003 for Series and , 2003 for Series .
Series , , , and will each have an initial rate period of
days. Series will have an initial rate period of days. For subsequent rate
periods, Preferred Shares pay dividends based on a rate set at auction, usually
held weekly in the case of Series , , , and or every 28 days in the
case of Series . Dividends on the Preferred Shares will be cumulative.
Prospective purchasers should carefully review the auction procedures described
in this prospectus and should note: (1) a buy order (called a "bid order") or
sell order is a commitment to buy or sell Preferred Shares based on the results
of an auction; (2) auctions will be conducted by telephone; and (3) purchases
and sales will be settled on the next business day after the auction.
The Preferred Shares are redeemable, in whole or in part, at the option of
the Fund on the second business day prior to any date dividends are paid on the
Preferred Shares, and will be subject to mandatory redemption in certain
circumstances at a redemption price of $25,000 per share, plus accumulated,
unpaid dividends to the date of redemption, plus a premium in certain
circumstances.
The Preferred Shares will not be listed on an exchange. You may only buy or
sell Preferred Shares through an order placed at an auction with or through a
broker-dealer that has entered into an agreement with the auction agent and the
Trust or in a secondary market maintained by certain broker-dealers. These
broker-dealers are not required to maintain this market, and it may not provide
you with liquidity.
The Preferred Shares do not represent a deposit or obligation of, and are
not guaranteed or endorsed by, any bank or other insured depository institution
and are not federally insured by the Federal Deposit Insurance Corporation, the
Federal Reserve Board or any other government agency.
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED OR INCORPORATED BY
REFERENCE IN THIS PROSPECTUS. WE HAVE NOT, AND THE UNDERWRITERS HAVE NOT,
AUTHORIZED ANY OTHER PERSON TO PROVIDE YOU WITH DIFFERENT INFORMATION. IF ANYONE
PROVIDES YOU WITH DIFFERENT OR INCONSISTENT INFORMATION, YOU SHOULD NOT RELY ON
IT. WE ARE NOT, AND THE UNDERWRITERS ARE NOT, MAKING AN OFFER TO SELL THESE
SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED. YOU
SHOULD ASSUME THAT THE INFORMATION APPEARING IN THIS PROSPECTUS IS ACCURATE ONLY
AS OF THE DATE OF THIS PROSPECTUS.
------------------
TABLE OF CONTENTS
PAGE
----
Prospectus Summary.......................................... 1
Financial Highlights (unaudited)............................ 11
The Fund.................................................... 12
Use of Proceeds............................................. 12
Capitalization (unaudited).................................. 13
Portfolio Composition....................................... 13
The Fund's Investments...................................... 14
Leverage.................................................... 18
Interest Rate Transactions.................................. 19
Risk Factors................................................ 21
Management of the Fund...................................... 28
Description of Preferred Shares............................. 31
The Auction................................................. 39
Description of Borrowings................................... 42
Description of Common Shares................................ 43
U.S. Federal Income Tax Matters............................. 43
Certain Provisions of the Agreement and Declaration of Trust
and By-Laws............................................... 46
Custodian, Auction Agent, Transfer Agent, Dividend Paying
Agent and Registrar....................................... 47
Underwriting................................................ 48
Legal Opinions.............................................. 49
Available Information....................................... 49
Table of Contents for Statement of Additional Information... 50
i
PROSPECTUS SUMMARY
This is only a summary. This summary may not contain all of the information
that you should consider before investing in the Fund's Preferred Shares. You
should review the more detailed information contained in this prospectus and in
the Statement of Additional Information, especially the information set forth
under the heading "Risk Factors." Capitalized terms used but not defined in this
prospectus shall have the meanings given to such terms in the Statement of
Preferences of Preferred Shares, attached as Appendix A to the Statement of
Additional Information.
THE FUND...................... Calamos Convertible and High Income Fund is a
recently organized, diversified, closed-end
management investment company. Throughout the
prospectus, we refer to Calamos Convertible and
High Income Fund as the "Fund" or as "we,"
"us," or "our." See "The Fund." The Fund's
common shares are traded on the New York Stock
Exchange under the symbol "CHY." As of May 30,
2003, the Fund had 52,200,000 common shares
outstanding and net assets of $ . The
Fund's principal offices are located at 1111
East Warrenville Road, Naperville, Illinois
60563.
THE OFFERING.................. We are offering Series Preferred
Shares, Series Preferred Shares,
Series Preferred Shares,
Series Preferred Shares, Series
Preferred Shares and Series
Preferred Shares, each at a purchase price of
$25,000 per share. The Preferred Shares are
offered through a group of underwriters led by
.
The Preferred Shares entitle their holders to
receive cash dividends at an annual rate that
may vary for the successive dividend periods
for the Preferred Shares. In general, except as
described under "-- Dividends and Rate Periods"
below and "Description of Preferred
Shares -- Dividends and Rate Periods," the
dividend period for the Series , , ,
and Preferred Shares will each be seven days
and for the Series Preferred Shares the
dividend period will be 28 days. The auction
agent will determine the dividend rate for a
particular period by an auction conducted on
the business day immediately prior to the start
of that rate period. See "The Auction."
Generally, investors in Preferred Shares will
not receive certificates representing ownership
of their shares. The securities depository (The
Depository Trust Company or any successor) or
its nominee for the account of the investor's
broker-dealer will maintain record ownership of
Preferred Shares in book-entry form. An
investor's broker-dealer, in turn, will
maintain records of that investor's beneficial
ownership of Preferred Shares.
An investor should consider whether to invest
in a particular series based on the series'
rate of return, the investor's time horizon for
investment, and the investor's liquidity
preference. Investors can choose between six
tranches.
INVESTMENT OBJECTIVE.......... The Fund's investment objective is to provide
total return, through a combination of capital
appreciation and current
1
income. There can be no assurance that the Fund
will achieve its investment objective. See "The
Fund's Investments -- Investment Objective."
INVESTMENT POLICIES........... Primary Investments. Under normal
circumstances, the Fund will invest at least
80% of its managed assets in a diversified
portfolio of convertible securities and below
investment grade (high yield/high risk)
non-convertible debt securities. The portion of
the Fund's assets invested in convertible
securities and below investment grade (high
yield/high risk) non-convertible debt
securities will vary from time to time
consistent with the Fund's investment
objective, changes in equity prices and changes
in interest rates and other economic and market
factors, although, under normal circumstances,
the Fund will invest at least 20% of its
managed assets in convertible securities and at
least 20% of its managed assets in below
investment grade (high yield/high risk)
non-convertible debt securities (so long as the
combined total equals at least 80% of the
Fund's managed assets). The Fund invests in
securities with a broad range of maturities.
The average term to maturity of the Fund's
securities typically will range from five to
ten years. See "The Fund's
Investment -- Principal Investment Strategies."
Convertible Securities. Investment in
convertible securities forms an important part
of the Fund's investment strategies. Under
normal circumstances, the Fund will invest at
least 20% of its managed assets in convertible
securities. A convertible security is a debt
security or preferred stock that is
exchangeable for an equity security of the
issuer at a predetermined price (the
"conversion price"). Depending upon the
relationship of the conversion price to the
market value of the underlying security, a
convertible security may trade more like an
equity security than a debt instrument. The
Fund may invest in convertible securities of
any rating. See "The Fund's
Investments -- Principal Investment
Strategies -- Convertible Securities."
Synthetic Convertible Securities. Calamos
Asset Management, Inc. ("Calamos"), the Fund's
investment adviser, may also create a
"synthetic" convertible security by combining
separate securities that possess the two
principal characteristics of a true convertible
security, i.e., a fixed-income security
("fixed-income component") and the right to
acquire an equity security ("convertible
component"). The fixed-income component is
achieved by investing in non-convertible,
fixed-income securities such as bonds,
preferred stocks and money market instruments.
The convertible component is achieved by
investing in warrants or options to buy common
stock at a certain exercise price, or options
on a stock index. The Fund may also purchase
synthetic securities created by other parties,
typically investment banks, including
convertible structured notes. Different
companies may issue the fixed-income and
convertible components which may be purchased
separately, and at different times. The Fund's
holdings of synthetic convertible securities
are considered convertible securities for
purposes of the Fund's policy to invest at
2
least 20% of its managed assets in convertible
securities and 80% of its managed assets in a
diversified portfolio of convertible securities
and below investment grade (high yield/high
risk) non-convertible debt securities. See "The
Fund's Investments -- Principal Investment
Strategies -- Synthetic Convertible
Securities."
High Yield Securities. Investment in high
yield securities forms an important part of the
Fund's investment strategies. The Fund will
invest in high yield securities for either
current income or capital appreciation or both.
Under normal circumstances, the Fund will
invest at least 20% of its managed assets in
high yield non-convertible debt securities.
These securities are rated Ba or lower by
Moody's or BB or lower by Standard & Poor's or
are unrated securities of comparable quality as
determined by Calamos, the Fund's investment
adviser. The Fund may invest in high yield
securities of any rating. The Fund may, but
currently does not intend to, invest up to 5%
of its total assets in distressed securities
that are in default or the issuers of which are
in bankruptcy. Non-convertible debt securities
rated below investment grade are commonly
referred to as "junk bonds" and are considered
speculative with respect to the issuer's
capacity to pay interest and repay principal.
They involve greater risk of loss, are subject
to greater price volatility and are less
liquid, especially during periods of economic
uncertainty or change, than higher rated
securities. See "The Fund's
Investments -- Principal Investment
Strategies -- High Yield Securities."
Foreign Issuers. Although the Fund primarily
invests in securities of U.S. issuers, the Fund
may invest up to 25% of its managed assets in
securities of foreign issuers, including debt
and equity securities of corporate issuers and
debt securities of government issuers in
developed and emerging markets. The Fund may
invest up to 15% of its managed assets in
securities of foreign issuers in emerging
markets. A foreign issuer is a company
organized under the laws of a foreign country
that is principally traded in the financial
markets of a foreign country. For purposes of
these percentage limitations, foreign
securities do not include securities
represented by American Depository Receipts
("ADRs") or securities guaranteed by a U.S.
person. See "The Fund's
Investments -- Principal Investment
Strategies -- Foreign Securities."
Rule 144A Securities. The Fund may invest
without limit in securities that have not been
registered for public sale, but that are
eligible for purchase and sale by certain
qualified institutional buyers ("Rule 144A
Securities"). Calamos, under the supervision of
the Board of Trustees, will determine whether
securities purchased under Rule 144A are
illiquid (that is, not readily marketable) and
thus subject to the Fund's limit on investing
no more than 15% of its managed assets in
illiquid securities. See "The Fund's
Investments -- Principal Investment
Strategies -- Rule 144A Securities."
3
Other Securities. The Fund may invest in other
securities of various types. Normally, the Fund
invests substantially all of its assets to meet
its investment objective. For temporary
defensive purposes, the Fund may depart from
its principal investment strategies and invest
part or all of its assets in securities with
remaining maturities of less than one year,
cash equivalents, or may hold cash. During such
periods, the Fund may not be able to achieve
its investment objective. See "The Fund's
Investments -- Principal Investment
Strategies."
USE OF LEVERAGE BY THE FUND... The Fund may, but is not required to, use
financial leverage for investment purposes. In
addition to issuing Preferred Shares, the Fund
may borrow money or issue debt securities such
as commercial paper or notes. Throughout the
prospectus, borrowing money and issuing debt
securities sometimes may be collectively
referred to as "Borrowings." Any Borrowings
will have seniority over Preferred Shares and
payments to holders of Preferred Shares in
liquidation or otherwise will be subject to the
prior payment of any Borrowings. As a
non-fundamental policy, financial leverage (the
total of Preferred Shares or other preferred
shares and any Borrowings) may not exceed 38%
of the Fund's total assets. Since Calamos's fee
is based upon a percentage of the Fund's
managed assets, which include assets
attributable to any outstanding leverage, the
investment management fee will be higher if the
Fund is leveraged and Calamos will have an
incentive to be more aggressive and leverage
the Fund. Calamos intends only to leverage the
Fund when it believes that the potential return
on such additional investments is likely to
exceed the costs incurred in connection with
the borrowing. See "Leverage."
INTEREST RATE TRANSACTIONS.... In connection with the Fund's use of leverage
through the sale of Preferred Shares or
Borrowings, the Fund, if market conditions are
deemed favorable, likely will enter into
interest rate swap or cap transactions to
attempt to protect itself from increasing
dividend or interest expenses on its leverage.
The use of interest rate swaps and caps is a
highly specialized activity that involves
investment techniques and risks different from
those associated with ordinary portfolio
security transactions.
In an interest rate swap, the Fund would agree
to pay to the other party to the interest rate
swap (which is known as the "counterparty") a
fixed rate payment in exchange for the
counterparty agreeing to pay to the Fund a
variable rate payment obligation on Preferred
Shares or any variable rate Borrowings. The
payment obligations would be based on the
notional amount of the swap. The Fund's payment
obligations under the swap are general
unsecured obligations of the Fund and are
ranked senior to distributions under the common
shares and the Preferred Shares.
In an interest rate cap, the Fund would pay a
premium to the counterparty to the interest
rate cap and, to the extent that a specified
variable rate index exceeds a predetermined
fixed rate, would receive from the counterparty
payments of the difference based on the
notional amount of such cap. If the
counterparty to
4
an interest rate swap or cap defaults, the Fund
would be obligated to make the payments that it
had intended to avoid. Depending on the state
of interest rates in general, this default
could negatively impact the Fund's ability to
make dividend payments on the Preferred Shares.
In addition, at the time an interest rate swap
or cap transaction reaches its scheduled
termination date, there is a risk that the Fund
would not be able to obtain a replacement
transaction or that the terms of the
replacement would not be as favorable as on the
expiring transaction. If this occurs, it could
have a negative impact on the Fund's ability to
make dividend payments on the Preferred Shares
or interest payments on Borrowings. If the Fund
fails to meet an asset coverage ratio required
by law or if the Fund does not meet a rating
agency guideline in a timely manner, the Fund
may be required to redeem some or all of the
Preferred Shares. See "Redemption" below.
Similarly, the Fund could be required to prepay
the principal amount of Borrowings, if any.
Such redemption or prepayment would likely
result in the Fund seeking to terminate early
all or a portion of any swap or cap
transaction. Early termination of a swap could
result in a termination payment by or to the
Fund. A termination payment by the Fund would
result in a reduction in common share net
earnings. Early termination of a cap could
result in a termination payment to the Fund.
The Fund intends to maintain in a segregated
account with its custodian, cash or liquid
securities having a value at least equal to the
Fund's net payment obligations under any swap
transaction, marked to market daily. Under
certain circumstances, the Fund may be required
to pledge the assets in such segregated account
to the counter-party. The Fund will not enter
into interest rate swap or cap transactions
having a notional amount that exceeds the
outstanding amount of the Fund's leverage. See
"Interest Rate Transactions" for additional
information.
INVESTMENT ADVISER............ Calamos Asset Management, Inc. ("Calamos") is
the Fund's investment adviser. Calamos is
responsible on a day-to-day basis for
investment of the Fund's portfolio in
accordance with its investment objective and
policies. Calamos makes all investment
decisions for the Fund and places purchase and
sale orders for the Fund's portfolio
securities. As of , 2003, Calamos
managed approximately $ billion in assets
of individuals and institutions. Calamos is a
wholly-owned subsidiary of Calamos Holdings,
Inc. ("Holdings"). Holdings is controlled by
John P. Calamos, who has been engaged in the
investment advisory business since 1977.
PORTFOLIO MANAGER............. John P. Calamos and Nick P. Calamos are
responsible for managing the portfolio of the
Fund. During the past five years, John P.
Calamos has been president of Calamos and
Calamos Financial Services, Inc. ("CFS"), an
affiliate of Calamos, and Nick P. Calamos has
been senior executive vice president of Calamos
and CFS.
5
FUND ACCOUNTANT............... U.S. Bancorp Fund Services, LLC, will provide
fund accounting and financial accounting
services to the Fund.
RISK FACTORS SUMMARY.......... Risk is inherent in all investing. Therefore,
before investing in the Preferred Shares you
should consider certain risks carefully. The
primary risks of investing in the Preferred
Shares are:
- the Fund will not be permitted to declare
dividends or other distributions with respect
to your Preferred Shares or redeem your
Preferred Shares unless the Fund meets
certain asset coverage requirements;
- if you try to sell your Preferred Shares
between auctions you may not be able to sell
any or all of your shares or you may not be
able to sell them for $25,000 per share or
$25,000 per share plus accumulated dividends.
If the Fund has designated a special rate
period, changes in interest rates could
affect the price you would receive if you
sold your shares in the secondary market. You
may transfer shares outside of auction only
to or through a broker-dealer that has
entered into an agreement with the auction
agent and the Fund or other person as the
Fund permits.
- if an auction fails you may not be able to
sell some or all of your shares;
- because of the nature of the market for
Preferred Shares, you may receive less than
the price you paid for your shares if you
sell them outside of the auction, especially
when market interest rates are rising;
- a rating agency could downgrade the rating
assigned to the Preferred Shares, which could
affect liquidity;
- the Fund may be forced to redeem your shares
at a time when it is not advantageous to meet
regulatory or rating agency requirements or
may voluntarily redeem your shares in certain
circumstances;
- in certain circumstances, the Fund may not
earn sufficient income from its investments
to pay dividends;
- the Preferred Shares will be junior to any
Borrowings;
- any Borrowing may constitute a substantial
lien and burden on the Preferred Shares by
reason of its priority claim against the
income of the Fund and against the net assets
of the Fund in liquidation;
- if the Fund leverages through Borrowings, the
Fund may not be permitted to declare
dividends or other distributions with respect
to the Preferred Shares or purchase Preferred
Shares unless at the time thereof the Fund
meets certain asset coverage requirements and
the payments of principal and of interest on
any such Borrowings are not in default.
- the value of the Fund's investment portfolio
may decline, reducing the asset coverage for
the Preferred Shares. See "Risk
Factors -- General Risks of Investing in the
Funds" for
6
a discussion of the general risks of the
Fund's investment portfolio.
- certain events, such as terrorist attacks
(including the terrorist attacks in the
United States on September 11, 2001), war and
other geopolitical events have led to
increased short-term market volatility and
may have long-term effects on U.S. and world
economies and markets. The Fund cannot
predict the effects of similar events in the
future on the U.S. economy. Similar
disruptions of the financial markets could
impact interest rates, auctions, secondary
trading, ratings, credit risk, inflation and
other factors relating to securities or other
financial interests.
For additional information about the risks of
investing in Preferred Shares and in the Fund,
see "Risk Factors."
TRADING MARKET................ The Preferred Shares will not be listed on an
exchange. Instead, you may buy or sell the
Preferred Shares at an auction that normally is
held every seven days for the Series , ,
, and and every 28 days for the Series
by submitting orders to a broker-dealer that
has entered into an agreement with the auction
agent and the Trust (a "Broker-Dealer"), or to
a broker-dealer that has entered into a
separate agreement with a Broker-Dealer. In
addition to the auctions, Broker-Dealers and
other broker-dealers may maintain a secondary
trading market in Preferred Shares outside of
auctions, but may discontinue this activity at
any time. There is no assurance that a
secondary market will be created or, if
created, that it will provide shareholders with
liquidity or that the trading price in any
secondary market would be $25,000. You may
transfer shares outside of auctions only to or
through a Broker-Dealer or a broker-dealer that
has entered into a separate agreement with a
Broker-Dealer.
The table below shows the first auction date
for each series of Preferred Shares and the day
of the week on which each subsequent auction,
if any, will normally be held for each series
of Preferred Shares. The first auction date for
each series of Preferred Shares will be the
business day before the dividend payment date
for the initial rate period for that series of
Preferred Shares. The start date for subsequent
rate periods will normally be the business day
following the auction date unless the
then-current rate period is a special rate
period or the first day of the subsequent rate
period is not a business day.
FIRST AUCTION SUBSEQUENT
SERIES DATE AUCTION DAY
------ ------------- ------------
DIVIDENDS AND RATE PERIODS.... The table below shows the initial dividend
rates, the dividend payment dates and the day
of the week upon which subsequent dividends, if
any, will be paid for each series and number of
days
7
for the initial rate periods on each series of
Preferred Shares offered in this prospectus.
For subsequent rate periods, each series of
Preferred Shares will pay dividends based on a
rate set at auctions, normally held every seven
days in the case of Series , , , and
and every 28 days in the case of Series . In
most instances, dividends are payable on the
first business day following the end of the
rate period. The rate set at auction will not
exceed the maximum applicable rate. See
"Description of Preferred Shares -- Dividends
and Rate Periods."
DIVIDEND NUMBER OF
DATE OF PAYMENT DAYS OF
INITIAL ACCUMULATION DATE FOR SUBSEQUENT INITIAL
DIVIDEND AT INITIAL INITIAL RATE DIVIDEND RATE
SERIES RATE RATE PERIOD PAYMENT DAY PERIOD
------ -------- ------------ ------------ ----------- ---------
Dividends on the Preferred Shares will be
cumulative from the date the shares are first
issued and will be paid out of legally
available funds.
The Fund may, subject to certain conditions,
designate special rate periods of more than
seven or 28 days. A requested special rate
period will not be effective unless sufficient
clearing bids were made in the auction
immediately preceding the special rate period.
In addition, full cumulative dividends, any
amounts due with respect to mandatory
redemptions and any additional dividends
payable prior to such date must be paid in
full. In addition, the Fund does not intend to
designate a special rate period if such
designation would adversely affect Moody's or
Fitch's or any substitute rating agency's
then-current rating on the Preferred Shares.
The dividend payment date for special rate
periods will be set out in the notice
designating a special rate period. See
"Description of Preferred Shares -- Dividends
and Rate Periods -- Designation of Special Rate
Periods" and "The Auction."
RATINGS....................... The Fund will issue Preferred Shares only if
such shares have received a credit quality
rating of "AAA" from Fitch and "Aaa" from
Moody's. These ratings are an assessment of the
capacity and willingness of an issuer to pay
preferred stock obligations. The ratings are
not a recommendation to purchase, hold or sell
those shares inasmuch as the ratings do not
comment as to market price or suitability for a
particular investor. The ratings described
above also do not address the likelihood that
an owner of Preferred Shares will be able to
sell such shares in an auction or otherwise.
The ratings are based on current information
furnished to Fitch and Moody's by the Fund and
Calamos and information obtained from other
sources. The ratings may be changed, suspended
or withdrawn in the rating agencies' discretion
as a result of changes in, or the
unavailability of, such information. See
"Description of Preferred Shares -- Rate Agency
Guidelines."
8
ASSET MAINTENANCE............. Under the Fund's Statement of Preferences for
Preferred Shares (the "Statement"), which
establishes and fixes the rights and
preferences of the shares of each series of
Preferred Shares, the Fund must maintain:
- asset coverage of the Preferred Shares as
required by the rating agency or agencies
rating the Preferred Shares, and
- asset coverage of at least 200% with respect
to senior securities that are stock,
including the Preferred Shares.
In the event that the Fund does not maintain or
cure these coverage tests, some or all of the
Preferred Shares will be subject to mandatory
redemption. See "Description of Preferred
Shares -- Redemption."
Based on the composition of the Fund's
portfolio as of , 2003, the asset
coverage of the Preferred Shares as measured
pursuant to the 1940 Act would be approximately
% if the Fund were to issue all of the
Preferred Shares offered in this Prospectus,
representing approximately % of the Fund's
managed assets.
RESTRICTIONS ON DIVIDENDS,
REDEMPTION AND OTHER
PAYMENTS.................... If the Fund issues any Borrowings that
constitute senior securities representing
indebtedness (as defined in the 1940 Act),
under the 1940 Act, the Fund would not be
permitted to declare any dividend on Preferred
Shares unless, after giving effect to such
dividend, asset coverage with respect to the
Fund's Borrowings that constitute senior
securities representing indebtedness, if any,
is at least 200%. In addition, the Fund would
not be permitted to declare any distribution on
or purchase or redeem Preferred Shares unless,
after giving effect to such distribution,
purchase or redemption, asset coverage with
respect to the Fund's Borrowings that
constitute senior securities representing
indebtedness, if any, is at least 300%.
Dividends or other distributions on or
redemptions or purchases of Preferred Shares
may also be prohibited (i) at any time when an
event of default under any Borrowings has
occurred and is continuing; or (ii) after
giving effect to such 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. See "Description of
Preferred Shares -- Restrictions on Dividend,
Redemption and Other Payments."
REDEMPTION.................... The Fund may be required to redeem shares if,
for example, the Fund does not meet an asset
coverage ratio required by law or to correct a
failure to meet a rating agency guideline in a
timely manner. The Fund voluntarily may redeem
Preferred Shares under certain conditions. See
"Description of Preferred Shares -- Redemption"
and "Description of Preferred Shares -- Rating
Agency Guidelines."
9
LIQUIDATION PREFERENCE........ The liquidation preference for shares of each
series of Preferred Shares will be $25,000 per
share plus accumulated but unpaid dividends, if
any, whether or not declared. See "Description
of Preferred Shares -- Liquidation."
VOTING RIGHTS................. Except as otherwise indicated, holders of
Preferred Shares have one vote per share. The
holders of preferred shares, including
Preferred Shares, voting as a separate class,
have the right to elect at least two trustees
of the Fund at all times. The Board of Trustees
will determine to which class or classes the
Trustees elected by the holders of Preferred
Shares will be assigned, and the holders of the
Preferred Shares will only be entitled to elect
the Trustees so designated as being elected by
the holders of the Preferred Shares, when their
term will have expired and such Trustees
appointed by the holders of Preferred Shares
will be allocated as evenly as possible among
the classes of Trustees. Holders of Preferred
Shares also have the right to elect a majority
of the trustees in the event that two years'
dividends on the preferred shares are unpaid.
In each case, the remaining trustees will be
elected by holders of common shares and
preferred shares, including Preferred Shares,
voting together as a single class. The holders
of preferred shares, including Preferred
Shares, will vote as a separate class or
classes on certain other matters as required
under the Fund's Agreement and Declaration of
Trust, the Investment Company Act of 1940 (the
"Investment Company Act") and Delaware law. See
"Description of Preferred Shares -- Voting
Rights," and "Certain Provisions in the
Agreement and Declaration of Trust and By-
Laws."
FEDERAL INCOME TAXES.......... Distributions with respect to the Preferred
Shares will generally be subject to U.S.
federal income taxation. In addition, also as a
result of the Fund's anticipated portfolio
holdings, corporate investors in the Preferred
Shares may only be entitled to the dividends
received deduction on a portion of the Fund's
qualifying distributions, if any. The Internal
Revenue Service ("IRS") currently requires that
a regulated investment company, which has two
or more classes of stock, allocate to each such
class proportionate amounts of each type of its
income (such as ordinary income and capital
gain) based upon the percentage of total
dividends distributed to each class for the tax
year. Accordingly, the Fund intends each year
to allocate ordinary income dividends and
capital gain dividends between its common
shares and the Preferred Shares in proportion
to the total dividends paid to each class
during or with respect to such year. See "U.S.
Federal Income Tax Matters."
CUSTODIAN, AUCTION AGENT,
TRANSFER AGENT, DIVIDEND
PAYING AGENT AND
REGISTRAR................... The Bank of New York serves as custodian of the
Fund's securities and cash. The Bank of New
York also serves as auction agent with respect
to the Preferred Shares, and transfer agent,
dividend paying agent and registrar for the
Fund's common shares and Preferred Shares.
10
FINANCIAL HIGHLIGHTS
(UNAUDITED)
Information contained in the table below shows the unaudited operating
performance of the Fund from the commencement of the Fund's investment
operations on , 2003 through , 2003. Since the Fund was
recently organized and commenced investment operations on , 2003, the
table covers approximately month(s) of operations, during which a substantial
portion of the Fund's portfolio was held in temporary investments pending
investment in securities that meet the Fund's investment objectives and
policies. Accordingly, the information presented may not provide a meaningful
picture of the Fund's future operating performance.
FOR THE PERIOD
, 2003
THROUGH
, 2003
--------------
Per Common Share Operating Performance:
Net asset value, beginning of period........................ (a)
Net investment income(b)..................................
Net realized and unrealized gain (loss) on investments....
Net increase from investment operations.....................
Net asset value, end of period..............................
Market value, end of period.................................
Total Investment Return(c):
Market value..............................................
Net asset value...........................................
Ratios To Average Net Assets Of Common Shareholders(d):
Net expenses..............................................
Net investment income.....................................
Gross expenses prior to management fee waiver by
advisor................................................
Supplemental Data:
Average net assets of common shareholders (000).............
Portfolio turnover..........................................
Net assets of common shareholders, end of period (000)......
---------------
(a) Net of sales load of $ on initial shares issued.
(b) Based on average shares outstanding.
(c) 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 Fund's
dividend reinvestment plan. Total return is not annualized for periods less
than one year. Brokerage commissions are not reflected.
(d) Annualized.
The information above represents the unaudited operation performance for a
common share outstanding, total investment return, ratios to average net assets
and other supplemental data for the periods indicated. This information has been
determined based upon financial information provided in the financial statements
and market value data for the Fund's common shares.
11
THE FUND
Calamos Convertible and High Income Fund is a recently organized,
diversified, closed-end management investment company. The Fund was organized
under the laws of the state of Delaware on March 12, 2003, and has registered
under the 1940 Act. On May 30, 2003, the Fund issued an aggregate of 52,200,000
common shares of beneficial interest, no par value, pursuant to the initial
public offering and commenced its investment operations. The Fund's common
shares are traded on the New York Stock Exchange under the symbol "CHY." The
Fund's principal office is located at 1111 East Warrenville Road, Naperville,
Illinois 60563-1493, and its telephone number is 1-800-582-6959.
The following provides information about the Fund's authorized and
outstanding shares as of , 2003.
AMOUNT AMOUNT HELD BY THE AMOUNT
TITLE OF CLASS AUTHORIZED FUND OR FOR ITS ACCOUNT OUTSTANDING
-------------- ---------- ----------------------- -----------
Common...................................
Preferred................................
Series ................................
Series ................................
Series ................................
Series ................................
Series ................................
Series ................................
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 $ . The Fund
will invest the net proceeds of the offering in accordance with the Fund's
investment objective and policies as stated below. It is presently anticipated
that the Fund will be able to invest substantially all of the net proceeds in
securities that meet these investment objectives and policies within 3 months
after completion of this offering. Pending such investment, the Fund anticipates
that all or a portion of the proceeds will be invested in U.S. government
securities or high grade, short-term money market instruments. If necessary, the
Fund may also purchase, as temporary investments, securities of other open- or
closed-end investment companies that invest primarily in the types of securities
in which the Fund may invest directly. See "The Fund's Investments."
12
CAPITALIZATION
(UNAUDITED)
The following table sets forth the capitalization of the Fund as of
, 2003, and as adjusted, to give effect to the issuance of all the
Preferred Shares offered hereby (including estimated offering expenses and sales
load of $ ).
ACTUAL AS ADJUSTED
------------ ------------
Preferred Shares, no par value per share, $25,000 stated
value per share, at liquidation value; unlimited shares
authorized (no shares issued and shares issued
as adjusted, respectively)............................. $ $
============ ============
COMMON SHAREHOLDERS' EQUITY:
Common shares, no par value per share; unlimited shares
authorized, shares outstanding*................ $ $
Undistributed net investment income....................
Accumulated net realized gain (loss) from
investments.........................................
Net unrealized appreciation (depreciation) of
investments.........................................
------------ ------------
Net assets applicable to common shares................. $ $
============ ============
---------------
* None of these outstanding shares are held by or for the account of the Fund.
PORTFOLIO COMPOSITION
As of , 2003, approximately % of the market value of the
Fund's portfolio was invested in convertible securities and high yield debt
securities and approximately % of the market value of the Fund's portfolio
was invested in short-term investment grade debt securities. The following table
sets forth certain information with respect to the composition of the Fund's
investment portfolio as of , 2003, based on the highest rating
assigned each investment by either Moody's or S&P.
VALUE
CREDIT RATING (000) PERCENT
------------- ------------ -------
Aaa/AAA.....................................................
Aa/AA.......................................................
A/A.........................................................
Baa/BBB.....................................................
Ba/BB.......................................................
B/B.........................................................
Caa/CCC.....................................................
Unrated+....................................................
Short-Term..................................................
Total.....................................................
---------------
+ Refers to securities that have not been rated by Moody's or S&P.
13
THE FUND'S INVESTMENTS
INVESTMENT OBJECTIVE
The Fund's investment objective is to provide total return, through a
combination of capital appreciation and current income. The Fund's investment
objective may be changed by the Board of Trustees without a shareholder vote.
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 at least 80% of its
managed assets in a diversified portfolio of convertible securities and below
investment grade (high yield/high risk) non-convertible debt securities. This is
a non-fundamental policy and may be changed by the Board of Trustees of the Fund
provided that shareholders are provided with at least 60 days' prior written
notice of any change as required by the rules under the 1940 Act. The portion of
the Fund's assets invested in convertible securities and below investment grade
(high yield/high risk) non-convertible debt securities will vary from time to
time consistent with the Fund's investment objective, changes in equity prices
and changes in interest rates and other economic and market factors, although,
under normal circumstances, the Fund will invest at least 20% of its managed
assets in convertible securities and at least 20% of its managed assets in below
investment grade (high yield/high risk) non-convertible debt securities (so long
as the combined total equals at least 80% of the Fund's managed assets). The
Fund invests in securities with a broad range of maturities. The average term to
maturity of the Fund's securities typically will range from five to ten years.
We start from a universe of primarily convertible and high yield
non-convertible debt securities, and perform fundamental research to assess
credit. We filter out securities with high probability of bankruptcy, declining
credits, or distressed credits. We also screen issues based on equity
characteristics of the security, such as intrinsic/economic business value, cash
flow generation, and sufficient access to capital. We then ensure there is
sufficient return potential, and assess relative risk/reward. Finally, we
perform top-down portfolio construction by actively managing the security mix,
overlay macro/industry themes, and diversify by sector and industry.
CONVERTIBLE SECURITIES. Investment in convertible securities forms an
important part of the Fund's investment strategies. Under normal circumstances,
the Fund will invest at least 20% of its managed assets in convertible
securities. A convertible security is a debt security or preferred stock that is
exchangeable for an equity security of the 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.
SYNTHETIC CONVERTIBLE SECURITIES. Calamos may also create a "synthetic"
convertible security by combining separate securities that possess the two
principal characteristics of a true convertible security, i.e., a fixed-income
security ("fixed-income component") and the right to acquire an equity security
("convertible component"). The fixed-income component is achieved by investing
in non-convertible, fixed-income securities such as bonds, preferred stocks and
money market instruments. The convertible component is achieved by investing in
warrants or options to buy common stock at a certain exercise price, or options
on a stock index. Different companies may issue the fixed-income and convertible
components, which may be purchased separately and at different times. The Fund
may also purchase synthetic 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. The Fund's holdings of synthetic convertible securities are
considered convertible securities for purposes of the Fund's policy to invest at
least 20% of its managed
14
assets in convertible securities and 80% of its managed assets in a diversified
portfolio of convertible securities and below investment grade (high yield/high
risk) non-convertible debt securities.
HIGH YIELD SECURITIES. Investment in high yield non-convertible debt
securities forms an important part of the Fund's investment strategies. The Fund
will invest in high yield securities for either current income or capital
appreciation or both. Under normal circumstances, the Fund will invest at least
20% of its managed assets in high yield non-convertible debt securities. The
high yield securities in which the Fund invests are rated Ba or lower by Moody's
or BB or lower by Standard & Poor's or are unrated but determined by Calamos to
be of comparable quality. The Fund may invest in high yield securities of any
rating. The Fund may, but currently does not intend to, invest up to 5% of its
total assets in distressed securities that are in default or the issuers of
which are in bankruptcy. Non-convertible debt securities rated below investment
grade are commonly referred to as "junk bonds" and are considered speculative
with respect to the issuer's capacity to pay interest and repay principal. Below
investment grade non-convertible debt securities involve greater risk of loss,
are subject to greater price volatility and are less liquid, especially during
periods of economic uncertainty or change, than higher rated debt securities.
OTHER INCOME SECURITIES. The Fund may also invest in investment grade
income securities. The Fund's investments in investment grade income securities
may have fixed or variable principal payments and all types of interest rate and
dividend payment and reset terms, including fixed rate, adjustable rate, zero
coupon, contingent, deferred, payment in kind and auction rate features.
PREFERRED SHARES. The Fund may invest in preferred shares. The preferred
shares in which the Fund typically will invest will be convertible securities.
Preferred shares are equity securities, but they have many characteristics of
fixed income securities, such as a fixed dividend payment rate and/or a
liquidity preference over the issuer's common shares. However, because preferred
shares are equity securities, they may be more susceptible to risks
traditionally associated with equity investments than the Fund's fixed income
securities.
FOREIGN SECURITIES. Although the Fund primarily invests in securities of
U.S. issuers, the Fund may invest up to 25% of its managed assets in securities
of foreign issuers, including debt and equity securities of corporate issuers
and debt securities of government issuers in developed and emerging markets. The
Fund may invest up to 15% of its managed assets in securities of foreign issuers
in emerging markets. A foreign issuer is a company organized under the laws of a
foreign country that is principally traded in the financial markets of a foreign
country. For purposes of these percentage limitations, foreign securities do not
include securities represented by American Depository Receipts ("ADRs") or
securities guaranteed by a U.S. person.
RULE 144A SECURITIES. The Fund may invest without limit in securities that
have not been registered for public sale, but that are eligible for purchase and
sale by certain qualified institutional buyers ("Rule 144A Securities").
Calamos, under the supervision of the Board of Trustees, will consider whether
securities purchased under Rule 144A are illiquid and thus subject to the Fund's
limit of investing no more than 15% of its managed assets in illiquid
securities. A determination of whether a Rule 144A security is liquid or not is
a question of fact. In making this determination, Calamos will consider the
trading markets for the specific security, taking into account the unregistered
nature of a Rule 144A security. In addition, Calamos could consider the (1)
frequency of trades and quotes, (2) number of dealers and potential purchasers,
(3) dealer undertakings to make a market and (4) nature of a security and of
marketplace trades (e.g., the time needed to dispose of the security, the method
of soliciting offers and the mechanics of transfer). The liquidity of Rule 144A
securities will be monitored and, if as a result of changed conditions, it is
determined that a Rule 144A security is no longer liquid, the Fund's holdings of
illiquid securities would be reviewed to determine what, if any, steps are
required to assure that the Fund does not invest more than 15% of its assets in
illiquid securities. Investing in Rule 144A securities could have the effect of
increasing the amount of the portfolio's assets invested in illiquid securities
if qualified institutional buyers are unwilling to purchase such securities.
REITS. The Fund may invest in real estate investment trusts ("REITs").
REITs primarily invest in income producing real estate or real estate related
loans or interests. REITs are generally classified as
15
equity REITs, mortgage REITs or a combination of equity and mortgage REITs.
Equity REITs invest the majority of their assets directly in real property and
derive income primarily from the collection of rents. Equity REITs can also
realize capital gains by selling properties that have appreciated in value.
Mortgage REITs invest the majority of their assets in real estate mortgages and
derive income from the collection of interest payments. REITs are not taxed on
income distributed to shareholders; provided, they comply with the applicable
requirements of the Internal Revenue Code of 1986, as amended (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.
U.S. GOVERNMENT SECURITIES. U.S. government securities in which the Fund
invests include debt obligations of varying maturities issued by the U.S.
Treasury or issued or guaranteed by an agency or instrumentality of the U.S.
government, including the Federal Housing Administration, Federal Financing
Bank, Farmers Home Administration, Export-Import Bank of the United States,
Small Business Administration, Government National Mortgage Association, General
Services Administration, Central Bank for Cooperatives, Federal Farm Credit
Banks, Federal Home Loan Banks, Federal Home Loan Mortgage Corporation, Federal
National Mortgage Association ("FNMA"), Maritime Administration, Tennessee
Valley Authority, District of Columbia Armory Board, Student Loan Marketing
Association, Resolution Fund Corporation and various institutions that
previously were or currently are part of the Farm Credit System (which has been
undergoing reorganization since 1987). Some U.S. government securities, such as
U.S. Treasury bills, Treasury notes and Treasury bonds, which differ only in
their interest rates, maturities and times of issuance, are supported by the
full faith and credit of the United States. Others are supported by: (i) the
right of the issuer to borrow from the U.S. Treasury, such as securities of the
Federal Home Loan Banks; (ii) the discretionary authority of the U.S. government
to purchase the agency's obligations, such as securities of the FNMA; or (iii)
only the credit of the issuer. No assurance can be given that the U.S.
government will provide financial support in the future to U.S. government
agencies, authorities or instrumentalities that are not supported by the full
faith and credit of the United States. Securities guaranteed as to principal and
interest by the U.S. government, its agencies, authorities or instrumentalities
include: (i) securities for which the payment of principal and interest is
backed by an irrevocable letter of credit issued by the U.S. government or any
of its agencies, authorities or instrumentalities; and (ii) participations in
loans made to non-U.S. governments or other entities that are so guaranteed. The
secondary market for certain of these participations is limited and, therefore,
may be regarded as illiquid. U.S. government securities include STRIPS and
CUBES, which are issued by the U.S. Treasury as component parts of U.S. Treasury
bonds and represent scheduled interest and principal payments on the bonds.
ZERO COUPON SECURITIES. The securities in which the Fund invests may
include zero coupon securities, which are debt obligations that are issued or
purchased at a significant discount from face value. The discount approximates
the total amount of interest the security will accrue and compound over the
period until maturity or the particular interest payment date at a rate of
interest reflecting the market rate of the security at the time of issuance.
Zero coupon securities do not require the periodic payment of interest. These
investments benefit the issuer by mitigating its need for cash to meet debt
service, but generally require a higher rate of return to attract investors who
are willing to defer receipt of cash. These investments may experience greater
volatility in market value than U.S. government securities that make regular
payments of interest. The Fund accrues income on these investments for tax and
accounting purposes, which is distributable to shareholders and which, because
no cash is received at the time of accrual, may require the liquidation of other
portfolio securities to satisfy the Fund's distribution obligations, in which
case the Fund will forgo the purchase of additional income producing assets with
these funds. 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.
INVESTMENTS IN EQUITY SECURITIES. Consistent with its objective, the Fund
may invest in equity securities. Equity securities, such as common stock,
generally represent an ownership interest in a
16
company. Although equity securities have historically generated higher average
returns than fixed income securities, equity securities have also experienced
significantly more volatility in those returns. An adverse event, such as an
unfavorable earnings report, may depress the value of a particular equity
security held by the Fund. Also, the prices of equity securities, particularly
common stocks, are sensitive to general movements in the stock market. A drop in
the stock market may depress the price of equity securities held by the Fund.
OTHER INVESTMENT COMPANIES. The Fund may invest in the securities of other
investment companies to the extent that such investments are consistent with the
Fund's investment objective and policies and are permissible under the 1940 Act.
Under the 1940 Act, the Fund may not acquire the securities of other domestic or
non-U.S. investment companies if, as a result, (1) more than 10% of the Fund's
total assets would be invested in securities of other investment companies, (2)
such purchase would result in more than 3% of the total outstanding voting
securities of any one investment company being held by the Fund, or (3) more
than 5% of the Fund's total assets would be invested in any one investment
company. These limitations do not apply to the purchase of shares of any
investment company in connection with a merger, consolidation, reorganization or
acquisition of substantially all the assets of another investment company.
The Fund, as a holder of the securities of other investment companies, will
bear its prorata portion of the other investment companies' expenses, including
advisory fees. These expenses are in addition to the direct expenses of the
Fund's own operations.
TEMPORARY DEFENSIVE INVESTMENTS. Under unusual market or economic
conditions or for temporary defensive purposes, the Fund may invest up to 100%
of its total assets in securities issued or guaranteed by the U.S. government or
its instrumentalities or agencies, certificates of deposit, bankers' acceptances
and other bank obligations, commercial paper rated in the highest category by a
nationally recognized statistical rating organization or other fixed income
securities deemed by Calamos to be consistent with a defensive posture, or may
hold cash. The yield on such securities may be lower than the yield on lower
rated fixed income securities.
REPURCHASE AGREEMENTS. The Fund may enter into repurchase agreements with
broker-dealers, member banks of the Federal Reserve System and other financial
institutions. Repurchase agreements are arrangements under which the Fund
purchases securities and the seller agrees to repurchase the securities within a
specific time and at a specific price. The repurchase price is generally higher
than the Fund's purchase price, with the difference being income to the Fund.
The counterparty's obligations under the repurchase agreement are collateralized
with U.S. Treasury and/or agency obligations with a market value of not less
than 100% of the obligations, valued daily. Collateral is held by the Fund's
custodian in a segregated, safekeeping account for the benefit of the Fund.
Repurchase agreements afford the Fund an opportunity to earn income on
temporarily available cash at low risk. In the event of commencement of
bankruptcy or insolvency proceedings with respect to the seller of the security
before repurchase of the security under a repurchase agreement, the Fund may
encounter delay and incur costs before being able to sell the security. Such a
delay may involve loss of interest or a decline in price of the security. If the
court characterizes the transaction as a loan and the Fund has not perfected a
security interest in the security, the Fund may be required to return the
security to the seller's estate and be treated as an unsecured creditor of the
seller. As an unsecured creditor, the Fund would be at risk of losing some or
all of the principal and interest involved in the transaction.
LENDING OF PORTFOLIO SECURITIES. The Fund may lend portfolio securities to
registered broker-dealers or other institutional investors deemed by Calamos to
be of good standing under agreements which require that the loans be secured
continuously by collateral in cash, cash equivalents or U.S. Treasury bills
maintained on a current basis at an amount at least equal to the market value of
the securities loaned. The Fund continues to receive the equivalent of the
interest or dividends paid by the issuer on the securities loaned as well as the
benefit of an increase and the detriment of any decrease in the market value of
the securities loaned and would also receive compensation based on investment of
the collateral. The Fund would not, however, have the right to vote any
securities having voting rights during the existence of the
17
loan, but would call the loan in anticipation of an important vote to be taken
among holders of the securities or of the giving or withholding of consent on a
material matter affecting the investment.
As with other extensions of credit, there are risks of delay in recovery or
even loss of rights in the collateral should the borrower of the securities fail
financially. At no time would the value of the securities loaned exceed 33 1/3%
of the value of the Fund's total assets.
PORTFOLIO TURNOVER. It is the policy of the Fund not to engage in trading
for short-term profits although portfolio turnover rate is not considered a
limiting factor in the execution of investment decisions for the Fund.
LEVERAGE
The Fund may issue preferred shares, including Preferred Shares, or borrow
or issue short-term debt securities to increase its assets available for
investment. The Fund is authorized to issue preferred shares, borrow or issue
debt obligations. The Preferred Shares will have a liquidation preference of
$25,000 per share plus an amount equal to accumulated but unpaid dividends. As a
non-fundamental policy, such preferred shares, including Preferred Shares, or
borrowings may not exceed 38% of the Fund's total assets. However, the Board of
Trustees reserves the right to issue preferred shares or borrow to the extent
permitted by the 1940 Act. Before issuing any additional preferred shares to
increase its assets available for investment, the Fund must have received
confirmation from Moody's and Fitch or any substitute rating agency that the
proposed issuance will not adversely affect such rating agency's then-current
rating on the Preferred Shares. The Fund generally will not issue preferred
shares or borrow unless Calamos expects that the Fund will achieve a greater
return on such borrowed funds than the additional costs the Fund incurs as a
result of such borrowing. The Fund also may borrow money as a temporary measure
for extraordinary or emergency purposes, including the payment of dividends and
the settlement of securities transactions which otherwise might require untimely
dispositions of the Fund's holdings. When the Fund leverages its assets, the
fees paid to Calamos for investment management services will be higher than if
the Fund did not borrow because Calamos's fees are calculated based on the
Fund's managed assets, which include the proceeds of the issuance of preferred
shares or any outstanding borrowings. Consequently, the Fund and Calamos may
have differing interests in determining whether to leverage the Fund's assets.
The Fund's use of leverage is premised upon the expectation that the Fund's
preferred share dividends or borrowing cost will be lower than the return the
Fund achieves on its investments with the proceeds of the issuance of preferred
shares or borrowing. Such difference in return may result from the Fund's higher
credit rating or the short-term nature of its borrowing compared to the
long-term nature of its investments. Since the total assets of the Fund
(including the assets obtained from leverage) will be invested in the higher
yielding portfolio investments or portfolio investments with the potential for
capital appreciation, the holders of common shares will be the beneficiaries of
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 or the Fund otherwise incurs
losses on its investments, the Fund's net asset value attributable to its common
shares will reflect the decline in the value of portfolio holdings resulting
therefrom.
To the extent the income or capital appreciation derived from securities
purchased with funds received from leverage exceeds the cost of leverage, the
Fund's return to common shareholders will be greater than if leverage had not
been used. Conversely, if the income or capital appreciation from the securities
purchased with such funds is not sufficient to cover the cost of leverage or if
the Fund incurs capital losses, the return of the Fund to common shareholders
will be less than if leverage had not been used. Calamos may determine to
maintain the Fund's leveraged position if it expects that the long-term benefits
to the Fund's common shareholders of maintaining the leveraged position will
outweigh the current reduced return. Capital raised through the issuance of
preferred shares or 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 Fund also may be required to maintain minimum average balances in
connection
18
with borrowings or to pay a commitment or other fee to maintain a line of
credit; either of these requirements would increase the cost of borrowing over
the stated interest rate.
Under the 1940 Act, the Fund is not permitted to issue preferred shares
unless immediately after such issuance the net asset value of the Fund's
portfolio is at least 200% of the liquidation value of the outstanding preferred
shares (i.e., such liquidation value may not exceed 50% of the value of the
Fund's total assets). In addition, the Fund is not permitted to declare any cash
dividend or other distribution on its common shares unless, at the time of such
declaration, the net asset value of the Fund's portfolio (determined after
deducting the amount of such dividend or distribution) is at least 200% of such
liquidation value. In the event preferred shares are issued, the Fund intends,
to the extent possible, to purchase or redeem preferred shares from time to time
to maintain coverage of any preferred shares of at least 200%. Under the 1940
Act, the Fund is not permitted to incur indebtedness unless immediately after
such borrowing the Fund has an asset coverage of at least 300% of the aggregate
outstanding principal balance of indebtedness (i.e., such indebtedness may not
exceed 33 1/3% of the value of the Fund's total assets). Additionally, under the
1940 Act, the Fund may not declare any dividend or other distribution upon any
class of its shares, or purchase any such shares, unless the aggregate
indebtedness of the Fund has, at the time of the declaration of any such
dividend or distribution or at the time of any such purchase, an asset coverage
of at least 300% after deducting the amount of such dividend, distribution, or
purchase price, as the case may be.
The Fund may be subject to certain restrictions on investments imposed by
guidelines of one or more nationally recognized rating organizations which may
issue ratings for the preferred shares or short-term debt instruments issued by
the Fund. These guidelines may impose asset coverage or portfolio composition
requirements that are more stringent than those imposed by the 1940 Act. Certain
types of borrowings may result in the Fund being subject to covenants in credit
agreements, including those relating to asset coverage, borrowing base and
portfolio composition requirements and additional covenants. The Fund may also
be required to pledge its assets to the lenders in connection with certain types
of borrowing. Calamos does not anticipate that these covenants or restrictions
will adversely affect its ability to manage the Fund's portfolio in accordance
with the Fund's investment objective and policies. Due to these covenants or
restrictions, the Fund may be forced to liquidate investments at times and at
prices that are not favorable to the Fund, or the Fund may be forced to forgo
investments that Calamos otherwise views as favorable.
If and to the extent that the Fund employs leverage will depend on many
factors, the most important of which are investment outlook, market conditions
and interest rates.
INTEREST RATE TRANSACTIONS
In connection with the Fund's anticipated use of leverage through its sale
of Preferred Shares or Borrowings, the Fund may enter into interest rate swap or
cap transactions. Interest rate swaps involve the Fund's agreement with the swap
counterparty to pay a fixed rate payment in exchange for the counterparty paying
the Fund a variable rate payment that is expected to approximate the rate of any
variable rate payment obligation on Preferred Shares or any variable rate
borrowing. The payment obligation would be based on the notional amount of the
swap. The Fund's payment obligations under the swap are general unsecured
obligations of the Fund and are ranked senior to distributions under the common
shares and Preferred Shares.
The Fund may use an interest rate cap, which would require it to pay a
premium to the cap counterparty and would entitle it, to the extent that a
specified variable rate index exceeds a predetermined fixed rate, to receive
from the counterparty payment of the difference based on the notional amount.
The Fund would use interest rate swaps or caps only with the intent to reduce or
eliminate the risk that an increase in short-term interest rates could have on
common share net earnings as a result of leverage.
The Fund will usually enter into swaps or caps on a net basis; that is, the
two payment streams will be netted out in a cash settlement on the payment date
or dates specified in the instrument, with the Fund receiving or paying, as the
case may be, only the net amount of the two payments. The Fund intends to
19
maintain in a segregated account with its custodian cash or liquid securities
having a value at least equal to the Fund's net payment obligations under any
swap transaction, marked to market daily. Under certain circumstances, the Fund
may be required to pledge the assets in such segregated account to the counter-
party.
The use of interest rate swaps and caps is a highly specialized activity
that involves investment techniques and risks different from those associated
with ordinary portfolio security transactions. Depending on the state of
interest rates in general, the Fund's use of interest rate swaps or caps could
enhance or harm the overall performance on the common shares. To the extent
there is a decline in interest rates, the value of the interest rate swap or cap
could decline, and could result in a decline in the net asset value of the
common shares. In addition, if short-term interest rates are lower than the
Fund's fixed rate of payment on the interest rate swap, the swap will reduce
common share net earnings. If, on the other hand, short-term interest rates are
higher than the fixed rate of payment on the interest rate swap, the swap will
enhance common share net earnings. Buying interest rate caps could enhance the
performance of the common shares by providing a maximum leverage expense. Buying
interest rate caps could also decrease the net earnings of the common shares in
the event that the premium paid by the Fund to the counterparty exceeds the
additional amount the Fund would have been required to pay had it not entered
into the cap agreement. The Fund has no current intention of selling an interest
rate swap or cap. The Fund will not enter into interest rate swap or cap
transactions in an aggregate notional amount that exceeds the outstanding amount
of the Fund's leverage.
