Filed pursuant to Rule 497(h)
under the Securities Act of 1933
File No. 333-132636
PROSPECTUS
3,900,000 SHARES
CALAMOS CONVERTIBLE AND HIGH INCOME FUND
COMMON SHARES OF BENEFICIAL INTEREST
$16.10 PER SHARE
------------------
We are selling 3,900,000 common shares of beneficial interest in this
offering. We have granted the underwriters an option to purchase up to 570,000
additional common shares to cover over-allotments.
Common Shares. The currently outstanding common shares of Calamos
Convertible and High Income Fund (the "Fund") are, and the common shares offered
in this prospectus will be, listed on the New York Stock Exchange ("NYSE") under
the trading or "ticker" symbol "CHY." The net asset value of the Fund's common
shares at the close of business on June 15, 2006 was $14.87 per share, and the
last sale price of the common shares on the NYSE on such date was $16.53. See
"Market and Net Asset Value Information."
Investment Objective. The Fund is a diversified, closed-end management
investment company which commenced investment operations in May 2003. The Fund's
investment objective is to provide total return through a combination of capital
appreciation and current income.
Portfolio Contents. Under normal circumstances, the Fund will invest 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 COMMON SHARES INVOLVES RISKS. SHARES OF CLOSED-END
FUNDS FREQUENTLY TRADE AT A DISCOUNT FROM THEIR NET ASSET VALUE. THE RISK OF
LOSS DUE TO A MARKET DISCOUNT MAY BE GREATER FOR INVESTORS EXPECTING TO SELL
THEIR SHARES IN A RELATIVELY SHORT PERIOD AFTER COMPLETION OF THE PUBLIC
OFFERING. SEE "RISK FACTORS" BEGINNING ON PAGE 30.
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(1)
--------- -----------
Public offering price $16.100 $62,790,000
Sales load $ 0.644 $ 2,511,600
Proceeds to the Fund(2) $15.456 $60,278,400
(1) The Fund has granted the underwriters an option to purchase up to an
additional 570,000 common shares at the public offering price less the
sales load within 30 days from the date of this prospectus, solely to
cover over-allotments, if any. If such option is exercised in full, the
total public offering price, sales load and proceeds to the Fund will
be $71,967,000, $2,878,680 and $69,088,320, respectively. See
"Underwriting."
(2) Estimated offering expenses are $291,800 in total and $0.075 on a per
share basis and are not reflected in the table above. The net proceeds
of this offering will be approximately $59,986,600 (or approximately
$68,796,520 assuming the underwriters exercise the over-allotment option
in full) after payment of offering costs and the deduction of the sales
load.
The underwriters expect to deliver the common shares to purchasers on or
about June 20, 2006.
------------------
CITIGROUP
A.G. EDWARDS
MERRILL LYNCH & CO.
RBC CAPITAL MARKETS
UBS INVESTMENT BANK
June 15, 2006
(continued from previous page)
Investment Adviser. Calamos Advisors LLC ("Calamos") is the Fund's
investment adviser. See "Management of the Fund."
Preferred Shares. On July 28, 2003, the Fund issued six series of auction
rate preferred shares (the "Preferred Shares"), liquidation preference $25,000
per share ($430,000,000 in the aggregate). The Preferred Shares are rated "Aaa"
and "AAA" by Moody's and Fitch Ratings ("Fitch"), respectively. As of June 7,
2006, the aggregate liquidation preference of Preferred Shares represented
approximately 31% of the Fund's total assets. The Fund may, in the future, issue
additional series of Preferred Shares or other senior securities to the extent
permitted by the Investment Company Act of 1940, as amended (the "1940 Act").
The Fund completed its initial public offering of common shares on May 27,
2003. After the payment of offering expenses and underwriting discounts, the
Fund received $858.2 million in proceeds from the initial public offering and
subsequent exercises of the underwriters' over-allotment option. The Fund's
common shares are junior in liquidation and distribution rights to the Preferred
Shares. The issuance of preferred shares, including the Preferred Shares,
represents the leveraging of the Fund's common shares. The issuance of
additional common shares offered by this prospectus will enable the Fund to
increase the aggregate amount of its leverage; however, the Fund does not
currently intend to issue additional leverage immediately following this
offering. The use of leverage creates an opportunity for increased income and
capital appreciation for common shareholders, but at the same time, it creates
special risks that may adversely affect common shareholders. Because Calamos's
fee is based on managed assets (including assets obtained through leverage),
Calamos's fee is higher when the Fund is leveraged. There can be no assurance
that a leveraged strategy will be successful during any period in which it is
used. See "Leverage" and "Risk Factors -- Leverage."