Interest rate swaps and caps do not involve the delivery of securities or
other underlying assets or principal. Accordingly, the risk of loss with respect
to interest rate swaps is limited to the net amount of interest payments that
the Fund is contractually obligated to make. If the counterparty defaults, the
Fund would not be able to use the anticipated net receipts under the swap or cap
to offset the dividend payments on Preferred Shares or interest payments on
Borrowings. Depending on whether the Fund would be entitled to receive net
payments from the counterparty on the swap or cap, which in turn would depend on
the general state of short-term interest rates at that point in time, such a
default could negatively impact the performance of the common shares.
Although this will not guarantee that the counterparty does not default,
the Fund will not enter into an interest rate swap or cap transaction with any
counterparty that Calamos believes does not have the financial resources to
honor its obligation under the interest rate swap or cap transaction. Further,
Calamos will continually monitor the financial stability of a counterparty to an
interest rate swap or cap transaction in an effort to proactively protect the
Fund's investments.
In addition, at the time the interest rate swap or cap transaction reaches
its scheduled termination date, there is a risk that the Fund will not be able
to obtain a replacement transaction or that the terms of the replacement will
not be as favorable as on the expiring transaction. If this occurs, it could
have a negative impact on the performance of the common shares.
The Fund may choose or be required to redeem some or all Preferred Shares
or prepay any Borrowings. This redemption would likely result in the Fund
seeking to terminate early all or a portion of any swap or cap transaction. Such
early termination of a swap could result in a termination payment by or to the
Fund. A termination payment by the Fund would result in a reduction in common
share net earnings. An early termination of a cap could result in a termination
payment to the Fund.
20
RISK FACTORS
Risk is inherent in all investing. Investing in any investment company
security involves risk, including the risk that you may receive little or no
return on your investment or that you may lose part or all of your investment.
Therefore, before investing you should consider carefully the following risks
that you assume when you invest in Preferred Shares.
RISKS OF INVESTING IN PREFERRED SHARES
INTEREST RATE RISK. The Fund issues Preferred Shares, which pay dividends
based on short-term interest rates. The Fund purchases convertible securities,
high yield securities and other securities that pay dividends that are based on
the performance of the issuing companies, and/or that pay interest, based on
longer term yields. These dividends and interest payments are typically,
although not always higher than short-term interest rates. Such dividends and
interest payments, as well as long-term and short-term interest rates,
fluctuate. If short-term interest rates rise, dividend rates on the Preferred
Shares may rise so that the amount of dividends paid to shareholders of
Preferred Shares exceeds the income from the portfolio securities. Because
income from the Fund's entire investment portfolio (not just the portion of the
portfolio purchased with the proceeds of the Preferred Shares offering) is
available to pay dividends on the Preferred Shares, dividend rates on the
Preferred Shares would need to greatly exceed the Fund's net portfolio income
before the Fund's ability to pay dividends on the Preferred Shares would be
jeopardized. If long-term interest rates rise, this could negatively impact the
value of the Fund's investment portfolio, reducing the amount of assets serving
as asset coverage for the Preferred Shares. Market interest rates currently are
at historically low levels.
AUCTION RISK. You may not be able to sell your Preferred Shares at an
auction if the auction fails; that is, if there are more Preferred Shares
offered for sale than there are buyers for those shares. Also, if you place hold
orders (orders to retain Preferred Shares) at an auction only at a specified
rate, and that bid rate exceeds the rate set at the auction, you will not retain
your Preferred Shares. Additionally, if you buy shares or elect to retain shares
without specifying a rate below which you would not wish to continue to hold
those shares, and the auction sets a below-market rate, you may receive a lower
rate of return on your shares than the market rate. Finally, the dividend
periods for the Preferred Shares may be changed by the Fund, subject to certain
conditions with notice to the holders of Preferred Shares, which could also
affect the liquidity of your investment. See "Description of Preferred Shares"
and "The Auction -- Auction Procedures."
SECONDARY MARKET RISK. If you try to sell your Preferred Shares between
auctions, you may not be able to sell any or all of your shares, or you may not
be able to sell them for $25,000 per share or $25,000 per share plus accumulated
dividends. If the Fund has designated a special dividend period (a rate period
other than 7 days in the case of Series , , , and and other than 28
days in the case of Series ), 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 the
Nasdaq stock market. You may transfer shares outside of auctions only to or
through a Broker-Dealer that has entered into an agreement with the Fund's
auction agent, The Bank of New York, and the Fund or such other persons as the
Fund permits. If you sell your Preferred Shares to a broker-dealer between
auctions, you may receive less than the price you paid for them, especially if
market interest rates have risen since the last auction. Accumulated Preferred
Shares dividends, however, should at least partially compensate for the
increased market interest rates.
RATINGS AND ASSET COVERAGE RISK. Although it is expected that Moody's will
assign a rating of "Aaa" to the Preferred Shares and Fitch 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. Moody's or Fitch 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 Moody's or Fitch
21
downgrades the Preferred Shares, the Fund may alter its portfolio or redeem
Preferred Shares in an effort to improve the rating, although there is no
assurance that it will be able to do so to the extent necessary to restore the
prior rating. If the Fund fails to satisfy the asset coverage ratios discussed
under "Description of Preferred Shares -- Rating Agency Guidelines," the Fund
will be required to redeem a sufficient number of Preferred Shares in order to
return to compliance with the asset coverage ratios. The Fund may be required to
redeem Preferred Shares at a time when it is not advantageous for the Fund to
make such redemption or to liquidate portfolio securities in order to have
available cash for such redemption. The Fund may voluntarily redeem Preferred
Shares under certain circumstances in order to meet asset maintenance tests.
Although a sale of substantially all the assets of the Fund or the merger of the
Fund into another entity would require the approval of the holders of the
Preferred Shares voting as a separate class as discussed under "Description of
the Preferred Shares -- Voting Rights," a sale of substantially all of the
assets of the Fund or the merger of the Fund with or into another entity would
not be treated as a liquidation of the Fund nor require that the Fund redeem the
Preferred Shares, in whole or in part, provided that the Fund continued to
comply with the asset coverage ratios discussed under "Description of Preferred
Shares -- Rating Agency Guidelines." See "Description of Preferred
Shares -- Rating Agency Guidelines" for a description of the asset maintenance
tests the Fund must meet.
INFLATION RISK. Inflation is the reduction in the purchasing power of
money resulting from the increase in the price of goods and services. Inflation
risk is the risk that the inflation adjusted (or "real") value of your Preferred
Shares investment or the income from that investment will be worth less in the
future. As inflation occurs, the real value of the Preferred Shares and
distributions declines. In an inflationary period, however, it is expected that,
through the auction process, Preferred Shares dividend rates would increase,
tending to offset this risk.
INCOME RISK. The Fund's income is based primarily on the income it earns
from its investments, which vary widely over the short- and long-term. If the
Fund's income drops, over time the Fund's ability to make dividend payments with
respect to the Preferred Shares may be impaired. See "-- General Risks of
Investing in the Fund" below for the general risks affecting the Fund.
DECLINE IN NET ASSET VALUE RISK. A material decline in the Fund's net
asset value may impair the Fund's ability to maintain required levels of asset
coverage. For a description of risks affecting the Fund, see "-- General Risks
of Investing in the Fund" below.
PAYMENT RESTRICTIONS. The Fund is prohibited from declaring, paying or
making any dividends or distributions on Preferred Shares unless it satisfies
certain conditions. See "Description of Preferred Shares -- Restrictions on
Dividend, Redemption and Other Payments." The Fund is also prohibited from
declaring, paying or making any dividends or distributions on common shares
unless it satisfies certain conditions. These prohibitions on the payment of
dividends or distributions might impair the Fund's ability to maintain its
qualification as a regulated investment company for federal income tax purposes.
The Fund intends, however, to redeem Preferred Shares if necessary to comply
with the asset coverage requirements. There can be no assurance, however, that
such redemptions can be effected in time to permit the Fund to distribute its
income as required to maintain its qualification as a regulated investment
company under the Code. See "U.S. Federal Income Tax Matters" in the Statement
of Additional Information.
LEVERAGE RISK. The Fund uses financial leverage for investment purposes.
In addition to issuing Preferred Shares, the Fund may make further use of
financial leverage through borrowing, including the issuance of commercial paper
or notes. As a non-fundamental policy, financial leverage (including Preferred
Shares and Borrowings) may not exceed 38% of the Funds' total assets. The Fund
may also borrow funds (a) in connection with a loan made by a bank or other
party that is privately arranged and not intended to be publicly distributed or
(b) in an amount equal to up to 5% of its total assets for temporary purposes
only.
If the Fund issues any senior securities representing indebtedness (as
defined in the 1940 Act), under the requirements of the 1940 Act, the value of
the Fund's total assets, less all liabilities and indebtedness of the Fund not
represented by such senior securities, must be at least equal, immediately after
any such senior securities representing indebtedness, to 300% of the aggregate
value of such senior securities. Upon
22
the issuance of Preferred Shares, the value of the Fund's total assets, less all
liabilities and indebtedness of the Fund not represented by senior securities
must be at least equal, immediately after the issuance of the Preferred Shares,
to 200% of the aggregate value of any senior securities and the Preferred
Shares.
If the Fund seeks an investment grade rating from one or more nationally
recognized statistical rating organizations for any commercial paper and notes
(which the Fund expects to do if it issues any such commercial paper or notes),
asset coverage or portfolio composition provisions in addition to and more
stringent than those required by the 1940 Act may be imposed in connection with
the issuance of such a rating. In addition, restrictions may be imposed on
certain investment practices in which the Fund may otherwise engage. Any lender
with respect to Borrowings by the Fund may require additional asset coverage and
portfolio composition provisions as well as restrictions on the Fund's
investment practices.
The money borrowed pursuant to any Borrowings may constitute a substantial
lien and burden on the Preferred Shares by reason of their prior claim against
the income of the Fund and against the net assets of the Fund in liquidation.
The Fund may not be permitted to declare dividends or other distributions,
including with respect to Preferred Shares or purchase or redeem shares,
including Preferred Shares unless (i) at the time thereof the Fund meets certain
asset coverage requirements and (ii) there is no event of default under any
Borrowings, that is continuing. See "Description of Preferred
Shares -- Restrictions on Dividend, Redemption and Other Payments." In the event
of a default under any Borrowings, the lenders may have the right to cause a
liquidation of the collateral (i.e., sell portfolio securities) and if any such
default is not cured, the lenders may be able to control the liquidation as
well.
The Fund reserves the right at any time, if it believes that market
conditions are appropriate, to increase its level of debt or other senior
securities to maintain or increase the Fund's current level of leverage to the
extent permitted by the 1940 Act and existing agreements between the Fund and
third parties. However, as a non-fundamental policy, financial leverage (the
total of Preferred Shares or other preferred shares and any Borrowings) may not
exceed 38% of the Fund's total assets.
Because the fee paid to Calamos will be calculated on the basis of managed
assets, the fee will be higher when leverage is utilized, giving Calamos an
incentive to utilize leverage.
GENERAL RISKS OF INVESTING IN THE FUND
LIMITED OPERATING HISTORY. The Fund is a recently organized closed-end
management investment company with a limited operating history.
CONVERTIBLE SECURITIES. Investment in convertible securities form an
important part of the Fund's investment strategies. Under normal circumstances,
the Fund will invest at least 20% of its managed assets in convertible
securities. Convertible securities generally offer lower interest or dividend
yields than non-convertible securities of similar quality. The market values of
convertible securities tend to decline as interest rates increase and,
conversely, to increase as interest rates decline. However, the convertible's
market value tends to reflect the market price of the common stock of the
issuing company when that stock price is greater than the convertible's
"conversion price." The conversion price is defined as the predetermined price
at which the convertible could be exchanged for the associated stock. As the
market price of the underlying common stock declines, the price of the
convertible security tends to be influenced more by the yield of the convertible
security. Thus, it may not decline in price to the same extent as the underlying
common stock. In the event of a liquidation of the issuing company, holders of
convertible securities would be paid before the company's common stockholders.
Consequently, the issuer's convertible securities generally entail less risk
than its common stock.
SYNTHETIC CONVERTIBLE SECURITIES. The value of a synthetic convertible
security will 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.
23
HIGH YIELD SECURITIES. Investment in high yield non-convertible debt
securities forms an important part of the Fund's investment strategies. Under
normal circumstances, the Fund will invest at least 20% of its managed assets in
high yield non-convertible debt securities. The Fund may invest in high yield
securities of any rating. The Fund may, but currently does not intend to, invest
up to 5% of its total assets in distressed securities. Investment in high yield
securities involves substantial risk of loss. Below investment grade
non-convertible debt securities or comparable unrated securities are commonly
referred to as "junk bonds" and are considered predominantly speculative with
respect to the issuer's ability to pay interest and principal and are
susceptible to default or decline in market value due to adverse economic and
business developments. The market values for high yield securities tend to be
very volatile, and these securities are less liquid than investment grade debt
securities. For these reasons, your investment in the Fund is subject to the
following specific risks:
- increased price sensitivity to changing interest rates and to a
deteriorating economic environment;
- greater risk of loss due to default or declining credit quality;
- adverse company specific events are more likely to render the issuer
unable to make interest and/or principal payments; and
- if a negative perception of the high yield market develops, the price and
liquidity of high yield securities may be depressed. This negative
perception could last for a significant period of time.
Securities rated below investment grade are speculative with respect to the
capacity to pay interest and repay principal in accordance with the terms of
such securities. A rating of C from Moody's means that the issue so rated can be
regarded as having extremely poor prospects of ever attaining any real
investment standing. Standard & Poor's assigns a rating of C to issues that are
currently highly vulnerable to nonpayment, and the C rating may be used to cover
a situation where a bankruptcy petition has been filed or similar action taken,
but payments on the obligation are being continued (a C rating is also assigned
to a preferred stock issue in arrears on dividends or sinking fund payments, but
that is currently paying). See the Statement of Additional Information for a
description of Moody's and Standard & Poor's ratings.
Adverse changes in economic conditions are more likely to lead to a
weakened capacity of a high yield issuer to make principal payments and interest
payments than an investment grade issuer. The principal amount of high yield
securities outstanding has proliferated in the past decade as an increasing
number of issuers have used high yield securities for corporate financing. An
economic downturn could severely affect the ability of highly leveraged issuers
to service their debt obligations or to repay their obligations upon maturity.
Similarly, downturns in profitability in specific industries could adversely
affect the ability of high yield issuers in those industries to meet their
obligations. The market values of lower quality debt securities tend to reflect
individual developments of the issuer to a greater extent than do higher quality
securities, which react primarily to fluctuations in the general level of
interest rates. Factors having an adverse impact on the market value of lower
quality securities may have an adverse effect on the Fund's net asset value and
the market value of its common shares. In addition, the Fund may incur
additional expenses to the extent it is required to seek recovery upon a default
in payment of principal or interest on its portfolio holdings. In certain
circumstances, the Fund may be required to foreclose on an issuer's assets and
take possession of its property or operations. In such circumstances, the Fund
would incur additional costs in disposing of such assets and potential
liabilities from operating any business acquired.
The secondary market for high yield securities may not be as liquid as the
secondary market for more highly rated securities, a factor which may have an
adverse effect on the Fund's ability to dispose of a particular security 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 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
24
particular issuer, and these instruments may become illiquid. As a result, the
Fund could find it more difficult to sell these securities or may be able to
sell the securities only at prices lower than if such securities were widely
traded. Prices realized upon the sale of such lower rated or unrated securities,
under these circumstances, may be less than the prices used in calculating the
Fund's net asset value.
Since investors generally perceive that there are greater risks associated
with lower quality debt securities of the type in which the Fund may invest a
portion of its assets, the yields and prices of such securities may tend to
fluctuate more than those for higher rated securities. In the lower quality
segments of the debt securities market, changes in perceptions of issuers'
creditworthiness tend to occur more frequently and in a more pronounced manner
than do changes in higher quality segments of the debt securities market,
resulting in greater yield and price volatility.
If the Fund invests in high yield securities that are rated C or below, the
Fund will incur significant risk in addition to the risks associated with
investments in high yield securities and corporate loans. Distressed securities
frequently do not produce income while they are outstanding. The Fund may
purchase distressed securities that are in default or the issuers of which are
in bankruptcy. The Fund may be required to bear certain extraordinary expenses
in order to protect and recover its investment.
INTEREST RATE RISK. Fixed income securities, including high yield
securities, are subject to certain common risks, including:
- if interest rates go up, the value of debt securities in the Fund's
portfolio generally will decline;
- during periods of declining interest rates, the issuer of a security may
exercise its option to prepay principal earlier than scheduled, forcing
the Fund to reinvest in lower yielding securities. This is known as call
or prepayment risk. Debt securities frequently have call features that
allow the issuer to repurchase the security prior to its stated maturity.
An issuer may redeem an obligation if the issuer can refinance the debt
at a lower cost due to declining interest rates or an improvement in the
credit standing of the issuer;
- during periods of rising interest rates, the average life of certain
types of securities may be extended because of slower than expected
principal payments. This may lock in a below market interest rate,
increase the security's duration (the estimated period until the security
is paid in full) and reduce the value of the security. This is known as
extension risk; and
- market interest rates currently are at historically low levels.
ILLIQUID INVESTMENTS. The Fund may invest up to 15% of its managed assets
in securities that, at the time of investment, are illiquid (determined using
the Commission's standard applicable to investment companies, i.e., securities
that cannot be disposed of within 7 days in the ordinary course of business at
approximately the value at which the Fund has valued the securities). The Fund
may also invest without limitation in securities that have not been registered
for public sale, but that are eligible for purchase and sale by certain
qualified institutional buyers. Calamos, under the supervision of the Board of
Trustees, will determine whether securities purchased under Rule 144A are
illiquid (that is, not readily marketable) and thus subject to the Fund's limit
of investing no more than 15% of its managed assets in illiquid securities.
Investments in Rule 144A Securities could have the effect of increasing the
amount of the Fund's assets invested in illiquid securities if qualified
institutional buyers are unwilling to purchase these Rule 144A Securities.
Illiquid securities may be difficult to dispose of at a fair price at the times
when the Fund believes it is desirable to do so. The market price of illiquid
securities generally is more volatile than that of more liquid securities, which
may adversely affect the price that the Fund pays for or recovers upon the sale
of illiquid securities. Illiquid securities are also more difficult to value and
Calamos' judgment may play a greater role in the valuation process. Investment
of the Fund's assets in illiquid securities may restrict the Fund's ability to
take advantage of market opportunities. The risks associated with illiquid
securities may be particularly acute in situations in which the Fund's
operations require cash and could result in the Fund borrowing to meet its
short-term needs or incurring losses on the sale of illiquid securities.
25
FOREIGN SECURITIES. Investments in non-U.S. issuers may involve unique
risks compared to investing in securities of U.S. issuers. These risks are more
pronounced to the extent that the Fund invests a significant portion of its
non-U.S. investments in one region or in the securities of emerging market
issuers. These risks may include:
- less information about non-U.S. issuers or markets may be available due
to less rigorous disclosure or accounting standards or regulatory
practices;
- many non-U.S. markets are smaller, less liquid and more volatile. In a
changing market, Calamos may not be able to sell the Fund's portfolio
securities at times, in amounts and at prices it considers reasonable;
- the adverse effect of currency exchange rates or controls on the value of
the Fund's investments;
- the economies of non-U.S. countries may grow at slower rates than
expected or may experience a downturn or recession;
- economic, political and social developments may adversely affect the
securities markets, including expropriation and nationalization;
- the difficulty in obtaining or enforcing a court judgment in non-U.S.
countries;
- restrictions on foreign investments in non-U.S. jurisdictions;
- difficulties in effecting the repatriation of capital invested in
non-U.S. countries; and
- withholding and other non-U.S. taxes may decrease the Fund's return.
There may be less publicly available information about non-U.S. markets and
issuers than is available with respect to U.S. securities and issuers. Non-U.S.
companies generally are not subject to accounting, auditing and financial
reporting standards, practices and requirements comparable to those applicable
to U.S. companies. The trading markets for most non-U.S. securities are
generally less liquid and subject to greater price volatility than the markets
for comparable securities in the United States. The markets for securities in
certain emerging markets are in the earliest stages of their development. Even
the markets for relatively widely traded securities in certain non-U.S. markets,
including emerging market countries, may not be able to absorb, without price
disruptions, a significant increase in trading volume or trades of a size
customarily undertaken by institutional investors in the United States.
Additionally, market making and arbitrage activities are generally less
extensive in such markets, which may contribute to increased volatility and
reduced liquidity.
Economies and social and political conditions in individual countries may
differ unfavorably from the United States. Non-U.S. economies may have less
favorable rates of growth of gross domestic product, rates of inflation,
currency valuation, capital reinvestment, resource self-sufficiency and balance
of payments positions. Many countries have experienced substantial, and in some
cases extremely high, rates of inflation for many years. Inflation and rapid
fluctuations in inflation rates have had, and may continue to have, very
negative effects on the economies and securities markets of certain emerging
countries. Unanticipated political or social developments may also affect the
values of the Fund's investments and the availability to the Fund of additional
investments in such countries.
CURRENCY RISKS. The value of the securities denominated or quoted in
foreign currencies may be adversely affected by fluctuations in the relative
currency exchange rates and by exchange control regulations. The Fund's
investment performance may be negatively affected by a devaluation of a currency
in which the Fund's investments are denominated or quoted. Further, the Fund's
investment performance may be significantly affected, either positively or
negatively, by currency exchange rates because the U.S. dollar value of
securities denominated or quoted in another currency will increase or decrease
in response to changes in the value of such currency in relation to the U.S.
dollar.
INTEREST RATE TRANSACTIONS RISK. The Fund may enter into an interest rate
swap or cap transaction to attempt to protect itself from increasing dividend or
interest expenses on its preferred shares, debt
26
securities or other borrowings resulting from increasing short-term interest
rates. A decline in interest rates may result in a decline in the value of the
swap or cap, which may result in a decline in the net asset value of the Fund.
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 REIT's investment in fixed rate
obligations can be expected to rise. Conversely, when interest rates rise, the
value of a REIT's investment in fixed rate obligations can be expected to
decline. If the REIT invests in adjustable rate mortgage loans the interest
rates on which are reset periodically, yields on a REIT's investment in such
loans will gradually align themselves to reflect changes in market interest
rates. This causes the value of such investments to fluctuate less dramatically
in response to interest rate fluctuations than would investments in fixed rate
obligations.
REITs may have limited financial resources, may trade less frequently and
in a limited volume and may be subject to more abrupt or erratic price movements
than larger company securities. Historically, REITs have been more volatile in
price than the larger capitalization stocks included in Standard & Poor's 500
Stock Index.
TAX RISK. The Fund may invest in convertible securities or other
securities the federal income tax treatment of which may not be clear or may be
subject to recharacterization by the Internal Revenue Service. It could be more
difficult for the Fund to comply with the tax requirements applicable to
regulated investment companies if the tax characterization of the Fund's
investments or the tax treatment of the income from such investments were
successfully challenged by the Internal Revenue Service. See "U.S. Federal
Income Tax Matters."
MANAGEMENT RISK. Calamos' judgment about the attractiveness, relative
value or potential appreciation of a particular sector, security or investment
strategy may prove to be incorrect.
ANTITAKEOVER PROVISIONS. The Fund's Agreement and Declaration of Trust and
By-laws include provisions that could limit the ability of other entities or
persons to acquire control of the Fund or to change the composition of its Board
of Trustees. Such provisions could limit the ability of shareholders to sell
their shares at a premium over prevailing market prices by discouraging a third
party from seeking to obtain control of the Fund. These provisions include
staggered terms of office for the Trustees, advance notice requirements for
shareholder proposals, and super-majority voting requirements for certain
transactions with affiliates, converting the Fund to an open-end investment
company or a merger, asset sale or similar transaction. Holders of preferred
shares will have voting rights in addition to and separate from the voting
rights of common shareholders with respect to certain of these matters. See
"Description of Shares -- Preferred Shares" and "Certain Provisions of the
Agreement and Declaration of Trust and By-Laws." The holders of preferred
shares, on the one hand, and the holders of the common shares, on the other, may
have interests that conflict in these situations.
MARKET DISRUPTION RISK. Certain events have a disruptive effect on the
securities markets, such as terrorist attacks (including the terrorist attacks
in the United States on September 11, 2001), war and other geopolitical events.
The Fund cannot predict the effects of similar events in the future on the U.S.
economy. High yield securities tend to be more volatile than higher rated debt
securities so that these events and any actions resulting from them may have a
greater impact on the prices and volatility of high yield securities than on
higher rated securities.
27
MANAGEMENT OF THE FUND
TRUSTEES AND OFFICERS
The Fund's Board of Trustees provides broad supervision over the affairs of
the Fund. The officers of the Fund are responsible for the Fund's operations.
There are seven Trustees of the Fund, two of whom are "interested persons" of
the Trust (as defined in the 1940 Act) and five of whom are not "interested
persons." The names and business addresses of the trustees and officers of the
Fund and their principal occupations and other affiliations during the past five
years are set forth under "Management of the Fund" in the Statement of
Additional Information.
INVESTMENT ADVISER
The Fund's investments are managed by Calamos, 1111 E. Warrenville Road,
Naperville, IL. On Calamos managed approximately $ billion in
assets of individuals and institutions. Calamos is a wholly-owned subsidiary of
Holdings. Holdings is controlled by John P. Calamos, who has been engaged in the
investment advisory business since 1977.
INVESTMENT MANAGEMENT AGREEMENT
Subject to the overall authority of the Board of Trustees, Calamos
regularly provides the Fund with investment research, advice and supervision and
furnishes continuously an investment program for the Fund. In addition, Calamos
furnishes for use of the Fund such office space and facilities as the Fund may
require for its reasonable needs, supervises the business and affairs of the
Fund and provides the following other services on behalf of the Fund and not
provided by persons not a party to the investment management agreement: (a)
preparing or assisting in the preparation of reports to and meeting materials
for the Trustees; (b) supervising, negotiating contractual arrangements with, to
the extent appropriate, and monitoring the performance of, accounting agents,
custodians, depositories, transfer agents and pricing agents, accountants,
attorneys, printers, underwriters, brokers and dealers, insurers and other
persons in any capacity deemed to be necessary or desirable to Fund operations;
(c) assisting in the preparation and making of filings with the Commission and
other regulatory and self-regulatory organizations, including, but not limited
to, preliminary and definitive proxy materials, amendments to the Fund's
registration statement on Form N-2 and semi-annual reports on Form N-SAR; (d)
overseeing the tabulation of proxies by the Fund's transfer agent; (e) assisting
in the preparation and filing of the Fund's federal, state and local tax
returns; (f) assisting in the preparation and filing of the Fund's federal
excise tax return pursuant to Section 4982 of the Code; (g) providing assistance
with investor and public relations matters; (h) monitoring the valuation of
portfolio securities and the calculation of net asset value; (i) monitoring the
registration of shares of beneficial interest of the Fund under applicable
federal and state securities laws; (j) maintaining or causing to be maintained
for the Fund all books, records and reports and any other information required
under the 1940 Act, to the extent that such books, records and reports and other
information are not maintained by the Fund's custodian or other agents of the
Fund; (k) assisting in establishing the accounting policies of the Fund; (l)
assisting in the resolution of accounting issues that may arise with respect to
the Fund's operations and consulting with the Fund's independent accountants,
legal counsel and the Fund's other agents as necessary in connection therewith;
(m) reviewing the Fund's bills; (n) assisting the Fund in determining the amount
of dividends and distributions available to be paid by the Fund to its
shareholders, preparing and arranging for the printing of dividend notices to
shareholders, and providing the transfer and dividend paying agent, the
custodian, and the accounting agent with such information as is required for
such parties to effect the payment of dividends and distributions; and (o)
otherwise assisting the Fund as it may reasonably request in the conduct of the
Fund's business, subject to the direction and control of the Trustees.
Under the investment management agreement, the Fund will pay to Calamos a
fee based on the average weekly managed assets that is accrued daily and paid on
a monthly basis. The fee paid by the Fund is at the annual rate of 0.80% of
managed assets. Because the fees paid to Calamos are determined
28
on the basis of the Fund's managed assets, Calamos' interest in determining
whether to leverage the Fund may differ from the interests of the Fund and its
common shareholders.
Under the terms of its investment management agreement, except for the
services and facilities provided by Calamos as set forth therein, the Fund shall
assume and pay all expenses for all other Fund operations and activities and
shall reimburse Calamos for any such expenses incurred by Calamos. The expenses
borne by the Fund shall include, without limitation: (a) organization expenses
of the Fund (including out-of-pocket expenses, but not including Calamos'
overhead or employee costs); (b) fees payable to Calamos; (c) legal expenses;
(d) auditing and accounting expenses; (e) maintenance of books and records that
are required to be maintained by the Fund's custodian or other agents of the
Fund; (f) telephone, telex, facsimile, postage and other communications
expenses; (g) taxes and governmental fees; (h) fees, dues and expenses incurred
by the Fund in connection with membership in investment company trade
organizations and the expense of attendance at professional meetings of such
organizations; (i) fees and expenses of accounting agents, custodians,
subcustodians, transfer agents, dividend disbursing agents and registrars; (j)
payment for portfolio pricing or valuation services to pricing agents,
accountants, bankers and other specialists, if any; (k) expenses of preparing
share certificates; (l) expenses in connection with the issuance, offering,
distribution, sale, redemption or repurchase of securities issued by the Fund;
(m) expenses relating to investor and public relations provided by parties other
than Calamos; (n) expenses and fees of registering or qualifying shares of
beneficial interest of the Fund for sale; (o) interest charges, bond premiums
and other insurance expenses; (p) freight, insurance and other charges in
connection with the shipment of the Fund's portfolio securities; (q) the
compensation and all expenses (specifically including travel expenses relating
to Fund business) of Trustees, officers and employees of the Fund who are not
affiliated persons of Calamos; (r) brokerage commissions or other costs of
acquiring or disposing of any portfolio securities of the Fund; (s) expenses of
printing and distributing reports, notices and dividends to shareholders; (t)
expenses of preparing and setting in type, printing and mailing prospectuses and
statements of additional information of the Fund and supplements thereto; (u)
costs of stationery; (v) any litigation expenses; (w) indemnification of
Trustees and officers of the Fund; (x) costs of shareholders' and other
meetings; (y) interest on borrowed money, if any; and (z) the fees and other
expenses of listing the Fund's shares on the New York Stock Exchange or any
other national stock exchange.
For the first eight years of the Fund's operations, Calamos has
contractually agreed to waive a portion of its management fee at the annual
rate, and for the time periods, set forth below:
FEE WAIVED (AS FEE WAIVED (AS
A PERCENTAGE OF A PERCENTAGE OF
AVERAGE WEEKLY AVERAGE WEEKLY
PERIOD ENDING MAY 31, MANAGED ASSETS) PERIOD ENDING MAY 31, MANAGED ASSETS)
--------------------- --------------- --------------------- ---------------
2003(1)................... 0.10% 2008...................... 0.10%
2004...................... 0.10% 2009...................... 0.07%
2005...................... 0.10% 2010...................... 0.05%
2006...................... 0.10% 2011...................... 0.03%
2007...................... 0.10%
---------------
(1) From the commencement of operations.
Calamos has not agreed to waive any portion of its management fee beyond
May 31, 2011.
PORTFOLIO MANAGER
John P. Calamos and Nick P. Calamos are responsible for managing the
portfolio of the Fund. During the past five years, John P. Calamos has been
president of Calamos and CFS, an affiliate of Calamos, and Nick P. Calamos has
been senior executive vice president of Calamos and CFS. For over 20 years, the
Calamos management team has managed money for their clients in convertible, high
yield and global strategies.
29
Furthermore, Calamos has extensive experience investing in foreign markets
through its convertible securities and high yield securities strategies. Such
experience has included investments in established as well as emerging foreign
markets.
FUND ACCOUNTANT
Under the terms of a fund accounting servicing agreement ("Fund Accounting
Servicing Agreement"), U.S. Bancorp Fund Services, LLC ("USB") provides certain
administrative and accounting services, including but not limited to,
accounting, valuation, financial reporting and tax accounting services to the
Fund and to the Calamos Investment Trust and Calamos Advisors Trust (the Fund,
Calamos Investment Trust and Calamos Advisors Trust 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, USB receives fees
based on the combined managed assets of the Calamos Funds ("Combined Assets").
Each fund of the Calamos Funds pays its prorata share of the fees payable to USB
described below based on relative managed assets of each fund.
For the fund accounting services USB receives a fee at the annual rate of
$750,000 on the first $2.5 billion of Combined Assets; 0.02% on the next $2.5
billion of Combined Assets; 0.01% on the next $2.5 billion of Combined Assets;
0.0075% on the next $2.5 billion of Combined Assets and 0.005% on Combined
Assets above $10 billion ("fund accounting service fee"). For the financial
accounting services USB receives a fee at the annual rate of 0.0200% on the
first $1 billion of Combined Assets; 0.0175% on the next $1 billion of Combined
Assets and 0.0125% on Combined Assets above $2 billion ("financial accounting
service fee").
Management has proposed to the Boards of Trustees of the Calamos Funds,
including the Fund, that Calamos provide the financial accounting services to
the Calamos Funds described more fully in the Statement of Additional
Information, rather than USB. For providing those services, it is proposed that
Calamos will receive a fee at the annual rate of 0.0175% on the first $1 billion
of Combined Assets; 0.0150% on the next $1 billion of Combined Assets; and
0.0110% on Combined Assets above $2 billion ("proposed financial accounting
service fee"). Each fund of the Calamos Funds will pay its prorata share of the
proposed financial accounting service fee to Calamos based on relative managed
assets of each fund.
Under management's proposal, Calamos will replace USB solely with respect
to certain financial accounting services described in the Statement of
Additional Information. Calamos will receive the proposed financial accounting
service fee described above. Under the proposal, USB will continue to provide
the fund accounting services described in the Statement of Additional
Information and receive the fund accounting service fee described above. The
Boards of Trustees at a meeting held on April 14, 2003 were supportive of
management's proposal; however, as of the date hereof no final determination
with respect to management's proposal has been made.
30
DESCRIPTION OF PREFERRED SHARES
The following is a brief description of the terms of the Preferred Shares.
For the complete terms of the Preferred Shares, please refer to the detailed
description of the Preferred Shares in the Statement of Preferences for
Preferred Shares (the "Statement") attached as Appendix A to the Statement of
Additional Information.
GENERAL
The Fund's Agreement and Declaration of Trust authorizes the issuance of
preferred shares, no par value per share, in one or more classes or series with
rights as determined by the Board of Trustees without the approval of common
shareholders. The Statement currently authorizes the issuance of Preferred
Shares, Series , Preferred Shares, Series , Preferred Shares,
Series , Preferred Shares, Series , Preferred Shares, Series and
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 Shares carries one vote on matters on which Preferred Shares can
be voted. The Preferred Shares, when issued by the Fund and paid for pursuant to
the terms of this prospectus, will be fully paid and non-assessable and will
have no preemptive, exchange or conversion rights. Any Preferred Shares
repurchased or redeemed by the Fund will be classified as authorized and
unissued Preferred Shares. The Board of Trustees may by resolution classify or
reclassify any authorized and unissued Preferred Shares from time to time by
setting or changing the preferences, rights, voting powers, restrictions,
limitations as to dividends, qualifications or terms or conditions of redemption
of such shares. The Preferred Shares will not be subject to any sinking fund,
but will be subject to mandatory redemption under certain circumstances
described below.
DIVIDENDS AND RATE PERIODS
The following is a general description of dividends and rate periods for
the Preferred Shares.
RATE PERIODS. The initial rate period and rate for each series of
Preferred Shares is as set forth below:
SERIES INITIAL RATE PERIOD INITIAL DIVIDEND RATE
------ ------------------- ---------------------
days %
days
days
days
days
days
Any subsequent rate periods of a series of Preferred Shares will generally
be seven or, in the case of Series Preferred Shares, 28 days. The Fund,
subject to certain conditions, may change the length of subsequent rate periods
by designating them as special rate periods. See "-- Designation of Special Rate
Periods" below.
DIVIDEND PAYMENT DATES. Dividends on each series of Preferred Shares will
be payable, when, as and if declared by the Board of Trustees, out of legally
available funds in accordance with the Agreement and
31
Declaration of Trust, the Statement and applicable law. The initial dividend
payment date and the day of the week upon which subsequent dividends, if any,
will be paid for each series are as follows:
INITIAL DIVIDEND SUBSEQUENT DIVIDEND
SERIES PAYMENT DATE PAYMENT DAY
------ ---------------- -------------------
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 rate period of more
than seven days in the case of Series , , , and Preferred Shares and
more than 28 days in the case of Series Preferred Shares, provided that such
dates shall be set forth in the notice of special rate period relating to such
special rate period.
Dividends will be paid through the Depository Trust Company ("DTC") on each
dividend payment date. The dividend payment date will normally be the first
business day after the dividend period ends. DTC, in accordance with its current
procedures, is expected to distribute dividends received from the auction agent
in same-day funds on each dividend payment date to agent members (members of DTC
that will act on behalf of existing or potential holders of Preferred Shares).
These agent members are in turn expected to distribute such dividends to the
persons for whom they are acting as agents. However, each of the current
Broker-Dealers has indicated to the Fund that dividend payments will be
available in same-day funds on each dividend payment date to customers that use
a Broker-Dealer or a Broker-Dealer's designee as agent member.
CALCULATION OF DIVIDEND PAYMENT. The Fund computes the dividends per share
payable on Preferred Shares by multiplying the applicable rate in effect by a
fraction. The numerator of this fraction will normally be the number of days in
the rate period and the denominator will normally be 360. This rate is then
multiplied by $25,000 to arrive at the dividends per share.
Dividends on Preferred Shares will accumulate from the date of their
original issue, which is , 2003. For each dividend payment period
after the initial rate 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 applicable rate described below.
The maximum applicable rate for any standard rate period will be the
applicable percentage (set forth in the table below) of the applicable "AA"
Financial Commercial Paper Rate. In the case of a special rate period, the
maximum applicable rate will be specified by the Fund in the notice of the
special rate period for such dividend payment period. The applicable percentage
will be determined based on the lower of the credit rating or ratings assigned
to the Preferred Shares by Fitch and Moody's. If Fitch and Moody's or both do
not make such rating available, the rate will be determined by reference to
equivalent ratings issued by a substitute rating agency.
CREDIT RATINGS FOR PREFERRED SHARES APPLICABLE
------------------------------------ PERCENTAGE:
MOODY'S FITCH NO NOTIFICATION
----------------- ---------------- ---------------
Aa3 or higher AA- or higher 150%
A3 to A1 A- to A+ 200%
Baa3 to Baa1 BBB- to BBB+ 225%
Below Baa3 Below BBB- 275%
On each dividend payment date, the Fund is required to deposit with the
auction agent sufficient funds for the payment of declared dividends. The
failure to make such deposit will not result in the cancellation of any auction.
The Fund does not intend to establish any reserves for the payment of dividends.
32
RESTRICTIONS ON DIVIDEND, REDEMPTION AND OTHER PAYMENTS. Under the 1940
Act, the Fund may not (i) declare any dividend with respect to the Preferred
Shares if, at the time of such declaration (and after giving effect thereto),
asset coverage with respect to the Fund's Borrowings that are senior securities
representing indebtedness (as defined in the 1940 Act) would be less than 200%
(or such other percentage as may in the future be specified in or under the 1940
Act as the minimum asset coverage for senior securities representing
indebtedness of a closed-end investment company as a condition of declaring
dividends on its preferred shares) or (ii) declare any other distribution on the
Preferred Shares or purchase or redeem Preferred Shares if at the time of the
declaration (and after giving effect thereto), asset coverage with respect to
the Fund's senior securities representing indebtedness would be less than 300%
(or such other percentage as may in the future be specified in or under the 1940
Act as the minimum asset coverage for senior securities representing
indebtedness of a closed-end investment company as a condition of declaring
distributions, purchases or redemptions of its shares of beneficial interest).
"Senior securities representing indebtedness" generally means any bond,
debenture, note or similar obligation or instrument constituting a security
(other than shares of beneficial interest) and evidencing indebtedness and could
include the Fund's obligations under any Borrowings. For purposes of determining
asset coverage for senior securities representing indebtedness in connection
with the payment of dividends or other distributions on or purchases or
redemptions of stock, the term "senior security" does not include any promissory
note or other evidence of indebtedness issued in consideration of any loan,
extension or renewal thereof, made by a bank or other person and privately
arranged, and not intended to be publicly distributed. The term "senior
security" also does not include any such promissory note or other evidence of
indebtedness in any case where such a loan is for temporary purposes only and in
an amount not exceeding 5% of the value of the total assets of the Fund at the
time when the loan is made; a loan is presumed under the 1940 Act to be for
temporary purposes if it is repaid within 60 days and is not extended or
renewed; otherwise it is presumed not to be for temporary purposes. For purposes
of determining whether the 200% and 300% asset coverage requirements described
above apply in connection with dividends or distributions on or purchases or
redemptions of Preferred Shares, such asset coverages may be calculated on the
basis of values calculated as of a time within 48 hours (not including Sundays
or holidays) next preceding the time of the applicable determination.
In addition, a declaration of a dividend or other distribution on or
purchase or redemption of Preferred Shares may be prohibited (i) at any time
when an event of default under any Borrowings has occurred and is continuing; or
(ii) after giving effect to such declaration, the Fund would not have eligible
portfolio holdings with an aggregated discounted value at least equal to any
asset coverage requirements associated with such Borrowings; or (iii) the Fund
has not redeemed the full amount of Borrowings, if any, required to be redeemed
by any provision for mandatory redemption.
While any of the Preferred Shares are outstanding, the Fund generally may
not declare, pay or set apart for payment, any dividend or other distribution in
respect of its common shares (other than in additional common shares or rights
to purchase common shares) or repurchase any of its common shares (except by
conversion into or exchange for shares of the Fund ranking junior to the
Preferred Shares as to the payment of dividends and the distribution of assets
upon liquidation) unless each of the following conditions has been satisfied:
- In the case of Moody's coverage requirements, immediately after such
transaction, the aggregate Discounted Value (i.e., the aggregate value of
the Fund's portfolio discounted according to Moody's criteria) would be
equal to or greater than the Preferred Shares Basic Maintenance Amount
(i.e., the amount necessary to pay all outstanding obligations of the
Fund with respect to the Preferred Shares, any preferred stock
outstanding expenses for the next 90 days and any other liabilities of
the Fund) (see "Rating Agency Guidelines" below);
- In the case of Fitch's coverage requirements, immediately after such
transaction, the aggregate Discounted Value (i.e., the aggregate value of
the Fund's portfolio discounted according to Fitch criteria) would be
equal to or greater than the Preferred Shares Basic Maintenance Amount;
33
- Immediately after such transaction, the 1940 Act Preferred Shares Asset
Coverage (as defined in this Prospectus under "Rating Agency Guidelines"
below) is met;
- Full cumulative dividends on the Preferred Shares due on or prior to the
date of the transaction have been declared and paid or have been declared
and sufficient funds for the payment thereof deposited with the auction
agent; and
- The Fund has redeemed the full number of Preferred Shares required to be
redeemed by any provision for mandatory redemption contained in the
Statement.
The Fund generally will not declare, pay or set apart for payment any
dividend on any shares of the Fund ranking, as to the payment of dividends, on a
parity with Preferred Shares unless the Fund has declared and paid or
contemporaneously declares and pays full cumulative dividends on the Preferred
Shares through its most recent dividend payment date. However, if the Fund has
not paid dividends in full on the Preferred Shares through the most recent
dividend payment date or upon any shares of the Fund ranking, as to the payment
of dividends, on a parity with Preferred Shares through their most recent
respective dividend payment dates, the amount of dividends declared per share on
Preferred Shares and such other class or series of shares will in all cases bear
to each other the same ratio that accumulated dividends per share on the
Preferred Shares and such other class or series of shares bear to each other.
DESIGNATION OF SPECIAL RATE PERIODS. The Fund may, in certain situations,
declare a special rate period. Prior to declaring a special rate period, the
Fund will give notice (a "notice of special rate period") to the auction agent
and to each Broker-Dealer. The notice will state that the next succeeding rate
period for the Preferred Shares will be a number of days as specified in such
notice. The Fund may not designate a special rate 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 rate period if such designation would adversely affect
Moody's or Fitch's or any substitute rating agency's then-current rating on the
Preferred Shares. The Fund also must have portfolio securities with a discounted
value at least equal to the Preferred Share Maintenance Amount. A notice of
special rate period also will specify whether the Preferred Shares will be
subject to optional redemption during such special rate period and, if so, the
redemption, premium, if any, required to be paid by the Fund in connection with
such optional redemption.
VOTING RIGHTS
Except as noted below, the Fund's common shares and Preferred Shares have
equal voting rights of one vote per share and vote together as a single class.
In elections of trustees, the holders of Preferred Shares, as a separate class,
vote to elect two trustees. The Board of Trustees will determine to which class
or classes the trustees elected by the holders of Preferred Shares will be
assigned and the holders of the Preferred Shares shall only be entitled to elect
the trustees so designated as being elected by the holders of the Preferred
Shares when their term shall have expired and such trustees appointed by the
holders of Preferred Shares will be allocated as evenly as possible among the
classes of trustees. The holders of the common shares and holders of Preferred
Shares vote together as a single class to elect the remaining trustees. In
addition, during any period ("Voting Period") in which the Fund has not paid
dividends on the Preferred Shares in an amount equal to two full years
dividends, the holders of Preferred Shares, voting as a single class, are
entitled to elect (in addition to the two trustees set forth above) the smallest
number of additional trustees as is necessary to ensure that a majority of the
trustees has been elected by the holders of Preferred Shares. The holders of
Preferred Shares will continue to have these rights until all dividends in
arrears have been paid or otherwise provided for.
In an instance when the Fund has not paid dividends as set forth in the
immediately preceding paragraph, the terms of office of all persons who are
trustees of the Fund at the time of the commencement of a Voting Period will
continue, notwithstanding the election by the holders of the Preferred Shares of
the number of trustees that such holders are entitled to elect. The persons
elected by the holders of the Preferred Shares, together with the incumbent
trustees, will constitute the duly elected
34
trustees of the Fund. When all dividends in arrears on the Preferred Shares have
been paid or provided for, the terms of office of the additional trustees
elected by the holders of the Preferred Shares will terminate.
So long as any of the Preferred Shares are outstanding, the Fund will not,
without the affirmative vote of the holders of a majority of the outstanding
Preferred Shares, (i) institute any proceedings to be adjudicated bankrupt or
insolvent, or consent to the institution of bankruptcy or insolvency proceedings
against it, or file a petition seeking or consenting to reorganization or relief
under any applicable federal or state law relating to bankruptcy or insolvency,
or consent to the appointment of a receiver, liquidator, assignee, trustee,
sequestrator (or other similar official) of the Fund or a substantial part of
its property, or make any assignment for the benefit of creditors, or, except as
may be required by applicable law, admit in writing its inability to pay its
debts generally as they become due or take any corporate action in furtherance
of any such action; (ii) create, incur or suffer to exist, or agree to create,
incur or suffer to exist, or consent to cause or permit in the future (upon the
happening of a contingency or otherwise) the creation, incurrence or existence
of any material lien, mortgage, pledge, charge, security interest, security
agreement, conditional sale or trust receipt or other material encumbrance of
any kind upon any of the Fund's assets as a whole, except (A) liens the validity
of which are being contested in good faith by appropriate proceedings, (B) liens
for taxes that are not then due and payable or that can be paid thereafter
without penalty, (C) liens, pledges, charges, security interests, security
agreements or other encumbrances arising in connection with any indebtedness
senior to the Preferred Shares, or arising in connection with any futures
contracts or options thereon, interest rate swap or cap transactions, forward
rate transactions, put or call options or other similar transactions, (D) liens,
pledges, charges, security interests, security agreements or other encumbrances
arising in connection with any indebtedness permitted under clause (iii) below
and (E) liens to secure payment for services rendered including, without
limitation, services rendered by the Fund's Paying Agent and the auction agent;
or (iii) create, authorize, issue, incur or suffer to exist any indebtedness for
borrowed money or any direct or indirect guarantee of such indebtedness for
borrowed money, except the Fund may borrow as may be permitted by the Fund's
investment restrictions; provided, however, that transfers of assets by the Fund
subject to an obligation to repurchase will not be deemed to be indebtedness for
purposes of this provision to the extent that after any such transaction the
Fund has eligible assets with an aggregate discounted value at least equal to
the Preferred Shares Basic Maintenance Amount as of the immediately preceding
valuation date.
In addition, the affirmative vote of the holders of a majority, as defined
in the 1940 Act, of the outstanding Preferred Shares is required to approve any
plan of reorganization (as such term is used in the 1940 Act) adversely
affecting such shares or any action requiring a vote of security holders of the
Fund under Section 13(a) of the 1940 Act, including, among other things, changes
in the Fund's fundamental investment restrictions described under "Investment
Restrictions" in the Statement of Additional Information and changes in the
Fund's subclassification as a closed-end investment company.
The affirmative vote of the holders of a majority, as defined in the 1940
Act, of the outstanding Preferred Shares of any series, voting separately from
any other series, shall be required with respect to any matter that materially
and adversely affects the rights, preferences, or powers of that series in a
manner different from that of other series or classes of the Fund's shares of
beneficial interest. For purposes of the foregoing, no matter will be deemed to
adversely affect any right, preference or power unless such matter (i) alters or
abolishes any preferential right of such series; (ii) creates, alters or
abolishes any right in respect of redemption of such series; or (iii) creates or
alters (other than to abolish) any restriction on transfer applicable to such
series. The vote of holders of any series described in this paragraph will in
each case be in addition to a separate vote of the requisite percentage of
common shares and/or preferred shares necessary to authorize the action in
question.
The common shares and the Preferred Shares also will vote separately to the
extent otherwise required under Delaware law or the 1940 Act as in effect from
time to time. The class votes of holders of Preferred Shares described above
will in each case be in addition to any separate vote of the requisite
percentage of common shares and Preferred Shares, voting together as a single
class, necessary to authorize the action in question.
35
For purpose of any right of the holders of Preferred Shares to vote on any
matter, whether the right is created by the Agreement and Declaration of Trust,
by statute or otherwise, a holder of a preferred share is not entitled to vote
and the Preferred Shares will not be deemed to be outstanding for the purpose of
voting or determining the number of Preferred Shares required to constitute a
quorum, if prior to or concurrently with a determination of the Preferred Shares
entitled to vote or of Preferred Shares deemed outstanding for quorum purposes,
as the case may be, a notice of redemption was given in respect of those
Preferred Shares and sufficient Deposit Securities for the redemption of those
Preferred Shares were deposited.
RATING AGENCY GUIDELINES
The Fund is required under Fitch and Moody's 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 Moody's have each
established separate guidelines for determining discounted value. To the extent
any particular portfolio holding does not satisfy the applicable rating agency's
guidelines, all or a portion of such holding's value will not be included in the
calculation of discounted value (as defined by the rating agency). The Fitch and
Moody's guidelines also impose certain diversification requirements on the
Fund's overall portfolio. The "Preferred Shares Basic Maintenance Amount"
includes the sum of (i) the aggregate liquidation preference of the Preferred
Shares then outstanding, (ii) the total principal of any senior debt (plus
accrued and projected dividends), (iii) certain Fund expenses and (iv) certain
other current liabilities.
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 Moody's have agreed that the auditors must certify once per quarter
the asset coverage test on a date randomly selected by the auditors. Based on
the Fund's assets and liabilities as of , 2003, 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 Moody's. 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 Moody's, or both, as
appropriate, that any such change would not impair the ratings then assigned by
Fitch and Moody's to the Preferred Shares.
The Board of Trustees may amend the definition of Maximum Rate to increase
the percentage amount by which the Reference Rate is multiplied to determine the
Maximum Rate without the vote or
36
consent of the holders of Preferred Shares, including each series, or any other
shareholder of the Fund, but only with confirmation from each Rating Agency, 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.
As described by Fitch and Moody's, 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 Moody's by
the Fund and Calamos and information obtained from other sources. The ratings
may be changed, suspended or withdrawn as a result of changes in, or the
unavailability of, such information.
The rating agency guidelines will apply to the Preferred Shares only so
long as such rating agency is rating these shares. The Fund will pay fees to
Fitch and Moody's for rating the Preferred Shares.
REDEMPTION
MANDATORY REDEMPTION. If the Fund does not timely cure a failure to (1)
maintain a discounted value of its portfolio equal to the Preferred Shares Basic
Maintenance Amount, (2) maintain the 1940 Act Preferred Shares Asset Coverage,
or (3) file a required certificate related to asset coverage on time, the
Preferred Shares will be subject to mandatory redemption out of funds legally
available therefor in accordance with the Statement and applicable law, at the
redemption price of $25,000 per share plus an amount equal to accumulated but
unpaid dividends thereon (whether or not earned or declared) to (but not
including) the date fixed for redemption. Any such redemption will be limited to
the number of Preferred Shares necessary to restore the required discounted
value or the 1940 Act Preferred Shares Asset Coverage, as the case may be.
In determining the number of Preferred Shares required to be redeemed in
accordance with the foregoing, the Fund will allocate the number of shares
required to be redeemed to satisfy the Preferred Shares Basic Maintenance Amount
or the 1940 Act Preferred Shares Asset Coverage, as the case may be, prorata
among the Preferred Shares of the Fund and any other preferred shares of the
Fund, subject to redemption or retirement. If fewer than all outstanding shares
of any series are, as a result, to be redeemed, the Fund may redeem such shares
prorata, by lot or other method that it deems fair and equitable.