You should read this prospectus, which contains important information about
the Fund, before deciding whether to invest in the Fund's common shares, and
retain it for future reference. A statement of additional information, dated
June 15, 2006, containing additional information about the Fund, has been filed
with the Securities and Exchange Commission (the "Commission") and is
incorporated by reference in its entirety into this prospectus. You may request
a free copy of the statement of additional information, the table of contents of
which is on page 53 of this prospectus, by calling 1-800-582-6959 or by writing
to the Fund. The Fund's annual and semi-annual reports are also available on its
website at www.calamos.com, which also provides a link to the Commission's
website, as described below, where the Fund's statement of additional
information can be obtained. You can review and copy documents the Fund has
filed at the Commission's Public Reference Room in Washington, D.C. Call
1-202-551-8090 for information. The Commission charges a fee for copies. You can
get the same information free from the Commission's EDGAR database on the
Internet (http://www.sec.gov). You may also e-mail requests for these documents
to publicinfo@sec.gov or make a request in writing to the Commission's Public
Reference Section, Washington, D.C. 20549-0213.
The Fund's common shares do not represent a deposit or obligation of, and
are not guaranteed or endorsed by, any bank or other insured depository
institution and are not federally insured by the Federal Deposit Insurance
Corporation, the Federal Reserve Board or any other government agency.
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED OR INCORPORATED BY
REFERENCE IN THIS PROSPECTUS. WE HAVE NOT, AND THE UNDERWRITERS HAVE NOT,
AUTHORIZED ANY OTHER PERSON TO PROVIDE YOU WITH DIFFERENT INFORMATION. IF ANYONE
PROVIDES YOU WITH DIFFERENT OR INCONSISTENT INFORMATION, YOU SHOULD NOT RELY ON
IT. WE ARE NOT, AND THE UNDERWRITERS ARE NOT, MAKING AN OFFER TO SELL THESE
SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED.
------------------
TABLE OF CONTENTS
Prospectus Summary.......................................... 1
Summary of Fund Expenses.................................... 13
Financial Highlights........................................ 15
The Fund.................................................... 17
Capitalization.............................................. 18
Market and Net Asset Value Information...................... 19
Portfolio Composition....................................... 20
Use of Proceeds............................................. 21
Investment Objective and Principal Investment Strategies.... 21
Leverage.................................................... 25
Interest Rate Transactions.................................. 27
Risk Factors................................................ 30
Forward-Looking Statements.................................. 36
Management of the Fund...................................... 37
Dividends and Distributions; Automatic Dividend Reinvestment
Plan...................................................... 39
Closed-End Fund Structure................................... 43
U.S. Federal Income Tax Matters............................. 43
Net Asset Value............................................. 46
Description of Shares....................................... 47
Certain Provisions of the Agreement and Declaration of Trust
and By-Laws............................................... 49
Underwriting................................................ 50
Custodian, Transfer Agent, Dividend Disbursing Agent and
Registrar................................................. 52
Legal Opinions.............................................. 52
Table of Contents for Statement of Additional Information... 53
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 common shares. You
should review the more detailed information contained in this prospectus and in
the statement of additional information, especially the information set forth
under the heading "Risk Factors."
THE FUND...................... Calamos Convertible and High Income Fund is a
diversified, closed-end management investment
company which commenced investment operations
in May 2003. 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 OFFERING.................. The Fund is offering 3,900,000 common shares of
beneficial interest ("common shares") at a
public offering price of $16.10 per share. The
common shares are being offered by a group of
underwriters led by Citigroup Global Markets
Inc., A.G. Edwards & Sons, Inc., Merrill Lynch,
Pierce, Fenner & Smith Incorporated, RBC
Capital Markets Corporation and UBS Securities
LLC. You must purchase at least 100 common
shares ($1,610.00) in order to participate in
the offering. The Fund has granted the
underwriters the right to purchase up to an
additional 570,000 common shares at the public
offering price, less the sales load, within 30
days from the date of this prospectus to cover
over-allotments. See "Underwriting." The
provisions of the 1940 Act require that the
public offering price of the common shares,
less underwriting commissions and discounts,
must equal or exceed the net asset value per
share of the Fund's common shares (calculated
within 48 hours of pricing).