OPTIONAL REDEMPTION. To the extent permitted under the 1940 Act and
Delaware law, the Fund at its option may without the consent of the holders of
Preferred Shares, redeem Preferred Shares having a dividend period of one year
or less, in whole or in part, on the business day after the last day of such
dividend period upon not less than 15 calendar days and not more than 40
calendar days prior notice. The optional redemption price per share will be
$25,000 per share, plus an amount equal to accumulated but unpaid dividends
thereon (whether or not earned or declared) to the date fixed for redemption.
Preferred Shares having a dividend period of more than one year are redeemable
at the option of the Fund, in whole or in part, prior to the end of the relevant
dividend period, subject to any specific redemption provisions, which may
include the payment of redemption premiums to the extent required under any
applicable specific redemption provisions. The Fund will not make any optional
redemption unless, after giving effect thereto, (i) the Fund has available
certain deposit securities with maturities or tender dates not later than the
day preceding the applicable redemption date and having a value not less than
the amount (including any applicable premium) due to holders of the Preferred
Shares by reason of the redemption of the Preferred Shares on such date fixed
for the redemption and (ii) the Fund has eligible assets with an aggregate
discounted value at least equal to the Preferred Shares Basic Maintenance
Amount.
Notwithstanding the foregoing, Preferred Shares may not be redeemed at the
option of the Fund unless all dividends in arrears on the outstanding Preferred
Shares, and any other outstanding preferred shares, have been or are being
contemporaneously paid or set aside for payment. This would not prevent
37
the lawful purchase or exchange offer for Preferred Shares made on the same
terms to holders of all outstanding preferred shares.
LIQUIDATION
Subject to the rights of holders of any series or class or classes of
shares ranking on a parity with Preferred Shares with respect to the
distribution of assets upon liquidation of the Fund, upon a liquidation of the
Fund, whether voluntary or involuntary, the holders of Preferred Shares then
outstanding will be entitled to receive and to be paid out of the assets of the
Fund available for distribution to its shareholders, before any payment or
distribution is made on the common shares, an amount equal to the liquidation
preference with respect to such shares ($25,000 per share), plus an amount equal
to all dividends thereon (whether or not earned or declared by the Fund, but
excluding the interest thereon) accumulated but unpaid to and including the date
of final distribution in same-day funds in connection with the liquidation of
the Fund. After the payment to the holders of Preferred Shares of the full
preferential amounts provided for as described herein, the holders of Preferred
Shares as such will have no right or claim to any of the remaining assets of the
Fund.
Neither the sale of all or substantially all the property or business of
the Fund, nor the merger or consolidation of the Fund into or with any other
entity nor the merger or consolidation of any other entity into or with the
Fund, will be a liquidation, whether voluntary or involuntary, for the purposes
of the foregoing paragraph.
38
THE AUCTION
GENERAL
The Statement provides that, except as otherwise described in this
prospectus, the applicable rate for the Preferred Shares for each rate period
after the initial rate 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 60 days after the delivery of such notice. If the
auction agent should resign, the Fund will use its best efforts to enter into an
agreement with a successor auction agent containing substantially the same terms
and conditions as the auction agency agreement. The Fund may remove the auction
agent provided that, prior to such removal, the Fund has entered into such an
agreement with a successor auction agent.
BROKER-DEALER AGREEMENTS. Each auction requires the participation of one
or more Broker-Dealers. The auction agent will enter into agreements with
several Broker-Dealers selected by the Fund, which provide for the participation
of those Broker-Dealers in auctions for Preferred Shares.
The auction agent will pay to each Broker-Dealer after each auction from
funds provided by the Fund, a service charge at the annual rate of 1/4 of 1% of
the liquidation preference ($25,000 per share) of the Preferred Shares held by
that Broker-Dealer's customer upon settlement in an auction.
The Fund may request that the auction agent terminate one or more
Broker-Dealer agreements at any time upon five days' notice, provided that at
least one Broker-Dealer agreement is in effect after termination of the
agreement.
AUCTION PROCEDURES
Prior to the submission deadline on each auction date for the Preferred
Shares, each customer of a Broker-Dealer who is listed on the records of that
Broker-Dealer (or, if applicable, the auction agent) as a beneficial owner of
Preferred Shares may submit the following types of orders with respect to shares
of such series of Preferred Shares to that Broker-Dealer:
1. Hold Order -- indicating its desire to hold Preferred Shares
without regard to the applicable rate for the next rate period.
2. Bid -- indicating its desire to sell shares of such series at
$25,000 per share if the applicable rate for shares of such series for the
next period is less than the rate or spread specified in the bid.
3. Sell Order -- indicating its desire to sell shares of such series
at $25,000 per share without regard to the applicable rate for shares of
such series for the next 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 applicable rate on the auction date will
be treated as having submitted a sell order to its Broker-Dealer. A beneficial
owner that fails to submit an order to its Broker-Dealer will ordinarily be
deemed to have submitted a hold order to its Broker-Dealer. However, if a
beneficial owner fails to submit an order for some or all of its shares to its
Broker-Dealer for an auction relating to a rate 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
39
Preferred Shares subject to the sell order. A beneficial owner that offers to
become the beneficial owner of additional Preferred Shares is, for the purposes
of such offer, a potential holder as discussed below.
A potential holder is either a customer of a Broker-Dealer that is not a
beneficial owner of Preferred Shares but that wishes to purchase shares of such
series or that is a beneficial owner of shares of such series that wishes to
purchase additional shares of such series. A potential holder may submit bids to
its Broker-Dealer in which it offers to purchase shares of such series at
$25,000 per share if the applicable rate for the next dividend period is not
less than the specified rate in such bid. A bid placed by a potential holder
specifying a rate higher than the maximum rate for shares of such series on the
auction date will not be accepted.
The Broker-Dealers in turn will submit the orders of their respective
customers who are beneficial owners and potential holders to the auction agent.
They will designate themselves (unless otherwise permitted by the Fund) as
existing holders of shares subject to orders submitted or deemed submitted to
them by beneficial owners. They will designate themselves as potential holders
of shares subject to orders submitted to them by potential beneficial owners.
However, neither the Fund nor the auction agent will be responsible for a
Broker-Dealer's failure to comply with these procedures. Any order placed with
the auction agent by a Broker-Dealer as or on behalf of an existing holder or a
potential holder will be treated the same way as an order placed with a
Broker-Dealer by a beneficial owner or potential holder. Similarly, any failure
by a Broker-Dealer to submit to the auction agent an order for any Preferred
Shares held by it or customers who are beneficial owners will be treated as a
beneficial owner's failure to submit to its Broker-Dealer an order in respect of
Preferred Shares held by it. A Broker-Dealer may also submit orders to the
auction agent for its own account as an existing holder or potential holder,
provided it is not an affiliate of the Fund.
There are sufficient clearing bids in an auction if the number of shares
subject to bids submitted or deemed submitted to the auction agent by
Broker-Dealers for potential holders with rates or spreads equal to or lower
than the maximum applicable 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 applicable
rate for such series submitted or deemed submitted to the auction agent by
Broker-Dealers for existing holders of such series. If there are sufficient
clearing bids, the applicable rate for shares of such series for the next
succeeding rate 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 rate period will be the maximum rate on the auction date.
However, if the Fund has declared a special rate period and there are not
sufficient clearing bids, the election of a special rate period will not be
effective and the applicable rate for the next rate period will be the same as
during the current rate 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 rate period following the auction will
automatically be the same length as the preceding rate period and the applicable
rate for the next rate period will be the seven-day AA Financial Commercial
Paper Rate in the case of a standard dividend period for Series , , ,
and Preferred Shares and the 30-day AA Financial Commercial Paper Rate for
Series Preferred Shares.
The auction procedures include a prorata allocation of shares for purchase
and sale which may result in an existing holder continuing to hold or selling,
or a potential holder purchasing, a number of Preferred Shares that is different
than the number of shares specified in its order. To the extent the allocation
procedures have that result, Broker-Dealers that have designated themselves as
existing holders or potential holders in respect of customer orders will be
required to make appropriate prorata allocations among their respective
customers.
40
Settlement of purchases and sales will be made on the next business day
(which is also a dividend payment date) after the auction date through DTC.
Purchasers will make payment through their agent members in same-day funds to
DTC against delivery to their respective Agent Members. DTC will make payment to
the sellers' Agent Members in accordance with DTC's normal procedures, which now
provide for payment against delivery by their Agent Members in same-day funds.
The auctions for Series , , , and Preferred Shares will normally
be held every seven days and the auctions for Series Preferred Shares will
normally be held every 28 days. Each subsequent rate 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 Auction Rate for the next dividend period will be the Auction Rate
determined on the previous Auction Date.
If a Dividend Payment Date is not a business day because the New York Stock
Exchange is closed for business for more than three consecutive business days
due to an act of God, natural disaster, act of war, civil or military
disturbance, act of terrorism, sabotage, riots or a loss or malfunction of
utilities or communications services, or the dividend payable on such date can
not be paid for any such reason, then:
- the Dividend Payment Date for the affected dividend period will be the
next business day on which the trust and its paying agent, if any, can
pay the dividend;
- the affected dividend period will end on the day it otherwise would have
ended; and
- the next dividend period will begin and end on the dates on which it
otherwise would have begun and ended.
The following is a simplified example of how a typical auction works.
Assume that the Fund has 1,000 outstanding Preferred Shares of any series, and
three current holders. The three current holders and three potential holders
submit orders through Broker-Dealers at the auction:
Current Holder A........ Owns 500 shares, wants to sell Bid order of 4.1% rate for all
all 500 shares if auction rate 500 Shares
is less than 4.1%
Current Holder B........ Owns 300 shares, wants to hold Hold order -- will take the
auction rate
Current Holder C........ Owns 200 shares, wants to sell Bid order of 3.9% rate for all
all 200 shares if auction rate 200 shares
is less than 3.9%
Potential Holder D...... Wants to buy 200 shares Places order to buy at or
above 4.0%
Potential Holder E...... Wants to buy 300 shares Places order to buy at or
above 3.9%
Potential Holder F...... Wants to buy 200 shares Places order to buy at or
above 4.1%
The lowest dividend rate that will result in all 1,000 Preferred Shares
continuing to be held is 4.0% (the offer by D). Therefore, the dividend rate
will be 4.0%. Current holders B and C will continue to own their shares. Current
holder A will sell its shares because A's dividend rate bid was higher than the
dividend rate. Potential holder D will buy 200 shares and potential holder E
will buy 300 shares because their bid rates were at or below the dividend rate.
Potential holder F will not buy any shares because its bid rate was above the
dividend rate.
41
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 rate
period should note that because the dividend rate on such shares will be fixed
for the length of that dividend period, the value of such shares may fluctuate
in response to the changes in interest rates, and may be more or less than their
original cost if sold on the open market in advance of the next auction thereof,
depending on market conditions.
A beneficial owner or an existing holder may sell, transfer or otherwise
dispose of Preferred Shares only in whole shares and only:
- pursuant to a bid or sell order placed with the auction agent in
accordance with the auction procedures;
- to a Broker-Dealer; or
- to such other persons as may be permitted by the Fund; provided, however,
that (x) if you hold your Preferred Shares in the name of a
Broker-Dealer, a sale or transfer of your Preferred Shares to that
Broker-Dealer, or to another customer of that Broker-Dealer, will not be
considered a sale or transfer for purposes of the foregoing if that
Broker-Dealer remains the existing holder of the Preferred Shares
immediately after the transaction and (y) in the case of all transfers,
other than through an auction, the Broker-Dealer (or other person, if the
Fund permits) receiving the transfer will advise the auction agent of the
transfer.
Further description of the auction procedures can be found in the
Statement.
DESCRIPTION OF BORROWINGS
The Agreement and Declaration of Trust authorizes the Fund, without prior
approval of holders of common and preferred shares, including Preferred Shares,
to borrow money. In this connection, the Fund may issue notes or other evidence
of indebtedness (including bank borrowings or commercial paper) and may secure
any such borrowings by mortgaging, pledging or otherwise subjecting as security
the Fund's assets. In connection with such borrowing, the Fund may be required
to maintain minimum average balances with the lender or to pay a commitment or
other fee to maintain a line of credit. Any such requirements will increase the
cost of borrowing over the stated interest rate.
LIMITATIONS. Under the requirements of the 1940 Act, the Fund, immediately
after issuing any Borrowings that are senior securities representing
indebtedness (as defined in the 1940 Act), must have an asset coverage of at
least 300%. With respect to any such Borrowings, asset coverage means the ratio
which the value of the total assets of the Fund, less all liabilities and
indebtedness not represented by senior securities, bears to the aggregate amount
of any such Borrowings that are senior securities representing indebtedness,
issued by the Fund. Certain types of Borrowings may also result in the Fund
being subject to covenants in credit agreements relating to asset coverages or
portfolio composition or otherwise. In addition, the Fund may be subject to
certain restrictions imposed by guidelines of one or more rating agencies which
may issue ratings for commercial paper or notes issued by the Fund. Such
restrictions may be more stringent than those imposed by the 1940 Act.
DISTRIBUTION PREFERENCE. The rights of lenders to the Fund to receive
interest on and repayment of principal of any such Borrowings will be senior to
those of the Preferred Shares shareholders, and the terms of any such Borrowings
may contain provisions which limit certain activities of the Fund, including the
payment of dividends to Preferred Shares shareholders in certain circumstances.
42
VOTING RIGHTS. The 1940 Act does (in certain circumstances) grant to the
lenders to the Fund certain voting rights in the event of default in the payment
of interest on or repayment of principal. In the event that such provisions
would impair the Fund's status as a regulated investment company under the Code,
the Fund, subject to its ability to liquidate its relatively illiquid portfolio,
intends to repay the Borrowings. Any Borrowing will likely be ranked senior or
equal to all other existing and future borrowings of the Fund, including
Preferred Shares.
The discussion above describes the Board of Trustees' present intention
with respect to a possible offering of Borrowings. If the Board of Trustees
determines to authorize any of the foregoing, the terms may be the same as, or
different from, the terms described above, subject to applicable law and the
Fund's Declaration of Trust.
DESCRIPTION OF COMMON SHARES
The Fund is authorized to issue an unlimited number of common shares,
without par value. The Board of Trustees is authorized, however, to classify and
reclassify any unissued shares into one or more additional classes or series of
shares. The Board of Trustees may establish such series or class, including
preferred shares, from time to time by setting or changing in any one or more
respects the designations, preferences, conversion or other rights, voting
powers, restrictions, limitations as to dividends, qualifications or terms or
conditions of redemption of such shares and pursuant to such classification or
reclassification to increase or decrease the number of authorized shares of any
existing class or series. The Board of Trustees, without shareholder approval,
is authorized to amend the Agreement and Declaration of Trust and By-laws to
reflect the terms of any such class or series.
Common shares, when issued and outstanding, will be fully paid and
non-assessable. Common shareholders are entitled to share prorata in the net
assets of the Fund available for distribution to common shareholders upon
liquidation of the Fund. Common shareholders are entitled to one vote for each
share held.
So long as any Preferred Shares of the Fund are outstanding, holders of
common shares will not be entitled to receive any net income of or other
distributions from the Fund unless all accumulated dividends on Preferred Shares
have been paid, and unless asset coverage (as defined in the 1940 Act) with
respect to Preferred Shares would be at least 200% after giving effect to such
distributions.
The Common shares are listed on the New York Stock Exchange.
U.S. FEDERAL INCOME TAX MATTERS
The following is a description of certain U.S. federal income tax
consequences to a shareholder that acquires, holds and/or disposes of Preferred
Shares of the Fund. The discussion reflects applicable tax laws of the United
States as of the date of this prospectus, which tax laws may be changed or
subject to new interpretations by the courts or the Internal Revenue Service
("IRS") retroactively or prospectively. No attempt is made to present a detailed
explanation of U.S. federal income tax concerns affecting the Fund and its
shareholders, and the discussion set forth herein does not constitute tax
advice. In addition, no attempt is made to present state, local or foreign tax
concerns or tax concerns applicable to an investor with a special tax status
such as a financial institutional or non-U.S. investors. INVESTORS ARE URGED TO
CONSULT THEIR OWN TAX ADVISORS TO DETERMINE THE TAX CONSEQUENCES TO THEM OF
INVESTING IN THE FUND.
The Fund intends to elect to be treated, and to qualify each year, as a
"regulated investment company" under Subchapter M of the Internal Revenue Code
of 1986, as amended (the "Code"), so that it will not pay U.S. federal income
tax on income and capital gains timely distributed to shareholders. If the Fund
qualifies as a regulated investment company and distributes to its shareholders
at least 90% of the sum of (i) its "investment company taxable income" as that
term is defined in the Code (which includes, among other things, dividends,
taxable interest, the excess of any net short-term capital gains over net
long-term capital losses and certain net foreign exchange gains as reduced by
certain deductible
43
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" (the
excess of net long-term capital gain over net short-term capital loss), it will
be subject to U.S. federal income tax at regular corporate rates (currently at
the maximum rate of 35%) on the amount retained. The Fund intends to distribute
at least annually all or substantially all of its investment company taxable
income, net tax-exempt interest, and net capital gain. In addition, the Fund
will generally be subject to a nondeductible 4% federal excise tax on the
portion of its undistributed ordinary income and capital gains if it fails to
meet certain distribution requirements with respect to each calendar year. The
Fund intends to make distributions in a timely manner and accordingly does not
expect to be subject to the excise tax.
If for any taxable year the Fund did not qualify as a regulated investment
company for U.S. federal income tax purposes, it would be treated as a U.S.
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 addition, in the event of a failure to qualify as a regulated investment
company, the Fund's distributions, to the extent derived from the Fund's current
or accumulated earnings and profits, would generally constitute ordinary
dividends, which although generally eligible for the corporate dividends
received deduction and reduced rate of taxation for "qualified dividend income"
to individuals, would be taxable to shareholders as ordinary income, even though
such distributions might otherwise, at least in part, have been treated as
long-term capital gains in such shareholders' hands.
It is anticipated that Preferred Shares will constitute stock of the Fund,
and thus distributions with respect to Preferred Shares (other than capital gain
distributions and distributions in redemption of Preferred Shares subject to
Section 302(b) of the Code) will generally constitute dividends to the extent of
the Fund's current or accumulated earnings and profits, as calculated for
federal income tax purposes. Such dividends generally will be taxable as
ordinary income to holders and a portion of such dividends, if any, may qualify
for the dividends received deduction available to corporations under Section 243
of the Code and the reduced rate of taxation for "qualified dividend income" to
individuals under Section 1(h)(11)(B) of the Code. Dividends designated by the
Fund as capital gain distributions will be treated as long-term capital gains in
the hands of holders regardless of the length of time such holders have held
their shares. Distributions in excess of current and accumulated earnings and
profits of the Fund are treated first as return of capital to the extent of the
shareholder's basis in the Preferred Shares and, thereafter, as capital gain.
The IRS currently requires that a regulated investment company that has two or
more classes of stock allocate to each such class proportionate amounts of each
type of its income (such as ordinary income and capital gains). Accordingly, the
Fund intends to designate distributions made with respect to Preferred Shares as
capital gain distributions in proportion to the Preferred Shares' share of total
dividends paid during the year. See "U.S. Federal Income Tax Matters" in the
Statement of Additional Information.
If the Fund retains any net capital gain, the Fund may designate the
retained amount as undistributed capital gains in a notice to shareholders who,
if subject to U.S. federal income tax on long-term capital gains, (i) will be
required to include in income as long-term capital gain, their proportionate
share of such undistributed amount and (ii) will be entitled to credit their
proportionate share of the tax paid by the Fund on the undistributed amount
against their U.S. federal income tax liabilities, if any, and to claim refunds
to the extent the credit exceeds such liabilities. If such an event occurs, the
tax basis of shares owned by a shareholder of the Fund will for U.S. federal
income tax purposes, generally be increased by the difference between the amount
of undistributed net capital gain included in the shareholder's gross income and
the tax deemed to have been paid by the shareholders.
Sales and other dispositions of the Preferred Shares are taxable events for
shareholders that are subject to federal income tax. Shareholders should consult
their own tax advisors with reference to their individual circumstances to
determine whether any particular transaction in the Preferred Shares is properly
treated as a sale for tax purposes, as the following discussion assumes, and the
tax treatment of any gains or losses recognized in such transactions. Any loss
realized by a shareholder upon the sale or
44
other disposition of shares with a tax holding period of six months or less will
be treated as a long-term capital loss to the extent of any amounts treated as
distributions of long-term capital gain with respect to such shares. Losses on
sales or other dispositions of shares may be disallowed under the "wash sale"
rules in the event of other investments in the Fund (including those made
pursuant to reinvestment of dividends) within a period of 61 days beginning 30
days before and ending 30 days after a sale or other disposition of shares. In
such a case, the disallowed portion of any loss generally would be included in
the U.S. federal tax basis of the shares acquired in the other investments.
The Fund is required in certain circumstances to backup withhold at a rate
of 28% on reportable payments including dividends, capital gain distributions
and proceeds of sales or other dispositions of the Preferred Shares paid to
certain holders of the Preferred Shares who do not furnish the Fund with their
correct social security number or other taxpayer identification number and
certain other certifications, or who are otherwise subject to backup
withholding. Backup withholding is not an additional tax. Any amounts withheld
from payments made to a shareholder may be refunded or credited against such
shareholder's U.S. federal income tax liability, if any, provided that the
required information is furnished to the IRS.
THE FOREGOING IS A GENERAL AND ABBREVIATED SUMMARY OF THE PROVISIONS OF THE
CODE AND THE TREASURY REGULATIONS IN EFFECT AS THEY DIRECTLY GOVERN THE TAXATION
OF THE FUND AND ITS SHAREHOLDERS. THESE PROVISIONS ARE SUBJECT TO CHANGE BY
LEGISLATIVE OR ADMINISTRATIVE ACTION, AND ANY SUCH CHANGE MAY BE RETROACTIVE. A
MORE COMPLETE DISCUSSION OF THE TAX RULES APPLICABLE TO THE FUND CAN BE FOUND IN
THE STATEMENT OF ADDITIONAL INFORMATION WHICH IS INCORPORATED BY REFERENCE INTO
THIS PROSPECTUS. SHAREHOLDERS ARE URGED TO CONSULT THEIR TAX ADVISORS REGARDING
SPECIFIC QUESTIONS AS TO U.S. FEDERAL, FOREIGN, STATE, AND LOCAL INCOME OR OTHER
TAXES.
45
CERTAIN PROVISIONS OF THE AGREEMENT AND
DECLARATION OF TRUST AND BY-LAWS
The Fund's Agreement and Declaration of Trust includes provisions that
could have the effect of limiting the ability of other entities or persons to
acquire control of the Fund or to change the composition of its Board of
Trustees and could have the effect of depriving shareholders of an opportunity
to sell their shares at a premium over prevailing market prices by discouraging
a third party from seeking to obtain control of the Fund. These provisions,
however, have the advantage of potentially requiring persons seeking control of
the Fund to negotiate with its management regarding the price to be paid and
facilitating the continuity of the Fund's investment objective and policies. The
Board of Trustees of the Fund has considered these provisions and concluded that
they are in the best interests of the Fund.
The Board of Trustees is divided into three classes of approximately equal
size. The terms of the Trustees of the different classes are staggered so that
approximately one third of the Board of Trustees is elected by shareholders each
year. A Trustee may be removed from office with or without cause by a vote of at
least a majority of the then Trustees if such removal is approved by the holders
of at least 75% of the shares entitled to be voted with respect to the election
of such Trustee and present in person or by proxy at a meeting of shareholders
called for such purpose.
In addition, the Agreement and Declaration of Trust requires the
affirmative vote of at least 75% of the outstanding shares entitled to vote on
the matter for the Trust to merge or consolidate with any other corporation,
association, trust or other organization or to sell, lease or exchange all or
substantially all of the Fund's assets; unless such action has been approved,
adopted or authorized by the affirmative vote of at least 75% of the Trustees
then in office, in which case, the affirmative vote of a majority of the shares
entitled to vote on the matter is required.
In addition, conversion of the Fund to an open-end investment company would
require an amendment to the Fund's Agreement and Declaration of Trust. Such an
amendment would require the favorable vote of a majority of the then Trustees
followed by a favorable vote of the holders of at least 75% of the shares
entitled to vote on the matter, voting as separate classes or series (or a
majority of such shares if the amendment was previously approved by 75% of the
Trustees). Such a vote also would satisfy a separate requirement in the 1940 Act
that the change be approved by the shareholders. The Fund would be required to
redeem all of its outstanding Preferred Shares prior to its conversion to an
open-end investment company.
Shareholders of an open-end investment company may require the company to
redeem their shares of common stock at any time (except in certain circumstances
as authorized by or under the 1940 Act) at their net asset value, less such
redemption charge, if any, as might be in effect at the time of a redemption. If
the Fund is converted to an open-end investment company, it could be required to
liquidate portfolio securities to meet requests for redemption, and the common
shares would no longer be listed on the New York Stock Exchange. Conversion to
an open-end investment company would also require changes in certain of the
Fund's investment policies and restrictions, such as those relating to the
purchase of illiquid securities.
In addition, the Agreement and Declaration of Trust requires the
affirmative vote of 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, voting separately as a class or series, to
approve, adopt or authorize certain transactions with 5% or greater holders of a
class or series of shares and their associates, unless the transaction has been
approved by at least 75% of the Trustees, in which case "a majority of the
outstanding voting securities" (as defined in the 1940 Act) entitled to vote
shall be required. For purposes of these provisions, a 5% or greater holder of a
class or series of shares (a "Principal Shareholder") refers to any person who,
whether directly or indirectly and whether alone or together with its affiliates
and associates, beneficially owns 5% or more of the outstanding shares of any
46
class or series of shares of beneficial interest of the Fund. The 5% holder
transactions subject to these special approval requirements are:
- the merger or consolidation of the Fund or any subsidiary of the Fund
with or into any Principal Shareholder;
- the issuance of any securities of the Fund to any Principal Shareholder
for cash; or
- the sale, lease or exchange to the Fund or any subsidiary of the Fund, in
exchange for securities of the Fund, of any assets of any Principal
Shareholder, except assets having an aggregate fair market value of less
than $1,000,000, aggregating for purposes of such computation all assets
sold, leased or exchanged in any series of similar transactions within a
12-month period.
The Fund may be terminated by the affirmative vote of not less than 75% of
the Trustees then in office by written notice to the shareholders.
The Agreement and Declaration of Trust and By-laws provide that the Board
of Trustees has the power, to the exclusion of shareholders, to make, alter or
repeal any of the By-laws (except for any By-law specified not to be amended or
repealed by the Board), subject to the requirements of the 1940 Act. Neither
this provision of the Agreement and Declaration of Trust, nor any of the
foregoing provisions thereof requiring the affirmative vote of 75% of
outstanding shares of the Fund, can be amended or repealed except by the vote of
such required number of shares.
The Fund's By-laws generally require that advance notice be given to the
Fund in the event a shareholder desires to nominate a person for election to the
Board of Trustees or to transact any other business at an annual meeting of
shareholders. With respect to an annual meeting following the first annual
meeting of shareholders, notice of any such nomination or business must be
delivered to or received at the principal executive offices of the Fund not less
than 90 calendar days nor more than 120 calendar days prior to the anniversary
date of the prior year's annual meeting (subject to certain exceptions). In the
case of the first annual meeting of shareholders, the notice must be given no
later than the tenth calendar day following public disclosure as specified in
the By-laws of the date of the meeting. Any notice by a shareholder must be
accompanied by certain information as provided in the By-laws.
CUSTODIAN, AUCTION AGENT, TRANSFER AGENT,
DIVIDEND PAYING AGENT AND REGISTRAR
The Fund's securities and cash are held under a custodian agreement with
The Bank of New York, One Wall Street, New York, New York 10286. The Bank of New
York is also the transfer agent, dividend paying agent and registrar for the
Fund's common shares and the Preferred Shares. In addition, The Bank of New York
is the auction agent with respect to Preferred Shares.
47
UNDERWRITING
is acting as representative of the underwriters named below.
Subject to the terms and conditions stated in the underwriting agreement dated
the date hereof, each underwriter named below has severally agreed to purchase,
and the Fund has agreed to sell to such underwriter, the number of Preferred
Shares set forth opposite the name of such underwriter.
NUMBER OF SHARES
---------------------------------------------------------------------
UNDERWRITERS SERIES -- SERIES -- SERIES -- SERIES -- SERIES -- SERIES --
------------ --------- --------- --------- --------- --------- ---------
...................
----- ----- ----- ----- ----- -----
Total................
The underwriting agreement provides that the obligations of the several
underwriters to purchase the shares included in this offering are subject to
approval of certain legal matters by counsel and to certain other conditions.
The underwriters are obligated to purchase all the Preferred Shares if they
purchase any of the shares.
The underwriters propose to offer some of the shares directly to the public
at the public offering price set forth on the cover page of this prospectus and
some of the shares to certain dealers at the public offering price less a
concession not in excess of $ per share. The sales load the Fund will pay
of $ per share is equal to % of the initial offering price. The
underwriters may allow, and such dealers may reallow, a concession not in excess
of $ per share on sales to certain other dealers. If all of the Preferred
Shares are not sold at the initial offering price, the representatives may
change the public offering price and other selling terms. Investors must pay for
any Preferred Shares purchased on or before , 2003.
The Fund anticipates that from time to time the underwriters may act as
brokers or dealers in connection with the execution of the Fund's portfolio
transactions after they have ceased to be underwriters and, subject to certain
restrictions, may act as brokers while they are underwriters. The underwriters
are active underwriters of, and dealers in, securities and act as market makers
in a number of such securities, and therefore can be expected to engage in
portfolio transactions with, and perform services for the Fund, subject to
applicable law.
The Fund anticipates that the underwriters or one of their respective
affiliates may, from time to time, act in auctions as Broker-Dealers and receive
fees as set forth under "The Auction" and in the Statement of Additional
Information.
The Fund, and Calamos have agreed to indemnify the underwriters against
certain liabilities, including liabilities arising under the Securities Act of
1933, or to contribute to payments the underwriters may be required to make
because of any of those liabilities. Insofar as indemnification for liability
arising under the Securities Act of 1933 may be permitted to directors, officers
and controlling persons of the Fund pursuant to the foregoing provisions, or
otherwise, the Fund has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the Fund of
expenses incurred or paid by a director, officer or controlling person of the
Fund in the successful defense of any action, suit or proceeding) is asserted by
such director, officer or controlling person in connection with the securities
being registered, the Fund will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
The principal business address of is
.
48
LEGAL OPINIONS
Bell, Boyd & Lloyd LLC, Chicago, Illinois, serves as counsel to the Fund
and to the non-interested Trustees. Vedder, Price, Kaufman & Kammholz ("Vedder
Price"), Chicago, Illinois, which is serving as special counsel to the Fund in
connection with the offering, will pass on the legality of the shares offered
hereby. Vedder Price is also counsel to Calamos. Certain matters will be passed
upon for the underwriters by Simpson Thacher & Bartlett LLP, New York, New York.
Vedder Price and Simpson Thacher & Bartlett LLP may rely on the opinion of
Morris, Nichols, Arsht & Tunnell, Wilmington, Delaware on certain matters of
Delaware law.
AVAILABLE INFORMATION
The Fund is subject to the informational requirements of the Securities
Exchange Act of 1934 and the Investment Company Act and is required to file
reports, proxy statements and other information with the Securities and Exchange
Commission. These documents can be inspected and copied for a fee at the SEC's
public reference room, 450 Fifth Street, N.W., Washington, D.C. 20549, and at
the SEC's Chicago Regional Office, Suite 1400, Northwestern Atrium Center, 500
West Madison Street, Chicago, Illinois 60661-2511. Reports, proxy statements,
and other information about the Trust can be inspected at the offices of the New
York Stock Exchange, 20 Broad Street, New York, New York 10005.
This prospectus does not contain all of the information in the Fund's
registration statement, including amendments, exhibits, and schedules.
Statements in this prospectus about the contents of any contract or other
document are not necessarily complete and in each instance reference is made to
the copy of the contract or other document filed as an exhibit to the
registration statement, each such statement being qualified in all respects by
this reference.
Additional information about the Fund and Preferred Shares can be found in
the Fund's registration statement (including amendments, exhibits, and
schedules) on Form N-2 filed with the SEC. The SEC maintains a web site
(http://www.sec.gov) that contains the Trust's registration statement, other
documents incorporated by reference, and other information the Trust has filed
electronically with the Commission, including proxy statements and reports filed
under the Securities Exchange Act of 1934.
49
TABLE OF CONTENTS FOR STATEMENT OF ADDITIONAL INFORMATION
Use of Proceeds............................................. S-2
Investment Objective and Policies........................... S-2
Investment Restrictions..................................... S-20
Management of the Fund...................................... S-20
Portfolio Transactions...................................... S-28
Net Asset Value............................................. S-28
Additional Information Concerning The Auctions for Preferred
Shares.................................................... S-29
Repurchase of Common Shares................................. S-30
U.S. Federal Income Tax Matters............................. S-32
Custodian, Transfer Agent, Dividend Paying Agent and
Registrar................................................. S-38
Experts..................................................... S-38
Additional Information...................................... S-38
Financial Statement and Independent Auditors' Report........ F-1
Appendix A -- Statement of Preferences of Preferred
Shares.................................................... A-1
Appendix B -- Description of Ratings........................ B-1
50
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
____________
CALAMOS CONVERTIBLE AND HIGH
INCOME FUND
PREFERRED SHARES
SHARES, SERIES
SHARES, SERIES
SHARES, SERIES
SHARES, SERIES
SHARES, SERIES
SHARES, SERIES
------------
PROSPECTUS
, 2003
------------
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
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 is
effective. This Statement of Additional Information 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.
CALAMOS CONVERTIBLE AND HIGH INCOME FUND
STATEMENT OF ADDITIONAL INFORMATION
Calamos Convertible and High Income Fund (the "Fund") is a recently
organized, diversified, closed-end management investment company. This Statement
of Additional Information relating to Preferred Shares ("Preferred Shares") does
not constitute a prospectus, but should be read in conjunction with the
prospectus relating thereto dated ___________ ____,2003. This Statement of
Additional Information does not include all information that a prospective
investor should consider before purchasing and investors should obtain and read
the Prospectus prior to purchasing such shares. A copy of the prospectus may be
obtained without charge by calling 1-800-582-6959. You may also obtain a copy of
the prospectus on the Securities and Exchange Commission's web site
(http://www.sec.gov). Capitalized terms used but not defined in this Statement
of Additional Information have the same meanings ascribed to them in the
prospectus or the Statement of Preferences of Preferred Shares (the "Statement")
attached as Appendix A.
TABLE OF CONTENTS FOR STATEMENT OF ADDITIONAL INFORMATION
Use of Proceeds..............................................................S-2
Investment Objective and Policies............................................S-2
Investment Restrictions.....................................................S-20
Management of the Fund......................................................S-20
Portfolio Transactions......................................................S-28
Net Asset Value.............................................................S-28
Additional Information Concerning The Auctions for Preferred Shares.........S-29
Repurchase of Common Shares.................................................S-30
U.S. Federal Income Tax Matters.............................................S-32
Custodian, Transfer Agent, Dividend Paying Agent and Registrar..............S-38
Experts ...................................................................S-38
Additional Information......................................................S-38
Financial Statement and Independent Auditors' Report.........................F-1
Appendix A-- Statement of Preferences of Preferred Shares....................A-1
Appendix B-- Description of Ratings..........................................B-1
This Statement of Additional Information is dated _______,2003.
S-1
USE OF PROCEEDS
The Fund will invest the net proceeds of the offering in accordance
with the Fund's investment objective and policies as stated below. It is
presently anticipated that the Fund will be able to invest substantially all of
the net proceeds in securities that meet the investment objective and policies
within three months after completion of the offering. Pending such investment,
the net proceeds may be invested in U.S. government securities high grade,
short-term money market instruments. If necessary, the Fund may also purchase,
as temporary investments, securities of other open- or closed-end investment
companies that invest primarily the types of securities in which the Fund may
invest directly.
INVESTMENT OBJECTIVE AND POLICIES
The prospectus presents the investment objective and the principal
investment strategies and risks of the Fund. This section supplements the
disclosure in the Fund's prospectus and provides additional information on the
Fund's investment policies or restrictions. Restrictions or policies stated as a
maximum percentage of the Fund's assets are only applied immediately after a
portfolio investment to which the policy or restriction is applicable (other
than the limitations on borrowing). Accordingly, any later increase or decrease
resulting from a change in values, net assets or other circumstances will not be
considered in determining whether the investment complies with the Fund's
restrictions and policies.
PRIMARY INVESTMENTS
Under normal circumstances, the Fund will invest at least 80% of its
managed assets in a diversified portfolio of convertible securities and below
investment grade (high yield/high risk) non-convertible debt securities. The
Fund will provide written notice to shareholders at least 60 days prior to any
change to the requirement that it invest at least 80% of its managed assets as
described in the sentence above. The portion of the Fund's assets invested in
convertible securities and below investment grade (high yield/high risk)
non-convertible debt securities will vary from time to time in light of the
Fund's investment objective, changes in equity prices and changes in interest
rates and other economic and market factors, although, under normal
circumstances, the Fund will invest at least 20% of its managed assets in
convertible securities and at least 20% of its managed assets in below
investment grade (high yield/high risk) non-convertible debt securities (so long
as the combined total equals at least 80% of the Fund's managed assets).
"Managed assets" means the total assets of the Fund (including any assets
attributable to any leverage that may be outstanding) minus the sum of accrued
liabilities (other than debt representing financial leverage). For this purpose,
the liquidation preference on the preferred shares will not constitute a
liability.
CONVERTIBLE SECURITIES
Investment in convertible securities forms an important part of the
Fund's investment strategies. Under normal circumstances, the Fund will invest
at least 20% of its managed assets in 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
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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 Asset Management, Inc. ("Calamos") may create a "synthetic"
convertible security by combining fixed income securities with the right to
acquire equity securities. More flexibility is possible in the assembly of a
synthetic convertible security than in the purchase of a convertible security.
Although synthetic convertible securities may be selected where the two
components are issued by a single issuer, thus making the synthetic convertible
security similar to the true convertible security, the character of a synthetic
convertible security allows the combination of components representing distinct
issuers, when Calamos believes that such a combination would better promote the
Fund's investment objective. A synthetic convertible security also is a more
flexible investment in that its two components may be purchased separately. For
example, the Fund may purchase a warrant for inclusion in a synthetic
convertible security but temporarily hold short-term investments while
postponing the purchase of a corresponding bond pending development of more
favorable market conditions.
A holder of a synthetic convertible security faces the risk of a
decline in the price of the security or the level of the index involved in the
convertible component, causing a decline in the value of the call option or
warrant purchased to create the synthetic convertible security. Should the price
of the stock fall below the exercise price and remain there throughout the
exercise period, the entire amount paid for the call option or warrant would be
lost. Because a synthetic convertible security includes the fixed-income
component as well, the holder of a synthetic convertible security also faces the
risk that interest rates will rise, causing a decline in the value of the
fixed-income instrument.
The Fund may also purchase synthetic convertible securities
manufactured by other parties, including convertible structured notes.
Convertible structured notes are fixed income debentures linked to equity, and
are typically issued by investment banks. Convertible structured notes have the
attributes of a convertible security, however, the investment bank that issued
the convertible note assumes the credit risk associated with the investment,
rather than the issuer of the underlying common stock into which the note is
convertible.
The Fund's holdings of synthetic convertible securities are considered
convertible securities for purposes of the Fund's policy to invest at least 50%
of its assets in convertible securities and 80% of its managed assets in a
diversified portfolio of convertible and non-convertible income securities.
HIGH YIELD SECURITIES
Investment in high yield non-convertible debt securities forms an
important part of the Fund's investment strategy. Under normal circumstances,
the Fund will invest at least 20% of its managed assets in high yield
non-convertible debt securities. The high yield securities in which the Fund
invests are rated Ba or lower by Moody's or BB or lower by Standard & Poor's or
are unrated but determined by Calamos to be of comparable quality.
Non-convertible debt securities rated below investment grade are commonly
referred to as "junk bonds" and are considered speculative with respect to the
issuer's capacity to pay interest and repay principal.
S-3
INVESTMENT IN HIGH YIELD SECURITIES INVOLVES SUBSTANTIAL RISK OF LOSS.
Below investment grade debt securities or comparable unrated securities are
commonly referred to as "junk bonds" and are considered predominantly
speculative with respect to the issuer's ability to pay interest and principal
and are susceptible to default or decline in market value due to adverse
economic and business developments. The market values for high yield securities
tend to be very volatile, and these securities are less liquid than investment
grade debt securities. For these reasons, your investment in the Fund is subject
to the following specific risks:
- increased price sensitivity to changing interest rates and to a
deteriorating economic environment;
- greater risk of loss due to default or declining credit quality;
- adverse company specific events are more likely to render the
issuer unable to make interest and/or principal payments; and
- if a negative perception of the high yield market develops, the
price and liquidity of high yield securities may be depressed.
This negative perception could last for a significant period of
time.
Debt securities rated below investment grade are speculative with
respect to the capacity to pay interest and repay principal in accordance with
the terms of such securities. A rating of C from Moody's means that the issue so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing. Standard & Poor's assigns a rating of C to issues that
are currently highly vulnerable to nonpayment, and the C rating may be used to
cover a situation where a bankruptcy petition has been filed or similar action
taken, but payments on the obligation are being continued (a C rating is also
assigned to a preferred stock issue in arrears on dividends or sinking fund
payments, but that is currently paying). See Appendix A to this statement of
additional information for a description of Moody's and Standard & Poor's
ratings.
Adverse changes in economic conditions are more likely to lead to a
weakened capacity of a high yield issuer to make principal payments and interest
payments than an investment grade issuer. The principal amount of high yield
securities outstanding has proliferated in the past decade as an increasing
number of issuers have used high yield securities for corporate financing. An
economic downturn could severely affect the ability of highly leveraged issuers
to service their debt obligations or to repay their obligations upon maturity.
Similarly, down-turns in profitability in specific industries could adversely
affect the ability of high yield issuers in that industry to meet their
obligations. The market values of lower quality debt securities tend to reflect
individual developments of the issuer to a greater extent than do higher quality
securities, which react primarily to fluctuations in the general level of
interest rates. Factors having an adverse impact on the market value of lower
quality securities may have an adverse effect on the Fund's net asset value and
the market value of its common shares. In addition, the Fund may incur
additional expenses to the extent it is required to seek recovery upon a default
in payment of principal or interest on its portfolio holdings. In certain
circumstances, the Fund may be required to foreclose on an issuer's assets and
take possession of its property or operations. In such circumstances, the Fund
would incur additional costs in disposing of such assets and potential
liabilities from operating any business acquired.
S-4
The secondary market for high yield securities may not be as liquid as
the secondary market for more highly rated securities, a factor which may have
an adverse effect on the Fund's ability to dispose of a particular security when
necessary to meet its liquidity needs. There are fewer dealers in the market for
high yield securities than investment grade obligations. The prices quoted by
different dealers may vary significantly and the spread between the bid and
asked price is generally much larger than higher quality instruments. Under
adverse market or economic conditions, the secondary market for high yield
securities could contract further, independent of any specific adverse changes
in the condition of a particular issuer, and these instruments may become
illiquid. As a result, the Fund could find it more difficult to sell these
securities or may be able to sell the securities only at prices lower than if
such securities were widely traded. Prices realized upon the sale of such lower
rated or unrated securities, under these circumstances, may be less than the
prices used in calculating the Fund's net asset value.
Since investors generally perceive that there are greater risks
associated with lower quality debt securities of the type in which the Fund may
invest a portion of its assets, the yields and prices of such securities may
tend to fluctuate more than those for higher rated securities. In the lower
quality segments of the debt securities market, changes in perceptions of
issuers' creditworthiness tend to occur more frequently and in a more pronounced
manner than do changes in higher quality segments of the debt securities market,
resulting in greater yield and price volatility.
If the Fund invests in high yield securities that are rated C or below,
the Fund will incur significant risk in addition to the risks associated with
investments in high yield securities and corporate loans. Distressed securities
frequently do not produce income while they are outstanding. The Fund may
purchase distressed securities that are in default or the issuers of which are
in bankruptcy. The Fund may be required to bear certain extraordinary expenses
in order to protect and recover its investment.
DISTRESSED SECURITIES
The Fund may, but currently does not intend to, invest up to 5% of its
total assets in distressed securities, including corporate loans, which are the
subject of bankruptcy proceedings or otherwise in default as to the repayment of
principal and/or payment of interest at the time of acquisition by the Fund or
are rated in the lower rating categories (Ca or lower by Moody's or CC or lower
by Standard & Poor's) or which are unrated investments considered by Calamos to
be of comparable quality. Investment in distressed securities is speculative and
involves significant risk. Distressed securities frequently do not produce
income while they are outstanding and may require the Fund to bear certain
extraordinary expenses in order to protect and recover its investment.
Therefore, to the extent the Fund seeks capital appreciation through investment
in distressed securities, the Fund's ability to achieve current income for its
shareholders may be diminished. The Fund also will be subject to significant
uncertainty as to when and in what manner and for what value the obligations
evidenced by the distressed securities will eventually be satisfied (e.g.,
through a liquidation of the obligor's assets, an exchange offer or plan of
reorganization involving the distressed securities or a payment of some amount
in satisfaction of the obligation). In addition, even if an exchange offer is
made or a plan of reorganization is adopted with respect to distressed
securities held by the Fund, there can be no assurance that the securities or
other assets received by the Fund in connection with such exchange offer or plan
of reorganization will not have a lower value or income potential than may have
been anticipated when the investment was made. Moreover, any securities received
by the Fund upon completion of an exchange offer or plan of reorganization may
be restricted as to resale. As a result of the Fund's participation in
negotiations with respect to any exchange offer or plan of reorganization with
respect to an issuer of distressed securities, the Fund may be restricted from
disposing of such securities.
S-5
LOANS
The Fund may invest up to 5% of its total assets in loan participations
and other direct claims against a borrower. The corporate loans in which the
Fund invests primarily consist of direct obligations of a borrower and may
include debtor in possession financings pursuant to Chapter 11 of the U.S.
Bankruptcy Code, obligations of a borrower issued in connection with a
restructuring pursuant to Chapter 11 of the U.S. Bankruptcy Code, leveraged
buy-out loans, leveraged recapitalization loans, receivables purchase
facilities, and privately placed notes. The Fund may invest in a corporate loan
at origination as a co-lender or by acquiring in the secondary market
participations in, assignments of or novations of a corporate loan. By
purchasing a participation, the Fund acquires some or all of the interest of a
bank or other lending institution in a loan to a corporate or government
borrower. The participations typically will result in the Fund having a
contractual relationship only with the lender not the borrower. The Fund will
have the right to receive payments of principal, interest and any fees to which
it is entitled only from the lender selling the participation and only upon
receipt by the lender of the payments from the borrower. Many such loans are
secured, although some may be unsecured. Such loans may be in default at the
time of purchase. Loans that are fully secured offer the Fund more protection
than an unsecured loan in the event of non-payment of scheduled interest or
principal. However, there is no assurance that the liquidation of collateral
from a secured loan would satisfy the corporate borrower's obligation, or that
the collateral can be liquidated. Direct debt instruments may involve a risk of
loss in case of default or insolvency of the borrower and may offer less legal
protection to the Fund in the event of fraud or misrepresentation. In addition,
loan participations involve a risk of insolvency of the lending bank or other
financial intermediary. The markets in loans are not regulated by federal
securities laws or the Securities and Exchange Commission (SEC).
As in the case of other high yield investments, such corporate loans
may be rated in the lower rating categories of the established rating services
(Ba or lower by Moody's or BB or lower by Standard & Poor's), or may be unrated
investments considered by Calamos to be of comparable quality. As in the case of
other high yield investments, such corporate loans can be expected to provide
higher yields than lower yielding, higher rated fixed income securities, but may
be subject to greater risk of loss of principal and income. There are, however,
some significant differences between corporate loans and high yield bonds.
Corporate loan obligations are frequently secured by pledges of liens and
security interests in the assets of the borrower, and the holders of corporate
loans are frequently the beneficiaries of debt service subordination provisions
imposed on the borrower's bondholders. These arrangements are designed to give
corporate loan investors preferential treatment over high yield investors in the
event of a deterioration in the credit quality of the issuer. Even when these
arrangements exist, however, there can be no assurance that the borrowers of the
corporate loans will repay principal and/or pay interest in full. Corporate
loans generally bear interest at rates set at a margin above a generally
recognized base lending rate that may fluctuate on a day-to-day basis, in the
case of the prime rate of a U.S. bank, or which may be adjusted on set dates,
typically 30 days but generally not more than one year, in the case of the
London Interbank Offered Rate. Consequently, the value of corporate loans held
by the Fund may be expected to 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 25% of its net assets, in securities of
foreign issuers. For this purpose, 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
S-6
foreign issuers. Positions in those securities are not necessarily denominated
in the same currency as the common stocks into which they may be converted. ADRs
are receipts typically issued by an American bank or trust company evidencing
ownership of the underlying securities. EDRs are European receipts listed on the
Luxembourg Stock Exchange evidencing a similar arrangement. GDRs are U.S.
dollar-denominated receipts evidencing ownership of foreign securities.
Generally, ADRs, in registered form, are designed for the U.S. securities
markets and EDRs and GDRs, in bearer form, are designed for use in foreign
securities markets. The Fund may invest in sponsored or unsponsored ADRs. In the
case of an unsponsored ADR, the Fund is likely to bear its proportionate share
of the expenses of the depository and it may have greater difficulty in
receiving shareholder communications than it would have with a sponsored ADR.
To the extent positions in portfolio securities are denominated in
foreign currencies, the Fund's investment performance is affected by the
strength or weakness of the U.S. dollar against those currencies. For example,
if the dollar falls in value relative to the Japanese yen, the dollar value of a
Japanese stock held in the portfolio will rise even though the price of the
stock remains unchanged. Conversely, if the dollar rises in value relative to
the yen, the dollar value of the Japanese stock will fall. (See discussion of
transaction hedging and portfolio hedging below under "Currency Exchange
Transactions.")
Investors should understand and consider carefully the risks involved
in foreign investing. Investing in foreign securities, which are generally
denominated in foreign currencies, and utilization of forward foreign currency
exchange contracts involve certain considerations comprising both risks and
opportunities not typically associated with investing in U.S. securities. These
considerations include: fluctuations in exchange rates of foreign currencies;
possible imposition of exchange control regulation or currency restrictions that
would prevent cash from being brought back to the United States; less public
information with respect to issuers of securities; less governmental supervision
of stock exchanges, securities brokers, and issuers of securities; lack of
uniform accounting, auditing and financial reporting standards; lack of uniform
settlement periods and trading practices; less liquidity and frequently greater
price volatility in foreign markets than in the United States; possible
imposition of foreign taxes; and sometimes less advantageous legal, operational
and financial protections applicable to foreign sub-custodial arrangements.
Although the Fund intends to invest in companies and government
securities of countries having stable political environments, there is the
possibility of expropriation or confiscatory taxation, seizure or
nationalization of foreign bank deposits or other assets, establishment of
exchange controls, the adoption of foreign government restrictions, or other
adverse political, social or diplomatic developments that could affect
investment in these nations.
The Fund expects that substantially all of its investments will be in
developed nations. However, the Fund may invest in the securities of emerging
countries. The securities markets of emerging countries are substantially
smaller, less developed, less liquid and more volatile than the securities
markets of the U.S. and other more developed countries. Disclosure and
regulatory standards in many respects are less stringent than in the U.S. and
other major markets. There also may be a lower level of monitoring and
regulation of emerging markets and the activities of investors in such markets,
and enforcement of existing regulations has been extremely limited. Economies in
individual emerging markets may differ favorably or unfavorably from the U.S.
economy in such respects as growth of gross domestic product, rates of
inflation, currency depreciation, capital reinvestment, resource
self-sufficiency and balance of payments positions. Many emerging market
countries have experienced high rates of inflation for many years, which has had
and may continue to have very negative effects on the economies and securities
markets of those countries.
S-7
CURRENCY EXCHANGE TRANSACTIONS
Currency exchange transactions may be conducted either on a spot (i.e.,
cash) basis at the spot rate for purchasing or selling currency prevailing in
the foreign exchange market or through forward currency exchange contracts
("forward contracts"). Forward contracts are contractual agreements to purchase
or sell a specified currency at a specified future date (or within a specified
time period) and price set at the time of the contract. Forward contracts are
usually entered into with banks, foreign exchange dealers and broker-dealers,
are not exchange traded, and are usually for less than one year, but may be
renewed.
Forward currency exchange transactions may involve currencies of the
different countries in which the Fund may invest and serve as hedges against
possible variations in the exchange rate between these currencies. Currency
exchange transactions are limited to transaction hedging and portfolio hedging
involving either specific transactions or portfolio positions, except to the
extent described below under "Synthetic Foreign Money Market Positions."
Transaction hedging is the purchase or sale of forward contracts with respect to
specific receivables or payables of the Fund accruing in connection with the
purchase and sale of its portfolio securities or the receipt of dividends or
interest thereon. Portfolio hedging is the use of forward contracts with respect
to portfolio security positions denominated or quoted in a particular foreign
currency. Portfolio hedging allows the Fund to limit or reduce its exposure in a
foreign currency by entering into a forward contract to sell such foreign
currency (or another foreign currency that acts as a proxy for that currency) at
a future date for a price payable in U.S. dollars so that the value of the
foreign denominated portfolio securities can be approximately matched by a
foreign denominated liability. The Fund may not engage in portfolio hedging with
respect to the currency of a particular country to an extent greater than the
aggregate market value (at the time of making such sale) of the securities held
in its portfolio denominated or quoted in that particular currency, except that
the Fund may hedge all or part of its foreign currency exposure through the use
of a basket of currencies or a proxy currency where such currencies or currency
act as an effective proxy for other currencies. In such a case, the Fund may
enter into a forward contract where the amount of the foreign currency to be
sold exceeds the value of the securities denominated in such currency. The use
of this basket hedging technique may be more efficient and economical than
entering into separate forward contracts for each currency held in the Fund. The
Fund may not engage in "speculative" currency exchange transactions.