LISTING....................... Like the Fund's outstanding common shares, the
common shares offered hereby will be listed on
the NYSE under the symbol "CHY."
INVESTMENT OBJECTIVE.......... The Fund's investment objective is to provide
total return through a combination of capital
appreciation and current income. There can be
no assurance that the Fund will achieve its
investment objective. See "Investment Objective
and Principal Investment
Strategies -- 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
1
maturities. The average term to maturity of the
Fund's securities typically will range from
five to ten years. See "Investment Objective
and Principal Investment
Strategies -- 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 "Investment Objective and
Principal Investment Strategies -- Principal
Investment Strategies -- Convertible
Securities."
Synthetic Convertible Instruments. Calamos may
also establish a "synthetic" convertible
instrument by combining separate securities
that possess the economic characteristics
similar to a convertible security, i.e., an
income component, and the right or obligation
to acquire an equity security ("convertible
component"). The income component is achieved
by investing in non-convertible, fixed-income
securities such as bonds, preferred stocks,
money market instruments and other instruments
that provide an income component. The
convertible component is achieved by investing
in warrants or options to buy common stock at a
certain exercise price, or options on a stock
index. The Fund may also purchase synthetic
convertible instruments created by other
parties, typically investment banks, including
convertible structured notes. Different
companies may issue the income and convertible
components which may be purchased separately,
and at different times. The Fund's holdings of
synthetic convertible instruments are
considered convertible securities for purposes
of the Fund's policy to invest at 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
"Investment Objective and Principal Investment
Strategies -- Principal Investment
Strategies -- Synthetic Convertible
Instruments."
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
2
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 "Investment Objective and
Principal Investment Strategies -- 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 "Investment Objective and Principal
Investment Strategies -- 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 "Investment Objective
and Principal Investment
Strategies -- Principal Investment
Strategies -- Rule 144A Securities."
Other Securities. The Fund may invest in other
securities of various types. Normally, the Fund
invests substantially all of its assets to meet
its investment objective. For temporary
defensive purposes, the Fund may depart from
its principal investment strategies and invest
part or all of its assets in securities with
remaining maturities of less than one year,
cash equivalents, or may hold cash. During such
periods, the Fund may not be able to achieve
its investment objective. See "Investment
Objective and Principal Investment
Strategies -- Principal Investment Strategies."
USE OF LEVERAGE BY THE FUND... The Fund currently uses, and may in the future
use, financial leverage. On July 28, 2003, the
Fund issued the Preferred Shares, liquidation
preference $25,000 per share ($430,000,000 in
the aggregate). As of June 7, 2006, the
aggregate liquidation preference of the
Preferred Shares represented approximately 31%
of the Fund's total assets.
3
The Fund may make further use of financial
leverage through the issuance of additional
preferred shares or may borrow money or issue
debt securities; however, the Fund does not
currently intend to issue additional leverage
immediately following this offering. As a
non-fundamental policy, such preferred shares,
debt securities or borrowing may not exceed 38%
of the Fund's total assets. However, the Board
of Trustees reserves the right to issue
preferred shares or debt securities or borrow
to the extent permitted by the 1940 Act. See
"Leverage."
The Fund may not be leveraged at all times and
the amount of leverage, if any, may vary
depending upon a variety of factors, including
Calamos' outlook for the market and the costs
that the Fund would incur as a result of such
leverage. Leverage involves greater risks. The
Fund's leveraging strategy may not be
successful. By leveraging its investment
portfolio, the Fund creates an opportunity for
increased net income or capital appreciation.
However, the use of leverage also involves
risks, which can be significant. These risks
include the possibility that the value of the
assets acquired with the proceeds of leverage
decreases although the Fund's liability to
holders of preferred shares or other types of
leverage is fixed, greater volatility in the
Fund's net asset value and the market price of
the Fund's common shares and higher expenses.
In addition, the rights of lenders, the holders
of Preferred Shares and the holders of debt
securities issued by the Fund will be senior to
the rights of the holders of common shares with
respect to the payment of dividends or upon
liquidation. Holders of Preferred Shares have
voting rights in addition to and separate from
the voting rights of common shareholders. See
"Description of 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 certain
situations.
Because Calamos' management fee is based upon a
percentage of the Fund's managed assets, which
include assets attributable to any outstanding
leverage, the investment management fee will be
higher if the Fund is leveraged and Calamos
will have an incentive to leverage the Fund.