If the Fund enters into a forward contract, the Fund's custodian will
segregate liquid assets of the Fund having a value equal to the Fund's
commitment under such forward contract. At the maturity of the forward contract
to deliver a particular currency, the Fund may either sell the portfolio
security related to the contract and make delivery of the currency, or it may
retain the security and either acquire the currency on the spot market or
terminate its contractual obligation to deliver the currency by purchasing an
offsetting contract with the same currency trader obligating it to purchase on
the same maturity date the same amount of the currency. It is impossible to
forecast with absolute precision the market value of portfolio securities at the
expiration of a forward contract. Accordingly, it may be necessary for a Fund to
purchase additional currency on the spot market (and bear the expense of such
purchase) if the market value of the security is less than the amount of
currency the Fund is obligated to deliver and if a decision is made to sell the
security and make delivery of the currency. Conversely, it may be necessary to
sell on the spot market some of the currency received upon the sale of the
portfolio security if its market value exceeds the amount of currency the Fund
is obligated to deliver.
If the Fund retains the portfolio security and engages in an offsetting
transaction, the Fund will incur a gain or a loss to the extent that there has
been movement in forward contract prices. If the Fund engages in an offsetting
transaction, it may subsequently enter into a new forward contract to sell the
currency. Should forward prices decline during the period between the Fund's
entering into a forward contract for the sale of a currency and the date it
enters into an offsetting contract for the purchase of the
S-8
currency, the Fund will realize a gain to the extent the price of the currency
it has agreed to sell exceeds the price of the currency it has agreed to
purchase. Should forward prices increase, the Fund will suffer a loss to the
extent the price of the currency it has agreed to purchase exceeds the price of
the currency it has agreed to sell. A default on the contract would deprive the
Fund of unrealized profits or force the Fund to cover its commitments for
purchase or sale of currency, if any, at the current market price.
Hedging against a decline in the value of a currency does not eliminate
fluctuations in the value of a portfolio security traded in that currency or
prevent a loss if the value of the security declines. Hedging transactions also
preclude the opportunity for gain if the value of the hedged currency should
rise. Moreover, it may not be possible for a Fund to hedge against a devaluation
that is so generally anticipated that the Fund is not able to contract to sell
the currency at a price above the devaluation level it anticipates. The cost to
the Fund of engaging in currency exchange transactions varies with such factors
as the currency involved, the length of the contract period, and prevailing
market conditions. Because currency exchange transactions are usually conducted
on a principal basis, no fees or commissions are involved.
SYNTHETIC FOREIGN MONEY MARKET POSITIONS
The Fund may invest in money market instruments denominated in foreign
currencies. In addition to, or in lieu of, such direct investment, the Fund may
construct a synthetic foreign money market position by (a) purchasing a money
market instrument denominated in one currency, generally U.S. dollars, and (b)
concurrently entering into a forward contract to deliver a corresponding amount
of that currency in exchange for a different currency on a future date and at a
specified rate of exchange. For example, a synthetic money market position in
Japanese yen could be constructed by purchasing a U.S. dollar money market
instrument, and entering concurrently into a forward contract to deliver a
corresponding amount of U.S. dollars in exchange for Japanese yen on a specified
date and at a specified rate of exchange. Because of the availability of a
variety of highly liquid short-term U.S. dollar money market instruments, a
synthetic money market position utilizing such U.S. dollar instruments may offer
greater liquidity than direct investment in foreign currency and a concurrent
construction of a synthetic position in such foreign currency, in terms of both
income yield and gain or loss from changes in currency exchange rates, in
general should be similar, but would not be identical because the components of
the alternative investments would not be identical.
DEBT OBLIGATIONS OF NON-U.S. GOVERNMENTS
An investment in debt obligations of non-U.S. governments and their
political subdivisions (sovereign debt) involves special risks that are not
present in corporate debt obligations. The non-U.S. issuer of the sovereign debt
or the non-U.S. governmental authorities that control the repayment of the debt
may be unable or unwilling to repay principal or interest when due, and the Fund
may have limited recourse in the event of a default. During periods of economic
uncertainty, the market prices of sovereign debt may be more volatile than
prices of debt obligations of U.S. issuers. In the past, certain non-U.S.
countries have encountered difficulties in servicing their debt obligations,
withheld payments of principal and interest and declared moratoria on the
payment of principal and interest on their sovereign debt.
A sovereign debtor's willingness or ability to repay principal and pay
interest in a timely manner may be affected by, among other factors, its cash
flow situation, the extent of its foreign currency reserves, the availability of
sufficient non-U.S. currency, the relative size of the debt service burden, the
sovereign debtor's policy toward its principal international lenders and local
political constraints. 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
S-9
commitments to lend funds to the sovereign debtor, which may further impair such
debtor's ability or willingness to service its debts.
EURODOLLAR INSTRUMENTS AND SAMURAI AND YANKEE BONDS. The Fund may
invest in Eurodollar instruments and Samurai and Yankee bonds. Eurodollar
instruments are bonds of corporate and government issuers that pay interest and
principal in U.S. dollars but are issued in markets outside the United States,
primarily in Europe. Samurai bonds are yen-denominated bonds sold in Japan by
non-Japanese issuers. Yankee bonds are U.S. dollar-denominated bonds typically
issued in the U.S. by non-U.S. governments and their agencies and non-U.S. banks
and corporations. The Fund may also invest in Eurodollar Certificates of Deposit
("ECDs"), Eurodollar Time Deposits ("ETDs") and Yankee Certificates of Deposit
("Yankee CDs"). ECDs are U.S. dollar-denominated certificates of deposit issued
by non-U.S. branches of domestic banks; ETDs are U.S. dollar-denominated
deposits in a non-U.S. branch of a U.S. bank or in a non-U.S. bank; and Yankee
CDs are U.S. dollar-denominated certificates of deposit issued by a U.S. branch
of a non-U.S. bank and held in the U.S. These investments involve risks that are
different from investments in securities issued by U.S. issuers, including
potential unfavorable political and economic developments, non-U.S. withholding
or other taxes, seizure of non-U.S. deposits, currency controls, interest
limitations or other governmental restrictions which might affect payment of
principal or interest.
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's judgment, a material event requiring a shareholder vote would
otherwise occur before the loan was repaid. In the event of bankruptcy or other
default of the borrower, the Fund could experience both delays in liquidating
the loan collateral or recovering the loaned securities and losses, including
(a) possible decline in the value of the collateral or in the value of the
securities loaned during the period while the Fund seeks to enforce its rights
thereto, (b) possible subnormal levels of income and lack of access to income
during this period, and (c) expenses of enforcing its rights.
OPTIONS ON SECURITIES, INDEXES AND CURRENCIES
The Fund may purchase and sell put options and call options on
securities, indexes or foreign currencies. The Fund may purchase agreements,
sometimes called cash puts, that may accompany the purchase of a new issue of
bonds from a dealer.
A put option gives the purchaser of the option, upon payment of a
premium, the right to sell, and the writer the obligation to buy, the underlying
security, commodity, index, currency or other instrument at the exercise price.
For instance, the Fund's purchase of a put option on a security might be
designed to protect its holdings in the underlying instrument (or, in some
cases, a similar instrument) against a substantial decline in the market value
by giving the Fund the right to sell such instrument at the option exercise
price. A call option, upon payment of a premium, gives the purchaser of the
option the right to buy, and the seller the obligation to sell, the underlying
instrument at the exercise price. The Fund's purchase of a call option on a
security, financial future, index, currency or other instrument might be
intended to protect a fund against an increase in the price of the underlying
instrument that it intends to purchase in the future by fixing the price at
which it may purchase such instrument.
The Fund is authorized to purchase and sell exchange listed options and
over-the-counter options ("OTC options"). Exchange listed options are issued by
a regulated intermediary such as the Options Clearing Corporation ("OCC"), which
guarantees the performance of the obligations of the parties to such options.
The discussion below uses the OCC as an example, but is also applicable to other
financial intermediaries.
With certain exceptions, OCC issued and exchange listed options
generally settle by physical delivery of the underlying security or currency,
although in the future cash settlement may become available. Index options and
Eurodollar instruments are cash settled for the net amount, if any, by which the
option is "in-the-money" (i.e., where the value of the underlying instrument
exceeds, in the case of a call option, or is less than, in the case of a put
option, the exercise price of the option) at the time the option is exercised.
Frequently, rather than taking or making delivery of the underlying instrument
through the process of exercising the option, listed options are closed by
entering into offsetting purchase or sale transactions that do not result in
ownership of the new option.
S-10
OTC options are purchased from or sold to securities dealers, financial
institutions or other parties ("Counterparties") through direct bilateral
agreement with the Counterparty. In contrast to exchange listed options, which
generally have standardized terms and performance mechanics, all the terms of an
OTC option, including such terms as method of settlement, term, exercise price,
premium, guarantees and security, are set by negotiation of the parties. The
Fund may sell OTC options (other than OTC currency options) that are subject to
a buy-back provision permitting the Fund to require the Counterparty to sell the
option back to a fund at a formula price within seven days. The Fund expects
generally to enter into OTC options that have cash settlement provisions,
although it is not required to do so. The staff of the SEC currently takes the
position that OTC options purchased by a fund, and portfolio securities
"covering" the amount of a fund's obligation pursuant to an OTC option sold by
it (or the amount of assets equal to the formula price for the repurchase of
the option, if any, less the amount by which the option is in the money) are
illiquid, and are subject to a fund's limitation on investing no more than 15%
of its net assets in illiquid securities.
The Fund may also purchase and sell options on securities indices and
other financial indices. Options on securities indices and other financial
indices are similar to options on a security or other instrument except that,
rather than settling by physical delivery of the underlying instrument, they
settle by cash settlement, i.e., an option or an index gives the holder the
right to receive, upon exercise of the option, an amount of cash if the closing
level of the index upon which the option is based exceeds, in the case of a
call, or is less than, in the case of a put, the exercise price of the option
(except if, in the case of an OTC option, physical delivery is specified). This
amount of cash is equal to the excess of the closing price of the index over the
exercise price of the option, which also may be multiplied by a formula value.
The seller of the option is obligated, in return for the premium received, to
make delivery of this amount. The gain or loss on an option on an index depends
on price movements in the instruments making upon the market, market segment,
industry or other composite on which the underlying index is based, rather than
price movements in individual securities, as is the case with respect to options
on securities.
The Fund will write call options and put options only if they are
"covered." For example, a call option written by the Fund will require the Fund
to hold the securities subject to the call (or securities convertible into the
needed securities without additional consideration) or to segregate cash or
liquid assets sufficient to purchase and deliver the securities if the call is
exercised. A call option sold by a fund on an index will require the Fund to own
portfolio securities which correlate with the index or to segregate cash or
liquid assets equal to the excess of the index value over the exercise price on
a current basis. A put option written by the Fund requires the Fund to segregate
cash or liquid assets equal to the exercise price.
OTC options entered into by the Fund and OCC issued and exchange listed
index options will generally provide for cash settlement. As a result, when the
Fund sells these instruments it will only segregate an amount of cash or liquid
assets equal to its accrued net obligations, as there is no requirement for
payment or delivery of amounts in excess of the net amount. These amounts will
equal 100% of the exercise price in the case of a non cash-settled put, the same
as an OCC guaranteed listed option sold by the Fund, or the in-the-money amount
plus any sell-back formula amount in the case of a cash-settled put or call. In
addition, when the Fund sells a call option on an index at a time when the
in-the-money amount exceeds the exercise price, the Fund will segregate, until
the option expires or is closed out, cash or cash equivalents equal in value to
such excess. OCC issued and exchange listed options sold by the Fund other than
those above generally settle with physical delivery, or with an election of
either physical delivery or cash settlement and the Fund will segregate an
amount of cash or liquid assets equal to the full value of the option. OTC
options settling with physical delivery, or with an election of either physical
delivery or cash settlement, will be treated the same as other options settling
with physical delivery.
If an option written by the Fund expires, the Fund realizes a capital
gain equal to the premium received at the time the option was written. If an
option purchased by the Fund expires, the Fund realizes a capital loss equal to
the premium paid.
The Fund will realize a capital gain from a closing purchase
transaction if the cost of the closing option is less than the premium received
from writing the option, or, if it is more, the Fund will realize a capital
loss. If the premium received from a closing sale transaction is more than the
premium paid to purchase the option, the Fund will realize a capital gain or, if
it is less, the Fund will realize a capital loss. The principal factors
affecting the market value of a put or a call option include supply and demand,
interest rates, the current market price of the underlying security or index in
relation to the exercise price of the option, the volatility of the underlying
security or index, and the time remaining until the expiration date.
A put or call option purchased by the Fund is an asset of the Fund,
valued initially at the premium paid for the option. The premium received for an
option written by the Fund is recorded as a deferred credit. The value of an
option purchased or written is marked-to-market daily and is valued at the
closing price on the exchange on which it is traded or, if not traded on an
exchange or if no closing price is available, at the mean between the last bid
and asked prices.
S-11
RISKS ASSOCIATED WITH OPTIONS
There are several risks associated with transactions in options. For
example, there are significant differences between the securities markets, the
currency markets and the options markets that could result in an imperfect
correlation among these markets, causing a given transaction not to achieve its
objectives. A decision as to whether, when and how to use options involves the
exercise of skill and judgment, and even a well-conceived transaction may be
unsuccessful to some degree because of market behavior or unexpected events. The
ability of the Fund to utilize options successfully will depend on Calamos'
ability to predict pertinent market investments, which cannot be assured.
The Fund's ability to close out its position as a purchaser or seller
of an OCC or exchange listed put or call option is dependent, in part, upon the
liquidity of the option market. Among the possible reasons for the absence of a
liquid option market on an exchange are: (i) insufficient trading interest in
certain options; (ii) restrictions on transactions imposed by an exchange; (iii)
trading halts, suspensions or other restrictions imposed with respect to
particular classes or series of options or underlying securities including
reaching daily price limits; (iv) interruption of the normal operations of the
OCC or an exchange; (v) inadequacy of the facilities of an exchange or OCC to
handle current trading volume; or (vi) a decision by one or more exchanges to
discontinue the trading of options (or a particular class or series of options),
in which event the relevant market for that option on that exchange would cease
to exist, although outstanding options on that exchange would generally continue
to be exercisable in accordance with their terms. If the Fund were unable to
close out an option that it has purchased on a security, it would have to
exercise the option in order to realize any profit or the option would expire
and become worthless. If the Fund were unable to close out a covered call option
that it had written on a security, it would not be able to sell the underlying
security until the option expired. As the writer of a covered call option on a
security, the Fund foregoes, during the option's life, the opportunity to profit
from increases in the market value of the security covering the call option
above the sum of the premium and the exercise price of the call. As the writer
of a covered call option on a foreign currency, the Fund foregoes, during the
option's life, the opportunity to profit from currency appreciation.
The hours of trading for listed options may not coincide with the hours
during which the underlying financial instruments are traded. To the extent that
the option markets close before the markets for the underlying financial
instruments, significant price and rate movements can take place in the
underlying markets that cannot be reflected in the option markets.
Unless the parties provide for it, there is no central clearing or
guaranty function in an OTC option. As a result, if the Counterparty (as
described above under "Options on Securities, Indexes and Currencies") fails to
make or take delivery of the security, currency or other instrument underlying
an OTC option it has entered into with a fund or fails to make a cash settlement
payment due in accordance with the terms of that option, a fund will lose any
premium it paid for the option as well as any anticipated benefit of the
transaction. Accordingly, Calamos must assess the creditworthiness of each such
Counterparty or any guarantor or credit enhancement of the Counterparty's credit
to determine the likelihood that the terms of the OTC option will be satisfied.
The Fund will engage in OTC option transactions only with U.S. government
securities dealers recognized by the Federal Reserve Bank of New York as
"primary dealers" or broker/dealers, domestic or foreign banks or other
financial institutions which have received (or the guarantors of the obligation
of which have received) a short-term credit rating of A-1 from S&P or P-1 from
Moody's or an equivalent rating from any nationally recognized statistical
rating organization ("NRSRO") or, in the case of OTC currency transactions, are
determined to be of equivalent credit quality by Calamos.
The Fund may purchase and sell call options on securities indices and
currencies. All calls sold by the Fund must be "covered." Even though the Fund
will receive the option premium to help protect it against loss, a call sold by
the Fund exposes the Fund during the term of the option to possible loss of
opportunity to realize appreciation in the market price of the underlying
security or instrument and may require a fund to hold a security or instrument
which it might otherwise have sold. The Fund may purchase and sell put options
on securities indices and currencies. In selling put options, there is a risk
that the Fund may be required to buy the underlying security at a
disadvantageous price above the market price.
S-12
If trading were suspended in an option purchased or written by the
Fund, the Fund would not be able to close out the option. If restrictions on
exercise were imposed, the Fund might not be able to exercise an option it has
purchased.
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 index(1) at a specified price and time. A public market
exists in futures contracts covering a number of indexes (including, but not
limited to: the Standard & Poor's 500 Index, the Russell 2000 Index, the Value
Line Composite Index, and the New York Stock Exchange Composite Index) as well
as financial instruments (including, but not limited to: U.S. Treasury bonds,
U.S. Treasury notes, Eurodollar certificates of deposit and foreign currencies).
Other index and financial instrument futures contracts are available and it is
expected that additional futures contracts will be developed and traded.
The Fund may purchase and write call and put futures options. Futures
options possess many of the same characteristics as options on securities,
indexes and foreign currencies (discussed above). A futures option gives the
holder the right, in return for the premium paid, to assume a long position
(call) or short position (put) in a futures contract at a specified exercise
price at any time during the period of the option. Upon exercise of a call
option, the holder acquires a long position in the futures contract and the
writer is assigned the opposite short position. In the case of a put option, the
opposite is true. The Fund might, for example, use futures contracts to hedge
against or gain exposure to fluctuations in the general level of stock prices,
anticipated changes in interest rates or currency fluctuations that might
adversely affect either the value of the Fund's securities or the price of the
securities that the Fund intends to purchase. Although other techniques could be
used to reduce or increase the Fund's exposure to stock price, interest rate and
currency fluctuations, the Fund may be able to achieve its desired exposure more
effectively and perhaps at a lower cost by using futures contracts and futures
options.
The Fund will only enter into futures contracts and futures options
that are standardized and traded on an exchange, board of trade or similar
entity, or quoted on an automated quotation system.
The success of any futures transaction depends on the investment
manager correctly predicting changes in the level and direction of stock prices,
interest rates, currency exchange rates and other factors. Should those
predictions be incorrect, the Fund's return might have been better had the
transaction not been attempted; however, in the absence of the ability to use
futures contracts, the investment manager might have taken portfolio actions in
anticipation of the same market movements with similar investment results, but,
presumably, at greater transaction costs. When a purchase or sale of a futures
contract is made by the Fund, the Fund is required to deposit with its custodian
(or broker, if legally permitted) a specified amount of cash or U.S. Government
securities or other securities acceptable to the broker ("initial margin"). The
margin required for a futures contract is set by the exchange on which the
contract is traded and may be modified during the term of the contract, although
the Fund's broker may require margin deposits in excess of the minimum required
by the exchange. The initial margin is in the nature of a performance bond or
good faith deposit on the futures contract, which is returned to the Fund upon
termination of the contract, assuming all contractual obligations have been
satisfied. The Fund expects to earn interest income on its initial margin
deposits. A futures contract held by the Fund is valued daily at
------------------
(1) A futures contract on an index is an agreement pursuant to which two parties
agree to take or make delivery of an amount of cash equal to the difference
between the value of the index at the close of the last trading day of the
contract and the price at which the index contract was originally written.
Although the value of a securities index is a function of the value of certain
specified securities, no physical delivery of those securities is made.
S-13
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 daily net
asset value, the Fund will mark-to-market its open futures positions.
The Fund is also required to deposit and maintain margin with respect
to put and call options on futures contracts written by it. Such margin deposits
will vary depending on the nature of the underlying futures contract (and the
related initial margin requirements), the current market value of the option and
other futures positions held by the Fund.
Although some futures contracts call for making or taking delivery of
the underlying securities, usually these obligations are closed out prior to
delivery by offsetting purchases or sales of matching futures contracts (same
exchange, underlying security or index, and delivery month). If an offsetting
purchase price is less than the original sale price, the Fund engaging in the
transaction realizes a capital gain, or if it is more, the Fund realizes a
capital loss. Conversely, if an offsetting sale price is more than the original
purchase price, the Fund engaging in the transaction realizes a capital gain, or
if it is less, the Fund realizes a capital loss. The transaction costs must also
be included in these calculations.
RISKS ASSOCIATED WITH FUTURES
There are several risks associated with the use of futures contracts
and futures options. A purchase or sale of a futures contract may result in
losses in excess of the amount invested in the futures contract. In trying to
increase or reduce market exposure, there can be no guarantee that there will be
a correlation between price movements in the futures contract and in the
portfolio exposure sought. In addition, there are significant differences
between the securities and futures markets that could result in an imperfect
correlation between the markets, causing a given transaction not to achieve its
objectives. The degree of imperfection of correlation depends on circumstances
such as: variations in speculative market demand for futures, futures options
and the related securities, including technical influences in futures and
futures options trading and differences between the securities markets and the
securities underlying the standard contracts available for trading. For example,
in the case of index futures contracts, the composition of the index, including
the issuers and the weighing of each issue, may differ from the composition of
the Fund's portfolio, and, in the case of interest rate futures contracts, the
interest rate levels, maturities and creditworthiness of the issues underlying
the futures contract may differ from the financial instruments held in the
Fund's portfolio. A decision as to whether, when and how to use futures
contracts involves the exercise of skill and judgment, and even a well-conceived
transaction may be unsuccessful to some degree because of market behavior or
unexpected stock price or interest rate trends.
Futures exchanges may limit the amount of fluctuation permitted in
certain futures contract prices during a single trading day. The daily limit
establishes the maximum amount that the price of a futures contract may vary
either up or down from the previous day's settlement price at the end of the
current trading session. Once the daily limit has been reached in a futures
contract subject to the limit, no more trades may be made on that day at a price
beyond that limit. The daily limit governs only price movements during a
particular trading day and therefore does not limit potential losses because the
limit may work to prevent the liquidation of unfavorable positions. For example,
futures prices have occasionally moved to the daily limit for several
consecutive trading days with little or no trading, thereby preventing prompt
liquidation of positions and subjecting some holders of futures contracts to
substantial losses. Stock index futures contracts are not normally subject to
such daily price change limitations.
There can be no assurance that a liquid market will exist at a time
when the Fund seeks to close out a futures position or futures option position.
The Fund would be exposed to possible loss on the position
S-14
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 Fund's investment objective.
When purchasing a futures contract or writing a put option on a futures
contract, the Fund must maintain with its custodian (or broker, if legally
permitted) cash or cash equivalents (including any margin) equal to the market
value of such contract. When writing a call option on a futures contract, the
Fund similarly will maintain with its custodian cash or cash equivalents
(including any margin) equal to the amount by which such option is in-the-money
until the option expires or is closed by the Fund.
The Fund may not maintain open short positions in futures contracts,
call options written on futures contracts or call options written on indexes if,
in the aggregate, the market value of all such open positions exceeds the
current value of the securities in its portfolio, plus or minus unrealized gains
and losses on the open positions, adjusted for the historical relative
volatility of the relationship between the portfolio and the positions. For this
purpose, to the extent the Fund has written call options on specific securities
in its portfolio, the value of those securities will be deducted from the
current market value of the securities portfolio.
In order to comply with Commodity Futures Trading Commission Regulation
4.5 and thereby avoid being deemed a "commodity pool operator," the Fund will
use commodity futures or commodity options contracts solely for bona fide
hedging purposes within the meaning and intent of Regulation 1.3(z), or, with
respect to positions in commodity futures and commodity options contracts that
do not come within the meaning and intent of 1.3(z), the aggregate initial
margin and premiums required to establish such positions will not exceed 5% of
the fair market value of the assets of the Fund, after taking into account
unrealized profits and unrealized losses on any such contracts it has entered
into. In the case of an option that is in-the-money at the time of purchase, the
in-the-money amount (as defined in Section 190.01(x) of the Commission
Regulations) may be excluded in computing such 5%.
Recently, the CFTC proposed amendments to Regulation 4.5 to include an
alternative to the 5 percent test for positions that do not come within the
meaning and intent of 1.3(z). Under the alternative test, the aggregate
notational value of such non-hedge positions must not exceed the liquidation
value of the Fund's portfolio. Notational value will be calculated for each such
futures position by multiplying the size of the contract, in contract units, by
the current market price per unit and for each such option position by
multiplying the size of the contract, in contract units, by the stock price per
unit.
Although the proposed amendment to Regulation 4.5 is not effective as
of the date of this Statement of Additional Information, the CFTC has indicated
that it will take a no-action position if a fund, pending final action on the
amendments, operates in accordance with the amendments.
WARRANTS
The Fund may invest in warrants. A warrant is a right to purchase
common stock at a specific price (usually at a premium above the market value of
the underlying common stock at time of issuance) during a specified period of
time. A warrant may have a life ranging from less than a year to twenty years or
longer, but a warrant becomes worthless unless it is exercised or sold before
expiration. In addition, if the market price of the common stock does not exceed
the warrant's exercise price during the life of the warrant, the warrant will
expire worthless. Warrants have no voting rights, pay no dividends and have no
rights with respect to the assets of the corporation issuing them. The
percentage increase or decrease in the value of a warrant may be greater than
the percentage increase or decrease in the value of the underlying common stock.
PORTFOLIO TURNOVER
Although the Fund does not purchase securities with a view to rapid
turnover, there are no limitations on the length of time that portfolio
securities must be held. Portfolio turnover can occur for a number of reasons,
including calls for redemption, general conditions in the securities markets,
more
S-15
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 expenses,
which must be borne by that Fund. High portfolio turnover may also result in the
realization of capital gains or losses and, to the extent net short-term capital
gains are realized, any distributions resulting from such gains will be
considered ordinary income for federal income tax purposes.
SHORT SALES
The Fund may attempt to hedge against market risk and to enhance income
by selling short "against the box," that is: (1) entering into short sales of
securities that it currently has the right to acquire through the conversion or
exchange of other securities that it owns, or to a lesser extent, entering into
short sales of securities that it currently owns; and (2) entering into
arrangements with the broker-dealers through which such securities are sold
short to receive income with respect to the proceeds of short sales during the
period the Fund's short positions remain open. The Fund may make short sales of
securities only if at all times when a short position is open the Fund owns an
equal amount of such securities or securities convertible into or exchangeable
for, without payment of any further consideration, securities of the same issue
as, and equal in amount to, the securities sold short.
In a short sale against the box, the Fund does not deliver from its
portfolio the securities sold and does not receive immediately the proceeds from
the short sale. Instead, the Fund borrows the securities sold short from a
broker-dealer through which the short sale is executed, and the broker-dealer
delivers such securities, on behalf of the Fund, to the purchaser of such
securities. Such broker-dealer is entitled to retain the proceeds from the short
sale until the Fund delivers to such broker-dealer the securities sold short. In
addition, the Fund is required to pay to the broker-dealer the amount of any
dividends paid on shares sold short. Finally, to secure its obligation to
deliver to such broker-dealer the securities sold short, the Fund must deposit
and continuously maintain in a separate account with the Fund's custodian an
equivalent amount of the securities sold short or securities convertible into or
exchangeable for such securities without the payment of additional
consideration. The Fund is said to have a short position in the securities sold
until it delivers to the broker-dealer the securities sold, at which time the
Fund receives the proceeds of the sale. Because the Fund ordinarily will want to
continue to hold securities in its portfolio that are sold short, the Fund will
normally close out a short position by purchasing on the open market and
delivering to the broker-dealer an equal amount of the securities sold short,
rather than by delivering portfolio securities.
A short sale works the same way, except that the Fund places in the
segregated account cash or U.S. government securities equal in value to the
difference between (i) the market value of the securities sold short at the time
they were sold short and (ii) any cash or U.S. government securities required to
be deposited with the broker as collateral. In addition, so long as the short
position is open, the Fund must adjust daily the value of the segregated account
so that the amount deposited in it, plus any amount deposited with the broker as
collateral, will equal the current market value of the security sold short.
However, the value of the segregated account may not be reduced below the point
at which the segregated account, plus any amount deposited with the broker, is
equal to the market value of the securities sold short at the time they were
sold short.
Short sales may protect the Fund against the risk of losses in the
value of its portfolio securities because any unrealized losses with respect to
such portfolio securities should be wholly or partially offset by a
corresponding gain in the short position. However, any potential gains in such
portfolio securities should be wholly or partially offset by a corresponding
loss in the short position. The extent to which such gains or losses are offset
will depend upon the amount of securities sold short relative to the amount
S-16
the Fund owns, either directly or indirectly, and, in the case where the Fund
owns convertible securities, changes in the conversion premium.
Short sale transactions of the Fund involve certain risks. In
particular, the imperfect correlation between the price movements of the
convertible securities and the price movements of the underlying common stock
being sold short creates the possibility that losses on the short sale hedge
position may be greater than gains in the value of the portfolio securities
being hedged. In addition, to the extent that the Fund pays a conversion premium
for a convertible security, the Fund is generally unable to protect against a
loss of such premium pursuant to a short sale hedge. In determining the number
of shares to be sold short against the Fund's position in the convertible
securities, the anticipated fluctuation in the conversion premiums is
considered. The Fund will also incur transaction costs in connection with short
sales. Certain provisions of the Internal Revenue Code (and related Treasury
Regulations thereunder) may limit the degree to which the Fund is able to enter
into short sales and other transactions with similar effects without triggering
adverse tax consequences, which limitations might impair the Fund's ability to
achieve its investment objective. See "U.S. Federal Income Tax Matters."
In addition to enabling the Fund to hedge against market risk, short
sales may afford the Fund an opportunity to earn additional current income to
the extent the Fund is able to enter into arrangements with broker-dealers
through which the short sales are executed to receive income with respect to the
proceeds of the short sales during the period the Fund's short positions remain
open.
"WHEN-ISSUED" AND DELAYED DELIVERY SECURITIES AND REVERSE REPURCHASE AGREEMENTS
The Fund may purchase securities on a when-issued or delayed-delivery
basis. Although the payment and interest terms of these securities are
established at the time the Fund enters into the commitment, the securities may
be delivered and paid for a month or more after the date of purchase, when their
value may have changed. The Fund makes such commitments only with the intention
of actually acquiring the securities, but may sell the securities before
settlement date if Calamos deems it advisable for investment reasons. The Fund
may utilize spot and forward foreign currency exchange transactions to reduce
the risk inherent in fluctuations in the exchange rate between one currency and
another when securities are purchased or sold on a when-issued or
delayed-delivery basis.
The Fund may enter into reverse repurchase agreements with banks and
securities dealers. A reverse repurchase agreement is a repurchase agreement in
which the Fund is the seller of, rather than the investor in, securities and
agrees to repurchase them at an agreed-upon time and price. Use of a reverse
repurchase agreement may be preferable to a regular sale and later repurchase of
securities because it avoids certain market risks and transaction costs.
At the time when the Fund enters into a binding obligation to purchase
securities on a when-issued basis or enters into a reverse repurchase agreement,
liquid assets (cash, U.S. Government securities or other "high-grade" debt
obligations) of the Fund having a value at least as great as the purchase price
of the securities to be purchased will be segregated on the books of the Fund
and held by the custodian throughout the period of the obligation. The use of
these investment strategies may increase net asset value fluctuation.
ILLIQUID SECURITIES
The Fund may invest up to 15% of its managed assets in securities that,
at the time of investment, are illiquid (determined using the Commission's
standard applicable to investment companies, i.e., securities that cannot be
disposed of within 7 days in the ordinary course of business at approximately
the value at which the Fund has valued the securities). The Fund may invest
without limitation in securities that have not been registered for public sale,
but that are eligible for purchase and sale by certain qualified institutional
buyers. Calamos, under the supervision of the Board of Trustees, will determine
whether securities purchased under Rule 144A are illiquid (that is, not readily
marketable) and thus subject to the Fund's limit on investing no more than 15%
of its managed assets in illiquid securities. Investments in Rule 144A
Securities could have the effect of increasing the amount of the Fund's assets
invested in illiquid securities if qualified institutional buyers are unwilling
to purchase these Rule 144A Securities. Illiquid securities may be difficult to
dispose of at a fair price at the times when the Fund believes it is desirable
to do so. The market price of illiquid securities generally is more volatile
than that of more liquid securities, which may adversely affect the price that
the Fund pays for or recovers upon the sale of illiquid securities. Illiquid
securities are also more difficult to value and Calamos' judgment may play a
greater role in the valuation process. Investment of the Fund's assets in
illiquid securities may restrict the Fund's ability to take advantage of market
opportunities. The risks associated with illiquid securities may be particularly
acute in situations in which the Fund's operations require cash and could result
in the Fund borrowing to meet its short-term needs or incurring losses on the
sale of illiquid securities.
The Fund may invest in bonds, corporate loans, convertible securities,
preferred stocks and other securities that lack a secondary trading market or
are otherwise considered illiquid. Liquidity of a security relates to the
ability to easily dispose of the security and the price to be obtained upon
disposition of the security, which may be less than would be obtained for a
comparable more liquid security. Such investments may affect the Fund's ability
to realize the net asset value in the event of a voluntary or involuntary
liquidation of its assets.
S-17
TEMPORARY DEFENSIVE INVESTMENTS
The Fund may make temporary investments without limitation when Calamos
determines that a defensive position is warranted. Such investments may be in
money market instruments, consisting of obligations of, or guaranteed as to
principal and interest by, the U.S. Government or its agencies or
instrumentalities; certificates of deposit, bankers' acceptances and other
obligations of domestic banks having total assets of at least $500 million and
that are regulated by the U.S. Government, its agencies or instrumentalities;
commercial paper rated in the highest category by a recognized rating agency;
and repurchase agreements.
REPURCHASE AGREEMENTS
As part of its strategy for the temporary investment of cash, the Fund
may enter into "repurchase agreements" pertaining to U.S. Government securities
with member banks of the Federal Reserve System or primary dealers (as
designated by the Federal Reserve Bank of New York) in such securities. A
repurchase agreement arises when the Fund purchases a security and
simultaneously agrees to resell it to the vendor at an agreed upon future date.
The resale price is greater than the purchase price, reflecting an agreed upon
market rate of return that is effective for the period of time the Fund holds
the security and that is not related to the coupon rate on the purchased
security. Such agreements generally have maturities of no more than seven days
and could be used to permit the Fund to earn interest on assets awaiting long
term investment. The Fund requires continuous maintenance by the custodian for
the Fund's account in the Federal Reserve/Treasury Book Entry System of
collateral in an amount equal to, or in excess of, the market value of the
securities that are the subject of a repurchase agreement. Repurchase agreements
maturing in more than seven days are considered illiquid securities. In the
event of a bankruptcy or other default of a seller of a repurchase agreement,
the Fund could experience both delays in liquidating the underlying security and
losses, including: (a) possible decline in the value of the underlying security
during the period while the Fund seeks to enforce its rights thereto; (b)
possible subnormal levels of income and lack of access to income during this
period; and (c) expenses of enforcing its rights.
PREFERRED SHARES
The Fund may invest in preferred shares. The preferred shares that the
Fund will invest in will typically be convertible securities. Preferred shares
are equity securities, but they have many characteristics of fixed income
securities, such as a fixed dividend payment rate and/or a liquidity preference
over the issuer's common shares.
S-18
REAL ESTATE INVESTMENT FUNDS ("REITS") AND ASSOCIATED RISK FACTORS
REITs are pooled investment vehicles which invest primarily in income
producing real estate or real estate related loans or interests. REITs are
generally classified as equity REITs, mortgage REITs or a combination of equity
and mortgage REITs. Equity REITs invest the majority of their assets directly in
real property and derive income primarily from the collection of rents. Equity
REITs can also realize capital gains by selling properties that have appreciated
in value. Mortgage REITs invest the majority of their assets in real estate
mortgages and derive income from the collection of interest payments. REITs are
not taxed on income distributed to shareholders provided they comply with the
applicable requirements of the Internal Revenue Code of 1986, as amended (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 REIT's investment in fixed
rate obligations can be expected to rise. Conversely, when interest rates rise,
the value of a REIT's investment in fixed rate obligations can be expected to
decline. If the REIT invests in adjustable rate mortgage loans the interest
rates on which are reset periodically, yields on a REIT's investments in such
loans will gradually align themselves to reflect changes in market interest
rates. This causes the value of such investments to fluctuate less dramatically
in response to interest rate fluctuations than would investments in fixed rate
obligations.
REITs may have limited financial resources, may trade less frequently
and in a limited volume and may be subject to more abrupt or erratic price
movements than larger company securities. Historically REITs have been more
volatile in price than the larger capitalization stocks included in Standard &
Poor's 500 Stock Index.
OTHER INVESTMENT COMPANIES
The Fund may invest in the securities of other investment companies to
the extent that such investments are consistent with the Fund's investment
objective and policies and permissible under the 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 Fund's total assets would be invested in securities of
other investment companies, (ii) such purchase would result in more than 3% of
the total outstanding voting securities of any one investment company being held
by the Fund, or (iii) more than 5% of the Fund's total assets would be invested
in any one investment company. These limitations do not apply to the purchase of
shares of any investment company in connection with a merger, consolidation,
reorganization or acquisition of substantially all the assets of another
investment company.
The Fund, as a holder of the securities of other investment companies,
will bear its prorata portion of the other investment companies' expenses,
including advisory fees. These expenses are in addition to the direct expenses
of the Fund's own operations.
S-19
INVESTMENT RESTRICTIONS
The following are the Fund's fundamental investment restrictions. These
restrictions may not be changed without the approval of the holders of a
majority of the Fund's outstanding voting securities (which for this purpose and
under the 1940 Act means the lesser of (i) 67% of the common shares represented
at a meeting at which more than 50% of the outstanding common shares are
represented or (ii) more than 50% of the outstanding common shares). If the Fund
were to issue a class of preferred shares, the investment restrictions could not
be changed without the approval of a majority of the outstanding common and
preferred shares, voting together as a class, and the approval of a majority of
the outstanding preferred shares, voting separately by class.
The Fund may not:
(1) Issue senior securities, except as permitted by the 1940 Act
and the rules and interpretive positions of the SEC
thereunder.
(2) Borrow money, except as permitted by the 1940 Act and the
rules and interpretive positions of the SEC thereunder.
(3) Invest in real estate, except that the Fund may invest in
securities of issuers that invest in real estate or interests
therein, securities that are secured by real estate or
interests therein, securities of real estate investment funds
and mortgage-backed securities.
(4) Make loans, except by the purchase of debt obligations, by
entering into repurchase agreements or through the lending of
portfolio securities and as otherwise permitted by the 1940
Act and the rules and interpretive positions of the SEC
thereunder.
(5) Invest in physical commodities or contracts relating to
physical commodities.
(6) Act as an underwriter, except as it may be deemed to be an
underwriter in a sale of securities held in its portfolio.
(7) Make any investment inconsistent with the Fund's
classification as a diversified investment company under the
1940 Act and the rules and interpretive positions of the SEC
thereunder.
(8) Concentrate its investments in securities of companies in any
particular industry as defined in the 1940 Act and the rules
and interpretive positions of the SEC thereunder.
All other investment policies of the Fund are considered
non-fundamental and may be changed by the Board of Trustees without prior
approval of the Fund's outstanding voting shares.
Currently under the 1940 Act, the Fund is not permitted to issue
preferred shares unless immediately after such issuance the net asset value of
the Fund's portfolio is at least 200% of the liquidation value of the
outstanding preferred shares (i.e., such liquidation value may not exceed 50% of
the value of the Fund's total assets). In addition, currently under the 1940
Act, the Fund is not permitted to declare any cash dividend or other
distribution on its common shares unless, at the time of such declaration, the
net asset value of the Fund's portfolio (determined after deducting the amount
of such dividend or distribution) is at least 200% of such liquidation value.
Currently under the 1940 Act, the Fund is not permitted to incur indebtedness
unless immediately after such borrowing the Fund has asset coverage of at least
300% of the aggregate outstanding principal balance of indebtedness (i.e., such
indebtedness may not exceed 33 1/3% of the value of the Fund's total assets).
Additionally, currently under the 1940 Act, the Fund may not declare any
dividend or other distribution upon any class of its shares, or purchase any
such shares, unless the aggregate indebtedness of the Fund has, at the time of
the declaration of any such dividend or distribution or at the time of any such
purchase, an asset coverage of at least 300% after deducting the amount of such
dividend, distribution, or purchase price, as the case may be.
Currently under the 1940 Act, the Fund is not permitted to lend money
or property to any person, directly or indirectly, if such person controls or is
under common control with the Fund, except for a loan from the Fund to a company
which owns all of the outstanding securities of the Fund, except directors'
qualifying shares.
Currently, under interpretive positions of the SEC, the Fund may not
have on loan at any time Securities representing more than one third of its
total assets.
Currently under the 1940 Act, a "senior security" does not include any
promissory note or evidence of indebtedness where such loan is for temporary
purposes only and in an amount not exceeding 5% of the value of the total assets
of the issuer at the time the loan is made. A loan is presumed to be for
temporary purposes if it is repaid within sixty days and is not extended or
renewed.
Currently, the Fund would be deemed to "concentrate" in a particular
industry if it invested 25% or more of its total assets in that industry.
Currently under the 1940 Act, a "diversified company" means a
management company which meets the following requirements: at least 75% of the
value of its total assets is represented by cash and cash items (including
receivables), government securities, securities of other investment companies,
and other securities for the purposes of this calculation limited in respect of
any one issuer to an amount not greater in value than 5% of the value of the
total assets of such management company and not more than 10% of the outstanding
voting securities of such issuer.
Under the 1940 Act, the Fund may invest up to 10% of its total assets
in the aggregate in shares of other investment companies and up to 5% of its
total assets in any one investment company, provided the investment does not
represent more than 3% of the voting stock of the acquired investment company at
the time such shares are purchased. As a shareholder in any investment company,
the Fund will bear its ratable share of that investment company's expenses, and
would remain subject to payment of the Fund's advisory fees and other expenses
with respect to assets so invested. Holders of common shares would therefore be
subject to duplicative expenses to the extent the Fund invests in other
investment companies. In addition, the securities of other investment companies
may also be leveraged and will therefore be subject to the same leverage risks
described herein and in the Prospectus. As described in the prospectus in the
section entitled "Risk Factors," the net asset value and market value of
leveraged shares will be more volatile and the yield to shareholders will tend
to fluctuate more than the yield generated by unleveraged shares.
In addition, to comply with federal income tax requirements for
qualification as a "regulated investment company," the Fund's investments will
be limited by both an income and an asset test. See "U.S. Federal Income Tax
Matters."
As a non-fundamental policy, the Fund may not issue preferred shares,
borrow money or issue debt securities in an aggregate amount exceeding 38% of
the Fund's total assets.
MANAGEMENT OF THE FUND
TRUSTEES AND OFFICERS
The Fund's Board of Trustees provides broad supervision over the Fund's
affairs. The officers of the Fund are responsible for the Fund's operations. The
Fund's Trustees and officers are listed below, together with their age,
positions held with the Fund, term of office and length of service and principal
occupations during the past five years. Asterisks indicates those Trustees who
are interested persons of the Fund within the meaning of the 1940 Act, and they
are referred to as Interested Trustees. Trustees who are not interested persons
of the Fund are referred to as Independent Trustees. Each of the Trustees serves
as a Trustee of other investment companies (10 U.S. registered investment
portfolios) for which Calamos serves as investment adviser (collectively, the
"Calamos Funds"). The address for all Interested Trustees and all officers of
the Fund is 1111 East Warrenville Road, Naperville, Illinois 60563-1493. The
address of Mr. Dowen is Department of Finance, Northern Illinois University,
DeKalb, Illinois 60115; Mr. Hanauer's is 361 Forest Avenue, Suite 200, Laguna
Beach, California 92651; Mr. Neal's is 309 Sterling Road, Kenilworth, Illinois
60043; Mr. Marsh's is 311 South Wacker Drive, Suite 3000 Chicago, IL
60606-6677; and Mr. Rybak's is 12813 Misty Harbour Lane, Palos Park, IL 60464.
S-20
NUMBER OF
TERM OF PORTFOLIOS IN
POSITIONS OFFICE AND PRINCIPAL OCCUPATION DURING PAST FIVE FUND COMPLEX
NAME AND AGE HELD WITH LENGTH OF YEARS AND OTHER DIRECTORSHIPS HELD BY OVERSEEN BY
AT MARCH 31, 2003 THE FUND SERVICE THE TRUSTEE TRUSTEE
----------------- -------- ------- ----------- -------
INTERESTED TRUSTEES:
*John P. Calamos (62) Trustee and Trustee since President, Calamos Holdings, Inc., 10
President March 2003. Term Calamos and Calamos Financial Services,
expires in 2005. Inc. ("CFS").
*Nick P. Calamos (41) Trustee Trustee since Senior Executive Vice President, Calamos 10
March 2003. Term Holdings, Inc., Calamos and CFS.
expires in 2004.
INDEPENDENT TRUSTEES:
Richard J. Dowen (58) Trustee Trustee since Chair and Professor of Finance, Northern 10
March 2003. Term Illinois University.
expires in 2004.
Joe F. Hanauer (65) Trustee Trustee since Director, MAF Bancorp (banking); Director, 10
March 2003. Term Homestore.com, Inc., (Internet provider of
expires in 2006. real estate information and products);
Director, Combined Investments, L.P.
(investment management); Director, Loopnet,
Inc. (internet company).
+Weston W. Marsh (52) Trustee Trustee since Partner, Freeborn & Peters (law firm); 10
March 2003. Term Director, Telesource International
expires in 2005.
John E. Neal (53) Trustee Trustee since Managing Director, Bank One Capital 10
March 2003. Term Markets (investment banking) (since 1999);
expires in 2006. Private Investor prior thereto.
William R. Rybak (52) Trustee Trustee since Executive Vice President and CFO, Van 10
March 2003. Term Kampen Investments, Inc. (and subsidiaries)
expires in 2005. (investment manager) (1986-2000); Director,
Alliance Bancorp (formerly Hinsdale
Financial Corporation) (savings & loan
holding company) (1986-2001); Director,
Howe Barnes Investments (since January
2002).
FUND OFFICERS:
Rhowena Blank (34) Treasurer Since Vice President-Operations, Calamos (since
March 2003. 1999); Vice President, CFS; Director of
Serves at the Operations, Christian Brothers Investment
discretion of the Services (1998-1999); and Audit Manager,
Board. Ernst & Young, LP (1994-1998).
Patrick H. Dudasik (48) Vice President Since Executive Vice President, Chief Financial
March 2003. and Administrative Officer and Treasurer
Serves at the of Calamos Holdings, Inc., Calamos and
discretion of the CFS (since 2001); Chief Financial
Board. Officer, David Gomez and Associates, Inc.
(executive search firm)
(1998-2001); and Chief Financial Officer,
Scudder Kemper Investments, Inc., prior
thereto.
James S. Hamman, Jr. (33) Secretary Since Executive Vice President and General
March 2003. Counsel, Calamos Holdings, Inc., Calamos
Serves at the and CFS (since 1998).
discretion of the
Board.
Jeff Lotito (31) Assistant Since Operations Manager, Calamos (since 2000);
Treasurer March 2003. Manager-Fund Administration, Van Kampen
Serves at the (1999-2000); Supervisor-Corporate
discretion of the Accounting, Stein Roe and Farnham (investment manager)
Board. (1998-1999); and Supervisor-Financial
Reporting, Scudder Kemper Investments,
Inc. prior thereto.
-------------------
* John P. Calamos and Nick P. Calamos are trustees who are "interested
persons" of the Fund as defined in the Investment Company Act of 1940
because of their position with Calamos.
+ Mr. Marsh is a partner at a law firm that has performed work
for John P. Calamos, the chief executive and a controlling person of
Calamos (such work was not with respect to 1940 Act or Investment
Advisers Act of 1940 matters). Upon the advice of counsel to the Fund,
the Fund does not believe that Mr. Marsh is an "interested person" of
Calamos.
The Fund's Board of Trustees consists of seven members. The term of
one class expires each year commencing with the first annual meeting following
this public offering and no term shall continue for more than three years after
the applicable election. The terms of Nick P. Calamos and Richard J. Dowen
expire at the first annual meeting following this public offering, the terms of
John P. Calamos, Weston W. Marsh and William Rybak expire at the second annual
meeting, and the terms of Joe F. Hanauer and John E. Neal
S-21
expire at the third annual meeting. Subsequently, each class of Trustees will
stand for election at the conclusion of its respective term. Such classification
may prevent replacement of a majority of the Trustees for up to a two-year
period. Each officer serves until his or her successor is chosen and qualified
or until his or her resignation or removal by the Board of Trustees.
S-22
COMMITTEES OF THE BOARD OF TRUSTEES. The Fund's Board of Trustees
currently has three standing committees:
EXECUTIVE COMMITTEE. Messrs. John Calamos and Nick Calamos are
members of the Executive Committee, which has authority during
intervals between meetings of the Board of Trustees to exercise the
powers of the board, with certain exceptions.
AUDIT COMMITTEE. Messrs. Dowen, Hanauer, Neal and Rybak serve on
the Audit Committee. The Audit Committee recommends independent
auditors to the trustees, monitors the auditors' performance, reviews
the results of the Fund's audit, and responds to other matters deemed
appropriate by the Board of Trustees.
GOVERNANCE COMMITTEE. Messrs. Dowen, Hanauer, Neal and Rybak 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 who are not interested persons of
the Fund make recommendations to the Board of Trustees regarding
candidates for election as non-interested Trustees. The Governance
Committee will not consider shareholder recommendations regarding
candidates for election as Trustees.
In addition to the above committees, there is a pricing committee
comprised of officers of the Fund and employees of Calamos.
The Fund's Agreement and Declaration of Trust provides that the Fund
will indemnify the Trustees and officers against liabilities and expenses
incurred in connection with any claim in which they may be involved because of
their offices with the Fund, unless it is determined in the manner specified in
the Agreement and Declaration of Trust that they have not acted in good faith in
the reasonable belief that their actions were in the best interests of the Fund
or that such indemnification would relieve any officer
S-23
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 Funds as a group.
Compensation from the Fund is for the current calendar year and is estimated.
Total compensation from the Calamos Funds as a group is for the calendar year
ended December 31, 2002.
ESTIMATED
AGGREGATE
COMPENSATION TOTAL COMPENSATION FROM THE FUND AND
NAME OF TRUSTEE FROM FUND OTHER CALAMOS FUNDS(1)**
--------------- ------------ ------------------------------------
John P. Calamos $ 0 $ 0
Nick P. Calamos 0 0
Richard. J. Dowen 3,425 44,000+
Joe F. Hanauer 3,425 44,000
Weston W. Marsh* 3,425 35,250
John E. Neal 3,425 44,000+
William Rybak* 3,425 35,250
+ 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 Calamos Funds selected by the trustee. As of
December 31, 2002, the values of Messrs. Dowen's and Neal's deferred
compensation accounts were $32,195 and $44,693, respectively.
* Messrs. Marsh and Rybak were appointed trustees of the Calamos Investment
Trust and Calamos Advisors Trust in March 2002.
** The Fund Complex includes the Calamos Investment Trust, the Calamos Advisors
Trust and the Calamos Convertibles Opportunities and Income Fund.
The Fund has adopted a deferred compensation plan (the "Plan"). Under
the Plan, a Trustee who is not an "interested person" of Calamos and who has
elected to participate in the Plan ("participating Trustees") may defer receipt
of all or a portion of his compensation from the Fund in order to defer payment
of income taxes or for other reasons. The deferred compensation payable to the
participating Trustee is credited to the Trustee's deferral account as of the
business day such compensation would have been paid to the Trustee. The value of
a Trustee's deferred compensation account at any time is equal to what would be
the value if the amounts credited to the account had instead been invested in
shares of one or more of the portfolios of Calamos Investment Trust as
designated by the Trustee. Thus, the value of the account increases with
contributions to the account or with increases in the value of the measuring
shares, and the value of the account decreases with withdrawals from the account
or with declines in the value of the measuring shares. If a participating
trustee retires, the Trustee may elect to receive payments under the plan in a
lump sum or in equal installments over a period of five years. If a
participating Trustee dies, any amount payable under the Plan will be paid to
the Trustee's beneficiaries.
OWNERSHIP OF SHARES OF THE FUND AND OTHER CALAMOS FUNDS
The following table indicates the value of shares that each Trustee
beneficially owns in the Fund and the Calamos Funds 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, 2002. The value of the shares
held are stated in ranges in accordance with the requirements of the Securities
and Exchange Commission (the "Commission"). The table reflects the Trustee's
beneficial ownership of shares of the Calamos Funds. Beneficial ownership is
determined in accordance with the rules of the SEC.
AGGREGATE DOLLAR RANGE OF EQUITY
DOLLAR RANGE OF SECURITIES IN ALL REGISTERED
EQUITY SECURITIES INVESTMENT COMPANIES IN THE
NAME OF TRUSTEE IN THE FUND CALAMOS FUNDS
--------------- ----------------- --------------------------------
INTERESTED TRUSTEES:
John P. Calamos........................ None $ over 100,000
Nick P. Calamos........................ None over 100,000
NON-INTERESTED TRUSTEES:
Richard. J. Dowen...................... None 50,001 - 100,000
Joe F. Hanauer......................... None None
Weston W. Marsh........................ None None
John E. Neal........................... None over 100,000
William Rybak.......................... None None
S-24
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 transaction 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.
INVESTMENT ADVISER AND INVESTMENT MANAGEMENT AGREEMENT
Subject to the overall authority of the board of trustees, Calamos
provides the Fund with investment research, advice and supervision and furnishes
continuously an investment program for the Fund. In addition, Calamos furnishes
for use of the Fund such office space and facilities as the Fund may require for
its reasonable needs and supervises the business and affairs of the Fund and
provides the following other services on behalf of the Fund and not provided by
persons not a party to the investment management agreement: (i) preparing or
assisting in the preparation of reports to and meeting materials for the
Trustees; (ii) supervising, negotiating contractual arrangements with, to the
extent appropriate, and monitoring the performance of, accounting agents,
custodians, depositories, transfer agents and pricing agents, accountants,
attorneys, printers, underwriters, brokers and dealers, insurers and other
persons in any capacity deemed to be necessary or desirable to Fund operations;
(iii) assisting in the preparation and making of filings with the Commission and
other regulatory and self-regulatory organizations, including, but not limited
to, preliminary and definitive proxy materials, amendments to the Fund's
registration statement on Form N-2 and semi-annual reports on Form N-SAR; (iv)
overseeing the tabulation of proxies by the Fund's transfer agent; (v) assisting
in the preparation and filing of the Fund's federal, state and local tax
returns; (vi) assisting in the preparation and filing of the Fund's federal
excise tax return pursuant to Section 4982 of the Code; (vii) providing
assistance with investor and public relations matters; (viii) monitoring the
valuation of portfolio securities and the calculation of net asset value; (ix)
monitoring the registration of shares of beneficial interest of the Fund under
applicable federal and state securities laws; (x) maintaining or causing to be
maintained for the Fund all books, records and reports and any other information
required under the 1940 Act, to the extent that such books, records and reports
and other information are not maintained by the Fund's custodian or other agents
of the Fund; (xi) assisting in establishing the accounting policies of the Fund;
(xii) assisting in the resolution of accounting issues that may arise with
respect to the Fund's operations and consulting with the Fund's independent
accountants, legal counsel and the Fund's other agents as necessary in
connection therewith; (xiii) reviewing the Fund's bills; (xiv) assisting the
Fund in determining the amount of dividends and distributions available to be
paid by the Fund to its shareholders, preparing and arranging for the printing
of dividend notices to shareholders, and providing the transfer and dividend
paying agent, the custodian, and the accounting agent with such information as
is required for such parties to effect the payment of dividends and
distributions; and (xv) otherwise assisting the Fund as it may reasonably
request in the conduct of the Fund's business, subject to the direction and
control of the Trustees.
Under the investment management agreement, the Fund pays to Calamos a
fee based on the average weekly managed assets that is accrued daily and paid on
a monthly basis. The fee paid by the Fund is at the annual rate of 0.80% of
managed assets. Because the fees paid to Calamos are determined
S-25
on the basis of the Fund's managed assets, Calamos's interest in determining
whether to leverage the Fund may differ from the interests of the Fund.
For the first eight years of the Fund's operations, Calamos has
contractually agreed to waive its management fee in the annual amounts, and for
the time periods, set forth below:
FEE WAIVED (AS A FEE WAIVED (AS A
PERIOD ENDING PERCENTAGE OF AVERAGE PERIOD ENDING PERCENTAGE OF AVERAGE
JUNE 30 WEEKLY MANAGED ASSETS) JUNE 30 WEEKLY MANAGED ASSETS)
------------- ---------------------- ------------- ----------------------
2003(1).................... 0.10% 2008....................... 0.10%
2004....................... 0.10% 2009....................... 0.07%
2005....................... 0.10% 2010....................... 0.05%
2006....................... 0.10% 2011....................... 0.03%
2007....................... 0.10%
------------------
(1) From the commencement of operations.
Calamos has not agreed to waive any portion of its management fees
beyond May 31, 2011.
Under the terms of its investment management agreement with the Fund,
except for the services and facilities provided by Calamos as set forth therein,
the Fund shall assume and pay all expenses for all other Fund operations and
activities and shall reimburse Calamos for any such expenses incurred by
Calamos. The expenses borne by the Fund shall include, without limitation: (a)
organization expenses of the Fund (including out-of-pocket expenses, but not
including the Manager's overhead or employee costs); (b) fees payable to
Calamos; (c) legal expenses; (d) auditing and accounting expenses; (e)
maintenance of books and records that are required to be maintained by the
Fund's custodian or other agents of the Fund; (f) telephone, telex, facsimile,
postage and other communications expenses; (g) taxes and governmental fees; (h)
fees, dues and expenses incurred by the Fund in connection with membership in
investment company trade organizations and the expense of attendance at
professional meetings of such organizations; (i) fees and expenses of accounting
agents, custodians, subcustodians, transfer agents, dividend disbursing agents
and registrars; (j) payment for portfolio pricing or valuation services to
pricing agents, accountants, bankers and other specialists, if any; (k) expenses
of preparing share certificates; (l) expenses in connection with the issuance,
offering, distribution, sale, redemption or repurchase of securities issued by
the Fund; (m) expenses relating to investor and public relations provided by
parties other than Calamos; (n) expenses and fees of registering or qualifying
shares of beneficial interest of the Fund for sale; (o) interest charges, bond
premiums and other insurance expenses; (p) freight, insurance and other charges
in connection with the shipment of the Fund's portfolio securities; (q) the
compensation and all expenses (specifically including travel expenses relating
to Fund business) of Trustees, officers and employees of the Fund who are not
affiliated persons of Calamos; (r) brokerage commissions or other costs of
acquiring or disposing of any portfolio securities of the Fund; (s) expenses of
printing and distributing reports, notices and dividends to shareholders; (t)
expenses of preparing and setting in type, printing and mailing prospectuses and
statements of additional information of the Fund and supplements thereto; (u)
costs of stationery; (v) any litigation expenses; (w) indemnification of
Trustees and officers of the Fund; (x) costs of shareholders' and other
meetings; (y) interest on borrowed money, if any; and (z) the fees and other
expenses of listing the Fund's shares on the New York Stock Exchange or any
other national stock exchange.
Unless earlier terminated as described below, the investment management
agreement will remain in effect until August 1, 2004 and will continue 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
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who are not interested persons of any party to the investment management
agreement, cast in person at a meeting called for the purpose of voting on such
approval. The investment management agreement may be terminated at any time,
without penalty, by either the Fund or Calamos upon 60 days' written notice, and
is automatically terminated in the event of its assignment as defined in the
1940 Act.
FACTORS CONSIDERED BY THE INDEPENDENT TRUSTEES IN APPROVING THE
INVESTMENT MANAGEMENT AGREEMENT. The Fund's investment management agreement is
required to be approved before it is entered into and thereafter annually both
by the Board of Trustees and a majority of the Independent Trustees voting
separately. The Independent Trustees have determined that the terms of the
Fund's investment management agreement are fair and reasonable and that the
agreement is in the Fund's best interests. The Independent Trustees believe that
the investment management agreement will enable the Fund to enjoy high quality
investment management services at a cost which they deem appropriate, reasonable
and in the best interests of the Fund. In making such determinations, the
Independent Trustees relied upon the assistance of counsel to the Independent
Trustees.
In evaluating the investment management agreement, the Independent
Trustees considered Calamos, its affiliates and their personnel, operations and
financial condition. The Independent Trustees discussed with representatives of
Calamos the Fund's operations and Calamos's ability to provide advisory and
other services to the Fund. The Independent Trustees also reviewed, among other
things:
- the investment performance of other Calamos funds with similar
investment strategies;
- the proposed fees to be charged by Calamos for investment
management services;
- the Fund's projected total operating expenses;
- the investment performance, fees and total expenses of investment
companies with similar objectives and strategies managed by other
investment advisers;
- the experience of the investment advisory and other personnel
providing services to the Fund and the historical quality of the
services provided by Calamos; and
The Independent Trustees considered the following as relevant to their
recommendations: (1) the favorable history, reputation, qualification and
background of Calamos, as well as the qualifications of its personnel and its
financial condition; (2) that the fee and expense ratios of the Fund are
reasonable given the quality of services expected to be provided and are
comparable to the fee and expense ratios of similar investment companies; (3)
the relative performance of other funds managed by Calamos with similar
objectives compared to the results of other comparable investment companies and
unmanaged indices; and (4) other factors that the Independent Trustees deemed
relevant.
The 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.
FUND ACCOUNTANT
Under the terms of a fund accounting servicing agreement ("Fund
Accounting Servicing Agreement"), U.S. Bancorp Fund Services, LLC ("USB")
provides certain administration and accounting services, including but not
limited to, fund accounting and financial accounting services to the Fund and to
the Calamos Investment Trust and Calamos Advisors Trust (the Fund, Calamos
Investment Trust and Calamos Advisors Trust are collectively referred to as the
"Calamos Funds"). For the services rendered to the Calamos Funds, USB receives
fees based on the combined managed assets of the Calamos Funds ("Combined
Assets"). Each fund of the Calamos Funds pays their prorata share of the fees
payable to USB described below based on relative managed assets of each fund.
Under the Fund Accounting Servicing Agreement, USB maintains portfolio
records on a trade date plus one basis using security trade information; obtains
prices from a pricing service and applies those prices to portfolio positions;
identifies interest and dividend accrual balances as of each valuation date and
calculates gross earnings on investments for the accounting period; determines
gain/loss on security sales and identifies them as short-term or long-term;
accounts for periodic distributions of gains or losses to shareholders and
maintains undistributed gain or loss balances as of each valuation date; for
each valuation date, calculates the expense accrual amounts as directed by the
Fund as to methodology, rate or dollar amount; records payments for expenses
upon receipt of written authorization from the Fund; accounts for expenditures
and maintains expense accrual balances; provides expense accrual and payment
reporting; accounts for fund share repurchases, tenders, sales, exchanges,
transfers, dividend reinvestments, and other fund share activity; applies
equalization accounting as directed by the Fund; determines net investment
income for the Fund as of each valuation date and accounts for periodic
distributions of earnings to shareholders and maintains undistributed net
investment income balances as of each valuation date; maintains a general ledger
and other accounts, books and financial records for the Fund; determines the
NAV, per share earnings and other per share amounts reflective of fund
operations; communicates the per share price to parties as agreed upon; prepares
monthly reports that document the adequacy of accounting detail to support
month-end ledger balances; maintains accounting records for the investment
portfolio of the Fund to support the tax reporting required for IRS-defined
regulated investment companies; maintains tax lot detail for the Fund's
investment portfolio; calculates taxable gain/loss on security sales using the
tax lot relief method designate by the Fund; provides the necessary financial
information to support the taxable components of income and capital gains
distributions to the Fund's transfer agent to support tax reporting to the
shareholders; supports reporting to regulatory bodies and support financial
statement preparation by making the Fund's accounting records available to the
Fund, the SEC and outside auditors; maintains accounting records; reconciles
cash and investment balances of the Fund with the Fund's custodian and provides
the Fund with the beginning cash balance available for investment purposes;
transmits or mails a copy of the portfolio valuation to the Fund; reviews the
impact of current day's activity on a per share basis and reviews changes in
market value; prepares monthly security transactions listings; supplies various
statistical data as requested by the Fund; provides alternative verification of
corporate actions for preferred securities and private placements;
Morningstar/Lipper quarterly portfolio reporting and monthly NAV reporting;
comparison of manual prices provided by Calamos to pricing vendor quotations
prepares monthly a reconciliation between the Fund's cash portfolio; NAV data
delivery services; pre-tax and post-tax monthly performance calculations; and
reporting and benchmark comparisons ("fund accounting services"). For providing
the fund accounting services, USB receives a fee payable monthly at the annual
rate of $750,000 on the first $2.5 billion of Combined Assets; 0.02% on the next
$2.5 billion of Combined Assets; 0.01% on the next $2.5 billion of Combined
Assets; 0.0075% on the next $2.5 billion of Combined Assets and 0.005% on
Combined Assets above $10 billion ("fund accounting service fee").
Under the Fund Accounting Servicing Agreement, USB also provides: fund
expense management; fund expense payment processing; expense accrual monitoring,
analysis and modifications; expense reimbursement and management fee waiver
coordination; 1099 MISC for the Board members and service providers; SEC yield
calculations; deferred compensation plan monitoring; calculation of quarterly
net investment income distributions and annual long-term capital gains
distributions; year-end dividend disclosure information; tax adjustment
calculation, tracking and reporting on all contingent debt obligations and on
all trust preferred obligations; excise and fiscal distribution schedules; tax
footnote information required for financial statements; preparation of all state
and federal tax returns; and specialized calculation of amortization on
convertible securities for financial statements; ("financial accounting
services"). For providing financial accounting services, USB receives a fee
payable monthly at the annual rate of 0.0200% on the first $1 billion of
Combined Assets; 0.0150% on the next $1 billion of Combined Assets and 0.0125%
on Combined Assets above $2 billion ("financial accounting service fee").
Management has proposed to the Boards of Trustees of the Calamos Funds,
including the Fund, that Calamos provide the following financial accounting
services to the Calamos Funds, rather than USB: 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 SEC; calculate net investment
income dividends and capital gains distributions; calculate track and report tax
adjustments on all assets of each fund, including but not limited to contingent
debt and preferred trust obligations; prepare excise tax and fiscal year
distributions schedules; prepare tax information required for financial
statement footnotes; prepare state and federal income tax returns; prepare
specialized calculations of amortization on convertible securities; prepare
year-end dividend disclosure information; monitor trustee deferred compensation
plan accruals and valuations; and prepare Form 1099 information statements for
Board members and service providers. For providing those financial accounting
services, it is proposed that Calamos will receive a fee payable monthly at the
annual rate of 0.0175% on the first $1 billion of Combined Assets; 0.0150% on
the next $1 billion of Combined Assets; and 0.0110% on Combined Assets above $2
billion ("proposed financial accounting service fee"). Each fund of the Calamos
Funds will pay its prorata share of the proposed financial accounting service
fee payable to Calamos based on relative managed assets of each fund.
Under management's proposal, Calamos will replace USB solely with
respect to financial accounting services. Calamos will receive the proposed
financial accounting service fee described above. Under the proposal, USB will
continue to provide the fund accounting services described above and receive the
fund accounting service fee described above and will not receive the financial
accounting service fee described above. The Boards of Trustees at a meeting held
on April 14, 2003 were supportive of management's proposal; however, as of the
date hereof no final determination with respect to management's proposal has
been made.
S-27
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 Calamos Financial Services, Inc. ("CFS"), an affiliate
of Calamos, if, in the judgment of Calamos, the use of CFS is likely to result
in prices and execution at least as favorable to the Funds as those available
from other qualified brokers and if, in such transactions, CFS charges the Fund
commission rates consistent with those charged by CFS to comparable unaffiliated
customers in similar transactions. The Board of Trustees, including a majority
of the Trustees who are not "interested" trustees, has adopted procedures that
are reasonably designed to provide that any commissions, fees or other
remuneration paid to CFS are consistent with the foregoing standard. The Fund
will not effect principal transactions with CFS.
Consistent with the Rules of Fair Practice of the National Association
of Securities Dealers, Inc. and subject to seeking the most favorable
combination of net price and execution available and such other policies as the
Trustees may determine, Calamos may consider sales of shares of the Fund as a
factor in the selection of broker-dealers to execute portfolio transactions for
that Fund.
In allocating the Fund's portfolio brokerage transactions to
unaffiliated broker-dealers, Calamos may take into consideration the research,
analytical, statistical and other information and services provided by the
broker-dealer, such as general economic reports and information, reports or
analyses of particular companies or industry groups, market timing and technical
information, and the availability of the brokerage firm's analysts for
consultation. Although Calamos believes these services have substantial value,
they are considered supplemental to Calamos's own efforts in the performance of
its duties under the management agreement. As permitted by Section 28(e) of the
Securities Exchange Act of 1934 ("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.
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
S-28
preferred shares, by the total number of common shares outstanding. Currently,
the net asset values of shares of publicly traded closed-end investment
companies investing in debt securities are published in Barron's, the Monday
edition of The Wall Street Journal and the Monday and Saturday editions of The
New York Times.
The values of the securities in the Fund are based on market prices
from the primary market in which they are traded. As a general rule, equity
securities listed on a U.S. securities exchange or Nasdaq National Market are
valued at the last quoted sale priced on the day the valuation is made. Bonds
and other fixed-income securities that are traded over the counter and on an
exchange will be valued according to the broadest and most representative
market, and it is expected this will ordinarily be the over-the-counter market.
The foreign securities held by a Fund are traded on exchanges throughout the
world. Trading on these foreign securities exchanges is completed at various
times throughout the day and often does not coincide with the close of trading
on the New York Stock Exchange. The value of foreign securities is determined at
the close of trading of the exchange on which the securities are traded or at
the close of trading on the New York Stock Exchange, whichever is earlier. If
market prices are not readily available or the Fund's valuation methods do not
produce a value reflective of the fair value of the security, securities and
other assets are priced at a fair value as determined by the Board of Trustees
or a committee thereof.
ADDITIONAL INFORMATION CONCERNING THE AUCTIONS FOR PREFERRED SHARES
GENERAL
The Depository Trust Company ("DTC") will act as the Securities
Depository with respect to the Preferred Shares. One certificate for all of the
shares of each series will be registered in the name of Cede & Co., as nominee
of the Securities Depository. Such certificate will bear a legend to the effect
that such certificate is issued subject to the provisions restricting transfers
of shares of the Preferred Shares contained in the Statement. The Fund will also
issue stop-transfer instructions to the transfer agent for the Preferred Shares.
Prior to the commencement of the right of holders of the Preferred Shares to
elect a majority of the Fund's Trustees, as described under "Description of the
Preferred Shares -- Voting Rights"
in the prospectus, Cede & Co. will be the holder of record of the Preferred
Shares and owners of such shares will not be entitled to receive certificates
representing their ownership interest in such shares.
DTC, a New York-chartered limited purpose trust company, performs
services for its participants, some of whom (and/or their representatives) own
DTC. DTC maintains lists of its participants and will maintain the positions
(ownership interests) held by each such participant in Preferred Shares, whether
for its own account or as a nominee for another person.
CONCERNING THE AUCTION AGENT
The auction agent (the "Auction Agent") will act as agent for the Fund
in connection with the auctions of the Preferred Shares (the "Auctions"). In the
absence of willful misconduct or gross negligence on its part, the Auction Agent
will not be liable for any action taken, suffered, or omitted or for any error
of judgment made by it in the performance of its duties under the auction agency
agreement between the Fund and the Auction Agent and will not be liable for any
error of judgment made in good faith unless the Auction Agent was grossly
negligent in ascertaining the pertinent facts.
The Auction Agent may conclusively rely upon, as evidence of the
identities of the holders of the Preferred Shares, the Auction Agent's registry
of holders, and the results of Auctions and notices from any Broker-Dealer (or
other person, if permitted by the Fund) with respect to transfers described
under
S-29
"The Auction -- Secondary Market Trading and Transfers of the Preferred
Shares" in the prospectus and notices from the Fund. The Auction Agent is not
required to accept any such notice for an Auction unless it is received by the
Auction Agent by 3:00 p.m., New York City time, on the business day preceding
such Auction.
The Auction Agent may terminate its auction agency agreement with the
Fund upon notice to the Fund on a date no earlier than [60] days after such
notice. If the auction agent should resign, the Fund will use its best efforts
to enter into an agreement with a successor auction agent containing
substantially the same terms and conditions as the auction agency agreement. The
Fund may remove the auction agent provided that prior to such removal the Fund
has entered into such an agreement with a successor Auction Agent.
BROKER-DEALERS
The Auction Agent after each Auction for the Preferred Shares will pay
to each Broker-Dealer, from funds provided by the Fund, a service charge at the
annual rate of 1/4 of 1% in the case of any auction immediately preceding the
dividend period of less than one year, or a percentage agreed to by the Fund and
the Broker-Dealer in the case of any Auction immediately preceding a dividend
period of one year or longer, of the purchase price of the Preferred Shares
placed by such Broker-Dealer at such auction. For the purposes of the preceding
sentence, the Preferred Shares will be placed by a Broker-Dealer if such shares
were (a) the subject of hold orders deemed to have been submitted to the Auction
Agent by the Broker-Dealer and were acquired by such Broker-Dealer for its
customers who are beneficial owners or (b) the subject of an order submitted by
such Broker-Dealer that is (i) a submitted bid of an existing holder that
resulted in the existing holder continuing to hold such shares as a result of
the Auction or (ii) a submitted bid of a potential bidder that resulted in the
potential holder purchasing such shares as a result of the auction or (iii) a
valid hold order.
The Fund may request the Auction Agent to terminate one or more
Broker-Dealer agreements at any time, provided that at least one Broker-Dealer
agreement is in effect after such termination.
The Broker-Dealer agreement provides that a Broker-Dealer (other than
an affiliate of the Fund) may submit orders in Auctions for its own account,
unless the Trust notifies all Broker-Dealers that they may no longer do so, in
which case Broker-Dealers may continue to submit hold orders and sell orders for
their own accounts. Any Broker-Dealer that is an affiliate of the Fund may
submit orders in Auctions, but only if such orders are not for its own account.
If a Broker-Dealer submits an order for its own account in any Auction, it might
have an advantage over other bidders because it would have knowledge of all
orders submitted by it in that Auction; such Broker-Dealer, however, would not
have knowledge of orders submitted by other Broker-Dealers in that Auction.
REPURCHASE OF COMMON SHARES
The Fund is a closed-end investment company and as such its
shareholders will not have the right to cause the Fund to redeem their shares.
Instead, the Fund's common shares will trade in the open market at a price that
will be a function of several factors, including dividend levels (which are in
turn affected by expenses), net asset value, call protection, dividend
stability, relative demand for and supply of such shares in the market, general
market and economic conditions and other factors. Because shares of a closed-end
investment company may frequently trade at prices lower than net asset value,
the Fund's Board of Trustees may consider action that might be taken to reduce
or eliminate any material discount from net asset value in respect of common
shares, which may include the repurchase of such shares in the open market or in
private transactions, the making of a tender offer for such shares, or the
conversion of
S-30
the Fund to an open-end investment company. The Board of Trustees may decide not
to take any of these actions. In addition, there can be no assurance that share
repurchases or tender offers, if undertaken, will reduce market discount.
Notwithstanding the foregoing, at any time when the Fund's preferred
shares are outstanding, the Fund may not purchase, redeem or otherwise acquire
any of its common shares unless (1) all accumulated preferred shares dividends
have been paid and (2) at the time of such purchase, redemption or acquisition,
the net asset value of the Fund's portfolio (determined after deducting the
acquisition price of the common shares) is at least 200% of the liquidation
value of the outstanding preferred shares (expected to equal the original
purchase price per share plus any accrued and unpaid dividends thereon). Any
service fees incurred in connection with any tender offer made by the Fund will
be borne by the Fund and will not reduce the stated consideration to be paid to
tendering shareholders.
Subject to its investment restrictions, the Fund may borrow to finance
the repurchase of shares or to make a tender offer. Interest on any borrowings
to finance share repurchase transactions or the accumulation of cash by the Fund
in anticipation of share repurchases or tenders will reduce the Fund's net
income. Any share repurchase, tender offer or borrowing that might be approved
by the Fund's Board of Trustees would have to comply with the Exchange Act, the
1940 Act and the rules and regulations thereunder.
Although the decision to take action in response to a discount from net
asset value will be made by the Board of Trustees at the time it considers such
issue, it is not currently anticipated that the Board of Trustees would
authorize repurchases of common shares or a tender offer for such shares if: (1)
such transactions, if consummated, would (a) result in the delisting of the
common shares from the New York Stock Exchange, or (b) impair the Fund's status
as a regulated investment company under the Code (which would make the Fund a
taxable entity, causing the Fund's income to be taxed at the corporate level in
addition to the taxation of shareholders who receive dividends from the Fund) or
as a registered closed-end investment company under the 1940 Act; (2) the Fund
would not be able to liquidate portfolio securities in an orderly manner and
consistent with the Fund's investment objective and policies in order to
repurchase shares; or (3) there is, in the board's judgment, any (a) material
legal action or proceeding instituted or threatened challenging such
transactions or otherwise materially adversely affecting the Fund, (b) general
suspension of or limitation on prices for trading securities on the New York
Stock Exchange, (c) declaration of a banking moratorium by federal or state
authorities or any suspension of payment by United States or New York banks, (d)
material limitation affecting the Fund or the issuers of its portfolio
securities by federal or state authorities on the extension of credit by lending
institutions or on the exchange of foreign currency, (e) commencement of war,
armed hostilities or other international or national calamity directly or
indirectly involving the United States, or (f) other event or condition which
would have a material adverse effect (including any adverse tax effect) on the
Fund or its shareholders if shares were repurchased.
The repurchase by the Fund of its shares at prices below net asset
value will result in an increase in the net asset value of those shares that
remain outstanding. However, there can be no assurance that share repurchases or
tender offers at or below net asset value will result in the Fund's shares
trading at a price equal to their net asset value. Nevertheless, the fact that
the Fund's shares may be the subject of repurchase or tender offers from time to
time, or that the Fund may be converted to an open-end investment company, may
reduce any spread between market price and net asset value that might otherwise
exist.
In addition, a purchase by the Fund of its common shares will decrease
the Fund's total managed assets which would likely have the effect of increasing
the Fund's expense ratio. Any purchase by the
S-31
Fund of its common shares at a time when preferred shares are outstanding will
increase the leverage applicable to the outstanding common shares then
remaining.
Before deciding whether to take any action if the common shares trade
below net asset value, the Fund's Board of Trustees would likely consider all
relevant factors, including the extent and duration of the discount, the
liquidity of the Fund's portfolio, the impact of any action that might be taken
on the Fund or its shareholders and market considerations. Based on these
considerations, even if the Fund's shares should trade at a discount, the Board
of Trustees may determine that, in the interest of the Fund and its
shareholders, no action should be taken.
U.S. FEDERAL INCOME TAX MATTERS
The following is a summary discussion of certain U.S. federal income
tax consequences that may be relevant to a shareholder that acquires, holds
and/or disposes of Preferred Shares of the Fund. This discussion only addresses
U.S. federal income tax consequences to U.S. shareholders who hold their shares
as capital assets and does not address all of the U.S. federal income tax
consequences that may be relevant to particular shareholders in light of their
individual circumstances. This discussion also does not address the tax
consequences to shareholders who are subject to special rules, including,
without limitation, financial institutions, insurance companies, dealers in
securities or foreign currencies, foreign holders, persons who hold their shares
as or in a hedge against currency risk, a constructive sale, or conversion
transaction, holders who are subject to the alternative minimum tax, or tax-
exempt or tax-deferred plans, accounts, or entities. In addition, the discussion
does not address any state, local, or foreign tax consequences. The discussion
reflects applicable tax laws of the United States as of the date of this
prospectus, which tax laws may be changed or subject to new interpretations by
the courts or the Internal Revenue Service ("IRS") retroactively or
prospectively. No attempt is made to present a detailed explanation of all U.S.
federal income tax concerns affecting the Fund and its shareholders, and the
discussion set forth herein does not constitute tax advice. INVESTORS ARE URGED
TO CONSULT THEIR OWN TAX ADVISERS TO DETERMINE THE SPECIFIC TAX CONSEQUENCES TO
THEM OF INVESTING IN THE FUND, INCLUDING THE APPLICABLE FEDERAL, STATE, LOCAL
AND FOREIGN TAX CONSEQUENCES TO THEM AND THE EFFECT OF POSSIBLE CHANGES IN TAX
LAWS.
The Fund intends to elect to be treated, and to qualify each year, as a
"regulated investment company" under Subchapter M of the Internal Revenue Code
of 1986, as amended (the "Code"), so that it will not pay U.S. federal income
tax on income and capital gains timely distributed to shareholders. If a Fund
qualifies as a regulated investment company and distributes to its shareholders
at least 90% of the sum of (i) its "investment company taxable income" as that
term is defined in the Code (which includes, among other things, dividends,
taxable interest, and the excess of any net short-term capital gains over net
long-term capital losses as reduced by certain deductible expenses) without
regard to the deduction for dividends paid and (ii) the excess of its gross
tax-exempt interest, if any, over certain disallowed deductions, the Fund will
be relieved of U.S. federal income tax on any income of the Fund, including
long-term capital gains, distributed to shareholders. However, if the Fund
retains any investment company taxable income or "net capital gain" (the excess
of net long-term capital gain over net short-term capital loss), it will be
subject to U.S. federal income tax at regular corporate rates on the amount
retained. The Fund intends to distribute at least annually all or substantially
all of its investment company taxable income, net tax-exempt interest, and net
capital gain. If for any taxable year the Fund does not qualify as a regulated
investment company for U.S. federal income tax purposes, it would be treated as
a U.S. 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 addition, in the event that the Fund does not so qualify, the Fund's
distributions, to the extent derived from the Fund's current or accumulated
earnings and profits, would generally constitute ordinary dividends, which
although a portion of such dividends may be eligible for the corporate dividends
received deduction and reduced rate of taxation for "qualified dividend income"
to individuals,
S-32
would be taxable to shareholders as ordinary income, even though such
distributions might otherwise, at least in part, have been treated as long-term
capital gains in such shareholder's hands.
Under the Code, the Fund will be subject to a nondeductible 4% federal
excise tax on a portion of its undistributed ordinary income and capital gains
for any year if it fails to meet certain distribution requirements with respect
to that year. The Fund intends to make distributions in a timely manner and
accordingly does not expect to be subject to this excise tax.
In order to qualify as a regulated investment company under Subchapter
M of the Code, the Fund must, among other things, derive at least 90% of its
gross income for each taxable year from dividends, interest, payments with
respect to securities loans, gains from the sale or other disposition of stock,
securities or foreign currencies, or other income (including gains from options,
futures and forward contracts) derived with respect to its business of investing
in such stock, securities or currencies (the "90% income test"). For purposes of
the 90% income test, the character of income earned by certain entities in which
the Fund invests that are not treated as corporations (e.g., partnerships) for
U.S. federal income tax purposes will generally pass through to the Fund.
Consequently, the Fund may be required to limit its equity investments in such
entities that earn fee income, rental income or other nonqualifying income.
In addition to the 90% income test, the Fund must also diversify its
holdings (commonly referred to as the "asset test") so that, at the end of each
quarter of its taxable year (i) at least 50% of the market value of the Fund's
total assets is represented by cash and cash items, U.S. government securities,
securities of other regulated investment companies and other securities, with
such other securities of any one issuer limited for the purposes of this
calculation to an amount not greater in value than 5% of the value of the Fund's
total assets and to not more than 10% of the outstanding voting securities of
such issuer, and (ii) not more than 25% of the value of its total assets is
invested in the securities of any one issuer (other than U.S. government
securities or securities of other regulated investment companies) or of two or
more issuers controlled by the Fund and engaged in the same, similar or related
trades or businesses.
Dividends from investment company taxable income, which includes net
investment income, net short-term capital gain in excess of net long-term
capital loss and certain net foreign exchange gains, are taxable as ordinary
income to the extent of the Fund's current and accumulated earnings and profits.
Dividends from net capital gain (i.e. net long-term capital gain in excess of
net short-term capital loss), if any, are taxable as long-term capital gains for
U.S. federal income tax purposes without regard to the length of time the
shareholder has held shares of the Fund. The U.S. federal income tax status of
all distributions will be designated by the Fund and reported to the
shareholders annually. Any dividend declared by the Fund as of a record date in
October, November or December and paid during the following January will be
treated for U.S. federal income tax purposes as received by shareholders on
December 31 of the calendar year in which it is declared.
If the Fund retains any net capital gain, the Fund may designate the
retained amount as undistributed capital gains in a notice to shareholders who,
if subject to U.S. federal income tax on long-term capital gains (i) will be
required to include in income, as long-term capital gain, their proportionate
share of such undistributed amount, and (ii) will be entitled to credit their
proportionate share of the tax paid by the Fund on the undistributed amount
against their U.S. federal income tax liabilities, if any, and to claim refunds
to the extent the credit exceeds such liabilities. For U.S. federal income tax
purposes, the tax basis of shares owned by a shareholder of the Fund will be
increased by the difference between the amount of undistributed net capital gain
included in the shareholder's gross income and the tax deemed paid by the
shareholders.
S-33
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 (under proposed Treasury
regulations, generally including not only stock but also an option to acquire
stock such as is inherent in a convertible bond) in certain foreign corporations
that receive at least 75% of their annual gross income from passive sources
(such as interest, dividends, certain rents and royalties, or capital gains) or
that hold at least 50% of their assets in investments producing such passive
income ("passive foreign investment companies"), the Fund could be subject to
U.S. federal income tax and additional interest charges on "excess
distributions" received from such companies or on gain from the sale of stock in
such companies, even if all income or gain actually received by the Fund is
timely distributed to its shareholders. The Fund would not be able to pass
through to its shareholders any credit or deduction for such a tax. An election
may generally be available that would ameliorate these adverse tax consequences,
but any such election could require the Fund to recognize taxable income or gain
(subject to tax distribution requirements) without the concurrent receipt of
cash. These investments could also result in the treatment of associated capital
gains as ordinary income. The Fund may limit and/or manage its holdings in
passive foreign investment companies to limit its tax liability or maximize its
return from these investments.
The Fund may invest to a significant extent in debt obligations that
are in the lowest rating categories or are unrated, including debt obligations
of issuers not currently paying interest or who are in default. Investments in
debt obligations that are at risk of or in default present special tax issues
for the Fund. Tax rules are not entirely clear about issues such as when the
Fund may cease to accrue interest, original issue discount or market discount,
when and to what extent deductions may be taken for bad debts or worthless
securities and how payments received on obligations in default should be
allocated between principal and income. These and other related issues will be
addressed by the Fund when, as and if it invests in such securities, in order to
seek to ensure that it distributes sufficient income to preserve its status as a
regulated investment company and does not become subject to U.S. federal income
or excise taxes.
If the Fund utilizes leverage through borrowing, 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
S-34
or distributions potentially could limit or eliminate the Fund's ability to make
distributions on its common shares and/or Preferred Shares until the asset
coverage is restored. These limitations could prevent the Fund from distributing
at least 90% of its net income as is required under the Code and therefore might
jeopardize the Fund's qualification for the reduced rates of taxation available
to regulated investment companies and/or might subject the Fund to the
nondeductible 4% excise tax. Upon any failure to meet the asset coverage
requirements imposed by the 1940 Act, the Fund may, in its sole discretion and
to the extent permitted under the 1940 Act, purchase or redeem Preferred Shares
in order to maintain or restore the requisite asset coverage and avoid the
adverse consequences to the Fund and its shareholders of failing to meet the
distribution requirements. There can be no assurance, however, that any such
action would achieve these objectives. The Fund will endeavor to avoid
restrictions on its ability to distribute dividends.
If the Fund invests in certain pay-in-kind securities, zero coupon
securities, deferred interest securities or, in general, any other securities
with original issue discount (or with market discount if the Fund elects to
include market discount in income currently), the Fund must accrue income on
such investments for each taxable year, which generally will be prior to the
receipt of the corresponding cash payments. However, the Fund must distribute,
at least annually, all or substantially all of its net income, including such
accrued income, to shareholders to avoid U.S. federal income and excise taxes.
Therefore, the Fund may have to dispose of its portfolio securities under
disadvantageous circumstances to generate cash, or may have to leverage itself
by borrowing the cash, to satisfy distribution requirements.
At the time of an investor's purchase of the Preferred Shares, a
portion of the purchase price may be attributable to realized or unrealized
appreciation in the Fund's portfolio or undistributed taxable income of the
Fund. Consequently, subsequent distributions by the Fund with respect to these
shares from such appreciation or income may be taxable to such investor even if
the net asset value of the investor's shares is, as a result of the
distributions, reduced below the investor's cost for such shares and the
distributions economically represent a return of a portion of the investment.
Under present law and based in part on the fact that there is no
express or implied agreement between or among a Broker-Dealer or any other
party, and the Fund or any owners of Preferred Shares, that the Broker-Dealer or
any other party will guarantee or otherwise arrange to ensure that an owner of
Preferred Shares will be able to sell his or her shares, it is anticipated that
the Preferred Shares will constitute stock of the Fund, and thus distributions
with respect to the Preferred Shares (other than capital gain distributions and
distributions in redemption of the Preferred Shares subject to section 302(b) of
the Code) will generally constitute dividends to the extent of the Fund's
current or accumulated earnings and profits, as calculated for U.S. federal
income tax purposes. The following discussion assumes such treatment will apply.
Distributions in excess of current and accumulated earnings and profits of the
Fund are treated first as return of capital to the extent of the shareholder's
basis in the Preferred Shares and, after the adjusted basis is reduced to zero,
will be treated as capital gain to a holder of Preferred Shares that holds such
shares as a capital asset.
The Fund's income will consist of net investment income and may also
consist of net capital gain. The character of the Fund's income will not affect
the amount of dividends to which the holders of the Preferred Shares are
entitled. Holders of the Preferred Shares are entitled to receive only the
amount of dividends as determined by periodic auctions. For U.S. federal income
tax purposes, however, the Internal Revenue Service currently requires that a
regulated investment company that has two or more classes of shares allocate to
each such class proportionate amounts of each type of its income (such as
ordinary income and net capital gain) for each tax year. Accordingly, the Fund
intends to designate distributions made with respect to the common shares and
the Preferred Shares as consisting of particular types of income (e.g. net
capital gain and ordinary income), in accordance with each class's proportionate
share of the total dividends paid to both classes. Thus, each dividend paid with
respect to the Preferred Shares during a year will be designated as ordinary
income dividends and, if the Fund designates any dividend as a capital gains
dividend, capital gains in proportion to the Preferred Shares proportionate
share of the total distributions paid on the Preferred Shares during the year to
the total distributions paid on both the Preferred Shares
S-35
and the Common Shares during the year. Each holder of the Preferred Shares
during the year will be notified of the allocation within 60 days after the end
of the year. The amount of the net capital gain realized by the Fund may not be
significant, and there is no assurance that any such income will be realized by
the Fund in any year. Distributions of the Fund's net investment income are
taxable to shareholders as ordinary income. Distributions of the Fund's net
capital gain, if any, are taxable to shareholders at rates applicable to long-
term capital gains, regardless of the length of time the Preferred Shares have
been held by holders. Distributions in excess of the Fund's earnings and profits
will first reduce a shareholder's adjusted tax basis in his or her shares of
Preferred Shares and, after the adjusted tax basis is reduced to zero, will
constitute capital gains to a holder of shares of Preferred Shares who holds his
or her shares of Preferred Shares as a capital asset.
Although the Fund is required to distribute annually at least 90% of
its net investment income, the Fund is not required to distribute net capital
gain to the shareholders. The Fund may retain and reinvest such gains and pay
federal income taxes on such gains (the "net undistributed capital gain").
However, it is unclear whether a portion of the net undistributed capital gain
would have to be allocated to the Preferred Shares for U.S. federal income tax
purposes. Until and unless the Fund receives acceptable guidance from the
Internal Revenue Service as to the allocation of the net undistributed capital
gain between the Common Shares and the Preferred Shares, the Fund intends to
distribute its net capital gain for any year during which it has shares of
Preferred Shares outstanding. Such distribution will affect the tax character
but not the amount of dividends to which holders of shares of Preferred Shares
are entitled.
Sales and other dispositions of the Preferred Shares are taxable events
for shareholders that are subject to U.S. federal income tax. Shareholders
should consult their own tax advisors with reference to their individual
circumstances to determine whether any particular transaction in the Preferred
Shares is properly treated as a sale for tax purposes (as the following
discussion assumes) and the tax treatment of any gains or losses recognized in
such transactions. Any loss realized by a shareholder upon the sale or other
disposition of shares with a tax holding period of six months or less will be
treated as a long-term capital loss to the extent of any amounts treated as
distributions of long-term capital gain with respect to such shares. Losses on
sales or other dispositions of shares may be disallowed under "wash sale" rules
in the event of other investments in the Fund (including those made pursuant to
reinvestment of dividends) within a period of 61 days beginning 30 days before
and ending 30 days after a sale or other disposition of shares. In such a case,
the disallowed portion of any loss generally would be included in the U.S.
federal tax basis of the shares acquired in the other investments in the Fund.
The Fund may engage in various transactions utilizing options, futures
contracts, forward contracts, hedge instruments, straddles, and other similar
transactions. Such transactions may be subject to special provisions of the Code
that, among other things, affect the character of any income realized by the
Fund from such investments, accelerate recognition of income to the Fund, defer
Fund losses, and affect the determination of whether capital gain and loss is
characterized as long-term or short-term capital gain or loss. These rules could
therefore affect the character, amount and timing of distributions to
shareholders. These provisions may also require the Fund to mark-to-market
certain types of the positions in its portfolio (i.e., treat them as if they
were closed out), which may cause the Fund to recognize income without receiving
cash with which to make distributions in amounts necessary to satisfy the
distribution requirements for avoiding U.S. federal income and excise taxes. The
Fund will monitor its transactions, will make the appropriate tax elections, and
will make the appropriate entries in its books and records when it acquires an
option, futures contract, forward contract, hedge instrument or other similar
investment in order to mitigate the effect of these rules, prevent
disqualification of the Fund as a regulated investment company and minimize the
imposition of U.S. federal income and excise taxes.
Certain distributions by the Fund to its corporate shareholders may
qualify for the corporate dividends-received deduction subject to certain
holding period requirements and limitations on debt
S-36
financings under the Code, but only to the extent the Fund earned dividend
income from stock investments in U.S. domestic corporations and certain other
requirements are satisfied. The Fund is permitted to acquire stocks of U.S.
domestic corporations, and it is therefore possible that a small portion of the
Fund's distributions, from the dividends attributable to such stocks, may
qualify for the dividends-received deduction. Such qualifying portion, if any,
may affect a corporate shareholder's liability for alternative minimum tax
and/or result in basis reductions and other consequences in certain
circumstances.
In addition, certain distributions of "qualified dividend income"
(generally dividends received from U.S. domestic corporations and qualified
foreign corporations) by the Fund to its individual shareholders may qualify for
reduced rates of taxation subject to certain holding period and other
requirements under the Code. Because the Fund is permitted to acquire stock of
U.S. domestic corporations, it is therefore possible that a small portion of the
Fund's distributions from dividends attributable to such stocks, may constitute
qualified dividend income and may therefore qualify for such reduced rates of
taxation.
The Fund may invest in REITs that hold residual interests in real
estate mortgage investment conduits ("REMICs"). Under Treasury regulations a
portion of the Fund's income from a REIT that is attributable to the REIT's
residual interest in a REMIC (referred to in the Code as an "excess inclusion")
will be subject to U.S. federal income tax in all events. These regulations also
provide that excess inclusion income of a regulated investment company, such as
the Fund, will be allocated to shareholders of the regulated investment company
in proportion to the dividends received by such shareholders, with the same
consequences as if the shareholders held the related REMIC residual interest
directly. In general, excess inclusion income allocated to shareholders (i)
cannot be offset by net operating losses (subject to a limited exception for
certain thrift institutions), (ii) will constitute unrelated business taxable
income to entities (including a qualified pension plan, an individual retirement
account, a 401(k) plan, a Keogh plan or other tax-exempt entity) subject to tax
on unrelated business income, thereby potentially requiring such an entity that
is allocated excess inclusion income, and otherwise might not be required to
file a tax return, to file a tax return and pay tax on such income, and (iii) in
the case of a foreign shareholder, will not qualify for any reduction in U.S.
federal withholding tax. In addition, if at any time during any taxable year a
"disqualified organization" (as defined in the Code) is a record holder of a
share in a regulated investment company, then the regulated investment company
will be subject to a tax equal to that portion of its excess inclusion income
for the taxable year that is allocable to the disqualified organization,
multiplied by the highest federal income tax rate imposed on corporations. The
Fund does not intend to invest in REITs in which a substantial portion of the
assets will consist of residual interests in REMICs.
The Fund may be subject to withholding and other taxes imposed by
foreign countries, including taxes on interest, dividends and capital gains with
respect to its investments in those countries, which would, if imposed, reduce
the yield on or return from those investments. Tax treaties between certain
countries and the U.S. may reduce or eliminate such taxes in some cases. The
Fund does not expect to satisfy the requirements for passing through to its
shareholders their prorata shares of qualified foreign taxes paid by the Fund,
with the result that shareholders will not include such taxes in their gross
incomes and will not be entitled to a tax deduction or credit for such taxes on
their own tax returns.
Federal law requires that the Fund withhold, as "backup withholding"
28% of reportable payments, including dividends, capital gain distributions and
the proceeds of sales or other dispositions of the Preferred Shares paid to
shareholders who have not complied with IRS requirements. In order to avoid this
withholding requirement, shareholders must certify on their Account
Applications, or on a separate IRS Form W-9, that the Social Security Number or
other Taxpayer Identification Number they provide is their correct number and
that they are not currently subject to backup withholding, or that they are
exempt from backup withholding. The Fund may nevertheless be required to
withhold if it receives notice from the IRS or a broker that the number provided
is incorrect or backup withholding is applicable as a result of previous
underreporting of interest or dividend income.
The description of certain federal tax provisions above relates only to
U.S. federal income tax consequences for shareholders who are U.S. persons,
(i.e., U.S. citizens or residents or U.S. corporations, partnerships, trusts or
estates and who are subject to U.S. federal income tax). Investors other than
U.S. persons may be subject to different U.S. tax treatment, including a
non-resident alien U.S. federal withholding
S-37
tax at the rate of 30% or at a lower treaty rate on amounts treated as ordinary
dividends from the Fund and, unless an effective IRS Form W-8BEN, or other
authorized withholding certificate is on file, to backup withholding on certain
other payments from the Fund. SHAREHOLDERS SHOULD CONSULT THEIR OWN TAX ADVISORS
ON THESE MATTERS AND ON ANY SPECIFIC QUESTION OF U.S. FEDERAL, STATE, LOCAL,
FOREIGN AND OTHER APPLICABLE TAX LAWS, BEFORE MAKING AN INVESTMENT IN THE FUND.
CUSTODIAN, TRANSFER AGENT, DIVIDEND PAYING AGENT AND REGISTRAR
The Fund's securities and cash are held under a custodian agreement
with The Bank of New York, One Wall Street, New York, New York 10286. The
transfer agent, dividend paying agent and registrar for the Fund's shares is
also The Bank of New York.
EXPERTS
The financial statement of the Fund as of ________, 2003 appearing in
this Statement of Additional Information has been audited by Deloitte & Touche
LLP independent auditors, as set forth in their report thereon appearing
elsewhere herein, and is included in reliance upon such report given upon the
authority of such firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
A Registration Statement on Form N-2, including amendments thereto,
relating to the shares offered hereby, has been filed by the Fund with the
Commission, Washington, D.C. The prospectus and this Statement of Additional
Information do not contain all of the information set forth in the Registration
Statement, including any exhibits and schedules thereto. For further information
with respect to the Fund and the shares offered hereby, reference is made to the
Registration Statement. Statements contained in the prospectus and this
Statement of Additional Information as to the contents of any contract or other
document referred to are not necessarily complete and in each instance reference
is made to the copy of such contract or other document filed as an exhibit to
the Registration Statement, each such statement being qualified in all respects
by such reference. A copy of the Registration Statement may be inspected without
charge at the Commission's principal office in Washington, D.C., and copies of
all or any part thereof may be obtained from the Commission upon the payment of
certain fees prescribed by the Commission.
S-38
FINANCIAL STATEMENT AND INDEPENDENT AUDITORS' REPORT
F-1
REPORT OF INDEPENDENT AUDITORS
CALAMOS CONVERTIBLE AND HIGH INCOME FUND
STATEMENT OF ASSETS AND LIABILITIES
____ __, 200_
Calamos Convertible and High Income Fund
SCHEDULE OF INVESTMENTS ____ __, 200_ (UNAUDITED)
CALAMOS CONVERTIBLE AND HIGH INCOME FUND
STATEMENT OF ASSETS AND LIABILITIES
____ __, 200_ (UNAUDITED)
CALAMOS CONVERTIBLE AND HIGH INCOME FUND
STATEMENT OF OPERATIONS
FOR THE PERIOD ENDED ____ __, 200_ * (UNAUDITED)
CALAMOS CONVERTIBLE AND HIGH INCOME FUND
STATEMENT OF CHANGES IN NET ASSETS
CALAMOS CONVERTIBLE AND HIGH INCOME FUND
FINANCIAL HIGHLIGHTS
CALAMOS CONVERTIBLE AND HIGH INCOME FUND
STATEMENT OF PREFERENCES OF
PREFERRED SHARES ("PREFERRED SHARES")
TABLE OF CONTENTS
PAGE
DESIGNATION......................................................................................................A-1
PART I: TERMS OF PREFERRED SHARES...............................................................................A-2
1. Number of Shares; Ranking...............................................................................A-2
2. Dividends...............................................................................................A-2
3. Redemption..............................................................................................A-5
4. Designation of Dividend Period..........................................................................A-9
5. Restrictions on Transfer................................................................................A-9
6. Voting Rights..........................................................................................A-10
7. Liquidation Rights.....................................................................................A-13
8. Auction Agent..........................................................................................A-14
9. 1940 Act Preferred Shares Asset Coverage...............................................................A-14
10. Preferred Shares Basic Maintenance Amount..............................................................A-14
11. Certain Other Restrictions.............................................................................A-15
12. Compliance Procedures for Asset Maintenance Tests......................................................A-15
13. Notices................................................................................................A-17
14. Waiver.................................................................................................A-17
15. Termination............................................................................................A-17
16. Amendment..............................................................................................A-17
17. Definitions............................................................................................A-17
18. Interpretation.........................................................................................A-38
PART II: AUCTION PROCEDURES....................................................................................A-39
1. Certain Definitions....................................................................................A-39
2. Orders.................................................................................................A-39
3. Submission of Orders by Broker-Dealers to Auction Agent................................................A-41
4. Determination of Sufficient Clearing Bids, Winning Bid Rate and Applicable Rate........................A-43
5. Acceptance and Rejection of Submitted Bids and Submitted Sell Orders and Allocation....................A-44
6. Transfer of Preferred Shares...........................................................................A-47
i
Calamos Convertible and High Income Fund, a Delaware statutory trust
(the "Trust"), certifies that:
FIRST: Pursuant to authority expressly vested in the Board of Trustees
of the Trust by Article V of its Agreement and Declaration of Trust (which as
hereafter amended, restated and supplemented from time to time, is together with
this Statement, the "Declaration"), the Board of Trustees has duly authorized
the creation and issuance of, ________________ shares of the preferred shares
(no par value) (the "Preferred Shares") and has further classified ___________
of such shares a "Series ______ Preferred Shares," liquidation preference
$25,000 per share, _____________ of such shares as "Series ____ Preferred
Shares", liquidation preference $25,000 per share, ______________ of such shares
as "Series ____ Preferred Shares", liquidation preference $25,000 per share,
_____________ of such shares as "Series Preferred Shares", liquidation
preference $25,000 per share ___________ of such shares a "Series ______
Preferred Shares," liquidation preference $25,000 per share, and ______________
of such shares as "Series ____ Preferred Shares", liquidation preference $25,000
per share (each a "Series" of Preferred Shares, and together, the "Preferred
Shares").
SECOND: The preferences, voting powers, restrictions, limitations as to
dividends, qualifications, and terms and conditions of redemption, of the
Preferred Shares are as follows:
DESIGNATION
Series _ Preferred Shares: a Series of _____ Preferred Shares, no par
value, liquidation preference $25,000 per share, is hereby designated "____
Preferred Shares" ("Series _ Preferred Shares"). Each share of Series _
Preferred Shares shall have an initial dividend rate per annum equal to ____%
and an initial Dividend Payment Date of _________ __, 2003 and have such other
preferences, rights, voting powers, restrictions, limitations as to dividends,
qualifications and terms and conditions of redemption, in addition to those
required by applicable law, or as are set forth in Part I and Part II of this
Statement. The Series _ Preferred Shares shall constitute a separate Series of
Preferred Shares of the Trust.
Series __ Preferred Shares: a Series of _____ Preferred Shares, no par
value, liquidation preference $25,000 per share, is hereby designated "____
Preferred Shares" ("____ Preferred Shares"). Each share of Series __ Preferred
Shares shall have an initial dividend rate per annum equal to ____% and an
initial Dividend Payment Date of _________ __, 2003 and have such other
preferences, rights, voting powers, restrictions, limitations as to dividends,
qualifications and terms and conditions of redemption, in addition to those
required by applicable law, or as are set forth in Part I and Part II of this
Statement. The Series __ Preferred Shares shall constitute a separate Series of
Preferred Shares of the Trust.
Series _ Preferred Shares: a Series of _____ Preferred Shares, no par
value, liquidation preference $25,000 per share, is hereby designated
"Preferred Shares" ("____ Preferred Shares"). Each share of Series _ Preferred
Shares shall have an initial dividend rate per annum equal to ____% and an
initial Dividend Payment Date of _________ __, 2003 and have such other
preferences, rights, voting powers, restrictions, limitations as to dividends,
qualifications and terms and conditions of redemption, in addition to those
required by applicable law, or as are set forth in Part I and Part II of this
Statement. The Series _ Preferred Shares shall constitute a separate Series of
Preferred Shares of the Trust.
Series _ Preferred Shares: a Series of _____ Preferred Shares, no par
value, liquidation preference $25,000 per share, is hereby designated
"Preferred Shares" ("____ Preferred Shares"). Each share of Series _ Preferred
Shares shall have an initial dividend rate per annum equal to ____% and an
initial Dividend Payment Date of _________ __, 2003 and have such other
preferences, rights, voting powers, restrictions, limitations as to dividends,
qualifications and terms and conditions of redemption, in addition to those
required by applicable law, or as are set forth in Part I and Part II of this
Statement. The Series _ Preferred Shares shall constitute a separate Series of
Preferred Shares of the Trust.
Series _ Preferred Shares: a Series of _____ Preferred Shares, no par
value, liquidation preference $25,000 per share, is hereby designated
"Preferred Shares" ("____ Preferred Shares"). Each share of Series _ Preferred
Shares shall have an initial dividend rate per annum equal to ____% and an
initial Dividend Payment Date of _________ __, 2003 and have such other
preferences, rights, voting powers, restrictions, limitations as to dividends,
qualifications and terms and conditions of redemption, in addition to those
required by applicable law, or as are set forth in Part I and Part II of this
Statement. The Series _ Preferred Shares shall constitute a separate Series of
Preferred Shares of the Trust.
Series _ Preferred Shares: a Series of _____ Preferred Shares, no par
value, liquidation preference $25,000 per share, is hereby designated
"Preferred Shares" ("____ Preferred Shares"). Each share of Series _ Preferred
Shares shall have an initial dividend rate per annum equal to ____% and an
initial Dividend Payment Date of _________ __, 2003 and have such other
preferences, rights, voting powers, restrictions, limitations as to dividends,
qualifications and terms and conditions of redemption, in addition to those
required by applicable law, or as are set forth in Part I and Part II of this
Statement. The Series _ Preferred Shares shall constitute a separate Series of
Preferred Shares of the Trust.