Calamos intends to use financial leverage for
the Fund only when it believes that the
potential return on additional investments
acquired with the proceeds of leverage is
likely to exceed the costs incurred in
connection with the borrowing or issuance of
preferred shares. The Fund pays and common
shareholders effectively bear any costs and
expenses relating to any borrowings and to the
issuance and ongoing maintenance of preferred
shares. See "Leverage" and "Risk
Factors -- Leverage."
INTEREST RATE TRANSACTIONS.... In order to reduce the interest rate risk
inherent in the Fund's underlying investment
and capital structure, the Fund, if market
conditions are deemed favorable, may enter into
interest rate swap or cap transactions. The use
of interest rate swaps and caps is a highly
specialized activity that involves investment
tech-
4
niques and risks different from those
associated with ordinary portfolio security
transactions.
In an interest rate swap, the Fund would agree
to pay to the other party to the interest rate
swap (which is known as the "counterparty") a
fixed rate payment in exchange for the
counterparty agreeing to pay to the Fund a
payment at a variable rate that is expected to
approximate the rate on any variable rate
payment obligation on the Fund's leverage. The
payment obligations would be based on the
notional amount of the swap.
In an interest rate cap, the Fund would pay a
premium to the counterparty to the interest
rate cap and, to the extent that a specified
variable rate index exceeds a predetermined
fixed rate, would receive from the counterparty
payments of the difference based on the
notional amount of such cap. Depending on the
state of interest rates in general, the Fund's
use of interest rate swap or cap transactions
could enhance or harm the overall performance
of the common shares. See "Interest Rate
Transactions."
INVESTMENT ADVISER............ Calamos is the Fund's investment adviser.
Calamos is responsible on a day-to-day basis
for investment of the Fund's portfolio in
accordance with its investment objective and
policies. Calamos makes all investment
decisions for the Fund and places purchase and
sale orders for the Fund's portfolio
securities. As of May 31, 2006, Calamos managed
approximately $48.4 billion in assets of
individuals and institutions. Calamos is an
indirect subsidiary of Calamos Asset
Management, Inc., whose voting shares are
majority-owned by Calamos Family Partners,
Inc., which is controlled by John P. Calamos,
Sr. and the Calamos family.
The Fund pays Calamos an annual fee, payable
monthly, for its investment management services
equal to 0.80% of the Fund's average weekly
managed assets. Calamos has contractually
agreed to waive a portion of its management fee
at the annual rate of 0.10% of the average
weekly managed assets of the Fund for the first
five full years of the Fund's operations
(through May 31, 2008), and to waive a
declining amount for an additional three years
(0.07% of the average weekly managed assets
through May 31, 2009, 0.05% through May 31,
2010 and 0.03% through May 31, 2011). See
"Management of the Fund."
PORTFOLIO MANAGERS............ 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 Chairman, CEO and Co-Chief
Investment Officer of Calamos and Nick P.
Calamos has been Senior Executive Vice
President and Co-Chief Investment Officer of
Calamos.
CUSTODIAN, TRANSFER AGENT AND
DIVIDEND DISBURSING AGENT... The Bank of New York serves as the Fund's
custodian, transfer agent and dividend
disbursing agent. See "Custodian, Transfer
Agent, Dividend Disbursing Agent and
Registrar."
5
FUND ACCOUNTANTS.............. State Street Bank and Trust Company ("State
Street") and Calamos provide fund accounting
and financial accounting services to the Fund.
DISTRIBUTIONS................. The Fund has made regular monthly distributions
to its common shareholders of $0.1219 per share
since August 2003. Additionally, the Fund made
a one-time distribution of $0.0920 per share in
January 2006. The Fund intends to distribute to
common shareholders all or a portion of its net
investment income monthly and net realized
capital gains, if any, at least annually.
The Fund currently intends to make monthly
distributions to common shareholders at a level
rate established by the Board of Trustees. The
rate may be modified by the Board of Trustees
from time to time. Monthly distributions may
include net investment income, net realized
short-term capital gain and, if necessary,
return of capital. Net realized short-term
capital gain distributed to shareholders will
be taxed as ordinary income. In addition, one
distribution per calendar year may include net
realized long-term capital gain, which will be
taxed at long-term capital gain rates. A
distribution of an amount in excess of the
Fund's current and accumulated earnings and
profits, if any, will be treated by a
shareholder as a tax-free return of capital.
There is no guarantee that the Fund will
realize capital gain in any given year.