Subject to the provisions of Section 11(b) of Part I hereof, the Board
of Trusts of the Trust may, in the future, reclassify additional shares of the
Trust's unissued common shares as preferred shares, with
A-1
the same preferences, rights, voting powers, restrictions, limitations as to
dividends, qualifications and terms and conditions of redemption and other terms
herein described, except that the dividend rate for its initial Dividend Period,
its initial Dividend Payment Date and any other changes in the terms herein set
forth shall be as set forth in this Statement with respect to the additional
shares.
As used in Part I and Part II of this Statement, capitalized terms
shall have the meanings provided in Section 17 of Part I and Section 1 of Part
II of this Statement.
PART I: TERMS OF PREFERRED SHARES
1. Number of Shares; Ranking.
(a) The initial number of authorized shares constituting the
Series __ Preferred Shares is __ shares, Series __ Preferred Shares is __,
Series __ Preferred Shares is __ shares, Series __ Preferred Shares is __
shares, Series __ Preferred Shares is __ shares and Series __ Preferred Shares
is __ shares. No fractional shares of any Series shall be issued.
(b) Shares of each Series that at any time have been redeemed
or purchased by the Trust shall, after such redemption or purchase, have the
status of authorized but unissued preferred shares of beneficial interest.
(c) Shares of each Series shall rank on a parity with shares
of any other Series of preferred shares of the Trust (including any other
Preferred Shares) as to the payment of dividends to which such shares are
entitled.
(d) No Holder of shares of any Series shall have, solely by
reason of being such a holder, any preemptive or other right to acquire,
purchase or subscribe for any shares of any Series, Common Shares of the Trust
or other securities of the Trust which it may hereafter issue or sell.
2. Dividends.
(a) The Holders of shares of each Series shall be entitled to
receive, when, as and if declared by the Board of Trustees, out of funds legally
available therefor, cumulative cash dividends on their shares at the Applicable
Rate, determined as set forth in paragraph (c) of this Section 2, and no more,
payable on the respective dates determined as set forth in paragraph (b) of this
Section 2. Dividends on the Outstanding shares of each Series issued on the Date
of Original Issue shall accumulate from the Date of Original Issue.
(b) (i) Dividends shall be payable when, as and if declared
by the Board of Trustees following the initial Dividend Payment Date,
subject to subparagraph (b)(ii) of this Section 2, on the shares of
each Series, as follows:
(A) with respect to any Dividend Period of one year
or less, on the Business Day following the last day of such Dividend
Period; provided, however, if the Dividend Period is more than 91 days
then on the 91st, 181st and 271st days within such period, if
applicable, and on the Business Day following the last day of such
Dividend Period; and
(B) with respect to any Dividend Period of more than
one year, on a quarterly basis on each January 1, April 1, July 1 and
October 1 within such Dividend Period and on the Business Day following
the last day of such Dividend Period.
A-2
(ii) If a day for payment of dividends resulting from
the application of subparagraph (b) above is not a Business Day, then
the Dividend Payment Date shall be the first Business Day following
such day for payment of dividends.
(iii) The Trust shall pay to the Paying Agent not
later than 12:00 noon, New York City time, on each Dividend Payment
Date for a Series, an aggregate amount of immediately available funds
equal to the dividends to be paid to all Holders of such Series on such
Dividend Payment Date. The Trust shall not be required to establish any
reserves for the payment of dividends.
(iv) All moneys paid to the Paying Agent for the
payment of dividends shall be held in trust for the payment of such
dividends by the Paying Agent for the benefit of the Holders specified
in subparagraph (b)(v) of this Section 2. Any moneys paid to the Paying
Agent in accordance with the foregoing but not applied by the Paying
Agent to the payment of dividends will, upon request and to the extent
permitted by law, be repaid to the Trust at the end of 90 days from the
date on which such moneys were to have been so applied.
(v) Each dividend on each Series shall be paid on the
Dividend Payment Date therefor to the Holders of that Series as their
names appear on the share ledger or share records of the Trust on the
Business Day next preceding such Dividend Payment Date; provided,
however, if dividends are in arrears, they may be declared and paid at
any time to Holders as their names appear on the share ledger or share
records of the Trust on such date not exceeding 15 days preceding the
payment date thereof, as may be fixed by the Board of Trustees. No
interest will be payable in respect of any dividend payment or payments
which may be in arrears.
(c) (i) The dividend rate on Outstanding shares of each Series
during the period from and after the Date of Original Issue to and
including the last day of the initial Dividend Period therefor shall be
equal to the rate as determined in the manner set forth under
"Designation" above. For each subsequent Dividend Period for each
Series, the dividend rate shall be equal to the rate per annum that
results from an Auction (but the rate set at the Auction will not
exceed the Maximum Rate); provided, however, that if an Auction for any
subsequent Dividend Period of a Series is not held for any reason or if
Sufficient Clearing Orders have not been made in an Auction (other than
as a result of all shares of any Series being the subject of Submitted
Hold Orders and other than in an auction for a Special Dividend
Period), then the dividend rate on the shares of that Series For any
such Dividend Period shall be the Maximum Rate (except (i) during a
Default Period when the dividend rate shall be the Default Rate, as set
forth in Section 2(c)(ii) below or (ii) after a Default Period and
prior to the beginning of the next Dividend Period when the dividend
rate shall be the Maximum Rate at the close of business on the last day
of such Default Period). If the Fund has declared a Special Dividend
Period and there are not Sufficient Clearing Orders, the dividend rate
for the next rate period will be the same as during the current rate
period. If as a result of an unforeseeable disruption of the financial
markets, an Auction cannot be held, the dividend rate for the
Subsequent Dividend Period will be the same as the dividend rate for
the current Dividend Period.
(ii) Subject to the cure provisions in Section
2(c)(iii) below, a "Default Period" with respect to a particular Series
will commence on any date the Trust fails to deposit irrevocably in
trust in same-day funds, with the Paying Agent by 12:00 noon, New York
City time, (A) the full amount of any declared dividend on that Series
payable on the Dividend Payment Date (a "Dividend Default") or (B) the
full amount of any redemption price (the "Redemption Price") payable on
the date fixed for redemption (the "Redemption Date") (a
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"Redemption Default") and together with a Dividend Default, hereinafter
referred to as "Default").
Subject to the cure provisions of Section 2(c)(iii)
below, a Default Period with respect to a Dividend Default or a
Redemption Default shall end on the Business Day on which, by 12:00
noon, New York City time, all unpaid dividends and any unpaid
Redemption Price shall have been deposited irrevocably in trust in
same-day funds with the Paying Agent. In the case of a Dividend
Default, the Applicable Rate for each Dividend Period commencing during
a Default Period will be equal to the Default Rate, and each subsequent
Dividend Period commencing after the beginning of a Default Period
shall be a Standard Dividend Period; provided, however, that the
commencement of a Default Period will not by itself cause the
commencement of a new Dividend Period. No Auction shall be held during
a Default Period applicable to that Series.
(iii) No Default Period with respect to a Dividend
Default or Redemption Default shall be deemed to commence if the amount
of any dividend or any Redemption Price due (if such default is not
solely due to the willful failure of the Trust) is deposited
irrevocably in trust, in same-day funds with the Paying Agent by 12:00
noon, New York City time within three Business Days after the
applicable Dividend Payment Date or Redemption Date, together with an
amount equal to the Default Rate applied to the amount of such
non-payment based on the actual number of days comprising such period
divided by 365 for each Series. The Default Rate shall be equal to the
Reference Rate multiplied by three (3).
(iv) The amount of dividends per share payable (if
declared) on each Dividend Payment Date of each Dividend Period of less
than one (1) year (or in respect of dividends on another date in
connection with a redemption during such Dividend Period) shall be
computed by multiplying the Applicable Rate (or the Default Rate) for
such Dividend Period (or a portion thereof) by a fraction, the
numerator of which will be the number of days in such Dividend Period
(or portion thereof) that such share was Outstanding and for which the
Applicable Rate or the Default Rate was applicable and the denominator
of which will be 365 for each Series, multiplying the amount so
obtained by $25,000, and rounding the amount so obtained to the nearest
cent. During any Dividend Period of one (1) year or more, the amount of
dividends per share payable on any Dividend Payment Date (or in respect
of dividends on another date in connection with a redemption during
such Dividend Period) shall be computed as described in the preceding
sentence, except that it will be determined on the basis of a year
consisting of twelve 30-day months.
(d) Any dividend payment made on shares of any Series shall
first be credited against the earliest accumulated but unpaid dividends due with
respect to that Series.
(e) For so long as the Preferred Shares are Outstanding,
except as otherwise contemplated by Part I of this Statement, the Trust will not
declare, pay or set apart for payment any dividend or other distribution (other
than a dividend or distribution paid in shares of, or options, warrants or
rights to subscribe for or purchase, Common Shares or other shares ranking
junior to the Preferred Shares as to dividends or upon liquidation) with respect
to Common Shares or any other shares of beneficial interest of the Trust ranking
junior to the Preferred Shares as to dividends or upon liquidation, or call for
redemption, redeem, purchase or otherwise acquire for consideration any Common
Shares or other shares of beneficial interest ranking junior to the Preferred
Shares (except by conversion into or exchange for shares of the Trust ranking
junior to the Preferred Shares as to dividends and upon liquidation), unless (i)
immediately after such transaction, the Trust would have Eligible Assets with an
aggregate Discounted Value at least equal to the Preferred Shares Basic
Maintenance Amount and the 1940 Act Preferred Shares Asset Coverage would be
achieved, (ii) all cumulative and unpaid dividends due on or prior to the date
of the transaction have been declared and paid in full with
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respect to the Trust's preferred shares, including the Preferred Shares or
shall have been declared and sufficient funds for the payment thereof deposited
with the Auction Agent, and (iii) the Trust has redeemed the full number of
shares of preferred required to be redeemed by any mandatory provision for
redemption including the Preferred Shares required to be redeemed by any
provision for mandatory redemption contained in Section 3(a)(ii) of Part I of
this Supplement.
(f) For so long as the Preferred Shares are Outstanding,
except as set forth in the next sentence, the Trust will not declare, pay or set
apart for payment on any Series of shares of beneficial interest of the Trust
ranking, as to the payment of dividends, on a parity with the Preferred Shares
for any period unless full cumulative dividends have been or contemporaneously
are declared and paid on each Series through their most recent Dividend Payment
Date. When dividends are not paid in full upon the Preferred Shares through
their most recent Dividend Payment Dates or upon any other Series of shares of
beneficial interest ranking on a parity as to the payment of dividends with
Preferred Shares through their most recent respective Dividend Payment Dates,
all dividends declared upon the Preferred Shares and any other such Series of
shares of beneficial interest ranking on a parity as to the payment of dividends
with the Preferred Shares shall be declared prorata so that the amount of
dividends declared per share on the Preferred Shares and such other Series of
preferred shares of beneficial interest ranking on a parity therewith shall in
all cases bear to each other the same ratio that accumulated dividends per share
on the Preferred Shares and such other Series of preferred shares of beneficial
interest ranking on a parity therewith bear to each other.
3. Redemption.
(a) (i) After the initial Dividend Period, subject to the
provisions of this Section 3 and to the extent permitted under the 1940
Act and Delaware law, the Trust may, at its option, redeem in whole or
in part out of funds legally available therefor shares of any Series
herein designated as (A) having a Dividend Period of one year or less,
on the Business Day after the last day of such Dividend Period by
delivering a notice of redemption not less than 15 calendar days and
not more than 40 calendar days prior to the Redemption Date, at a
redemption price per share equal to $25,000, plus an amount equal to
accumulated but unpaid dividends thereon (whether or not earned or
declared) to the Redemption Date ("Redemption Price"), or (B) having a
Dividend Period of more than one year, on any Business Day prior to the
end of the relevant Dividend Period by delivering a notice of
redemption not less than 15 calendar days and not more than 40 calendar
days prior to the Redemption Date, at the Redemption Price, plus a
redemption premium, if any, determined by the Board of Trustees after
consultation with the Broker-Dealers and set forth in any applicable
Specific Redemption Provisions at the time of the designation of such
Dividend Period as set forth in Section 4 of Part I of this Statement;
provided, however, that during a Dividend Period of more than one year,
no shares of any Series will be subject to optional redemption except
in accordance with any Specific Redemption Provisions approved by the
Board of Trustees after consultation with the Broker-Dealers at the
time of the designation of such Dividend Period. Notwithstanding the
foregoing, the Trust shall not give a notice of or effect any
redemption pursuant to this Section 3(a)(i) unless, on the date on
which the Trust gives such notice and on the Redemption Date, (a) the
Trust has available Deposit Securities with maturity or tender dates
not later than the day preceding the applicable Redemption Date and
having a value not less than the amount (including any applicable
premium) due to Holders of each Series by reason of the redemption of
each Series on the Redemption Date and (b) the Trust would have
Eligible Assets with an aggregate Discounted Value at least equal to
the Preferred Shares Basic Maintenance Amount immediately subsequent to
such redemption, if such redemption were to occur on such date, it
being understood that the provisions of paragraph (d) of this Section 3
shall be applicable in such circumstances in the event the Trust makes
the deposit and takes the other action required thereby.
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(ii) If the Trust fails as of any Valuation Date to
meet the Preferred Shares Basic Maintenance Amount Test or, as of the
last Business Day of any month, the 1940 Act Preferred Shares Asset
Coverage, and such failure is not cured within ten Business Days
following the relevant Valuation Date, in the case of a failure to meet
the Preferred Shares Basic Maintenance Amount Test, or the last
Business Day of the following month in the case of a failure to meet
the 1940 Act Preferred Shares Asset Coverage (each an "Asset Coverage
Cure Date"), the Preferred Shares will be subject to mandatory
redemption out of funds legally available therefor. The number of
Preferred Shares to be redeemed in such circumstances will be equal to
the lesser of (A) the minimum number of Preferred Shares the redemption
of which, if deemed to have occurred immediately prior to the opening
of business on the relevant Asset Coverage Cure Date, would result in
the Trust meeting the Preferred Shares Basic Maintenance Amount Test,
and the 1940 Act Preferred Shares Asset Coverage, as the case may be,
in either case as of the relevant Asset Coverage Cure Date (provided
that, if there is no such minimum number of shares the redemption of
which would have such result, all Preferred Shares then Outstanding
will be redeemed) and (B) the maximum number of Preferred Shares that
can be redeemed out of funds expected to be available therefor on the
Mandatory Redemption Date at the Mandatory Redemption Price set forth
in subparagraph (a)(iii) of this Section 3.
(iii) In determining the Preferred Shares required to
be redeemed in accordance with the foregoing Section 3(a)(ii), the
Trust shall allocate the number of shares required to be redeemed to
satisfy the Preferred Shares Basic Maintenance Amount Test or the 1940
Act Preferred Shares Asset Coverage, as the case may be, prorata or
among the Holders of the Preferred Shares in proportion to the number
of shares they hold and other preferred shares subject to mandatory
redemption provisions similar to those contained in this Section 3,
subject to the further provisions of this subparagraph (iii). The Trust
shall effect any required mandatory redemption pursuant to: (A) the
Preferred Shares Basic Maintenance Amount Test, as described in
subparagraph (a)(ii) of this Section 3, no later than 30 days after the
Trust last met the Preferred Shares Basic Maintenance Amount Test, or
(B) the 1940 Act Preferred Shares Asset Coverage, as described in
subparagraph (a)(ii) of this Section 3, no later than 30 days after the
Asset Coverage Cure Date (the "Mandatory Redemption Date"), except that
if the Trust does not have funds legally available for the redemption
of, or is not otherwise legally permitted to redeem, the number of
Preferred Shares which would be required to be redeemed by the Trust
under clause (A) of subparagraph (a)(ii) of this Section 3 if
sufficient funds were available, together with other preferred shares
which are subject to mandatory redemption under provisions similar to
those contained in this Section 3, or the Trust otherwise is unable to
effect such redemption on or prior to such Mandatory Redemption Date,
the Trust shall redeem those Preferred Shares, and other preferred
shares which it was unable to redeem, on the earliest practicable date
on which the Trust will have such funds available, upon notice pursuant
to Section 3(b) to record owners of Preferred Shares to be redeemed and
the Paying Agent. The Trust will deposit with the Paying Agent funds
sufficient to redeem the specified number of Preferred Shares with
respect to a redemption required under subparagraph (a)(ii) of this
Section 3, by 1:00 P.M., New York City time, of the Business Day
immediately preceding the Mandatory Redemption Date. If fewer than all
of the Outstanding Preferred Shares are to be redeemed pursuant to this
Section 3(a)(iii), the number of shares to be redeemed shall be
redeemed prorata from the Holders of such shares in proportion to the
number of the Preferred Shares held by such Holders, by lot or by such
other method as the Trust shall deem fair and equitable, subject,
however, to the terms of any applicable Specific Redemption Provisions.
"Mandatory Redemption Price" means the Redemption Price plus (in the
case of a Dividend Period of one year or more only) a redemption
premium, if any, determined by the Board of Trustees after consultation
with the Broker-Dealers and set forth in any applicable Specific
Redemption Provisions.
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(b) In the event of a redemption pursuant to the foregoing
Section 3(a), the Trust will file a notice of its intention to redeem with the
Securities and Exchange Commission so as to provide at least the minimum notice
required under Rule 23c-2 under the 1940 Act or any successor provision. In
addition, the Trust shall deliver a notice of redemption to the Auction Agent
(the "Notice of Redemption") containing the information set forth below (i) in
the case of an optional redemption pursuant to Section 3(a)(i) above, one
Business Day prior to the giving of notice to the Holders, (ii) in the case of a
mandatory redemption pursuant to Section 3(a)(ii) above, on or prior to the 10th
day preceding the Mandatory Redemption Date. Only with respect to shares held by
the Securities Depository, the Auction Agent will use its reasonable efforts to
provide telephonic notice to each Holder of shares of any Series called for
redemption not later than the close of business on the Business Day immediately
following the day on which the Auction Agent determines the shares to be
redeemed (or, during a Default Period with respect to such shares, not later
than the close of business on the Business Day immediately following the day on
which the Auction Agent receives Notice of Redemption from the Trust). The
Auction Agent shall confirm such telephonic notice in writing not later than the
close of business on the third Business Day preceding the date fixed for
redemption by providing the Notice of Redemption to each Holder of shares called
for redemption, the Paying Agent (if different from the Auction Agent) and the
Securities Depository. Notice of Redemption will be addressed to the registered
owners of shares of any Series at their addresses appearing on the share records
of the Trust. Such Notice of Redemption will set forth (i) the date fixed for
redemption, (ii) the number and identity of shares of each Series To be
redeemed, (iii) the redemption price (specifying the amount of accumulated
dividends to be included therein), (iv) that dividends on the shares to be
redeemed will cease to accumulate on such date fixed for redemption, and (v) the
provision under which redemption shall be made. No defect in the Notice of
Redemption or in the transmittal or mailing thereof will affect the validity of
the redemption proceedings, except as required by applicable law. If fewer than
all shares held by any Holder are to be redeemed, the Notice of Redemption
mailed to such Holder shall also specify the number of shares to be redeemed
from such Holder. The Trust shall provide Moody's (if Moody's is then rating the
Preferred Shares) written notice of the Trust's intent to redeem shares pursuant
to Section 3(a) above.
(c) Notwithstanding the provisions of paragraph (a) of this
Section 3, no preferred shares, including the Preferred Shares, may be redeemed
at the option of the Trust unless all dividends in arrears on the Outstanding
Preferred Shares and any other preferred shares have been or are being
contemporaneously paid or set aside for payment; provided, however, that the
foregoing shall not prevent the purchase or acquisition of outstanding preferred
shares pursuant to the successful completion of an otherwise lawful purchase or
exchange offer made on the same terms to holders of all outstanding preferred
shares.
(d) Upon the deposit of funds sufficient to redeem shares of
any Series with the Paying Agent and the giving of the Notice of Redemption to
the Auction Agent under paragraph (b) of this Section 3, dividends on such
shares shall cease to accumulate and such shares shall no longer be deemed to be
Outstanding for any purpose (including, without limitation, for purposes of
calculating whether the Trust has met the Preferred Shares Basic Maintenance
Amount Test or the 1940 Act Preferred Shares Asset Coverage), and all rights of
the Holders of the shares so called for redemption shall cease and terminate,
except the right of such Holder to receive the redemption price specified
herein, but without any interest or other additional amount. Such redemption
price shall be paid by the Paying Agent to the nominee of the Securities
Depository. The Trust shall be entitled to receive from the Paying Agent,
promptly after the date fixed for redemption, any cash deposited with the Paying
Agent in excess of (i) the aggregate redemption price of the shares of any
Series called for redemption on such date and (ii) such other amounts, if any,
to which Holders of shares of any Series called for redemption may be entitled.
Any funds so deposited that are unclaimed at the end of two years from such
redemption date shall, to the extent permitted by law, and upon request, be paid
to the Trust, after which time the Holders of shares of each Series so called
for redemption may look only to the Trust for payment of the redemption price
and all other amounts, if any, to which they may be entitled; provided, however,
that the
A-7
Paying Agent shall notify all Holders whose funds are unclaimed by placing a
notice in The Wall Street Journal concerning the availability of such funds once
each week for three consecutive weeks.
(e) To the extent that any redemption for which Notice of
Redemption has been given is not made by reason of the absence of legally
available funds therefor, or is otherwise prohibited, such redemption shall be
made as soon as practicable to the extent such funds become legally available or
such redemption is no longer otherwise prohibited. Failure to redeem shares of
any Series shall be deemed to exist at any time after the date specified for
redemption in a Notice of Redemption when the Trust shall have failed, for any
reason whatsoever, to deposit in trust with the Paying Agent the redemption
price with respect to any shares for which such Notice of Redemption has been
given. Notwithstanding the fact that the Trust may not have redeemed shares of
each Series for which a Notice of Redemption has been given, dividends may be
declared and paid on shares of any Series and shall include those shares of any
Series for which Notice of Redemption has been given but for which deposit of
funds has not been made.
(f) All moneys paid to the Paying Agent for payment of the
redemption price of shares of any Series called for redemption shall be held in
trust by the Paying Agent for the benefit of holders of shares so to be
redeemed.
(g) So long as any shares of any Series are held of record by
the nominee of the Securities Depository, the redemption price for such shares
will be paid on the date fixed for redemption to the nominee of the Securities
Depository for distribution to Agent Members for distribution to the persons for
whom they are acting as agent.
(h) Except for the provisions described above, nothing
contained in this Statement limits any right of the Trust to purchase or
otherwise acquire any shares of each Series outside of an Auction at any price,
whether higher or lower than the price that would be paid in connection with an
optional or mandatory redemption, so long as, at the time of any such purchase,
there is no arrearage in the payment of dividends on, or the mandatory or
optional redemption price with respect to, any shares of each Series For which
Notice of Redemption has been given and the Trust meets the 1940 Act Preferred
Shares Asset Coverage and the Preferred Shares Basic Maintenance Amount Test
after giving effect to such purchase or acquisition on the date thereof. Any
shares which are purchased, redeemed or otherwise acquired by the Trust shall
have no voting rights. If fewer than all the Outstanding shares of any Series
are redeemed or otherwise acquired by the Trust, the Trust shall give notice of
such transaction to the auction agent, in accordance with the procedures agreed
upon by the Board of Trustees.
(i) In the case of any redemption pursuant to this Section 3,
only whole shares of each Series shall be redeemed, and in the event that any
provision of the Charter would require redemption of a fractional share, the
Auction Agent shall be authorized to round up so that only whole shares are
redeemed.
(j) Notwithstanding anything herein to the contrary, including, without
limitation, Section 6 of Part I of this Statement, the Board of Trustees, upon
notification to each Rating Agency, may authorize, create or issue other Series
of preferred shares, including other Series of Preferred Shares, Series of
preferred shares ranking on a parity with the Preferred Shares with respect to
the payment of dividends or the distribution of assets upon dissolution,
liquidation or winding up of the affairs of the Trust, and senior securities
representing indebtedness as defined in the 1940 Act, to the extent permitted by
the 1940 Act, if upon issuance of any such series, either (A) the net proceeds
from the sale of such shares (or such portion thereof needed to redeem or
repurchase the Outstanding Preferred Shares) are deposited with the Paying Agent
in accordance with Section 3(d) of Part I of this Statement, Notice of
Redemption as contemplated by Section 3(b) of Part I of this Statement has been
delivered prior thereto or is sent promptly thereafter, and
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such proceeds are used to redeem all Outstanding Preferred Shares or (B) the
Trust would meet the 1940 Act Preferred Shares Asset Coverage, the Preferred
Shares Basic Maintenance Amount Test and the requirements of Section 11 of Part
I of this Statement.
4. Designation of Dividend Period.
(a) The initial Dividend Period for each Series shall be as
determined in the manner set forth under "Designation" above. The Trust will
designate the duration of subsequent Dividend Periods of each Series; provided,
however, that no such designation is necessary for a Standard Dividend Period
and, provided further, that any designation of a Special Dividend Period shall
be effective only if (i) notice thereof shall have been given as provided
herein, (ii) any failure to pay in a timely manner to the Auction Agent the full
amount of any dividend on, or the redemption price of, each Series shall have
been cured as provided above, (iii) Sufficient Clearing Orders shall have
existed in an Auction held on the Auction Date immediately preceding the first
day of such proposed Special Dividend Period, (iv) if the Trust shall have
mailed a Notice of Redemption with respect to any shares, the redemption price
with respect to such shares shall have been deposited with the Paying Agent, (v)
each Rating Agency shall have been provided notice of the Trust's intention to
declare a Special Dividend Period.
(b) If the Trust proposes to designate any Special Dividend
Period, not fewer than seven Business Days (or two Business Days in the event
the duration of the Dividend Period prior to such Special Dividend Period is
fewer than eight days) nor more than 30 Business Days prior to the first day of
such Special Dividend Period, notice shall be (i) made by press release and (ii)
communicated by the Trust by telephonic or other means to the Auction Agent and
each Broker-Dealer and confirmed in writing promptly thereafter. Each such
notice shall state (A) that the Trust proposes to exercise its option to
designate a succeeding Special Dividend Period, specifying the first and last
days thereof and the Maximum Rate for such Special Dividend Period and (B) that
the Trust will by 3:00 P.M., New York City time, on the second Business Day next
preceding the first day of such Special Dividend Period, notify the Auction
Agent, who will promptly notify the Broker-Dealers, of either (x) its
determination, subject to certain conditions, to proceed with such Special
Dividend Period, subject to the terms of any Specific Redemption Provisions, or
(y) its determination not to proceed with such Special Dividend Period, in which
latter event the succeeding Dividend Period shall be a Standard Dividend Period.
No later than 3:00 P.M., New York City time, on the second Business Day next
preceding the first day of any proposed Special Dividend Period, the Trust shall
deliver to the Auction Agent, who will promptly deliver to the Broker-Dealers
and Existing Holders, either:
(i) a notice stating (A) that the Trust has
determined to designate the next succeeding Dividend Period as
a Special Dividend Period, specifying the first and last days
thereof and (B) the terms of any Specific Redemption
Provisions; or
(ii) a notice stating that the Trust has determined
not to exercise its option to designate a Special Dividend
Period.
If the Trust fails to deliver either such notice with respect to any designation
of any proposed Special Dividend Period to the Auction Agent or is unable to
make the confirmation provided in clause (v) of paragraph (a) of this Section 4
by 3:00 P.M., New York City time, on the second Business Day next preceding the
first day of such proposed Special Dividend Period, the Trust shall be deemed to
have delivered a notice to the Auction Agent with respect to such Dividend
Period to the effect set forth in clause (ii) above, thereby resulting in a
Standard Dividend Period.
5. Restrictions on Transfer. Shares of each Series may be transferred
only (a) pursuant to an order placed in an Auction, (b) to or through a
Broker-Dealer or (c) to the Trust or any Affiliate.
A-9
Notwithstanding the foregoing, a transfer other than pursuant to an Auction will
not be effective unless the selling Existing Holder or the Agent Member of such
Existing Holder, in the case of an Existing Holder whose shares are listed in
its own name on the books of the Auction Agent, or the Broker-Dealer or Agent
Member of such Broker-Dealer, in the case of a transfer between persons holding
shares of any Series through different Broker-Dealers, advises the Auction Agent
of such transfer. The certificates representing the shares of each Series issued
to the Securities Depository will bear legends with respect to the restrictions
described above and stop-transfer instructions will be issued to the Transfer
Agent and/or Registrar.
6. Voting Rights.
(a) Except as otherwise provided in the Declaration or as
otherwise required by applicable law, (i) each Holder of shares of any Series
shall be entitled to one vote for each share of any Series held on each matter
on which the Holders of the Preferred Shares are entitled to vote, and (ii) the
holders of the Outstanding preferred shares, including each Series, and holders
of shares of Common Shares shall vote together as a single class on all matters
submitted to the shareholders; provided, however, that, with respect to the
election of trustees, the holders of the Outstanding preferred shares, including
each Series, represented in person or by proxy at a meeting for the election of
trustees, shall be entitled, as a class, to the exclusion of the holders of all
other securities and classes of shares, including the Common Shares, to elect
two trustees of the Trust, each share of preferred, including each Series,
entitling the holder thereof to one vote. The identities of the nominees of such
trusteeships may be fixed by the Board of Trustees. The Board of Trustees will
determine to which class or classes the trustees elected by the Outstanding
preferred shares will be assigned and the holders of Outstanding preferred
shares shall only be entitled to elect the trustees so designated as being
elected by the holders of preferred shares when their term shall have expired
and such trustees appointed by the holders of preferred shares will be allocated
as evenly as possible among the classes of trustees. Subject to paragraph (b) of
this Section 6, the holders of outstanding shares of Common Shares and
outstanding preferred shares, including each Series, voting together as a single
class, shall be entitled to elect the balance of the trustees.
(b) If at any time dividends on the Preferred Shares shall be
unpaid in an amount equal to two full years' dividends on the Preferred Shares
(a "Voting Period"), the number of trustees constituting the Board of Trustees
shall be automatically increased by the smallest number of additional trustees
that, when added to the number of trustees then constituting the Board of
Trustees, shall (together with the two trustees elected by the holders of
preferred shares, including each Series, pursuant to paragraph (a) of this
Section 6) constitute a majority of such increased number, and the holders of
any shares of preferred shares, including each Series, shall be entitled, voting
as a single class on a one-vote-per-share basis (to the exclusion of the holders
of all other securities and classes of shares of the Trust), to elect the
smallest number of such additional trustees of the Trust that shall constitute a
majority of the total number of trustees of the Trust so increased. The Voting
Period and the voting rights so created upon the occurrence of the conditions
set forth in this paragraph (b) of Section 6 shall continue unless and until all
dividends in arrears on each Series shall have been paid or declared and
sufficient cash or specified securities are set apart for the payment of such
dividends. Upon the termination of a Voting Period, the voting rights described
in this paragraph (b) of Section 6 shall cease, subject always, however, to the
revesting of such voting rights in the holders of preferred shares, including
each Series, upon the further occurrence of any of the events described in this
paragraph (b) of Section 6.
(c) As soon as practicable after the accrual of any right of
the holders of preferred shares, including each Series, to elect additional
trustees as described in paragraph (b) of this Section 6, the Trust shall notify
the Auction Agent, and the Auction Agent shall call a special meeting of such
holders, by mailing a notice of such special meeting to such holders, such
meeting to be held not less than ten nor more than 90 days after the date of
mailing of such notice. If the Trust fails to send such notice to
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the Auction Agent or if the Auction Agent does not call such a special meeting,
it may be called by any such holder on like notice. The record date for
determining the holders entitled to notice of and to vote at such special
meeting shall be the close of business on the fifth Business Day preceding the
day on which such notice is mailed. At any such special meeting and at each
meeting of holders of preferred shares, including each Series, held during a
Voting Period at which trustees are to be elected, such holders, voting together
as a class (to the exclusion of the holders of all other securities and classes
of shares of the Trust), shall be entitled to elect the number of trustees
prescribed in paragraph (b) of this Section 6 on a one-vote-per-share basis. At
any such meeting or adjournment thereof in the absence of a quorum, a majority
of the holders of preferred shares, including Holders of the Preferred Shares,
present in person or by proxy shall have the power to adjourn the meeting
without notice, other than an announcement at the meeting, until a quorum is
present.
(d) For purposes of determining any rights of the holders of
the shares of preferred shares, including each Series, to vote on any matter,
whether such right is created by this Statement, by statute or otherwise, if
redemption of some or all of the preferred shares, including each Series, is
required, no holder of preferred shares, including each Series, shall be
entitled to vote and no preferred shares, including each Series, shall be deemed
to be "outstanding" for the purpose of voting or determining the number of
shares required to constitute a quorum, if prior to or concurrently with the
time of determination, sufficient Deposit Securities for the redemption of such
shares have been deposited in the case of Preferred Shares in trust with the
Paying Agent for that purpose and the requisite Notice of Redemption with
respect to such shares shall have been given as provided in Section 3(b) of Part
I of this Statement and in the case of other preferred shares the Trust has
otherwise met the conditions for redemption applicable to such shares.
(e) The terms of office of all persons who are trustees of the
Trust at the time of a special meeting of Holders of the Preferred Shares and
holders of other preferred shares to elect trustees pursuant to paragraph (b) of
this Section 6 shall continue, notwithstanding the election at such meeting by
the holders of the number of trustees that they are entitled to elect.
(f) Simultaneously with the termination of a Voting Period,
the terms of office of the additional trustees elected by the Holders of the
Preferred Shares and holders of other preferred shares pursuant to paragraph (b)
of this Section 6 shall terminate, the remaining trustees shall constitute the
trustees of the Trust and the voting rights of such holders to elect additional
trustees pursuant to paragraph (b) of this Section 6 shall cease, subject to the
provisions of the last sentence of paragraph (b) of this Section 6.
(g) Unless otherwise required by law or in the Trust's
Declaration, the Holders of Preferred Shares shall not have any relative rights
or preferences or other special rights other than those specifically set forth
herein. In the event that the Trust fails to pay any dividends on the Preferred
Shares of the Trust or fails to redeem any Preferred Shares which it is required
to redeem, or any other event occurs which requires the mandatory redemption of
Preferred Shares and the required Notice of Redemption has not been given, other
than the rights set forth in paragraph (a) of Section 3 of Part I of this
Statement, the exclusive remedy of the Holders of Preferred Shares shall be the
right to vote for trustees pursuant to the provisions of paragraph (b) of this
Section 6. In no event shall the Holders of Preferred Shares have any right to
sue for, or bring a proceeding with respect to, such dividends or redemptions or
damages for the failure to receive the same.
(h) For so long as any preferred shares, including each
Series, are outstanding, the Trust will not, without the affirmative vote of the
Holders of a majority of the outstanding preferred shares, (i) institute any
proceedings to be adjudicated bankrupt or insolvent, or consent to the
institution of bankruptcy or insolvency proceedings against it, or file a
petition seeking or consenting to reorganization or relief under any applicable
federal or state law relating to bankruptcy or insolvency, or consent to the
appointment of a receiver, liquidator, assignee, trustee, sequestrator (or other
similar
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official) of the Trust or a substantial part of its property, or make any
assignment for the benefit of creditors, or, except as may be required by
applicable law, admit in writing its inability to pay its debts generally as
they become due or take any corporate action in furtherance of any such action;
(ii) create, incur or suffer to exist, or agree to create, incur or suffer to
exist, or consent to cause or permit in the future (upon the happening of a
contingency or otherwise) the creation, incurrence or existence of any material
lien, mortgage, pledge, charge, security interest, security agreement,
conditional sale or trust receipt or other material encumbrance of any kind upon
any of the Trust's assets as a whole, except (A) liens the validity of which are
being contested in good faith by appropriate proceedings, (B) liens for taxes
that are not then due and payable or that can be paid thereafter without
penalty, (C) liens, pledges, charges, security interests, security agreements or
other encumbrances arising in connection with any indebtedness senior to the
Preferred Shares, (D) liens, pledges, charges, security interests, security
agreements or other encumbrances arising in connection with any indebtedness
permitted under clause (iii) below and (E) liens to secure payment for services
rendered including, without limitation, services rendered by the Trust's Paying
Agent and the Auction Agent; or (iii) create, authorize, issue, incur or suffer
to exist any indebtedness for borrowed money or any direct or indirect guarantee
of such indebtedness for borrowed money or any direct or indirect guarantee of
such indebtedness, except the Trust may borrow as may be permitted by the
Trust's investment restrictions; provided, however, that transfers of assets by
the Trust subject to an obligation to repurchase shall not be deemed to be
indebtedness for purposes of this provision to the extent that after any such
transaction the Trust has Eligible Assets with an aggregate Discounted Value at
least equal to the Preferred Shares Basic Maintenance Amount as of the
immediately preceding Valuation Date.
(i) The affirmative vote of the holders of a majority, as
defined in the 1940 Act, of the outstanding preferred shares, including each
Series, voting as a separate class, shall be required to approve any plan of
reorganization (as such term is used in the 1940 Act) adversely affecting such
shares or any action requiring a vote of security holders of the Trust under
Section 13(a) of the 1940 Act. In the event a vote of holders of preferred
shares is required pursuant to the provisions of Section 13(a) of the 1940 Act,
the Trust shall, not later than ten Business Days prior to the date on which
such vote is to be taken, notify each Rating Agency that such vote is to be
taken and the nature of the action with respect to which such vote is to be
taken and shall, not later than ten Business Days after the date on which such
vote is taken, notify each Rating Agency of the results of such vote.
(j) The affirmative vote of the Holders of a majority, as
defined in the 1940 Act, of the outstanding preferred shares of any series,
voting separately from any other series, shall be required with respect to any
matter that materially and adversely affects the rights, preferences, or powers
of that Series in a manner different from that of other Series or classes of the
Trust's shares of beneficial interest. For purposes of the foregoing, no matter
shall be deemed to adversely affect any rights, preference or power unless such
matter (i) alters or abolishes any preferential right of such series; (ii)
creates, alters or abolishes any right in respect of redemption of such series;
or (iii) creates or alters (other than to abolish) any restriction on transfer
applicable to such series. The vote of holders of any Series described in this
Section (j) will in each case be in addition to a separate vote of the requisite
percentage of Common Shares and/or preferred shares necessary to authorize the
action in question.
(k) The Board of Trustees, without the vote or consent of any
holder of preferred shares, including each Series, or any other shareholder of
the Trust, may from time to time amend, alter or repeal any or all of the
definitions contained herein, add covenants and other obligations of the Trust,
or confirm the applicability of covenants and other obligations set forth
herein, all in connection with obtaining or maintaining the rating of any Rating
Agency with respect to each Series, and any such amendment, alteration or repeal
will not be deemed to affect the preferences, rights or powers of Preferred
Shares or the Holders thereof, provided that the Board of Trustees receives
written confirmation from each relevant Rating Agency (with such confirmation in
no event being required to be obtained from a
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particular Rating Agency with respect to definitions or other provisions
relevant only to and adopted in connection with another Rating Agency's rating
of the any Series) that any such amendment, alteration or repeal would not
adversely affect the rating then assigned by such Rating Agency.
In addition, subject to compliance with applicable law, the Board of
Trustees may amend the definition of Maximum Rate to increase the percentage
amount by which the Reference Rate is multiplied to determine the Maximum Rate
shown therein without the vote or consent of the holders of shares of preferred,
including each Series, or any other shareholder of the Trust, but only with
confirmation from each Rating Agency, and after consultation with the
Broker-Dealers, provided that immediately following any such increase the Trust
would meet the Preferred Shares Basic Maintenance Amount test.
7. Liquidation Rights.
(a) In the event of any liquidation, dissolution or winding up of
the affairs of the Trust, whether voluntary or involuntary, the holders of
preferred shares, including each Series, shall be entitled to receive out of the
assets of the Trust available for distribution to shareholders, after claims of
creditors but before distribution or payment shall be made in respect of the
Common Shares or to any other shares of beneficial interest of the Trust ranking
junior to the preferred shares, as to liquidation payments, a liquidation
distribution in the amount of $25,000 per share (the "Liquidation Preference"),
plus an amount equal to all unpaid dividends accrued to and including the date
fixed for such distribution or payment (whether or not declared by the Board of
Trustees, but excluding interest thereon), but such Holders shall be entitled to
no further participation in any distribution or payment in connection with any
such liquidation, dissolution or winding up. Each Series shall rank on a parity
with shares of any other Series of preferred shares of the Trust (including each
Series) as to the distribution of assets upon dissolution, liquidation or
winding up of the affairs of the Trust.
(b) If, upon any such liquidation, dissolution or winding up of the
affairs of the Trust, whether voluntary or involuntary, the assets of the Trust
available for distribution among the holders of all outstanding preferred
shares, including each Series, shall be insufficient to permit the payment in
full to such holders of the amounts to which they are entitled, then such
available assets shall be distributed among the holders of all outstanding
preferred shares, including each Series, ratably in any such distribution of
assets according to the respective amounts which would be payable on all such
shares if all amounts thereon were paid in full. Unless and until payment in
full has been made to the holders of all outstanding preferred shares, including
each Series, of the liquidation distributions to which they are entitled, no
dividends or distributions will be made to holders of Common Shares or any
shares of beneficial interest of the Trust ranking junior to the preferred
shares as to liquidation.
(c) Neither the consolidation nor merger of the Trust with or into
any other business entity, nor the sale, lease, exchange or transfer by the
Trust of all or substantially all of its property and assets, shall be deemed to
be a liquidation, dissolution or winding up of the Trust for purposes of this
Section 7.
(d) After the payment to Holders of Preferred Shares of the full
preferential amounts provided for in this Section 7, the Holders of the
Preferred Shares as such shall have no right or claim to any of the remaining
assets of the Trust.
(e) In the event the assets of the Trust or proceeds thereof
available for distribution to the Holders of Preferred Shares, upon dissolution,
liquidation or winding up of the affairs of the Trust, whether voluntary or
involuntary, shall be insufficient to pay in full all amounts to which such
Holders are entitled pursuant to paragraph (a) of this Section 7, no such
distribution shall be made on account of any shares of any other Series of
preferred shares unless proportionate distributive amounts shall be paid on
account of
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the Preferred Shares, ratably, in proportion to the full distributable amounts
to which holders of all preferred shares are entitled upon such dissolution,
liquidation or winding up.
(f) Subject to the rights of the holders of other preferred shares
or after payment shall have been made in full to the Holders of Preferred Shares
as provided in paragraph (a) of this Section 7, but not prior thereto, any other
Series or class of shares ranking junior to the Preferred Shares with respect to
the distribution of assets upon dissolution, liquidation or winding up of the
affairs of the Trust shall, subject to any respective terms and provisions (if
any) applying thereto, be entitled to receive any and all assets remaining to be
paid or distributed, and the Holders of the Preferred Shares shall not be
entitled to share therein.
8. Auction Agent. For so long as any Preferred Shares are Outstanding,
the Auction Agent, duly appointed by the Trust to so act, shall be in each case
a commercial bank, trust company or other financial institution independent of
the Trust and its Affiliates (which, however, may engage or have engaged in
business transactions with the Trust or its Affiliates) and at no time shall the
Trust or any of its Affiliates act as the Auction Agent in connection with the
Auction Procedures. If the Auction Agent resigns or for any reason its
appointment is terminated during any period that any shares of any Series are
Outstanding, the Trust will use its best efforts to enter into an agreement with
a successor auction agent containing substantially the same terms and conditions
as the auction agency agreement. The Fund may remove the auction agent provided
that prior to such removal the Fund shall have entered into such an agreement
with a successor auction agent.
9. 1940 Act Preferred Shares Asset Coverage. The Trust shall maintain,
as of the last Business Day of each month in which any Preferred Shares are
Outstanding, the 1940 Act Preferred Shares Asset Coverage; provided, however,
that Section 3(a)(ii) shall be the sole remedy in the event the Trust fails to
do so.
10. Preferred Shares Basic Maintenance Amount. So long as any Preferred
Shares are Outstanding and any Rating Agency so requires, the Trust shall
maintain, as of each Valuation Date, Moody's Eligible Assets, as applicable,
equal to or exceeding 1.30 times the Preferred Shares Basic Maintenance Amount
and Fitch Eligible Assets, as applicable, having an aggregate Discounted Value
equal to or greater than the Preferred Shares Basic Maintenance Amount;
provided, however, that Section 3(a)(ii) shall be the sole remedy in the event
the Trust fails to do so.
11. Certain Other Restrictions. So long as any Preferred Shares are
Outstanding and Fitch, Moody's or any Other Rating Agency that is rating such
shares so requires, the Trust will not, unless it has received written
confirmation from Fitch (if Fitch is then rating the Preferred Shares), Moody's
(if Moody's is then rating the Preferred Shares) and (if applicable) such Other
Rating Agency, that any such action would not impair the rating then assigned by
such Rating Agency to the Preferred Shares, engage in any one or more of the
following transactions:
(a) except in connection with a refinancing of the Preferred
Shares, issue additional shares of any Series of preferred shares, including any
Series or reissue any preferred shares, including any Series previously
purchased or redeemed by the Trust;
(b) issue senior securities representing indebtedness as
defined under the 1940 Act;
(c) engage in any short sales of securities;
(d) lend portfolio securities;
(e) merge or consolidate into or with any other fund;
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[(e) (f) for purposes of valuation of Moody's Eligible Assets: (A) if the Trust
writes a call option, the underlying asset will be valued as follows: (1) if the
option is exchange-traded and may be offset readily or if the option expires
before the earliest possible redemption of the Preferred Shares, at the lower of
the Discounted Value of the underlying security of the option and the exercise
price of the option or (2) otherwise, it has no value; (B) if the Trust writes a
put option, the underlying asset will be valued as follows: the lesser of (1)
exercise price and (2) the Discounted Value of the underlying security; and (C)
call or put option contracts which the Trust buys have no value. For so long as
the Preferred Shares are rated by Moody's: (1) the Trust will not engage in
options transactions for leveraging or speculative purposes; (2) the Trust will
not write or sell any anticipatory contracts pursuant to which the Trust hedges
the anticipated purchase of an asset prior to completion of such purchase; (3)
the Trust will not enter into an option transaction with respect to portfolio
securities unless, after giving effect thereto, the Trust would continue to have
Eligible Assets with an aggregate Discounted Value equal to or greater than the
Preferred Shares Basic Maintenance Amount; (4) the Trust will not enter into an
option transaction with respect to portfolio securities unless after giving
effect to such transaction the Trust would continue to be in compliance with the
provisions relating to the Preferred Shares Basic Maintenance Amount; (5) for
purposes of the Preferred Shares Basic Maintenance Amount assets in margin
accounts are not Eligible Assets; (6) the Trust shall write only exchange-traded
options on exchanges approved by Moody's (if Moody's is then rating the
Preferred Shares); (7) where delivery may be made to the Trust with any of a
class of securities, the Trust shall assume for purposes of the Preferred Shares
Basic Maintenance Amount that it takes delivery of that security which yields it
the least value; (8) the Trust will not engage in forward contracts; and (9)
there shall be a quarterly audit made of the Trust's options transactions by the
Trust's independent auditors to confirm that the Trust is in compliance with
these standards.]
12. Compliance Procedures for Asset Maintenance Tests. For so long as
any Preferred Shares are Outstanding and any Rating Agency so requires:
(a) As of each Valuation Date, the Trust shall determine (i)
the Market Value of each Eligible Asset owned by the Trust on that date, (ii)
the Discounted Value of each such Eligible Asset, (iii) whether the Preferred
Shares Basic Maintenance Amount Test is met as of that date, (iv) the value (as
used in the 1940 Act) of the total assets of the Trust, less all liabilities,
and (v) whether the 1940 Act Preferred Shares Asset Coverage is met as of that
date.
(b) Upon any failure to meet the Preferred Shares Basic
Maintenance Amount Test or 1940 Act Preferred Shares Asset Coverage on any
Valuation Date, the Trust may use reasonable commercial efforts (including,
without limitation, altering the composition of its portfolio, purchasing
Preferred Shares outside of an Auction or, in the event of a failure to file a
certificate on a timely basis, submitting the requisite certificate), to meet
(or certify in the case of a failure to file a certificate on a timely basis, as
the case may be) the Preferred Shares Basic Maintenance Amount Test or 1940 Act
Preferred Shares Asset Coverage on or prior to the Asset Coverage Cure Date.
(c) Compliance with the Preferred Shares Basic Maintenance
Amount and 1940 Act Preferred Shares Asset Coverage tests shall be determined
with reference to those Preferred Shares which are deemed to be Outstanding
hereunder.
(d) In the case of the asset coverage requirements for Moody's
and Fitch, the auditors must certify once per quarter the asset coverage test on
a date randomly selected by the auditor.
(e) The Trust shall deliver to the Auction Agent and each
Rating Agency a certificate which sets forth a determination of items (i)-(iii)
of paragraph (a) of this Section 12 (a "Preferred Shares Basic Maintenance
Certificate") as of (A) within seven Business Days after the Date of Original
Issue, (B) the last Valuation Date of each month, (C) any date requested by any
Rating Agency,
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(D) a Business Day on or before any Asset Coverage Cure Date relating to the
Trust's cure of a failure to meet the Preferred Shares Basic Maintenance Amount
Test, (E) any day that Common Shares or Preferred Shares are redeemed, (F) any
day the Fitch Eligible Assets have an aggregate discounted value less than or
equal to 110% of the Preferred Shares Basic Maintenance Amount and (G) weekly if
Moody's Eligible Assets have an aggregate discounted value less than 1.30 times
the Preferred Shares Basic Maintenance Amount. Such Preferred Shares Basic
Maintenance Certificate shall be delivered in the case of clause (i)(A) on or
before the seventh Business Day after the Date of Original Issue and in the case
of all other clauses above on or before the seventh Business Day after the
relevant Valuation Date or Asset Coverage Cure Date.
(f) The Trust shall deliver to the Auction Agent and each
Rating Agency a certificate which sets forth a determination of items (iv) and
(v) of paragraph (a) of this Section 12 (a "1940 Act Preferred Shares Asset
Coverage Certificate") (i) as of the Date of Original Issue, and (ii) as of (A)
the last Valuation Date of each quarter thereafter, and (B) as of a Business Day
on or before any Asset Coverage Cure Date relating to the failure to meet the
1940 Act Preferred Shares Asset Coverage. Such 1940 Act Preferred Shares Asset
Coverage Certificate shall be delivered in the case of clause (i) on or before
the seventh Business Day after the Date of Original Issue and in the case of
clause (ii) on or before the seventh Business Day after the relevant Valuation
Date or the Asset Coverage Cure Date. The certificates required by paragraphs
(d) and (e) of this Section 12 may be combined into a single certificate.
(g) Within ten Business Days of the Date of Original Issue,
the Trust shall deliver to the Auction Agent and each Rating Agency a letter
prepared by the Trust's independent auditors (an "Auditor's Certificate")
regarding the accuracy of the calculations made by the Trust in the Preferred
Shares Basic Maintenance Certificate and the 1940 Act Preferred Shares Asset
Coverage Certificate required to be delivered by the Trust on or before the
seventh Business Day after the Date of Original Issue. Within ten Business Days
after delivery of the Preferred Shares Basic Maintenance Certificate and the
1940 Act Preferred Shares Asset Coverage Certificate relating to the last
Valuation Date of each fiscal quarter of the Trust, the Trust will deliver to
the Auction Agent and each Rating Agency an Auditor's Certificate regarding the
accuracy of the calculations made by the Trust in such Certificates and in one
other Preferred Shares Basic Maintenance Certificate randomly selected by the
Trust's independent auditors during such fiscal quarter. In addition, the Trust
will deliver to the persons specified in the preceding sentence an Auditor's
Certificate regarding the accuracy of the calculations made by the Trust on each
Preferred Shares Basic Maintenance Certificate and 1940 Act Preferred Shares
Asset Coverage Certificate delivered in relation to an Asset Coverage Cure Date
within ten days after the relevant Asset Coverage Cure Date. If an Auditor's
Certificate shows that an error was made in any such report, the calculation or
determination made by the Trust's independent auditors will be conclusive and
binding on the Trust.
(h) The Auditor's Certificates referred to in paragraph (g)
above will confirm, based upon the independent auditor's review of portfolio
data provided by the Trust, (i) the mathematical accuracy of the calculations
reflected in the related Preferred Shares Basic Maintenance Amount Certificates
and 1940 Act Preferred Shares Asset Coverage Certificates and (ii) that, based
upon such calculations, the Trust had, at such Valuation Date, met the Preferred
Shares Basic Maintenance Amount Test.
(i) In the event that a Preferred Shares Basic Maintenance
Certificate or 1940 Act Preferred Shares Asset Coverage Certificate with respect
to an applicable Valuation Date is not delivered within the time periods
specified in this Section 12, the Trust shall be deemed to have failed to meet
the Preferred Shares Basic Maintenance Amount Test or the 1940 Act Preferred
Shares Asset Coverage, as the case may be, on such Valuation Date for purposes
of Section 12(b) of Part I of this Statement. In the event that a Preferred
Shares Basic Maintenance Certificate, a 1940 Act Preferred Shares Asset Coverage
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Certificate or an applicable Auditor's Certificate with respect to an Asset
Coverage Cure Date is not delivered within the time periods specified herein,
the Trust shall be deemed to have failed to meet the Preferred Shares Basic
Maintenance Amount Test or the 1940 Preferred Shares Asset Coverage, as the case
may be, as of the related Valuation Date.
13. Notices. All notices or communications hereunder, unless otherwise
specified in this Statement, shall be sufficiently given if in writing and
delivered in person, by telecopier or mailed by first-class mail, postage
prepaid. Notices delivered pursuant to this Section 13 shall be deemed given on
the earlier of the date received or the date five days after which such notice
is mailed, except as otherwise provided in this Statement or by the Delaware law
for notices of shareholders' meetings.