Pursuant to the requirements of the 1940 Act
and other applicable laws, a notice would
accompany each monthly distribution with
respect to the estimated source of the
distribution made. Distributions are subject to
re-characterization for federal income tax
purposes after the end of the fiscal year. The
Fund may at times in its discretion pay out
less than the entire amount of net investment
income earned in any particular period and may
at times pay out such accumulated undistributed
income in addition to net investment income
earned in other periods in order to permit the
Fund to maintain its level distribution policy.
As a result, the dividend paid by the Fund to
holders of common shares for any particular
period may be more or less than the amount of
net investment income earned by the Fund during
such period.
In January 2004, Calamos, on behalf of itself
and certain funds (including the Fund), filed
an exemptive application with the Commission
seeking an order under the 1940 Act permitting
those funds to make periodic distributions of
long-term capital gain. There can be no
assurance that the Commission will grant such
an order. The staff of the Commission has
indicated that it has suspended the processing
of exemptive applications requesting the type
of relief referenced above, pending review by
the staff of the results of an industry-wide
inspection focusing on the dividend practices
of closed-end investment companies. There can
be no assurance as to when that review might be
completed or whether, following that review,
the staff would process such applications or
grant such relief.
Pursuant to the Fund's Automatic Dividend
Reinvestment Plan, unless a shareholder is
ineligible or elects otherwise, all dividends
6
and capital gains distributions are
automatically reinvested in additional common
shares of the Fund. However, an investor can
choose to receive dividends and distributions
in cash. Because not all investors can
participate in the automatic dividend
reinvestment plan, you should contact your
broker or nominee to confirm that you are
eligible to participate in the plan. See
"Dividends and Distributions; Automatic
Dividend Reinvestment Plan."
RISKS......................... Market Discount Risk. The Fund's common shares
have traded both at a premium and at a discount
relative to net asset value. The public
offering price represents a 8.27% premium over
the per share net asset value on June 15, 2006;
however, there can be no assurance that this
premium will continue after this offering or
that the shares will not again trade at a
discount. Common shares of closed-end
investment companies frequently trade at prices
lower than their net asset value. Depending on
the premium of the Fund's common shares, the
Fund's net asset value may be reduced
immediately following this offering by the
offering expenses paid by the Fund, including
the sales load. See "Use of Proceeds."
In addition to net asset value, the market
price of the Fund's common shares may be
affected by such factors as the Fund's use of
leverage, dividend stability, portfolio credit
quality, liquidity, market supply and demand of
the common shares and the Fund's dividends paid
(which are, in turn, affected by expenses),
call protection for portfolio securities and
interest rate movements. See "Leverage," "Risk
Factors" and "Description of Shares." The
Fund's common shares are designed primarily for
long-term investors, and you should not
purchase common shares if you intend to sell
them shortly after purchase.
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 generally
offer lower interest or dividend yields than
non-convertible securities of similar quality.
The market values of convertible securities
tend to decline as interest rates increase and,
conversely, to increase as interest rates
decline. However, the convertible security's
market value tends to reflect the market price
of the common stock of the issuing company when
that stock price is greater than the
convertible security's "conversion price." The
conversion price is defined as the
predetermined price at which the convertible
security could be exchanged for the associated
stock. As the market price of the underlying
common stock declines, the price of the
convertible security tends to be influenced
more by the yield of the convertible security.
Thus, it may not decline in price to the same
extent as the underlying common stock. In the
event of a liquidation of the issuing company,
holders of convertible securities would be paid
before the company's common stockholders.
Consequently, the issuer's convertible
securities generally
7
entail less risk than its common stock. See
"Risk Factors -- Convertible Securities."
Synthetic Convertible Instruments. The value
of a synthetic convertible instrument may
respond differently to market fluctuations than
a convertible security because a synthetic
convertible instrument is composed of two or
more separate securities, each with its own
market value. In addition, if the value of the
underlying common stock or the level of the
index involved in the convertible component
falls below the exercise price of the warrant
or option, the warrant or option may lose all
value. Synthetic convertible instruments
created by other parties have the same
attributes of a convertible security; however,
the issuer of the synthetic convertible
instrument assumes the credit risk associated
with the investment, rather than the issuer of
the underlying equity security into which the
instrument is convertible. Therefore, the Fund
is subject to the credit risk associated with
the party creating the synthetic convertible
instrument. See "Risk Factors -- Synthetic
Convertible Instruments."
High Yield Securities. Investment in high
yield 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 that are in default or
the issuers of which are in bankruptcy.
Investment in high yield securities involves
substantial risk of loss. Below investment
grade non-convertible debt securities or
comparable unrated securities are commonly
referred to as "junk bonds" and are considered
predominantly speculative with respect to the
issuer's ability to pay interest and principal
and are susceptible to default or decline in
market value due to adverse economic and
business developments. The market values for
high yield securities tend to be very volatile,
and these securities are less liquid than
investment grade debt securities. For these
reasons, your investment in the Fund is subject
to the following specific risks:
- increased price sensitivity to changing
interest rates and to a deteriorating
economic environment;
- greater risk of loss due to default or
declining credit quality;
- adverse company specific events are more
likely to render the issuer unable to make
interest and/or principal payments; and
- if a negative perception of the high yield
market develops, the price and liquidity of
high yield securities may be depressed. This
negative perception could last for a
significant period of time.
Adverse changes in economic conditions are more
likely to lead to a weakened capacity of a high
yield issuer to make principal payments and
interest payments than an investment grade
issuer. The principal amount of high yield
securities outstanding has
8
proliferated in the past decade as an
increasing number of issuers have used high
yield securities for corporate financing. An
economic downturn could severely affect the
ability of highly leveraged issuers to service
their debt obligations or to repay their
obligations upon maturity.
The secondary market for high yield securities
may not be as liquid as the secondary market
for more highly rated securities, a factor
which may have an adverse effect on the Fund's
ability to dispose of a particular security.
There are fewer dealers in the market for high
yield securities than for investment grade
obligations. The prices quoted by different
dealers may vary significantly and the spread
between the bid and asked price is generally
much larger than for higher quality
instruments. Under adverse market or economic
conditions, the secondary market for high yield
securities could contract further, independent
of any specific adverse changes in the
condition of a particular issuer, and these
instruments may become illiquid. As a result,
the Fund could find it more difficult to sell
these securities or may be able to sell the
securities only at prices lower than if such
securities were widely traded. Prices realized
upon the sale of such lower rated or unrated
securities, under these circumstances, may be
less than the prices used in calculating the
Fund's net asset value. See "Risk
Factors -- High Yield Securities."
Interest Rate Risk. In addition to the risks
discussed above, debt securities are subject to
certain 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 lower 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
- rising interest rates could result in an
increase in the cost of the Fund's leverage
and could adversely affect the ability of the
Fund to meet asset coverage requirements with
respect to leverage. See "Risk
Factors -- Interest Rate Risk."
Illiquid Investments. The Fund may invest up
to 15% of its managed assets in securities
that, at the time of investment, are
9
illiquid (determined using the Commission's
standard applicable to investment companies,
i.e., securities that cannot be disposed of
within 7 days in the ordinary course of
business at approximately the value at which
the Fund has valued the securities). The Fund
may also invest without limit in securities
that have not been registered for public sale,
but that are eligible for purchase and sale by
certain qualified institutional buyers.
Calamos, under the supervision of the Board of
Trustees, will determine whether securities
purchased under Rule 144A are illiquid (that
is, not readily marketable) and thus subject to
the Fund's limit of investing no more than 15%
of its managed assets in illiquid securities.
Investments in Rule 144A Securities could have
the effect of increasing the amount of the
Fund's assets invested in illiquid securities
if qualified institutional buyers are unwilling
to purchase these Rule 144A Securities.
Illiquid securities may be difficult to dispose
of at a fair price at the times when the Fund
believes it is desirable to do so. Investment
of the Fund's assets in illiquid securities may
restrict the Fund's ability to take advantage
of other market opportunities. The market price
of illiquid securities generally is more
volatile than that of more liquid securities,
which may adversely affect the price that the
Fund pays for or recovers upon the sale of
illiquid securities. Illiquid securities are
also more difficult to value and Calamos'
judgment may play a greater role in the
valuation process. The risks associated with
illiquid securities may be particularly acute
in situations in which the 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. See "Risk Factors -- Illiquid
Investments."
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;
- an 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;
and
10
- withholding and other non-U.S. taxes may
decrease the Fund's return. See "Risk
Factors -- Foreign Securities."