14. Waiver. To the extent permitted by Delaware law, Holders of at
least two-thirds of the Outstanding Preferred Shares, acting collectively, or
each Series, acting as a separate series, may waive any provision hereof
intended for their respective benefit in accordance with such procedures as may
from time to time be established by the Board of Trustees.
15. Termination. In the event that no Preferred Shares are Outstanding,
all rights and preferences of such shares established and designated hereunder
shall cease and terminate, and all obligations of the Trust under this Statement
shall terminate.
16. Amendment. Subject to the provisions of this Statement, the Board
of Trustees may, by resolution duly adopted without shareholder approval (except
as otherwise provided by this Statement or required by applicable law), amend
this Statement to reflect any amendments hereto which the Board of Trustees is
entitled to adopt pursuant to the terms of Section 6(k) of Part I of this
Statement without shareholder approval. To the extent permitted by applicable
law, the Board of Trustees may interpret, amend or adjust the provisions of this
Statement to resolve any inconsistency or ambiguity or to remedy any patent
defect.
17. Definitions. As used in Part I and Part II of this Statement, the
following terms shall have the following meanings (with terms defined in the
singular having comparable meanings when used in the plural and vice versa),
unless the context otherwise requires:
"AA' Financial Commercial Paper Rate" on any date means (i) the
interest equivalent of the 7-day rate, in the case of a Dividend Period which is
7 days or shorter; for Dividend Periods greater than 7 days but fewer than or
equal to 31 days, the 30-day rate; for Dividend Periods greater than 31 days but
fewer than or equal to 61 days, the 60-day rate; for Dividend Periods greater
than 61 days but fewer than or equal to 91 days, the 90 day rate; for Dividend
Periods greater than 91 days but fewer than or equal to 270 days, the rate
described in clause (ii) below; for Dividend Periods greater than 270 days, the
Treasury Index Rate; on commercial paper on behalf of financial issuers whose
corporate bonds are rated "AA" by S&P, or the equivalent of such rating by
another nationally recognized rating agency, as announced by the Federal Reserve
Bank of New York for the close of business on the Business Day immediately
preceding such date; or (ii) if the Federal Reserve Bank of New York does not
make available such a rate, then the arithmetic average of the interest
equivalent of such rates on commercial paper placed on behalf of such issuers,
as quoted on a discount basis or otherwise by the Commercial Paper Dealers to
the Auction Agent for the close of business on the Business Day immediately
preceding such date (rounded to the next highest .001 of 1%). If any Commercial
Paper Dealer does not quote a rate required to determine the "AA" Financial
Commercial Paper Rate, such rate shall be determined on the basis of the
quotations (or quotation) furnished by the remaining Commercial Paper Dealers
(or Dealer), if any, or, if there are no such Commercial Paper Dealers, by the
Auction Agent as agreed to by __________________. For purposes of this
definition, (A) "Commercial Paper Dealers" shall mean (1) Citigroup Global
Markets Inc., Lehman Brothers Inc., Merrill Lynch, Pierce, Fenner & Smith
Incorporated and Goldman Sachs & Co.; (2) in lieu
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of any thereof, its respective Affiliate or successor; and (3) in the event that
any of the foregoing shall cease to quote rates for commercial paper of issuers
of the sort described above, in substitution therefor, a nationally recognized
dealer in commercial paper of such issuers then making such quotations selected
by the Trust, and (B) "interest equivalent" of a rate stated on a discount basis
for commercial paper of a given number of days" maturity shall mean a number
equal to the quotient (rounded upward to the next higher one-thousandth of 1%)
of (1) such rate expressed as a decimal, divided by (2) the difference between
(x) 1.00 and (y) a fraction, the numerator of which shall be the product of such
rate expressed as a decimal, multiplied by the number of days in which such
commercial paper shall mature and the denominator of which shall be 360.
"Affiliate" means any person actually known to the Auction Agent to be
controlled by, in control of or under common control with the Trust; provided,
however, that no Broker-Dealer controlled by, in control of or under common
control with the Trust shall be deemed to be an Affiliate nor shall any
corporation or any Person controlled by, in control of or under common control
with such corporation, one of the directors or executive officers of which is a
trustee of the Trust be deemed to be an Affiliate solely because such director
or executive officer is also a trustee of the Trust.
"Agent Member" means a member of or a participant in the Securities
Depository that will act on behalf of a Bidder.
"All Hold Rate" means the __-day "AA" Financial Commercial Paper Rate
in the case of the Series _ and _ and the __-day "AA" Financial Commercial Paper
Rate in the case of Series __ and __ Preferred Shares.
"Preferred Shares" has the meaning set forth in paragraph FIRST of Part
I of this Statement.
"Applicable Rate" means, with respect to each Series for each Dividend
Period (i) if Sufficient Clearing Orders exist for the Auction in respect
thereof, the Winning Bid Rate, (ii) if Sufficient Clearing Orders do not exist
for the Auction in respect thereof, the Maximum Rate, and (iii) in the case of
any Dividend Period if all the shares of a Series are the subject of Submitted
Hold Orders for the Auction in respect thereof, the All Hold Rate corresponding
to that Series.
"Asset Coverage Cure Date" has the meaning set forth in Section
3(a)(ii) of this Statement.
"Auction" means each periodic operation of the Auction Procedures.
"Auction Agent" means The Bank of New York unless and until another
commercial bank, trust company, or other financial institution appointed by a
resolution of the Board of Trustees enters into an agreement with the Trust to
follow the Auction Procedures for the purpose of determining the Applicable
Rate.
"Auction Date" means the first Business Day next preceding the first
day of a Dividend Period for each Series.
"Auction Procedures" means the procedures for conducting Auctions as
set forth in Part II of this Statement.
"Auditor's Certificate" has the meaning set forth in Section 12(g) of
Part I of this Statement.
"Beneficial Owner," with respect to shares of each Series, means a
customer of a Broker-Dealer who is listed on the records of that Broker-Dealer
(or, if applicable, the Auction Agent) as a holder of shares of such series.
A-18
"Bid" has the meaning set forth in Section 2(a)(ii) of Part II of this
Statement.
"Bidder" has the meaning set forth in Section 2(a)(ii) of Part II of
this Statement, provided, however, that neither the Trust nor any Affiliate
shall be permitted to be a Bidder in an Auction.
"Board of Trustees" or "Board" means the Board of Trustees of the Trust
or any duly authorized committee thereof as permitted by applicable law.
"Broker-Dealer" means any broker-dealer or broker-dealers, or other
entity permitted by law to perform the functions required of a Broker-Dealer by
the Auction Procedures, that has been selected by the Trust and has entered into
a Broker-Dealer Agreement that remains effective.
"Broker-Dealer Agreement" means an agreement between the Auction Agent
and a Broker-Dealer, pursuant to which such Broker-Dealer agrees to follow the
Auction Procedures.
"Business Day" means a day on which the New York Stock Exchange is open
for trading and which is not a Saturday, Sunday or other day on which banks in
The City of New York, New York are authorized or obligated by law to close.
"Code" means the Internal Revenue Code of 1986, as amended.
"Commission" means the Securities and Exchange Commission.
"Common Shares" means the shares of the Trust common shares of
beneficial interest, no par value.
"Date of Original Issue" means the date on which a Series is originally
issued by the Trust.
"Default" has the meaning set forth in Section 2(c)(ii) of Part I of
this Statement.
"Default Period" has the meaning set forth in Sections 2(c)(ii) or
(iii) of Part I of this Statement.
"Default Rate" has the meaning set forth in Sections 2(c)(iii) of Part
I of this Statement.
"Deposit Securities" means cash and any obligations or securities,
including Short Term Money Market Instruments that are Eligible Assets, rated at
least AAA or A-1 by S&P, except that, for purposes of optional redemption, such
obligations or securities will be considered "Deposit Securities" only if they
also are rated at least P-1 by Moody's.
"Discount Factor" means the Fitch Discount Factor (if Fitch is then
rating the Preferred Shares), the Moody's Discount Factor (if Moody's is then
rating the Preferred Shares) or the discount factor established by any Other
Rating Agency which is then rating the Preferred Shares and which so requires,
whichever is applicable.
"Discounted Value" means the quotient of the Market Value of an
Eligible Asset divided by the applicable Discount Factor, provided that with
respect to an Eligible Asset that is currently callable, Discounted Value will
be equal to the quotient as calculated above or the call price, whichever is
lower, and that with respect to an Eligible Asset that is prepayable, Discounted
Value will be equal to the quotient as calculated above or the par value,
whichever is lower.
"Dividend Default" has the meaning set forth in Section 2(c)(iii) of
Part I of this Statement.
"Dividend Payment Date" with respect to the Preferred Shares means
any date on which dividends are payable pursuant to Section 2(b) of Part I of
this Statement.
A-19
"Dividend Period" means, with respect to each Series, the initial
period determined in the manner set forth under "Designation" above, and
thereafter, as to such Series, the period commencing on the Business Day
following each Dividend Period for such Series and ending on the calendar day
immediately preceding the next Dividend Payment Date for such Series.
"Eligible Assets" means Moody's Eligible Assets (if Moody's is then
rating the Preferred Shares), Fitch Eligible Assets (if Fitch is then rating the
Preferred Shares), and/or Other Rating Agency Eligible Assets if any Other
Rating Agency is then rating the Preferred Shares, whichever is applicable.
"Existing Holder" has the meaning set forth in Section 1(d) of Part II
of this Statement.
"Fitch" means Fitch Ratings.
"Fitch Discount Factor" means, for the purposes of determining the
Discounted Value of any Fitch Eligible Asset, the percentage determined as
follows. The Fitch Discount Factor for any Fitch Eligible Asset other than the
securities set forth below will be the percentage provided in writing by Fitch.
(i) Corporate debt securities. The percentage determined by
reference to the rating of a corporate debt security in accordance with
the table set forth below.
NOT
RATED
OR
TERM TO MATURITY OF CORPORATE BELOW
DEBT SECURITY UNRATED(1) AAA AA A BBB BB BB
---------------------------------------------- -------- ------- ------- ------- ------- ---------
3 years or less (but longer than 1 year)...... 106.38% 108.11% 109.89% 111.73% 129.87% 151.52%
5 years or less (but longer than 3 years)..... 111.11 112.99 114.94 116.96 134.24 151.52
7 years or less (but longer than 5 years)..... 113.64 115.61 117.65 119.76 135.66 151.52
10 years or less (but longer than 7 years).... 115.61 117.65 119.76 121.95 136.74 151.52
15 years or less (but longer than 10 years)... 119.76 121.95 124.22 126.58 139.05 151.52
More than 15 years............................ 124.22 126.58 129.03 131.58 144.55 151.52
------------------
(1) If a security is not rated by Fitch but is rated by two other Rating
Agencies, then the lower of the ratings on the security from the two
other Rating Agencies will be used to determine the Fitch Discount
Factor (e.g., where the S&P rating is A- and the Moody's rating is Baa1,
a Fitch rating of BBB+ will be used). If a security is not rated by
Fitch but is rated by only one other Rating Agency, then the rating on
the security from the other Rating Agency will be used to determine the
Fitch Discount Factor (e.g., where the only rating on a security is an
S&P rating of AAA, a Fitch rating of AAA will be used, and where the
only rating on a security is a Moody's rating of Ba3, a Fitch rating of
BB- will be used). If a security is not rated by any Rating Agency, the
Trust will use the percentage set forth under "Unrated" in this table.
(ii) Convertible debt securities. The Fitch Discount Factor
applied to convertible debt securities is (A) 200% for investment grade
convertibles and (B) 222% for below investment grade convertibles so
long as such convertible debt securities have neither (x) conversion
premium greater than 100% nor (y) have a yield to maturity or yield to
worst of >15.00% above the relevant Treasury curve.
A-20
The Fitch Discount Factor applied to convertible debt
securities which have conversion premiums of greater than 100% is (A)
152% for investment grade convertibles and (B) 179% for below
investment grade convertibles so long as such convertible debt
securities do not have a yield to maturity or yield to worst of >
15.00% above the relevant Treasury curve.
The Fitch Discount Factor applied to convertible debt
securities which have a yield to maturity or yield to worst of > 15.00%
above the relevant Treasury curve is 370%.
If a security is not rated by Fitch but is rated by
two other Rating Agencies, then the lower of the ratings on the
security from the two other Rating Agencies will be used to determine
the Fitch Discount Factor (e.g., where the S&P rating is A- and the
Moody's rating is Baa1, a Fitch rating of BBB+ will be used). If a
security is not rated by Fitch but is rated by only one other Rating
Agency, then the rating on the security from the other Rating Agency
will be used to determine the Fitch Discount Factor (e.g., where the
only rating on a security is an S&P rating of AAA, a Fitch rating of
AAA will be used, and where the only rating on a security is a Moody's
rating of Ba3, a Fitch rating of BB- will be used). If a security is
not rated by any Rating Agency, the Trust will treat the security as if
it were below investment grade.
(iii) Preferred securities: The percentage determined by
reference to the rating of a preferred security in accordance with the
table set forth below.
NOT
RATED
OR
BELOW
PREFERRED SECURITY(1) AAA AA A BBB BB BB
----------------------------------------------- ------- ------- ------- -------- ------- -------
Taxable Preferred............. 130.58% 133.19% 135.91% 138.73% 153.23% 161.08%
Dividend-Received Deduction
(DRD) Preferred............ 163.40% 163.40% 163.40% 163.40% 201.21% 201.21%
--------------------------
(1) If a security is not rated by Fitch but is rated by two other
Rating Agencies, then the lower of the ratings on the security
from the two other Rating Agencies will be used to determine the
Fitch Discount Factor (e.g., where the S&P rating is A- and the
Moody's rating is Baa1, a Fitch rating of BBB+ will be used). If
a security is not rated by Fitch but is rated by only one other
Rating Agency, then the rating on the security from the other
Rating Agency will be used to determine the Fitch Discount
Factor (e.g., where the only rating on a security is an S&P
rating of AAA, a Fitch rating of AAA will be used, and where the
only rating on a security is a Moody's rating of Ba3, a Fitch
rating of BB- will be used). If a security is not rated by any
Rating Agency, the Trust will use the percentage set forth under
"Unrated" in this table.
(iv) U.S. Government Securities and U.S. Treasury Strips:
DISCOUNT
TIME REMAINING TO MATURITY FACTOR
----------------------------------------------- ---------
1 year or less................................. 100%
2 years or less (but longer than 1 year)....... 103%
3 years or less (but longer than 2 years)...... 105%
4 years or less (but longer than 3 years)...... 107%
5 years or less (but longer than 4 years)...... 109%
7 years or less (but longer than 5 years)...... 112%
10 years or less (but longer than 7 years)..... 114%
15 years or less (but longer than 10 years).... 122%
20 years or less (but longer than 15 years).... 130%
25 years or less (but longer than 20 years).... 146%
Greater than 30 years.......................... 154%
A-21
(v) Short-Term Investments and Cash: The Fitch Discount Factor
applied to short-term portfolio securities, including without
limitation Debt Securities, Short Term Money Market Instruments and
municipal debt obligations, will be (A) 100%, so long as such portfolio
securities mature or have a demand feature at par exercisable within
the Fitch Exposure Period; (B) 115%, so long as such portfolio
securities mature or have a demand feature at par not exercisable
within the Fitch Exposure Period; and (C) 125%, so long as such
portfolio securities neither mature nor have a demand feature at par
exercisable within the Fitch Exposure Period. A Fitch Discount Factor
of 100% will be applied to cash.
(vi) Rule 144A Securities: The Fitch Discount Factor applied
to Rule 144A Securities will be 110% of the Fitch Discount Factor which
would apply were the securities registered under the Securities Act.
(vii) Foreign Bonds: The Fitch Discount Factor (A) for a
Foreign Bond the principal of which (if not denominated in U.S.
dollars) is subject to a currency hedging transaction will be the Fitch
Discount Factor that would otherwise apply to such Foreign Bonds in
accordance with this definition and (B) for (1) a Foreign Bond the
principal of which (if not denominated in U.S. dollars) is not subject
to a currency hedging transaction and (2) a bond issued in a currency
other than U.S. dollars by a corporation, limited liability company or
limited partnership domiciled in, or the government or any agency,
instrumentality or political subdivision of, a nation other than an
Approved Foreign Nation, will be 370%.
"Fitch Eligible Assets" means:
(i) cash (including interest and dividends due on assets rated
(A) BBB or higher by Fitch or the equivalent by another Rating Agency
if the payment date is within five Business Days of the Valuation Date,
(B) A or higher by Fitch or the equivalent by another Rating Agency if
the payment date is within thirty days of the Valuation Date, and (C)
A+ or higher by Fitch or the equivalent by another Rating Agency if the
payment date is within the Fitch Exposure Period) and receivables for
Fitch Eligible Assets sold if the receivable is due within five
Business Days of the Valuation Date, and if the trades which generated
such receivables are settled within five business days;
(ii) Short Term Money Market Instruments so long as (A) such
securities are rated at least F1+ by Fitch or the equivalent by another
Rating Agency, (B) in the case of demand deposits, time deposits and
overnight funds, the supporting entity is rated at least A by Fitch or
the equivalent by another Rating Agency, or (C) in all other cases, the
supporting entity (1) is rated at least A by Fitch or the equivalent by
another Rating Agency and the security matures within one month, (2) is
rated at least A by Fitch or the equivalent by another Rating Agency
and the security matures within three months or (3) is rated at least
AA by Fitch or the equivalent by another Rating Agency and the security
matures within six months;
(iii) U.S. Government Securities and U.S. Treasury Strips;
(iv) debt securities if such securities have been registered
under the Securities Act or are restricted as to resale under federal
securities laws but are eligible for resale pursuant to Rule 144A under
the Securities Act as determined by the Trust's investment manager or
portfolio manager acting pursuant to procedures approved by the Board
of Trustees of the Trust; and such securities are issued by (1) a U.S.
corporation, limited liability company or limited partnership, (2) a
corporation, limited liability company or limited partnership domiciled
in Argentina, Australia, Brazil, Chile, France, Germany, Italy, Japan,
Korea, Mexico, Spain or the
A-22
United Kingdom (the "Approved Foreign Nations"), (3) the government of
any Approved Foreign Nation or any of its agencies, instrumentalities
or political subdivisions (the debt securities of Approved Foreign
Nation issuers being referred to collectively as "Foreign Bonds"), (4)
a corporation, limited liability company or limited partnership
domiciled in Canada or (5) the Canadian government or any of its
agencies, instrumentalities or political subdivisions (the debt
securities of Canadian issuers being referred to collectively as
"Canadian Bonds"). Foreign Bonds held by the Trust will qualify as
Fitch Eligible Assets only up to a maximum of 20% of the aggregate
Market Value of all assets constituting Fitch Eligible Assets.
Similarly, Canadian Bonds held by the Trust will qualify as Fitch
Eligible Assets only up to a maximum of 20% of the aggregate Market
Value of all assets constituting Fitch Eligible Assets. Notwithstanding
the limitations in the two preceding sentences, Foreign Bonds and
Canadian Bonds held by the Trust will qualify as Fitch Eligible Assets
only up to a maximum of 30% of the aggregate Market Value of all assets
constituting Fitch Eligible Assets. In addition, bonds which are issued
in connection with a reorganization under U.S. federal bankruptcy law
("Reorganization Bonds") will be considered debt securities
constituting Fitch Eligible Assets if (a) they provide for periodic
payment of interest in cash in U.S. dollars or euros; (b) they do not
provide for conversion or exchange into equity capital at any time over
their lives; (c) they have been registered under the Securities Act or
are restricted as to resale under federal securities laws but are
eligible for trading under Rule 144A promulgated pursuant to the
Securities Act as determined by the Trust's investment manager or
portfolio manager acting pursuant to procedures approved by the Board
of Trustees of the Trust; (d) they were issued by a U.S. corporation,
limited liability company or limited partnership; and (e) at the time
of purchase at least one year had elapsed since the issuer's
reorganization. Reorganization Bonds may also be considered debt
securities constituting Fitch Eligible Assets if they have been
approved by Fitch, which approval shall not be unreasonably withheld.
All debt securities satisfying the foregoing requirements and
restrictions of this paragraph (iv) are herein referred to as "Debt
Securities."
(v) Preferred stocks if (A) dividends on such preferred stock
are cumulative, (B) such securities provide for the periodic payment of
dividends thereon in cash in U.S. dollars or euros and do not provide
for conversion or exchange into, or have warrants attached entitling
the holder to receive equity capital at any time over the respective
lives of such securities, (C) the issuer of such a preferred stock has
common stock listed on either the New York Stock Exchange or the
American Stock Exchange, (D) the issuer of such a preferred stock has a
senior debt rating or preferred stock rating from Fitch of BBB- or
higher or the equivalent rating by another Rating Agency. In addition,
the preferred stocks issue must be at least $50 million;
(vi) Asset-backed and mortgage-backed securities;
(vii) Rule 144A Securities;
(viii) Bank Loans;
(ix) Municipal debt obligation that (A) pays interest in cash
(B) is part of an issue of municipal debt obligations of at least $5
million, except for municipal debt obligations rated below A by Fitch
or the equivalent rating by another Rating Agency, in which case the
minimum issue size is $10 million;
(x) Tradable credit baskets (e.g., Traded Custody Receipts or
TRACERS and Targeted Return Index Securities Trust or TRAINS);
(xi) Convertible debt and convertible preferred stocks;
A-23
(xii) Financial contracts, as such term is defined in Section
3(c)(2)(B)(ii) of the Investment Company Act, not otherwise provided
for in this definition may be included in Fitch Eligible Assets, but,
with respect to any financial contract, only upon receipt by the Trust
of a writing from Fitch specifying any conditions on including such
financial contract in Fitch Eligible Assets and assuring the Trust that
including such financial contract in the manner so specified would not
affect the credit rating assigned by Fitch to the Preferred Shares;
(xiii) Interest rate swaps entered into according to
International Swap Dealers Association ("ISDA") standards if (1) the
counterparty to the swap transaction has a short-term rating of not
less than F1 by Fitch or the equivalent by another, NRSRO, or, if the
swap counterparty does not have a short-term rating, the counterparty's
senior unsecured long-term debt rating is AA or higher by Fitch or the
equivalent by another NRSRO and (2) the original aggregate notional
amount of the interest rate swap transaction or transactions is not
greater than the liquidation preference of the Preferred Shares
originally issued.
Where the Trust sells an asset and agrees to repurchase such asset in
the future, the Discounted Value of such asset will constitute a Fitch Eligible
Asset and the amount the Trust is required to pay upon repurchase of such asset
will count as a liability for the purposes of the Preferred Shares Basic
Maintenance Amount. Where the Trust purchases an asset and agrees to sell it to
a third party in the future, cash receivable by the Trust thereby will
constitute a Fitch Eligible Asset if the long-term debt of such other party is
rated at least A- by Fitch or the equivalent by another Rating Agency and such
agreement has a term of 30 days or less; otherwise the Discounted Value of such
purchased asset will constitute a Fitch Eligible Asset.
Notwithstanding the foregoing, an asset will not be considered a Fitch
Eligible Asset to the extent that it has been irrevocably deposited for the
payment of (i)(A) through (i)(E) under the definition of Preferred Shares Basic
Maintenance Amount or to the extent it is subject to any Liens, except for (A)
Liens which are being contested in good faith by appropriate proceedings and
which Fitch has indicated to the Trust will not affect the status of such asset
as a Fitch Eligible Asset, (B) Liens for taxes that are not then due and payable
or that can be paid thereafter without penalty, (C) Liens to secure payment for
services rendered or cash advanced to the Trust by its investment manager or
portfolio manager, the Trust's custodian, transfer agent or registrar or the
Auction Agent and (D) Liens arising by virtue of any repurchase agreement.
Portfolio holdings as described above must be within the following
diversification and issue size requirements in order to be included in Fitch's
Eligible Assets:
MINIMUM
SECURITY MAXIMUM MAXIMUM ISSUE SIZE
RATED SINGLE SINGLE ($ IN
AT LEAST ISSUER(1) INDUSTRY(1)(2) MILLION)(3)
---------------------- ---------- -------------- -------------
AAA 100% 100% $100
AA- 20 75 100
A- 10 50 100
BBB- 6 25 100
BB- 4 16 50
B- 3 12 50
CCC 2 8 50
------------------
(1) Percentages represent a portion of the aggregate market value of
corporate debt securities.
(2) Industries are determined according to Fitch's Industry
Classifications, as defined herein.
(3) Preferred stock has a minimum issue size of $50 million.
A-24
"Fitch Exposure Period" means the period commencing on (and including)
a given Valuation Date and ending 49 days thereafter.
"Fitch Hedging Transactions" means purchases or sales of
exchange-traded financial futures contracts based on any index approved by Fitch
or Treasury Bonds, and purchases, writings or sales of exchange-traded put
options on such futures contracts, any index approved by Fitch or Treasury Bonds
and purchases, writings or sales of exchange-traded call options on such
financial futures contracts, any index approved by Fitch or Treasury bonds
("Fitch Hedging Transactions"), subject to the following limitations:
(i) The Fund may not engage in any Fitch Hedging Transaction
based on any index approved by Fitch (other than transactions that
terminate a futures contract or option held by the Fund by the Fund's
taking the opposite position thereto ("closing transactions")) that
would cause the Fund at the time of such transaction to own or have
sold outstanding financial futures contracts based on such index
exceeding in number 10% of the average number of daily traded financial
futures contracts based on such index in the 30 days preceding the time
of effecting such transaction as reported by The Wall Street Journal.
(ii) The Fund will not engage in any Fitch Hedging Transaction
based on Treasury Bonds (other than closing transactions) that would
cause the Fund at the time of such transaction to own or have sold:
(A) Outstanding financial futures contracts based on
Treasury Bonds with such contracts having an aggregate market
value exceeding 20% of the aggregate market value of Fitch
Eligible Assets owned by the Fund and rated AA by Fitch (or,
if not rated by Fitch Ratings, rated Aa by Moody's; or, if not
rated by Moody's, rated AAA by S&P) or
(B) Outstanding financial futures contracts based on
Treasury Bonds with such contracts having an aggregate market
value exceeding 40% of the aggregate market value of all Fitch
Eligible Assets owned by the Fund (other than Fitch Eligible
Assets already subject to a Fitch Hedging Transaction) and
rated A or BBB by Fitch (or, if not rated by Fitch Ratings,
rated Baa by Moody's; or, if not rated by Moody's, rated A or
AA by S&P) (for purposes of the foregoing clauses (i) and
(ii), the Fund shall be deemed to own futures contracts that
underlie any outstanding options written by the Fund);
(iii) The Fund may engage in closing transactions to close out
any outstanding financial futures contract based on any index approved
by Fitch if the amount of open interest in such index as reported by
The Wall Street Journal is less than an amount to be mutually
determined by Fitch and the Fund.
(iv) The Fund may not enter into an option or futures
transaction unless, after giving effect thereto, the Fund would
continue to have Fitch Eligible Assets with an aggregate Discounted
Value equal to or greater than the Preferred Shares Basic Maintenance
Amount.
"Fitch Industry Classifications" means, for the purposes of determining
Fitch Eligible Assets, each of the following industry classifications:
1. Aerospace & Defense
2. Automobiles
A-25
3. Banking, Finance & Real Estate
4. Broadcasting & Media
5. Building & Materials
6. Cable
7. Chemicals
8. Computers & Electronics
9. Consumer Products
10. Energy
11. Environmental Services
12. Farming & Agriculture
13. Food, Beverage & Tobacco
14. Gaming, Lodging & Restaurants
15. Healthcare & Pharmaceuticals
16. Industrial/Manufacturing
17. Insurance
18. Leisure & Entertainment
19. Metals & Mining
20. Miscellaneous
21. Paper & Forest Products
22. Retail
23. Sovereign
24. Supermarkets & Drugstores
25. Telecommunications
26. Textiles & Furniture
27. Transportation
28. Utilities
"Hold Order" has the meaning set forth in Section 2(a)(ii) of Part II
of this Statement.
"Holder" means, with respect to the Preferred Shares, the registered
holder of shares of each Series as the same appears on the share ledger or share
records of the Trust.
"Investment Manager" means Calamos Asset Management, Inc.
"Liquidation Preference" means $25,000 per preferred share.
"Mandatory Redemption Date" has meaning set forth in Section 3(a)(iv)
of Part I of this Statement.
"Mandatory Redemption Price" has the meaning set forth in Section
3(a)(iv) of Part I of this Statement.
"Market Value" means the fair market value of an asset of the Trust as
computed as follows:
"Maximum Rate" means, on any date on which the Applicable Rate is
determined, the applicable percentage of the "AA" Financial Commercial Paper
Rate on the date of such Auction determined as set forth below based on the
lower of the credit ratings assigned to the Preferred Shares by Moody's and
Fitch subject to upward but not downward adjustment in the discretion of the
Board of Trustees after consultation with the Broker-Dealers; provided that
immediately following any such increase the Trust would be in compliance with
the Preferred Shares Basic Maintenance Amount.
A-26
MOODY'S CREDIT RATING FITCH CREDIT RATING APPLICABLE PERCENTAGE
------------------------------------ -------------------- ---------------------
Aa3 or Above AA- or Above 150%
A3 or a1 A- to A+ 200%
baa3 to baa1 BBB- to BBB+ 225%
Below baa3 Below BBB- 275%
"Moody's" means Moody's Investors Service, Inc. and its successors at
law.
"Moody's Discount Factor" means, for purposes of determining the
Discounted Value of any Moody's Eligible Asset, the percentage determined as
follows. According to Moody's guidelines, in addition to standard monthly
reporting, the Fund must notify Moody's if the portfolio coverage ratio of the
discounted value of Moody's Eligible Assets to liabilities is less than 130%.
Computation of rating agency asset coverage ratio requires use of the
Diversification Table prior to applying discount factors noted below and after
identifying Moody's eligible assets for purposes of completing basic maintenance
tests. The Moody's Discount Factor for any Moody's Eligible Asset other than the
securities set forth below will be the percentage provided in writing by
Moody's.
(i) Convertible securities (including convertible preferreds):
DISCOUNT FACTORS(1)
--------------------------------------------------------
RATINGS(2) UTILITY INDUSTRIAL FINANCIAL TRANSPORTATION
------------------ --------- ---------- --------- --------------
Aaa............ 162% 256% 233% 250%
Aa............. 167% 261% 238% 265%
A.............. 172% 266% 243% 275%
Baa............ 188% 282% 259% 285%
Ba............. 195% 290% 265% 290%
B.............. 199% 293% 270% 295%
NR(3).......... 300% 300% 300% 300%
------------------
(1) Discount factors are for 7-week exposure period.
(2) If a convertible security is unrated by Moody's but is rated by S&P, a
rating two numeric ratings below the S&P rating will be used (e.g.,
where the S&P rating is AAA, a Moody's rating of Aa2 will be used; where
the S&P rating is AA+, a Moody's rating of Aa3 will be used).
(3) Unrated fixed-income and convertible securities, which are rated by
neither Moody's nor S&P, are limited to 10% of discounted Moody's
Eligible Assets. If a corporate debt security is unrated by both Moody's
and S&P, the Fund will use the percentage set forth under "Unrated" in
this table.
Upon conversion to common stock, the discount Factors applicable to common stock
will apply:
COMMON STOCKS UTILITY INDUSTRIAL FINANCIAL
----------------------------- --------- ---------- ---------
7 week exposure period..... 170% 264% 241%
(ii) Corporate Debt Securities (non-convertible): The
percentage determined by reference to the rating on such asset with
reference to the remaining term to maturity of such asset, in
accordance with the table set forth below.
A-27
MOODY'S RATING CATEGORY(1)
-----------------------------------------------------------
TERMS TO MATURITY OF CORPORATE DEBT
SECURITY AAA AA A BAA BA B UNRATED(2)
--------------------------------------------- ------ ----- ------ ----- ----- ---- ----------
1 year or less............................... 109% 112% 115% 118% 119% 125% 225%
2 years or less (but longer than 1 year)..... 115 118 122 125 127 133 225
3 years or less (but longer than 2 years).... 120 123 127 131 133 140 225
4 years or less (but longer than 3 years).... 126 129 133 138 140 147 225
5 years or less (but longer than 4 years).... 132 135 139 144 146 154 225
7 years or less (but longer than 5 years).... 139 143 147 152 156 164 225
10 years or less (but longer than 7 years)... 145 150 155 160 164 173 225
15 years or less (but longer than 10 years).. 150 155 160 165 170 180 225
20 years or less (but longer than 15 years).. 150 155 160 165 170 190 225
30 years or less (but longer than 20 years).. 150 155 160 165 170 191 225
Greater than 30 years........................ 165 173 181 189 205 221 225
------------------
(1) If a corporate debt security is unrated by Moody's but is rated by S&P,
a rating two numeric ratings below the S&P rating will be used (e.g.,
where the S&P rating is AAA, a Moody's rating of Aa2 will be used; where
the S&P rating is AA+, a Moody's rating of Aa3 will be used).
(2) Unrated corporate debt securities, which are corporate debt securities
rated by neither Moody's nor S&P, are limited to 10% of discounted
Moody's Eligible Assets. If a corporate debt security is unrated by both
Moody's and S&P, the Fund will use the percentage set forth under
"Unrated" in this table.
The Moody's Discount Factors presented in the immediately preceding
table will also apply to corporate debt securities that do not pay interest in
U.S. dollars or euros, provided that the Moody's Discount Factor determined from
the table shall be multiplied by a factor of 120% for purposes of calculating
the Discounted Value of such securities.
(iii) Preferred Stock: The Moody's Discount Factor for
preferred stock shall be (A) for preferred stocks issued by a utility,
146%; (B) for preferred stocks of industrial and financial issuers,
209%; (C) for preferred stocks issued by real estate related issuers,
154%; and (D) for auction rate preferred stocks, 350%.
(iv) U.S. Government Securities and U.S. Treasury Strips:
U.S. GOVERNMENT SECURITIES U.S. TREASURY STRIPS
REMAINING TERM TO MATURITY DISCOUNT FACTOR DISCOUNT FACTOR
-------------------------------------------- -------------------------- --------------------
1 year or less.............................. 107% 107%
2 years or less (but longer than 1 year).... 113 115
3 years or less (but longer than 2 years)... 118 121
4 years or less (but longer than 3 years)... 123 128
5 years or less (but longer than 4 years)... 128 135
7 years or less (but longer than 5 years)... 135 147
10 years or less (but longer than 7 years).. 141 163
15 years or less (but longer than 10 years). 146 191
20 years or less (but longer than 15 years). 154 218
30 years or less (but longer than 20 years). 154 244
(v) Short-Term Instruments and Cash: The Moody's Discount
Factor applied to short-term portfolio securities, including without
limitation short-term corporate debt securities, Short Term Money
Market Instruments and short-term municipal debt obligations, will be
(A) 100%, so long as such portfolio securities mature or have a demand
feature at par exercisable within the Moody's Exposure Period; (B)
115%, so long as such portfolio securities mature or have a demand
feature at par not exercisable within the Moody's Exposure Period; and
A-28
(C) 125%, if such securities are not rated by Moody's, so long as such
portfolio securities are rated at least A-1+/AA or SP-1+/AA by S&P and
mature or have a demand feature at par exercisable within the Moody's
Exposure Period. A Moody's Discount Factor of 100% will be applied to
cash. Moody's rated Rule 2a-7 money market funds will also have a
discount factor of 100%.
(vi) Rule 144A Securities: The Moody's Discount Factor applied
to Rule 144A Securities for Rule 144A Securities will be 130% of the
Moody's Discount Factor which would apply were the securities
registered under the Securities Act.
"Moody's Eligible Assets" means:
(i) cash (including interest and dividends due on assets rated
(A) Baa3 or higher by Moody's if the payment date is within five
Business Days of the Valuation Date, (B) A2 or higher if the payment
date is within thirty days of the Valuation Date, and (C) A1 or higher
if the payment date is within the Moody's Exposure Period) and
receivables for Moody's Eligible Assets sold if the receivable is due
within five Business Days of the Valuation Date, and if the trades
which generated such receivables are (A) settled through clearing house
firms with respect to which the Fund has received prior written
authorization from Moody's or (B) (1) with counterparties having a
Moody's long-term debt rating of at least Baa3 or (2) with
counterparties having a Moody's Short Term Money Market Instrument
rating of at least P-1;
(ii) Short Term Money Market Instruments, so long as (A) such
securities are rated at least P-1, (B) in the case of demand deposits,
time deposits and overnight funds, the supporting entity is rated at
least A2, or (C) in all other cases, the supporting entity (1) is rated
A2 and the security matures within one month, (2) is rated A1 and the
security matures within three months or (3) is rated at least Aa3 and
the security matures within six months. In addition, Moody's rated Rule
2a-7 money market funds are also eligible investments.
(iii) U.S. Government Securities and U.S. Treasury Strips;
(iv) Rule 144A Securities;
(v) Corporate debt securities if (A) such securities are rated
B3 or higher by Moody's; (B) such securities provide for the periodic
payment of interest in cash in U.S. dollars or euros, except that such
securities that do not pay interest in U.S. dollars or euros shall be
considered Moody's Eligible Assets if they are rated by Moody's or S&P;
(C) for debt securities rated Ba1 and below, no more than 10% of the
original amount of such issue may constitute Moody's Eligible Assets;
(D) such securities have been registered under the Securities Act or
are restricted as to resale under federal securities laws but are
eligible for resale pursuant to Rule 144A under the Securities Act as
determined by the Fund's investment manager or portfolio manager acting
pursuant to procedures approved by the Board of Trustees, except that
such securities that are not subject to U.S. federal securities laws
shall be considered Moody's Eligible Assets if they are publicly
traded; and (E) such securities are not subject to extended settlement.
Notwithstanding the foregoing limitations, (x) corporate debt
securities not rated at least B3 by Moody's shall be considered to be
Moody's Eligible Assets only to the extent the Market Value of such
corporate debt securities does not exceed 10% of the aggregate Market
Value of all Moody's Eligible Assets; provided, however, that if the
Market Value of such corporate debt securities exceeds 10% of the
aggregate Market Value of all Moody's Eligible Assets, a portion of
such corporate debt securities (selected by the Fund) shall not be
considered
A-29
Moody's Eligible Assets, so that the Market Value of such corporate
debt securities (excluding such portion) does not exceed 10% of the
aggregate Market Value of all Moody's Eligible Assets; and (y)
corporate debt securities rated by neither Moody's nor S&P shall be
considered to be Moody's Eligible Assets only to the extent such
securities are issued by entities which (i) have not filed for
bankruptcy within the past three years, (ii) are current on all
principal and interest in their fixed income obligations, (iii) are
current on all preferred stock dividends, and (iv) possess a current,
unqualified auditor's report without qualified, explanatory language.
(vi) Convertible bonds, provided that (A) the issuer of common
stock must have a Moody's senior unsecured debt of B3 or better, or an
S&P rating of BB or better, (B) the common stocks must be traded on the
NYSE, AMEX, or NASDAQ, (C) dividends must be paid in U.S. dollars, (D)
the portfolio of convertible bonds must be diversified as set forth in
Figure 1 below, (E) the company shall not hold shares exceeding the
average weekly trading volume during the preceding month, (F) synthetic
convertibles are excluded from asset eligibility.
FIGURE 1
CONVERTIBLE BONDS DIVERSIFICATION GUIDELINES
--------------------------------------------------------------------------------
MAXIMUM SINGLE MAXIMUM SINGLE MAXIMUM SINGLE
TYPE ISSUER (%) (1) INDUSTRY (%) STATE (%) (1)
-------------------- --------------- --------------- -----------------
Utility........ 4 50 7 (2)
Other.......... 6 20 n/a
(1) Percentage represent a portion of the aggregate market value and number
of outstanding shares of the convertible stock portfolio.
(2) Utility companies operating in more than one state should be diversified
according to the state in which they generate the largest part of their
revenues. Publicly available information on utility company revenues by
state is available from the Uniform Statistical Report (USR) or the
Federal Energy Regulation commission (FERC).
(vii) Preferred stocks if (A) dividends on such preferred
stock are cumulative, (B) such securities provide for the periodic
payment of dividends thereon in cash in U.S. dollars or euros and do
not provide for conversion or exchange into, or have warrants attached
entitling the holder to receive, equity capital at any time over the
respective lives of such securities, (C) the issuer of such a preferred
stock has common stock listed on either the New York Stock Exchange or
the American Stock Exchange, (D) the issuer of such a preferred stock
has a senior debt rating from Moody's of Baa1 or higher or a preferred
stock rating from Moody's of Baa3 or higher and (E) such preferred
stock has paid consistent cash dividends in U.S. dollars or euros over
the last three years or has a minimum rating of A1 (if the issuer of
such preferred stock has other preferred issues outstanding that have
been paying dividends consistently for the last three years, then a
preferred stock without such a dividend history would also be
eligible). In addition, the preferred stocks must have the following
diversification requirements: (X) the preferred stock issue must be
greater than $50 million and (Y) the minimum holding by the Fund of
each issue of preferred stock is $500,000 and the maximum holding of
preferred stock of each issue is $5 million. In addition, preferred
stocks issued by transportation companies will not be considered
Moody's Eligible Assets.
(viii) Financial contracts, as such term is defined in Section
3(c)(2)(B)(ii) of the Investment Company Act, not otherwise provided
for in this definition but only upon receipt by the Fund of a letter
from Moody's specifying any conditions on including such financial
contract in Moody's Eligible Assets and assuring the Fund that
including such financial contract in the manner so specified would not
affect the credit rating assigned by Moody's to the Preferred Shares.
A-30
(ix) Interest rate swaps entered into according to
International Swap Dealers Association ("ISDA") standards if (i) the
counterparty to the swap transaction has a short-term rating of not
less than P-1 or, if the counterparty does not have a short-term
rating, the counterparty's senior unsecured long-term debt rating is
Aa3 or higher and (ii) the original aggregate notional amount of the
interest rate swap transaction or transactions is not to be greater
than the liquidation preference of the Preferred Shares originally
issued. The interest rate swap transaction will be marked-to-market
daily.
In addition, portfolio holdings as described below must be
within the following diversification and issue size requirements in
order to be included in Moody's Eligible Assets:
MAXIMUM MAXIMUM MAXIMUM
MAXIMUM SINGLE SINGLE ISSUE SIZE
SINGLE INDUSTRY(3)(4) INDUSTRY(3)(4) ($ IN
RATINGS(1) ISSUER(2)(3) NON-UTILITY UTILITY MILLION)(5)
---------------------- ------------ -------------- -------------- ------------
Aaa................ 100% 100% 100% $100
Aa................. 20 60 30 100
A.................. 10 40 25 100
Baa................ 6 20 20 100
Ba................. 4 12 12 50(6)
B1--B2.............. 3 8 8 50(6)
B3 or below........ 2 5 5 50(6)
------------------
(1) Refers to the preferred stock and senior debt rating of the portfolio
holding.
(2) Companies subject to common ownership of 25% or more are considered as
one issuer.
(3) Percentages represent a portion of the aggregate Market Value of
corporate debt securities.
(4) Industries are determined according to Moody's Industry
Classifications, as defined herein.
(5) Except for preferred stock, which has a minimum issue size of $50
million.
(6) Portfolio holdings from issues ranging from $50 million to $100 million
are limited to 20% of the Fund's total assets.
"Moody's Hedging Transactions" means purchases or sales of
exchange-traded financial futures contracts based on any index approved by
Moody's or Treasury Bonds, and purchases, writings or sales of exchange-traded
put options on such financial futures contracts, any index approved by Moody's
or Treasury Bonds, and purchases, writings or sales of exchange-traded call
options on such financial futures contracts, any index approved by Moody's or
Treasury Bonds, subject to the following limitations:
(i) the Fund will not engage in any Moody's Hedging
Transaction based on any index approved by Moody's (other than Closing
Transactions) that would cause the Fund at the time of such transaction
to own or have sold:
(A) Outstanding financial futures contracts based on
such index exceeding in number 10% of the average number of
daily traded financial futures contracts based on such index
in the 30 days preceding the time of effecting such
transaction as reported by The Wall Street Journal; or
(B) Outstanding financial futures contracts based on
any index approved by Moody's having a Market Value exceeding
50% of the Market Value of all portfolio securities of the
Fund constituting Moody's Eligible Assets owned by the Fund;
(ii) The Fund will not engage in any Moody's Hedging
Transaction based on Treasury Bonds (other than Closing Transactions)
that would cause the Fund at the time of such transaction to own or
have sold:
A-31
(A) Outstanding financial futures contracts based on
Treasury Bonds with such contracts having an aggregate Market
Value exceeding 20% of the aggregate Market Value of Moody's
Eligible Assets owned by the Fund and rated Aa by Moody's (or,
if not rated by Moody's but rated by S&P, rated AAA by S&P);
or
(B) Outstanding financial futures contracts based on
Treasury Bonds with such contracts having an aggregate Market
Value exceeding 50% of the aggregate Market Value of all
portfolio securities of the Fund constituting Moody's Eligible
Assets owned by the Fund (other than Moody's Eligible Assets
already subject to a Moody's Hedging Transaction) and rated
Baa or A by Moody's (or, if not rated by Moody's but rated by
S&P, rated A or AA by S&P);
(iii) The Fund will engage in Closing Transactions to
close out any outstanding financial futures contract based on any index
approved by Moody's if the amount of open interest in such index as
reported by The Wall Street Journal is less than an amount to be
mutually determined by Moody's and the Fund;
(iv) The Fund will engage in a Closing Transaction to
close out any outstanding financial futures contract by no later than
the fifth Business Day of the month in which such contract expires and
will engage in a Closing Transaction to close out any outstanding
option on a financial futures contract by no later than the first
Business Day of the month in which such option expires;
(v) The Fund will engage in Moody's Hedging Transactions
only with respect to financial futures contracts or options thereon
having the next settlement date or the settlement date immediately
thereafter;
(vi) The Fund (A) will not engage in options and futures
transactions for leveraging or speculative purposes, except that an
option or futures transaction shall not for these purposes be
considered a leveraged position or speculative and (B) will not write
any call options or sell any financial futures contracts for the
purpose of hedging the anticipated purchase of an asset prior to
completion of such purchase; and
(vii) The Fund will not enter into an option or futures
transaction unless, after giving effect thereto, the Fund would
continue to have Moody's Eligible Assets with an aggregate Discounted
Value equal to or greater than the Preferred Shares Basic Maintenance
Amount.
(b) "Moody's Industry Classifications" means, for the purposes
of determining Moody's Eligible Assets, each of the following industry
classifications (or such other classifications as Moody's may from time to time
approve for application to the Preferred shares).
1. Aerospace and Defense: Major Contractor, Subsystems,
Research, Aircraft Manufacturing, Arms, Ammunition.
2. Automobile: Automobile Equipment, Auto-Manufacturing,
Auto Parts Manufacturing, Personal Use Trailers, Motor Homes, Dealers.
3. Banking: Bank Holding, Savings and Loans, Consumer
Credit, Small Loan, Agency, Factoring, Receivables.
A-32
4. Beverage, Food and Tobacco: Beer and Ale, Distillers,
Wines and Liquors, Distributors, Soft Drink Syrup, Bottlers, Bakery,
Mill Sugar, Canned Foods, Corn Refiners, Dairy Products, Meat Products,
Poultry Products, Snacks, Packaged Foods, Distributors, Candy, Gum,
Seafood, Frozen Food, Cigarettes, Cigars, Leaf/Snuff, Vegetable Oil.
5. Buildings and Real Estate: Brick, Cement, Climate
Controls, Contracting, Engineering, Construction, Hardware, Forest
Products (building-related only), Plumbing, Roofing, Wallboard, Real
Estate, Real Estate Development, REITs, Land Development.
6. Chemicals, Plastics and Rubber: Chemicals
(non-agricultural), Industrial Gases, Sulphur, Plastics, Plastic
Products, Abrasives, Coatings, Paints, Varnish, Fabricating Containers.
7. Packaging and Glass: Glass, Fiberglass, Containers
made of: Glass, Metal, Paper, Plastic, Wood or Fiberglass.
8. Personal and Non-Durable Consumer Products
(Manufacturing Only): Soaps, Perfumes, Cosmetics, Toiletries, Cleaning
Supplies, School Supplies.
9. Diversified/Conglomerate Manufacturing.
10. Diversified/Conglomerate Service.
11. Diversified Natural Resources, Precious Metals and
Minerals: Fabricating, Distribution.
12. Ecological: Pollution Control, Waste Removal, Waste
Treatment and Waste Disposal.
13. Electronics: Computer Hardware, Electric Equipment,
Components, Controllers, Motors, Household Appliances, Information
Service Communication Systems, Radios, TVs, Tape Machines, Speakers,
Printers, Drivers, Technology.
14. Finance: Investment Brokerage, Leasing, Syndication,
Securities.
15. Farming and Agriculture: Livestock, Grains, Produce,
Agriculture Chemicals, Agricultural Equipment, Fertilizers.
16. Grocery: Grocery Stores, Convenience Food Stores.
17. Healthcare, Education and Childcare: Ethical Drugs,
Proprietary Drugs, Research, Health Care Centers, Nursing Homes, HMOs,
Hospitals, Hospital Supplies, Medical Equipment.
18. Home and Office Furnishings, Housewares, and Durable
Consumer Products: Carpets, Floor Coverings, Furniture, Cooking,
Ranges.
19. Hotels, Motels, Inns and Gaming.
20. Insurance: Life, Property and Casualty, Broker,
Agent, Surety.
A-33
21. Leisure, Amusement, Motion Pictures, Entertainment:
Boating, Bowling, Billiards, Musical Instruments, Fishing, Photo
Equipment, Records, Tapes, Sports, Outdoor Equipment (Camping),
Tourism, Resorts, Games, Toy Manufacturing, Motion Picture Production
Theaters, Motion Picture Distribution.
22. Machinery (Non-Agricultural, Non-Construction,
Non-Electronic): Industrial, Machine Tools, Steam Generators.
23. Mining, Steel, Iron and Non-Precious Metals: Coal,
Copper, Lead, Uranium, Zinc, Aluminum, Stainless Steel, Integrated
Steel, Ore Production, Refractories, Steel Mill Machinery, Mini-Mills,
Fabricating, Distribution and Sales of the foregoing.
24. Oil and Gas: Crude Producer, Retailer, Well Supply,
Service and Drilling.
25. Printing, Publishing, and Broadcasting: Graphic Arts,
Paper, Paper Products, Business Forms, Magazines, Books, Periodicals,
Newspapers, Textbooks, Radio, T.V., Cable Broadcasting Equipment.
26. Cargo Transport: Rail, Shipping, Railroads, Rail-car
Builders, Ship Builders, Containers, Container Builders, Parts,
Overnight Mail, Trucking, Truck Manufacturing, Trailer Manufacturing,
Air Cargo, Transport.
27. Retail Stores: Apparel, Toy, Variety, Drugs,
Department, Mail Order Catalog, Showroom.
28. Telecommunications: Local, Long Distance,
Independent, Telephone, Telegraph, Satellite, Equipment, Research,
Cellular.
29. Textiles and Leather: Producer, Synthetic Fiber,
Apparel Manufacturer, Leather Shoes.
30. Personal Transportation: Air, Bus, Rail, Car Rental.
31. Utilities: Electric, Water, Hydro Power, Gas.
32. Diversified Sovereigns: Semi-sovereigns, Canadian
Provinces, Supra-national Agencies.
The Fund will use SIC codes in determining which industry
classification is applicable to a particular investment in consultation
with the Independent Accountant and Moody's, to the extent the Fund
considers necessary.
"1933 Act" means the Securities Act of 1933, as amended.
"1940 Act" means the Investment Company Act of 1940, as amended.
"1940 Act Preferred Shares Asset Coverage" means asset coverage, as
determined in accordance with Section 18(h) of the 1940 Act, of at least 200%
with respect to all outstanding senior securities of the Trust which are stock,
including all Outstanding Preferred Shares (or such other asset coverage as may
in the future be specified in or under the 1940 Act as the minimum asset
coverage for senior securities which are stock of a closed-end investment
company as a condition of declaring dividends on its common shares),
A-34
determined on the basis of values calculated as of a time within 48 hours (not
including Sundays or holidays) next preceding the time of such determination.
"1940 Act Preferred Shares Asset Coverage Certificate" means the
certificate required to be delivered by the Trust pursuant to Section 12(e) of
this Statement.
"Notice of Redemption" means any notice with respect to the redemption
of Preferred Shares pursuant to Section 3 of Part I of this Statement.
"Order" has the meaning set forth in Section 2(a)(ii) of Part II of
this Statement.
"Other Rating Agency" means any rating agency other than Fitch or
Moody's then providing a rating for the Preferred Shares pursuant to the
request of the Trust.
"Other Rating Agency Eligible Assets" means assets of the Trust
designated by any Other Rating Agency as eligible for inclusion in calculating
the discounted value of the Trust's assets in connection with such Other Rating
Agency's rating of the Preferred Shares.
"Outstanding" means, as of any date, Preferred Shares theretofore
issued by the Trust except, without duplication, (i) any Preferred Shares
theretofore canceled, redeemed or repurchased by the Trust, or delivered to the
Auction Agent for cancellation or with respect to which the Trust has given
notice of redemption and irrevocably deposited with the Paying Agent sufficient
funds to redeem such shares and (ii) any Preferred Shares represented by any
certificate in lieu of which a new certificate has been executed and delivered
by the Trust. Notwithstanding the foregoing, (A) for purposes of voting rights
(including the determination of the number of shares required to constitute a
quorum), any Preferred Shares as to which the Trust or any Affiliate is the
Existing Holder will be disregarded and not deemed Outstanding; (B) in
connection with any Auction, any Preferred Shares as to which the Trust or any
person known to the Auction Agent to be an Affiliate is the Existing Holder will
be disregarded and not deemed Outstanding; and (C) for purposes of determining
the Preferred Shares Basic Maintenance Amount, Preferred Shares held by the
Trust will be disregarded and not deemed Outstanding, but shares held by any
Affiliate will be deemed Outstanding.
"Paying Agent" means The Bank of New York unless and until another
entity appointed by a resolution of the Board of Trustees enters into an
agreement with the Trust to serve as paying agent, which paying agent may be the
same as the Auction Agent.