Leverage. The Fund has issued Preferred Shares
and may issue additional preferred shares or
borrow money or issue debt securities. The
borrowing of money or issuance of debt
securities and preferred shares, including the
outstanding Preferred Shares, represents the
leveraging of the Fund's common shares. As a
non-fundamental policy, such preferred shares,
debt securities or borrowing may not exceed 38%
of the Fund's total assets. Leverage creates
risks which may adversely affect the return for
the holders of common shares, including:
- the likelihood of greater volatility of net
asset value and market price of the Fund's
common shares;
- fluctuations in the dividend rates on any
preferred shares or in interest rates on
borrowings and short-term debt;
- increased operating costs, which may reduce
the Fund's total return; and
- the potential for a decline in the value of
an investment acquired with borrowed funds,
while the Fund's obligations under such
borrowing remain fixed.
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 will be
greater than if leverage had not been used.
Conversely, if the income or capital
appreciation from the securities purchased with
such funds is not sufficient to cover the cost
of leverage or if the Fund incurs capital
losses, the return of the Fund will be less
than if leverage had not been used, and
therefore the amount available for distribution
to common shareholders as dividends and other
distributions will be reduced or potentially
eliminated.
Certain types of borrowings may result in the
Fund being subject to covenants in credit
agreements, including those relating to asset
coverage, borrowing base and portfolio
composition requirements and additional
covenants that may affect the Fund's ability to
pay dividends and distributions on common
shares in certain instances. The Fund may also
be required to pledge its assets to the lenders
in connection with certain types of borrowings.
The Fund 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. See "Risk Factors -- Leverage."
Interest Rate Transactions Risk. The Fund may
enter into an interest rate swap or cap
transaction in order to reduce the interest
rate risk inherent in the Fund's underlying
investments and capital structure. A decline in
interest rates may result in a decline in the
value of the swap or cap, which may result in a
11
decline in the net asset value of the Fund. See
"Risk Factors -- Interest Rate Transactions
Risk."
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. See "Risk Factors -- Management
Risk."
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 conversion of the Fund
to an open-end investment company or a merger,
asset sale or similar transaction. Holders of
Preferred Shares 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. See "Risk
Factors -- Antitakeover Provisions."
Market Disruption Risk. Certain events have a
disruptive effect on the securities markets,
such as terrorist attacks (including the
terrorist attacks in the United States on
September 11, 2001), war and other geopolitical
events, earthquakes, storms or other disasters.
The Fund cannot predict the effects of similar
events in the future on the markets or economy
of the U.S. or other countries. 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. See "Risk Factors -- Market
Disruption Risk."
12
SUMMARY OF FUND EXPENSES
The following table contains information about the costs and expenses that
common shareholders will bear directly or indirectly, after giving effect to
issuance of common shares pursuant to this prospectus, assuming no exercise of
the over-allotment option granted to the underwriters. The table assumes that
existing leverage (Preferred Shares with an aggregate liquidation preference of
$430,000,000) remain outstanding. "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). The liquidation preference of preferred shares is not considered a
liability for this purpose.
SHAREHOLDER TRANSACTION FEES
----------------------------
Sales Load (as a percentage of offering price).............. 4.00%
Offering Expenses of the Common Shares borne by the Fund (as
a percentage of offering price)........................... 0.48%
Dividend Reinvestment Plan Fees............................. None(1)
PERCENTAGE OF
NET ASSETS
ATTRIBUTABLE TO
COMMON SHARES
(ASSUMES
OUTSTANDING
ANNUAL EXPENSES LEVERAGE)(2)
--------------- ---------------
Management Fee.............................................. 1.16%
Other Expenses.............................................. 0.09%
Leverage Costs(2)........................................... 0.12%
Total Annual Expenses....................................... 1.37%
Fee Waiver (until May 31, 2008)............................. (0.15)%(3)
-----
Net Annual Expenses......................................... 1.22% (4)
=====
EXPENSE EXAMPLE: The following example illustrates the expenses (including
the sales load of $40 and estimated offering expenses of $4.80) that you would
pay on a $1,000 investment in common shares, assuming (1) net annual expenses of
1.22% of net assets attributable to common shares through May 31, 2008, 1.27%
through May 31, 2009, 1.30% through May 31, 2010, 1.33% through May 31, 2011 and
1.37% thereafter and (2) a 5% annual return:(5)
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
Total Expenses Incurred(6).................................. $57 $82 $111 $198
---------------
(1) A shareholder that directs the plan agent to sell shares held in a dividend
reinvestment account will pay brokerage charges.