"Person" or "Persons" means and includes an individual, a partnership,
the Trust, a trust, a corporation, a limited liability company, an
unincorporated association, a joint venture or other entity or a government or
any agency or political subdivision thereof.
"Potential Beneficial Owner or Holder" has the meaning set forth in
Section 1 of Part II of this Statement.
"Preferred Shares Basic Maintenance Amount" means as of any Valuation
Date as the dollar amount equal to the sum of:
(i) (A) the sum of the products resulting from multiplying the
number of Outstanding Preferred Shares on such date by the Liquidation
Preference (and redemption premium, if any) per share; (B) the
aggregate amount of dividends that will have accumulated at the
Applicable Rate (whether or not earned or declared) for each
Outstanding Preferred Shares to the 30th day after such Valuation Date;
(C) the amount of anticipated Trust non-interest expenses for the 90
days subsequent to such Valuation Date; (D) the amount of the current
outstanding balances of any indebtedness which is senior to the
Preferred Shares plus interest actually accrued together with 30 days
A-35
additional interest on the current outstanding balances calculated at
the current rate; and (E) any other current liabilities payable during
the 30 days subsequent to such Valuation Date, including, without
limitation, indebtedness due within one year and any redemption premium
due with respect to Preferred Shares for which a Notice of Redemption
has been given, as of such Valuation Date, to the extent not reflected
in any of (i)(A) through (i)(D): less
(ii) the sum of any cash plus the value of any of the Trust's
assets irrevocably deposited by the Trust for the payment of any (i)(B)
through (i)(F) ("value," for purposes of this clause (ii), means the
Discounted Value of the security, except that if the security matures
prior to the relevant redemption payment date and is either fully
guaranteed by the U.S. Government or is rated at least P-1 by Moody's
and A-1 by S&P, it will be valued at its face value).
"Preferred Shares Basic Maintenance Amount Test" means a test which is
met if the lower of the aggregate Discounted Values of the Moody's Eligible
Assets or the Fitch Eligible Assets meets or exceeds the Preferred Shares Basic
Maintenance Amount.
"Preferred Shares Basic Maintenance Certificate" has the meaning set
forth in Section 12(d) of Part I of this Statement.
"Rating Agency" means Moody's and Fitch, as long as such rating agency
is then rating the Preferred Shares and any Other Rating Agency then rating the
Preferred Shares.
"Redemption Date" has the meaning set forth in Section 2(c)(ii) of Part
II of this Statement.
"Redemption Default" has the meaning set forth in Section 2(c)(ii) of
Part I of this Statement.
"Redemption Price" has the meaning set forth in Section 3(a)(i) of Part
I of this Statement.
"Reference Rate" means, with respect to the determination of the
Default Rate, the applicable "AA" Financial Commercial Paper Rate (for a
Dividend Period of fewer than 184 days) or the applicable Treasury Index Rate
(for a Dividend Period of 184 days or more).
"Registrar" means The Bank of New York, unless and until another entity
appointed by a resolution of the Board of Trustees enters into an agreement with
the Trust to serve as transfer agent.
"S&P" means Standard & Poor's, a division of The McGraw-Hill Companies,
Inc., or its successors at law.
"Securities Depository" means The Depository Trust Company and its
successors and assigns or any successor securities depository selected by the
Trust that agrees to follow the procedures required to be followed by such
securities depository in connection with the Preferred Shares.
"Sell Order" has the meaning set forth in Section 2(b) of Part II of
this Statement.
"Short-Term Money Market Instrument" means the following types of
instruments if, on the date of purchase or other acquisition thereof by the
Trust, the remaining term to maturity thereof is not in excess of 180 days:
(i) commercial paper rated A-1 if such commercial paper
matures in 30 days or A-1+ if such commercial paper matures in over 30
days;
A-36
(ii) demand or time deposits in, and banker's acceptances and
certificates of deposit of (A) a depository institution or trust
company incorporated under the laws of the United States of America or
any state thereof or the District of Columbia or (B) a United States
branch office or agency of a foreign depository institution (provided
that such branch office or agency is subject to banking regulation
under the laws of the United States, any state thereof or the District
of Columbia);
(iii) overnight funds; and
(iv) U.S. Government Securities.
"Special Dividend Period" means a Dividend Period that is not a
Standard Dividend Period.
"Specific Redemption Provisions" means, with respect to any Special
Dividend Period of more than one year, either, or any combination of (i) a
period (a "Non-Call Period") determined by the Board of Trustees after
consultation with the Broker-Dealers, during which the shares subject to such
Special Dividend Period are not subject to redemption at the option of the
Trust, and (ii) a period (a "Premium Call Period"), consisting of a number of
whole years, as determined by the Board of Trustees after consultation with the
Broker-Dealers, during each year of which the shares subject to such Special
Dividend Period will be redeemable at the Trust's option at a price per share
equal to the Liquidation Preference plus accumulated but unpaid dividends
(whether or not earned or declared) plus a premium expressed as a percentage or
percentages of the Liquidation Preference or expressed as a formula using
specified variables as determined by the Board of Trustees after consultation
with the Broker-Dealers.
"Standard Dividend Period" means a Dividend Period of _____ days in the
case of Series __, __, __, __, and __ Preferred Shares and __ days in the case
of Series __ Preferred Shares unless such _______ day or ____ day is not a
Business Day, then the number of days ending on the Business Day next Business
Day following such _______ day or ____ day.
"Submission Deadline" means 1:00 p.m., New York City time, on any
Auction Date or such other time on any Auction Date by which Broker-Dealers are
required to submit Orders to the Auction Agent as specified by the Auction Agent
from time to time.
"Transfer Agent" means The Bank of New York, unless and until another
entity appointed by a resolution of the Board of Trustees enters into an
agreement with the Trust to serve as Transfer Agent.
"Treasury Index Rate" means the average yield to maturity for actively
traded marketable U.S. Treasury fixed interest rate securities having the same
number of 30-day periods to maturity as the length of the applicable Dividend
Period, determined, to the extent necessary, by linear interpolation based upon
the yield for such securities having the next shorter and next longer number of
30-day periods to maturity treating all Dividend Periods with a length greater
than the longest maturity for such securities as having a length equal to such
longest maturity, in all cases based upon data set forth in the most recent
weekly statistical release published by the Board of Governors of the Federal
Reserve System (currently in H.15 (519)); provided, however, if the most recent
such statistical release shall not have been published during the 15 days
preceding the date of computation, the foregoing computations shall be based
upon the average of comparable data as quoted to the Trust by at least three
recognized dealers in U.S. Government Securities selected by the Trust.
"U.S. Government Securities" means direct obligations of the United
States or of its agencies or instrumentalities that are entitled to the full
faith and credit of the United States and that, other than United States
Treasury Bills, provide for the periodic payment of interest and the full
payment of principal at maturity or call for redemption.
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"Valuation Date" means the last Business Day of each week, or such
other date as to which the Trust and Rating Agencies may agree for purposes of
determining the Preferred Shares Basic Maintenance Amount.
"Voting Period" has the meaning set forth in Section 6(b) of Part I of
this Statement.
"Winning Bid Rate" has the meaning set forth in Section 4(a)(iii) of
Part II of this Statement.
18. Interpretation. References to sections, subsections, clauses,
sub-clauses, paragraphs and subparagraphs are to such sections, subsections,
clauses, sub-clauses, paragraphs and subparagraphs contained in this Part I or
Part II hereof, as the case may be, unless specifically identified otherwise.
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PART II: AUCTION PROCEDURES
1. Certain Definitions. As used in Part II of this Statement, the
following terms shall have the following meanings, unless the context otherwise
requires and all section references below are to Part II of this Statement
except as otherwise indicated. Capitalized terms not defined in Section 1 of
Part II of this Statement shall have the respective meanings specified in Part I
of this Statement.
"Agent Member" means a member of or participant in the Securities
Depository that will act on behalf of existing or potential holders of
Preferred Shares.
"Available Preferred Shares" has the meaning set forth in Section
4(a)(i) of Part II of this Statement.
"Existing Holder" with respect to shares of a series of Preferred
Shares means a Broker-Dealer (or any such other Person as may be permitted by
the Trust) that is listed on the records of the Auction Agent as a holder of
such series.
"Hold Order" has the meaning set forth in Section 2(a)(ii) of Part II
of this Statement.
"Order" has the meaning set forth in Section 2(a)(ii) of Part II of
this Statement.
"Potential Holder" means (a) any Existing Holder who may be interested
in acquiring additional Preferred Shares, or (b) any other person who may be
interested in acquiring Preferred Shares or whose shares will be listed under
such person's Broker-Dealer's name on the records of the Auction Agent.
"Sell Order" has the meaning set forth in Section 2(b) of Part II of
this Statement.
"Submitted Bid Order" has the meaning set forth in Section 4(a) of Part
II of this Statement.
"Submitted Hold Order" has the meaning set forth in Section 4(a) of
Part II of this Statement.
"Submitted Order" has the meaning set forth in Section 4(a) of Part II
of this Statement.
"Submitted Sell Order" has the meaning set forth in Section 4(a) of
Part II of this Statement.
"Sufficient Clearing Orders" means that all Preferred Shares are the
subject of Submitted Hold Orders or that the number of Preferred Shares that are
the subject of Submitted Buy Orders by Potential Holders specifying one or more
rates equal to or less than the Maximum Rate exceeds or equals the sum of (A)
the number of Preferred Shares that are subject of Submitted Hold/Sell Orders by
Existing Holders specifying one or more rates higher than the Maximum Rate and
(B) the number of Preferred Shares that are subject to Submitted Sell Orders.
"Winning Bid Rate" means the lowest rate specified in the Submitted
Orders which, if (A) each Submitted Hold/Sell Order from Existing Holders
specifying such lowest rate and all other Submitted Hold/Sell Orders from
Existing Holders specifying lower rates were accepted and (B) each Submitted Buy
Order from Potential Holders specifying such lowest rate and all other Submitted
Buy Orders from Potential Holders specifying lower rates were accepted, would
result in the Existing Holders described in clause (A) above continuing to hold
an aggregate number of Preferred Shares which, when added to the number of
Preferred Shares to be purchased by the Potential Holders described in clause
(B) above and the number of Preferred Shares subject to Submitted Hold Orders,
would be equal to the number of Preferred Shares.
2. Orders.
(a) On or prior to the Submission Deadline on each Auction
Date for shares of a Series of Preferred Shares:
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(i) each Beneficial Owner of shares of such Series may submit
to its Broker-Dealer by telephone or otherwise information as to:
(A) the number of Outstanding shares, if any, of such
Series held by such Beneficial Owner which such Beneficial Owner
desires to continue to hold without regard to the Applicable Rate
for shares of such Series for the next succeeding Dividend Period
of such shares;
(B) the number of Outstanding shares, if any, of such
Series held by such Beneficial Owner which such Beneficial Owner
offers to sell if the Applicable Rate for shares of such Series for
the next succeeding Dividend Period of shares of such Series shall
be less than the rate per annum specified by such Beneficial Owner;
and/or
(C) the number of Outstanding shares, if any, of such
Series held by such Beneficial Owner which such Beneficial Owner
offers to sell without regard to the Applicable Rate for shares of
such Series for the next succeeding Dividend Period of shares of
such series; and
(ii) each Broker-Dealer, using lists of Potential Beneficial
Owners, shall in good faith for the purpose of conducting a competitive
Auction in a commercially reasonable manner, contact Potential
Beneficial Owners (by telephone or otherwise), including Persons that
are not Beneficial Owners, on such lists to determine the number of
shares, if any, of such Series which each such Potential Beneficial
Owner offers to purchase if the Applicable Rate for shares of such
Series for the next succeeding Dividend Period of shares of such Series
shall not be less than the rate per annum specified by such Potential
Beneficial Owner.
For the purposes hereof, the communication by a Beneficial Owner or Potential
Beneficial Owner to a Broker-Dealer, or by a Broker-Dealer to the Auction Agent,
of information referred to in clause (i)(A), (i)(B), (i)(C) or (ii) of this
paragraph (a) is hereinafter referred to as an "Order" and collectively as
"Orders" and each Beneficial Owner and each Potential Beneficial Owner placing
an Order with a Broker-Dealer, and such Broker-Dealer placing an Order with the
Auction Agent, is hereinafter referred to as a "Bidder" and collectively as
"Bidders"; an Order containing the information referred to in clause (i)(A) of
this paragraph (a) is hereinafter referred to as a "Hold Order" and collectively
as "Hold Orders"; an Order containing the information referred to in clause
(i)(B) or (ii) of this paragraph (a) is hereinafter referred to as a "Bid" and
collectively as "Bids"; and an Order containing the information referred to in
clause (i)(C) of this paragraph (a) is hereinafter referred to as a "Sell Order"
and collectively as "Sell Orders."
(b) (i) A Bid by a Beneficial Owner or an Existing Holder of shares of
a Series of Preferred Shares subject to an Auction on any Auction Date shall
constitute an irrevocable offer to sell:
(A) the number of Outstanding shares of such Series
specified in such Bid if the Applicable Rate for shares of such
Series determined on such Auction Date shall be less than the rate
specified therein;
(B) such number or a lesser number of Outstanding
shares of such Series to be determined as set forth in clause (iv)
of paragraph (a) of Section 5 of this Part II if the Applicable
Rate for shares of such Series determined on such Auction Date
shall be equal to the rate specified therein; or
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(C) the number of Outstanding shares of such Series
specified in such Bid if the rate specified therein shall be higher
than the Maximum Rate for shares of such series, or such number or
a lesser number of Outstanding shares of such Series to be
determined as set forth in clause (iii) of paragraph (b) of Section
5 of this Part II if the rate specified therein shall be higher
than the Maximum Rate for shares of such Series and Sufficient
Clearing Bids for shares of such Series do not exist.
(ii) A Sell Order by a Beneficial Owner or an Existing Holder
of shares of a Series of Preferred Shares subject to an Auction on any
Auction Date shall constitute an irrevocable offer to sell:
(A) the number of Outstanding shares of such Series
specified in such Sell Order; or
(B) such number or a lesser number of Outstanding
shares of such series as set forth in clause (iii) of paragraph (b)
of Section 5 of this Part II if Sufficient Clearing Bids for shares
of such Series do not exist;
provided, however, that a Broker-Dealer that is an Existing Holder with
respect to shares of a Series of Preferred Shares shall not be liable
to any Person for failing to sell such shares pursuant to a Sell Order
described in the proviso to paragraph (c) of Section 3 of this Part II
if (1) such shares were transferred by the Beneficial Owner thereof
without compliance by such Beneficial Owner or its transferee
Broker-Dealer (or other transferee person, if permitted by the Trust)
with the provisions of Section 6 of this Part II or (2) such
Broker-Dealer has informed the Auction Agent pursuant to the terms of
its Broker-Dealer Agreement that, according to such Broker-Dealer's
records, such Broker-Dealer believes it is not the Existing Holder of
such shares.
(iii) A Bid by a Potential Holder of shares of a Series of
Preferred Shares subject to an Auction on any Auction Date shall
constitute an irrevocable offer to purchase:
(A) the number of Outstanding shares of such Series
specified in such Bid if the Applicable Rate for shares of such
Series determined on such Auction Date shall be higher than the
rate specified therein; or (B) such number or a lesser number of
Outstanding shares of such Series as set forth in clause (v) of
paragraph (a) of Section 5 of this Part II if the Applicable Rate
for shares of such Series determined on such Auction Date shall be
equal to the rate specified therein.
(d) No Order for any number of Preferred Shares other than whole
shares shall be valid.
3. Submission of Orders by Broker-Dealers to Auction Agent.
(a) Each Broker-Dealer shall submit in writing to the Auction Agent
prior to the Submission Deadline on each Auction Date all Orders for Preferred
Shares of a Series subject to an Auction on such Auction Date obtained by such
Broker-Dealer, designating itself (unless otherwise permitted by the Trust) as
an Existing Holder in respect of shares subject to Orders submitted or deemed
submitted to it by Beneficial Owners and as a Potential Holder in respect of
shares subject to Orders submitted to it by Potential Beneficial Owners, and
shall specify with respect to each Order for such shares:
(i) the name of the Bidder placing such Order (which shall be
the Broker-Dealer unless otherwise permitted by the Trust);
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(ii) the aggregate number of shares of such Series that are
the subject of such Order;
(iii) to the extent that such Bidder is an Existing Holder of
shares of such series:
(A) the number of shares, if any, of such Series
subject to any Hold Order of such Existing Holder;
(B) the number of shares, if any, of such Series
subject to any Bid of such Existing Holder and the rate
specified in such Bid; and
(C) the number of shares, if any, of such Series
subject to any Sell Order of such Existing Holder; and
(D) to the extent such Bidder is a Potential Holder
of shares of such series, the rate and number of shares of
such Series specified in such Potential Holder's Bid.
(b) If any rate specified in any Bid contains more than three
figures to the right of the decimal point, the Auction Agent shall round such
rate up to the next highest one thousandth (.001) of 1%.
(c) If an Order or Orders covering all of the Outstanding Preferred
Shares of a Series held by any Existing Holder is not submitted to the Auction
Agent prior to the Submission Deadline, the Auction Agent shall deem a Hold
Order to have been submitted by or on behalf of such Existing Holder covering
the number of Outstanding shares of such Series held by such Existing Holder and
not subject to Orders submitted to the Auction Agent; provided, however, that if
an Order or Orders covering all of the Outstanding shares of such Series held by
any Existing Holder is not submitted to the Auction Agent prior to the
Submission Deadline for an Auction relating to a Special Dividend Period
consisting of more than 91 Dividend Period days, the Auction Agent shall deem a
Sell Order to have been submitted by or on behalf of such Existing Holder
covering the number of outstanding shares of such Series held by such Existing
Holder and not subject to Orders submitted to the Auction Agent.
(d) If one or more Orders of an Existing Holder is submitted to the
Auction Agent covering in the aggregate more than the number of Outstanding
Preferred Shares of a Series subject to an Auction held by such Existing Holder,
such Orders shall be considered valid in the following order of priority:
(i) all Hold Orders for shares of such Series shall
be considered valid, but only up to and including in the aggregate
the number of Outstanding shares of such Series held by such
Existing Holder, and if the number of shares of such Series subject
to such Hold Orders exceeds the number of Outstanding shares of
such Series held by such Existing Holder, the number of shares
subject to each such Hold Order shall be reduced prorata to cover
the number of Outstanding shares of such Series held by such
Existing Holder;
(ii) (A) any Bid for shares of such Series shall be
considered valid up to and including the excess of the number of
Outstanding shares of such Series held by such Existing Holder over
the number of shares of such series subject to any Hold Orders
referred to in clause (i) above;
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(B) subject to subclause (A), if more than one
Bid of an Existing Holder for shares of such Series is submitted to
the Auction Agent with the same rate and the number of Outstanding
shares of such Series subject to such Bids is greater than such
excess, such Bids shall be considered valid up to and including the
amount of such excess, and the number of shares of such Series
subject to each Bid with the same rate shall be reduced prorata to
cover the number of shares of such Series equal to such excess;
(C) subject to subclauses (A) and (B), if more
than one Bid of an Existing Holder for shares of such Series is
submitted to the Auction Agent with different rates, such Bids
shall be considered valid in the ascending order of their
respective rates up to and including the amount of such excess; and
(D) in any such event, the number, if any, of
such Outstanding shares of such Series subject to any portion of
Bids considered not valid in whole or in part under this clause
(ii) shall be treated as the subject of a Bid for shares of such
Series by or on behalf of a Potential Holder at the rate therein
specified; and
(iii) all Sell Orders for shares of such Series shall
be considered valid up to and including the excess of the number of
Outstanding shares of such Series held by such Existing Holder over the
sum of shares of such Series subject to valid Hold Orders referred to
in clause (i) above and valid Bids referred to in clause (ii) above.
(e) If more than one Bid for one or more shares of a Series of
Preferred Shares is submitted to the Auction Agent by or on behalf of any
Potential Holder, each such Bid submitted shall be a separate Bid with the rate
and number of shares therein specified.
(f) Any Order submitted by a Beneficial Owner or a Potential
Beneficial Owner to its Broker-Dealer, or by a Broker-Dealer to the Auction
Agent, prior to the Submission Deadline on any Auction Date, shall be
irrevocable.
4. Determination of Sufficient Clearing Bids, Winning Bid Rate and
Applicable Rate.
(a) Not earlier than the Submission Deadline on each Auction Date for
shares of a Series of Preferred Shares, the Auction Agent shall assemble all
valid Orders submitted or deemed submitted to it by the Broker-Dealers in
respect of shares of such Series (each such Order as submitted or deemed
submitted by a Broker-Dealer being hereinafter referred to individually as a
"Submitted Hold Order," a "Submitted Bid" or a "Submitted Sell Order," as the
case may be, or as a "Submitted Order" and collectively as "Submitted Hold
Orders," "Submitted Bids" or "Submitted Sell Orders," as the case may be, or as
"Submitted Orders") and shall determine for such series:
(i) the excess of the number of Outstanding shares of
such Series over the number of Outstanding shares of such Series
subject to Submitted Hold Orders (such excess being hereinafter
referred to as the "Available Preferred Shares" of such series);
(ii) from the Submitted Orders for shares of such
Series whether:
(A) the number of Outstanding shares of such
Series subject to Submitted Bids of Potential Holders specifying
one or more rates equal to or lower than the Maximum Rate (for all
Dividend Periods) for shares of such series;
A-43
exceeds or is equal to the sum of
(B) the number of Outstanding shares of such Series
subject to Submitted Bids of Existing Holders specifying one
or more rates higher than the Maximum Rate (for all Dividend
Periods) for shares of such series; and
(C) the number of Outstanding shares of such Series
subject to Submitted Sell Orders
(in the event such excess or such equality exists (other than because
the number of shares of such Series in subclauses (B) and (C) above is
zero because all of the Outstanding shares of such Series are subject
to Submitted Hold Orders), such Submitted Bids in subclause (A) above
being hereinafter referred to collectively as "Sufficient Clearing
Bids" for shares of such series); and
(iii) if Sufficient Clearing Bids for shares of such
Series exist, the lowest rate specified in such Submitted Bids (the
"Winning Bid Rate" for shares of such series) which if:
(A) (I) each such Submitted Bid of Existing Holders
specifying such lowest rate and (II) all other such Submitted
Bids of Existing Holders specifying lower rates were rejected,
thus entitling such Existing Holders to continue to hold the
shares of such Series that are subject to such Submitted Bids;
and
(B) (I) each such Submitted Bid of Potential Holders
specifying such lowest rate and (II) all other such Submitted
Bids of Potential Holders specifying lower rates were
accepted;
would result in such Existing Holders described in subclause (A) above
continuing to hold an aggregate number of Outstanding shares of such
Series which, when added to the number of Outstanding shares of such
Series to be purchased by such Potential Holders described in subclause
(B) above, would equal not less than the Available Preferred Shares of
such series.
(b) Promptly after the Auction Agent has made the determinations
pursuant to paragraph (a) of this Section 4, the Auction Agent shall advise the
Trust of the Maximum Rate for shares of the Series of Preferred Shares for which
an Auction is being held on the Auction Date and, based on such determination,
the Applicable Rate for shares of such Series for the next succeeding Dividend
Period thereof as follows:
(i) if Sufficient Clearing Bids for shares of such Series
exist, that the Applicable Rate for all shares of such Series for the
next succeeding Dividend Period thereof shall be equal to the Winning
Bid Rate for shares of such Series so determined;
(ii) if Sufficient Clearing Bids for shares of such
Series do not exist (other than because all of the Outstanding shares
of such Series are subject to Submitted Hold Orders), that the
Applicable Rate for all shares of such Series for the next succeeding
Dividend Period thereof shall be equal to the Maximum Rate for shares
of such series; or
(iii) if all of the Outstanding shares of such Series are
subject to Submitted Hold Orders, that the Applicable Rate for all
shares of such Series for the next succeeding Dividend Period thereof
shall be the All Hold Rate.
5. Acceptance and Rejection of Submitted Bids and Submitted Sell Orders
and Allocation. Existing Holders shall continue to hold the Preferred Shares
that are subject to Submitted Hold Orders, and, based
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on the determinations made pursuant to paragraph (a) of Section 4 of this Part
II, the Submitted Bids and Submitted Sell Orders shall be accepted or rejected
by the Auction Agent and the Auction Agent shall take such other action as set
forth below:
(a) If Sufficient Clearing Bids for shares of a Series of Preferred
Shares have been made, all Submitted Sell Orders with respect to shares of such
Series shall be accepted and, subject to the provisions of paragraphs (d) and
(e) of this Section 5, Submitted Bids with respect to shares of such Series
shall be accepted or rejected as follows in the following order of priority and
all other Submitted Bids with respect to shares of such Series shall be
rejected:
(i) Existing Holders' Submitted Bids for shares of such
series specifying any rate that is higher than the Winning Bid Rate for
shares of such Series shall be accepted, thus requiring each such
Existing Holder to sell the Preferred Shares subject to such Submitted
Bids;
(ii) Existing Holders' Submitted Bids for shares of such
series specifying any rate that is lower than the Winning Bid Rate for
shares of such Series shall be rejected, thus entitling each such
Existing Holder to continue to hold the Preferred Shares subject to
such Submitted Bids;
(iii) Potential Holders' Submitted Bids for shares of
such series specifying any rate that is lower than the Winning Bid Rate
for shares of such Series shall be accepted;
(iv) each Existing Holder's Submitted Bid for shares of
such series specifying a rate that is equal to the Winning Bid Rate for
shares of such Series shall be rejected, thus entitling such Existing
Holder to continue to hold the Preferred Shares subject to such
Submitted Bid, unless the number of Outstanding Preferred Shares
subject to all such Submitted Bids shall be greater than the number of
Preferred Shares ("remaining shares") in the excess of the Available
Preferred Shares of such Series over the number of Preferred Shares
subject to Submitted Bids described in clauses (ii) and (iii) of this
paragraph (a), in which event such Submitted Bid of such Existing
Holder shall be rejected in part, and such Existing Holder shall be
entitled to continue to hold Preferred Shares subject to such Submitted
Bid, but only in an amount equal to the Preferred Shares of such Series
obtained by multiplying the number of remaining shares by a fraction,
the numerator of which shall be the number of Outstanding Preferred
Shares held by such Existing Holder subject to such Submitted Bid and
the denominator of which shall be the aggregate number of Outstanding
Preferred Shares subject to such Submitted Bids made by all such
Existing Holders that specified a rate equal to the Winning Bid Rate
for shares of such series; and
(v) each Potential Holder's Submitted Bid for shares of
such series specifying a rate that is equal to the Winning Bid Rate for
shares of such Series shall be accepted but only in an amount equal to
the number of shares of such Series obtained by multiplying the number
of shares in the excess of the Available Preferred Shares of such
Series over the number of Preferred Shares subject to Submitted Bids
described in clauses (ii) through (iv) of this paragraph (a) by a
fraction, the numerator of which shall be the number of Outstanding
Preferred Shares subject to such Submitted Bid and the denominator of
which shall be the aggregate number of Outstanding Preferred Shares
subject to such Submitted Bids made by all such Potential Holders that
specified a rate equal to the Winning Bid Rate for shares of such
series.
(b) If Sufficient Clearing Bids for shares of a Series of Preferred
Shares have not been made (other than because all of the Outstanding shares of
such series are subject to Submitted Hold Orders), subject to the provisions of
paragraph (d) of this Section 5, Submitted Orders for shares of such series
shall be accepted or rejected as follows in the following order of priority and
all other Submitted Bids for shares of such Series shall be rejected:
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(i) Existing Holders' Submitted Bids for shares of
such series specifying any rate that is equal to or lower than the
Maximum Rate for shares of such Series shall be rejected, thus
entitling such Existing Holders to continue to hold the Preferred
Shares subject to such Submitted Bids;
(ii) Potential Holders' Submitted Bids for shares of
such series specifying any rate that is equal to or lower than the
Maximum Rate for shares of such Series shall be accepted; and
(iii) each Existing Holder's Submitted Bid for shares
of such series specifying any rate that is higher than the Maximum Rate
for shares of such Series and the Submitted Sell Orders for shares of
such Series of each Existing Holder shall be accepted, thus entitling
each Existing Holder that submitted or on whose behalf was submitted
any such Submitted Bid or Submitted Sell Order to sell the shares of
such Series subject to such Submitted Bid or Submitted Sell Order, but
in both cases only in an amount equal to the number of shares of such
Series obtained by multiplying the number of shares of such Series
subject to Submitted Bids described in clause (ii) of this paragraph
(b) by a fraction, the numerator of which shall be the number of
Outstanding shares of such Series held by such Existing Holder subject
to such Submitted Bid or Submitted Sell Order and the denominator of
which shall be the aggregate number of Outstanding shares of such
Series subject to all such Submitted Bids and Submitted Sell Orders.
(c) If all of the Outstanding shares of a Series of Preferred Shares
are subject to Submitted Hold Orders, all Submitted Bids for shares of such
Series shall be rejected.
(d) If, as a result of the procedures described in clause (iv)
or (v) of paragraph (a) or clause (iii) of paragraph (b) of this Section 5, any
Existing Holder would be entitled or required to sell, or any Potential Holder
would be entitled or required to purchase, a fraction of a share of a Series of
Preferred Shares on any Auction Date, the Auction Agent shall, in such manner as
it shall determine in its sole discretion, round up or down the number of
Preferred Shares of such Series to be purchased or sold by any Existing Holder
or Potential Holder on such Auction Date as a result of such procedures so that
the number of shares so purchased or sold by each Existing Holder or Potential
Holder on such Auction Date shall be whole shares of a Series of Preferred
Shares.
(e) If, as a result of the procedures described in clause (v)
of paragraph (a) of this Section 5 any Potential Holder would be entitled or
required to purchase less than a whole share of a Series of Preferred Shares on
any Auction Date, the Auction Agent shall, in such manner as it shall determine
in its sole discretion, allocate Preferred Shares of such Series for purchase
among Potential Holders so that only whole Preferred Shares of such Series are
purchased on such Auction Date as a result of such procedures by any Potential
Holder, even if such allocation results in one or more Potential Holders not
purchasing Preferred Shares of such Series on such Auction Date.
(f) Based on the results of each Auction for shares of a
Series of Preferred Shares, the Auction Agent shall determine the aggregate
number of shares of such Series to be purchased and the aggregate number of
shares of such Series to be sold by Potential Holders and Existing Holders and,
with respect to each Potential Holder and Existing Holder, to the extent that
such aggregate number of shares to be purchased and such aggregate number of
shares to be sold differ, determine to which other Potential Holder(s) or
Existing Holder(s) they shall deliver, or from which other Potential Holder(s)
or Existing Holder(s) they shall receive, as the case may be, Preferred Shares
of such series. Notwithstanding any provision of the Auction Procedures or the
Settlement Procedures to the contrary, in the event an Existing Holder or
Beneficial Owner of shares of a Series of Preferred Shares with respect to whom
a Broker-Dealer submitted a Bid
A-46
to the Auction Agent for such shares that was accepted in whole or in part, or
submitted or is deemed to have submitted a Sell Order for such shares that was
accepted in whole or in part, fails to instruct its Agent Member to deliver such
shares against payment therefor, partial deliveries of Preferred Shares that
have been made in respect of Potential Holders" or Potential Beneficial Owners"
Submitted Bids for shares of such Series that have been accepted in whole or in
part shall constitute good delivery to such Potential Holders and Potential
Beneficial Owners.
(g) Neither the Trust nor the Auction Agent nor any affiliate
of either shall have any responsibility or liability with respect to the failure
of an Existing Holder, a Potential Holder, a Beneficial Owner, a Potential
Beneficial Owner or its respective Agent Member to deliver Preferred Shares of
any Series or to pay for Preferred Shares of any Series sold or purchased
pursuant to the Auction Procedures or otherwise.
6. Transfer of Preferred Shares. Unless otherwise permitted by
the Trust, a Beneficial Owner or an Existing Holder may sell, transfer or
otherwise dispose of Preferred Shares only in whole shares and only pursuant to
a Bid or Sell Order placed with the Auction Agent in accordance with the
procedures described in this Part II or to a Broker-Dealer; provided, however,
that (a) a sale, transfer or other disposition of Preferred Shares from a
customer of a Broker-Dealer who is listed on the records of that Broker-Dealer
as the holder of such shares to that Broker-Dealer or another customer of that
Broker-Dealer shall not be deemed to be a sale, transfer or other disposition
for purposes of this Section 6 if such Broker-Dealer remains the Existing Holder
of the shares so sold, transferred or disposed of immediately after such sale,
transfer or disposition and (b) in the case of all transfers other than pursuant
to Auctions, the Broker-Dealer (or other Person, if permitted by the Trust) to
whom such transfer is made shall advise the Auction Agent of such transfer.
[Remainder of page left blank]
A-47
IN WITNESS WHEREOF, CALAMOS CONVERTIBLE AND HIGH INCOME FUND
has caused these presents to be signed in its name and on its behalf by its
_____________ and witnessed by its ____________________ as of this day of
_____________, 2003.
CALAMOS CONVERTIBLE AND HIGH
INCOME FUND
By: _____________________________
Name:
Title:
WITNESS:
By: _____________________________________
Name:
Title:
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APPENDIX B -- DESCRIPTION OF RATINGS(1)
MOODY'S PRIME RATING SYSTEM
Moody's short-term ratings are opinions of the ability of issuers to
honor senior financial obligations and contracts. Such obligations generally
have an original maturity not exceeding one year, unless explicitly noted.
Moody's employs the following designations, all judged to be investment
grade, to indicate the relative repayment ability of rated issuers:
PRIME-1: Issuers rated Prime-1 (or supporting institutions) have a
superior ability for repayment of senior short-term debt obligations. Prime-1
repayment ability will often be evidenced by many of the following
characteristics:
Leading market positions in well-established industries. High rates of
return on funds employed. Conservative capitalization structure with moderate
reliance on debt and ample asset protection. Broad margins in earnings coverage
of fixed financial charges and high internal cash generation. Well-established
access to a range of financial markets and assured sources of alternate
liquidity.
PRIME-2: Issuers (or supporting institutions) rated Prime-2 have a
strong ability to repay senior short-term debt obligations. This will normally
be evidenced by many of the characteristics cited above, but to a lesser degree.
Earnings trends and coverage ratios, while sound, may be more subject to
variation than is the case for Prime-2 securities. Capitalization
characteristics, while still appropriate, may be more affected by external
conditions. Ample alternate liquidity is maintained.
PRIME-3: Issuers (or supporting institutions) rated Prime-3 have an
acceptable ability for repayment of senior short-term obligations. The effect of
industry characteristics and market compositions may be more pronounced.
Variability in earnings and profitability may result in changes in the level of
debt-protection measurements and may require relatively high financial leverage.
Adequate alternate liquidity is maintained.
NOT PRIME: Issuers rated Not Prime do not fall within any of the Prime
rating categories.
In addition, in certain countries the prime rating may be modified by
the issuer's or guarantor's senior unsecured long-term debt rating.
MOODY'S DEBT RATINGS
Aaa: Bonds and preferred stock which are rated Aaa are judged to be of
the best quality. They carry the smallest degree of investment risk and are
generally referred to as "gilt edged." Interest payments are protected by a
large or by an exceptionally stable margin and principal is secure. While the
various protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position of such
issues.
Aa: Bonds and preferred stock which are rated Aa are judged to be of
high quality by all standards. Together with the Aaa group they comprise what
are generally known as high-grade bonds.
------------------
(1) The ratings indicated herein are believed to be the most recent ratings
available at the date of this prospectus for the securities listed. Ratings are
generally given to securities at the time of issuance. While the rating agencies
may from time to time revise such ratings, they undertake no obligation to do
so, and the ratings indicated do not necessarily represent ratings which will be
given to these securities on the date of the fund's fiscal year-end.
B-1
They are rated lower than the best bonds because margins of protection may not
be as large as in Aaa securities or fluctuation of protective elements may be of
greater amplitude or there may be other elements present which make the
long-term risk in Aa-rated securities appear somewhat larger than those
securities rated Aaa.
A: Bonds and preferred stock which are rated A possess many favorable
investment attributes and are to be considered as upper-medium-grade
obligations. Factors giving security to principal and interest are considered
adequate, but elements may be present which suggest a susceptibility to
impairment some time in the future.
Baa: Bonds and preferred stock which are rated Baa are considered as
medium-grade obligations (i.e., they are neither highly protected nor poorly
secured). Interest payments and principal security appear adequate for the
present but certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. Such bonds lack
outstanding investment characteristics and in fact have speculative
characteristics as well.
Ba: Bonds and preferred stock which are rated Ba are judged to have
speculative elements; their future cannot be considered as well-assured. Often
the protection of interest and principal payments may be very moderate, and
thereby not well safeguarded during both good and bad times over the future.
Uncertainty of position characterizes bonds in this class.
B: Bonds and preferred stock which are rated B generally lack
characteristics of the desirable investment. Assurance of interest and principal
payments or of maintenance of other terms of the contract over any long period
of time may be small.
Caa: Bonds and preferred stock which are rated Caa are of poor
standing. Such issues may be in default or there may be present elements of
danger with respect to principal or interest.
Ca: Bonds and preferred stock which are rated Ca represent obligations
which are speculative in a high degree. Such issues are often in default or have
other marked shortcomings.
C: Bonds and preferred stock which are rated C are the lowest rated
class of bonds, and issues so rated can be regarded as having extremely poor
prospects of ever attaining any real investment standing.
Moody's assigns ratings to individual debt securities issued from
medium-term note (MTN) programs, in addition to indicating ratings to MTN
programs themselves. Notes issued under MTN programs with such indicated ratings
are rated at issuance at the rating applicable to all pari passu notes issued
under the same program, at the program's relevant indicated rating, provided
such notes do not exhibit any of the characteristics listed below. For notes
with any of the following characteristics, the rating of the individual note may
differ from the indicated rating of the program:
1) Notes containing features which link the cash flow and/or
market value to the credit performance of any third party or
parties.
2) Notes allowing for negative coupons, or negative principal.
3) Notes containing any provision which could obligate the
investor to make any additional payments.
Market participants must determine whether any particular note is
rated, and if so, at what rating level.
B-2
Note: Moody's applies numerical modifiers 1, 2, and 3 in each generic
rating classification from Aa through Caa. The modifier 1 indicates that the
obligation ranks in the higher end of its generic rating category; the modifier
2 indicates a mid-range ranking; and the modifier 3 indicates a ranking in the
lower end of that generic rating category.
STANDARD & POOR'S SHORT-TERM ISSUE CREDIT RATINGS
A-1: A short-term obligation rated A-1 is rated in the highest category
by Standard & Poor's. The obligor's capacity to meet its financial commitment on
the obligation is strong. Within this category, certain obligations are
designated with a plus sign (+). This indicates that the obligor's capacity to
meet its financial commitment on these obligations is extremely strong.
A-2: A short-term obligation rated A-2 is somewhat more susceptible to
the adverse effects of changes in circumstances and economic conditions than
obligations in higher rating categories. However, the obligor's capacity to meet
its financial commitment on the obligation is satisfactory.
A-3: A short-term obligation rated A-3 exhibits adequate protection
parameters. However, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity of the obligor to meet its financial
commitment on the obligation.
B: A short-term obligation rated B is regarded as having significant
speculative characteristics. The obligor currently has the capacity to meet its
financial commitment on the obligation; however, it faces major ongoing
uncertainties which could lead to the obligor's inadequate capacity to meet its
financial commitment on the obligation.
C: A short-term obligation rated C is currently vulnerable to
nonpayment and is dependent upon favorable business, financial, and economic
conditions for the obligor to meet its financial commitment on the obligation.
D: A short-term obligation rated D is in payment default. The D rating
category is used when payments on an obligation are not made on the date due
even if the applicable grace period has not expired, unless Standard & Poor's
believes that such payments will be made during such grace period. The D rating
also will be used upon the filing of a bankruptcy petition or the taking of a
similar action if payments on an obligation are jeopardized.
STANDARD & POOR'S LONG-TERM ISSUE CREDIT RATINGS
Issue credit ratings are based, in varying degrees, on the following
considerations:
- Likelihood of payment-capacity and willingness of the obligor to
meet its financial commitment on an obligation in accordance with
the terms of the obligation;
- Nature of and provisions of the obligation;
- Protection afforded by, and relative position of, the obligation
in the event of bankruptcy, reorganization, or other arrangement
under the laws of bankruptcy and other laws affecting creditors'
rights.
The issue rating definitions are expressed in terms of default risk. As
such, they pertain to senior obligations of an entity. Junior obligations are
typically rated lower than senior obligations, to reflect the lower priority in
bankruptcy, as noted above. (Such differentiation applies when an entity has
both senior and subordinated obligations, secured and unsecured obligations, or
operating company and holding
B-3
company obligations.) Accordingly, in the case of junior debt, the rating may
not conform exactly with the category definition.
AAA: An obligation rated AAA has the highest rating assigned by
Standard & Poor's. The obligor's capacity to meet its financial commitment on
the obligation is extremely strong.
AA: An obligation rated AA differs from the highest rated obligations
only in small degree. The obligor's capacity to meet its financial commitment on
the obligation is very strong.
A: An obligation rated A is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than obligations in
higher rated categories. However, the obligor's capacity to meet its financial
commitment on the obligation is still strong.
BBB: An obligation rated BBB exhibits adequate protection parameters.
However, adverse economic conditions or changing circumstances are more likely
to lead to a weakened capacity of the obligor to meet its financial commitment
on the obligation.
Obligations rated BB, B, CCC, CC, and C are regarded as having
significant speculative characteristics. BB indicates the least degree of
speculation and C the highest. While such obligations will likely have some
quality and protective characteristics, these may be outweighed by large
uncertainties or major exposures to adverse conditions.
BB: An obligation rated BB is less vulnerable to nonpayment than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to the
obligor's inadequate capacity to meet its financial commitment on the
obligation.
B: An obligation rated B is more vulnerable to nonpayment than
obligations rated BB, but the obligor currently has the capacity to meet its
financial commitment on the obligation. Adverse business, financial, or economic
conditions will likely impair the obligor's capacity or willingness to meet its
financial commitment on the obligation.
CCC: An obligation rated CCC is currently vulnerable to nonpayment, and
is dependent upon favorable business, financial, and economic conditions for the
obligor to meet its financial commitment on the obligation. In the event of
adverse business, financial, or economic conditions, the obligor is not likely
to have the capacity to meet its financial commitment on the obligation.
CC: An obligation rated CC is currently highly vulnerable to
nonpayment.
C: A subordinated debt or preferred stock obligation rated C is
CURRENTLY HIGHLY VULNERABLE to nonpayment. The C rating may be used to cover a
situation where a bankruptcy petition has been filed or similar action taken,
but payments on this obligation are being continued. A C also will be assigned
to a preferred stock issue in arrears on dividends or sinking fund payments, but
that is currently paying.
D: An obligation rated D is in payment default. The D rating category
is used when payments on an obligation are not made on the date due even if the
applicable grace period has not expired, unless Standard & Poor's believes that
such payments will be made during such grace period. The D rating also will be
used upon the filing of a bankruptcy petition or the taking of a similar action
if payments on an obligation are jeopardized.
B-4
PLUS (+) OR MINUS (-): The ratings from AA to CCC may be modified by
the addition of a plus or minus sign to show relative standing within the major
rating categories.
r: This symbol is attached to the ratings of instruments with
significant noncredit risks. It highlights risks to principal or volatility of
expected returns which are not addressed in the credit rating.
N.R.: This indicates that no rating has been requested, that there is
insufficient information on which to base a rating, or that Standard & Poor's
does not rate a particular obligation as a matter of policy.
LOCAL CURRENCY AND FOREIGN CURRENCY RISKS
Country risk considerations are a standard part of Standard & Poor's
analysis for credit ratings on any issuer or issue. Currency of repayment is a
key factor in this analysis. An obligor's capacity to repay foreign currency
obligations may be lower than its capacity to repay obligations in its local
currency due to the sovereign government's own relatively lower capacity to
repay external versus domestic debt. These sovereign risk considerations are
incorporated in the debt ratings assigned to specific issues. Foreign currency
issuer ratings are also distinguished from local currency issuer ratings to
identify those instances where sovereign risks make them different for the same
issuer.
B-5
PART C - OTHER INFORMATION
ITEM 24: FINANCIAL STATEMENT AND EXHIBITS
1. Financial Statement
The Registrant's [statement of assets and liabilities (balance sheet)]
dated _________ __, 2003, notes to that financial statement and report of
independent public accountants thereon will be filed with a pre-effective
amendment to the Registrant's Registration Statement.
2. Exhibits:
a.1. Agreement and Declaration of Trust. (*)
a.2. Certificate of Trust. (*)
b. By-laws. (*)
c. None.
d. Form of Share Certificate. (**)
e. Terms and Conditions of the Dividend Reinvestment
Plan. (*)
f. None.
g.1 Investment Management Agreement with Calamos Asset
Management, Inc. (*)
g.2 Management Fee Waiver Agreement with Calamos Asset
Management, Inc. (*)
h.1. Form of Underwriting Agreement. (**)
h.2. Form of Standard Dealer Agreement. (**)
h.3. Form of Master Agreement Among Underwriters. (**)
i. None.
j.1. Custody Agreement. (*)
j.2. Form of Foreign Custody Merger Agreement. (**)
k. Form of Stock Transfer Agency Agreement. (**)
l.1. Opinion of Vedder, Price, Kaufman & Kammholz. (**)
l.2. Opinion of Morris, Nichols, Arsht & Tunnell. (**)
m. None.
n. Consent of Auditors. (**)
o. Not applicable.
p. Subscription Agreement. (*)
q. None.
r. Code of Ethics. (*)
s. Powers of Attorney. (*)
(*) Previously filed.
(**) To be filed by amendment.
ITEM 25: MARKETING ARRANGEMENTS
Reference will be made to the underwriting agreement for the
Registrant's shares of beneficial interest to be filed in an amendment to the
Registrant's Registration Statement.
C-1
ITEM 26: OTHER EXPENSES AND DISTRIBUTION
The following table sets forth the estimated expenses to be incurred in
connection with the offering described in this Registration Statement:
Registration fees....................................... $ *
New York Stock Exchange listing fee..................... *
Printing (other than certificates)...................... *
Engraving and printing certificates..................... *
Accounting fees and expenses............................ *
Legal fees and expenses................................. *
NASD fee................................................ *
Miscellaneous........................................... *
---------
Total................................................ $ *
=========
* To be completed by amendment.
ITEM 27. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL
None.
ITEM 28. NUMBER OF HOLDERS OF SECURITIES
As of ____________ __, 2003, the number or record holders of each class
of securities of the Registrant was
TITLE OF CLASS NUMBER OF RECORD HOLDERS
-------------- ------------------------
Common Shares (no par value)............. --
ITEM 29. INDEMNIFICATION
The Registrant's Agreement and Declaration of Trust (the
"Declaration") provides that every person who is, or has
been, a Trustee or an officer, employee or agent of the Registrant (including
any individual who serves at its request as director, officer, partner,
employee, Trustee, agent or the like of another organization in which it has any
interest as a shareholder, creditor or otherwise ("Covered Person") shall be
indemnified by the Registrant or the appropriate series of the Registrant to the
fullest extent permitted by law against liability and against all expenses
reasonably incurred or paid by him in connection with any claim, action, suit or
proceeding in which he becomes involved as a party or otherwise by virtue of his
being or having been a Covered Person and against amounts paid or incurred by
him in the settlement thereof; provided that no indemnification shall be
provided to a Covered Person (i) who shall have been adjudicated by a court or
body before which the proceeding was brought (A) to be liable to the Registrant
or its shareholders by reason of willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of his
office, or (B) not to have acted in good faith and in a manner the person
reasonably believed to be or not opposed to the best interest of the Registrant;
or (ii) in the event of a settlement, unless there has been a determination that
such Covered Person did not engage in willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of his
office; (A) by the court or other body approving the settlement; (B) by at least
a majority of those Trustees who are neither Interested Persons of the Trust nor
are parties to the matter based upon a review of readily available facts (as
opposed to a full trial-type inquiry); (C) by written opinion of independent
legal counsel based upon a review of readily available facts (as opposed to a
full trial-type inquiry) or (D) by a vote of a majority of the Outstanding
Shares entitled to vote (excluding any Outstanding Shares owned of record or
beneficially by such individual).
C-2
The Declaration also provides that if any shareholder or former
shareholder of any series of the Registrant shall be held personally liable
solely by reason of his being or having been a shareholder and not because of
his acts or omissions or for some other reason, the shareholder or former
shareholder (or his heirs, executors, administrators or other legal
representatives or in the case of any entity, its general successor) shall be
entitled out of the assets belonging to the applicable series of the Registrant
to be held harmless from and indemnified against all loss and expense arising
from such liability. The Registrant, on behalf of its affected series, shall,
upon request by such shareholder, assume the defense of any claim made against
such shareholder for any act or obligation of the series and satisfy any
judgment thereon from the assets of the series.
Insofar as indemnification for liability arising under the Securities
Act of 1933, as amended (the "1933 Act"), may be available to Trustees, officers
and controlling persons of the Registrant pursuant to the foregoing provisions,
or otherwise, the Registrant has been advised that in the opinion of the SEC
such indemnification is against public policy as expressed in the 1933 Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant's expenses
incurred or paid by a Trustee, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
Trustee, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the 1933 Act and will be governed by the final
adjudication of such issue.
The registrant, its trustees and officers, its investment adviser, the
other investment companies advised by the adviser and certain persons
affiliated with them are insured, within the limits and subject to the
limitations of the insurance, against certain expenses in connection with the
defense of actions, suits or proceedings, and certain liabilities that might be
imposed as a result of such actions, suits or proceedings. The insurance
expressly excludes coverage for any trustee or officer whose personal
dishonesty, fraudulent breach of trust, lack of good faith, or intention to
deceive or defraud has been finally adjudicated or may be established or who
willfully fails to act prudently.
ITEM 30. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
The information in the Statement of Additional Information under the
caption "Management--Trustees and Officers" is incorporated by reference.
ITEM 31. LOCATION OF ACCOUNTS AND RECORDS
All such accounts, books, and other documents are maintained at the
offices of the Registrant, at the offices of the Registrant's investment
manager, Calamos Asset Management, Inc., 1111 East Warrenville Road, Naperville,
Illinois 60563, at the offices of the custodian, 100 Church Street, New York,
New York 10286 or at the offices of the transfer agent, 111 8th Avenue, New
York, New York 10011-5201.
ITEM 32. MANAGEMENT SERVICES
Not applicable.
ITEM 33. UNDERTAKINGS
1. The Registrant undertakes to suspend the offering of shares
until the prospectus is amended if (1) subsequent to the effective date of its
registration statement, the net asset value declines more than ten percent from
its net asset value as of the effective date of the registration statement or
(2) the net asset value increases to an amount greater than its net proceeds as
stated in the prospectus.
2. Not applicable.
3. Not applicable.
4. Not applicable.
C-3
5. (a) For the purposes of determining any liability under the
1933 Act, the information omitted from the form of prospectus filed as part of a
registration statement in reliance upon Rule 430A and contained in the form of
prospectus filed by the Registrant under Rule 497(h) under the 1933 Act shall be
deemed to be part of the Registration Statement as of the time it was declared
effective.
(b) For the purpose of determining any liability under the
1933 Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities offered
therein, and the offering of the securities at that time shall be deemed to be
the initial bona fide offering thereof.
6. The Registrant undertakes to send by first class mail or other
means designed to ensure equally prominent delivery within two business days of
receipt of a written or oral request the Registrant's statement of additional
information.
C-4
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and/or
Investment Company Act of 1940, the Registrant has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in this City of Naperville and State of Illinois, on the 3rd day of
June, 2003.
Calamos Convertible and High Income Fund
By: /s/ John P. Calamos
--------------------------------------
John P. Calamos, Trustee and President
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the date(s) indicated.
/s/ John P. Calamos Trustee and President (Principal
------------------------ Executive Officer) June 3, 2003
John P. Calamos
/s/ Rhowena Blank Treasurer (Principal Financial and
------------------------ Accounting Officer) June 3, 2003
Rhowena Blank
/s/ Nick P. Calamos Trustee June 3, 2003
------------------------
Nick P. Calamos
Richard J. Dowen* Trustee
Joe E. Hanauer* Trustee
John E. Neal* Trustee
Weston W. Marsh* Trustee
William Rybak* Trustee
By: /s/ James S. Hamman, Jr. Attorney-In-Fact June 3, 2003
----------------------------
James S. Hamman, Jr.
* Original powers of attorney authorizing James S. Hamman, Jr. and John P.
Calamos among others, to execute this Registration Statement, and Amendments
thereto, for each of the trustees of the Registrant on whose behalf this
Registration Statement is filed, have been executed and filed with Amendment
#2 under the Investment Company Act of 1940 to the Registration Statement
filed on May 27, 2003, and are hereby incorporated by reference.
C-5
EXHIBIT INDEX
EXHIBIT DOCUMENT
------- --------
a.1. Agreement and Declaration of Trust. (*)
a.2. Certificate of Trust. (*)
b. By-laws. (*)
c. None.
d. Form of Share Certificate. (**)
e. Terms and Conditions of the Dividend Reinvestment
Plan. (*)
f. None.
g.1 Investment Management Agreement with Calamos Asset
Management, Inc. (*)
g.2 Management Fee Waiver Agreement with Calamos Asset
Management, Inc. (*)
h.1. Form of Underwriting Agreement. (**)
h.2. Form of Standard Dealer Agreement. (**)
h.3. Form of Master Agreement Among Underwriters. (**)
i. None.
j.1. Custody Agreement. (*)
j.2. Form of Foreign Custody Merger Agreement. (**)
k. Form of Stock Transfer Agency Agreement. (**)
l.1. Opinion of Vedder, Price, Kaufman & Kammholz. (**)
l.2. Opinion of Morris, Nichols, Arsht & Tunnell. (**)
m. None.
n. Consent of Auditors. (**)
o. Not applicable.
p. Subscription Agreement. (*)
q. None.
r. Code of Ethics. (*)
s. Powers of Attorney. (*)
(*) Previously filed.
(**) To be filed by amendment.