(2) Leverage Costs in the table reflect the weighted average cost to the Fund of
Preferred Shares, expressed as a percentage of the Fund's net assets, based
on interest rates and dividend rates during the period ended January 31,
2006, including expenses associated with ratings agencies' ratings of the
Preferred Shares. The table assumes outstanding Preferred Shares of $430
million, which reflects leverage in an amount representing approximately 31%
of total assets.
(3) Calamos has contractually agreed to waive a portion of its management fee at
the annual rate of 0.10% of average weekly managed assets through May 31,
2008, 0.07% of the average weekly managed assets in the following year
through May 31, 2009, 0.05% of the average weekly managed assets in the
following year through May 31, 2010 and 0.03% of the average weekly managed
assets in the following year through May 31, 2011. Assuming Preferred Shares
in an amount equal to 31% of the Fund's total assets immediately after
issuance and calculated as a percentage of net assets attributable to common
shares, those amounts would be 0.15% for each year through May 31, 2008,
0.10% through May 31, 2009, 0.07% through May 31, 2010 and 0.04% through May
31, 2011. Without the waiver, "Total Annual Expenses" would be estimated to
be 1.37% of average daily net assets attributable to common shares.
13
(4) Net Annual Expenses may increase if Other Expenses and Leverage Costs
increase.
(5) The example assumes that the estimated "Other Expenses" set forth in the fee
table are accurate and that all dividends and distributions are reinvested
at net asset value and that the Fund is engaging in leverage of 31% of total
assets, assuming a 0.12% cost of leverage. THE EXAMPLE SHOULD NOT BE
CONSIDERED A REPRESENTATION OF FUTURE EXPENSES. ACTUAL EXPENSES MAY BE
GREATER OR LESS THAN THOSE ASSUMED. MOREOVER, THE FUND'S ACTUAL RATE OF
RETURN MAY BE GREATER OR LESS THAN THE HYPOTHETICAL 5% RETURN SHOWN IN THE
EXAMPLE.
(6) Assumes waiver of fees at the annual rate of 0.10% of average weekly managed
assets through May 31, 2008, 0.07% in the following year through May 31,
2009, 0.05% in the following year through May 31, 2010 and 0.03% in the
following year through May 31, 2011. Calamos has not agreed to waive any
portion of its fees and expenses beyond May 31, 2011. See "Management of the
Fund -- Investment Management Agreement."
The purpose of the table above is to help you understand all fees and
expenses that you, as a common shareholder, would bear directly or indirectly.
The amount set forth under "Other Expenses" is based upon estimates for the
current year, assuming no exercise of the over-allotment option granted to the
underwriters. The table assumes that the Fund issues $60,000,000 in common
shares. If the Fund issues fewer common shares, all other things being equal,
these expenses, as a percentage of net assets, would increase. For additional
information with respect to the Fund's expenses, see "Management of the Fund."
Other expenses include custodial and transfer agency fees, legal and accounting
expenses, and listing fees.
14
FINANCIAL HIGHLIGHTS
The information contained in the table below shows the audited operating
performance of the Fund for the periods ending October 31, 2003, October 31,
2004 and October 31, 2005 and the unaudited operating performance for the Fund
for the period from November 1, 2005 through January 31, 2006.
NOVEMBER 1,
2005 THROUGH MAY 28, 2003*
JANUARY 31, THROUGH
2006 FOR THE YEAR OCTOBER 31,
(UNAUDITED) ENDED 2003
------------ ------------------- --------------
2005 2004
------------ -------- --------
Net asset value, beginning of period.......... $ 15.21 $ 15.47 $ 14.80 $ 14.32(a)
-------- -------- -------- --------
Income from investment operations:
Net investment income (loss)................ 0.50 1.49 1.60 0.44
Net realized and unrealized gain (loss) from
investments, foreign currency and
interest rate swaps...................... 0.42 (0.09) 0.63 0.46
Dividends to preferred shareholders from:
Net investment income (common share
equivalent basis)........................ (0.07) (0.20) (0.10) (0.02)
-------- -------- -------- --------
Total from investment operations......... 0.85 1.20 2.13 0.88
Less dividends to common shareholders from:
Net investment income....................... (0.40) (1.34) (1.46) (0.37)
Capital gains............................... (0.06) (0.12) -- --
Capital charge resulting from issuance of
common and preferred shares................. -- -- -- (0.03)
Net asset value, end of period................ $ 15.60 $ 15.21 $ 15.47 $ 14.80
======== ======== ======== ========
Market value, end of period................... $ 15.99 $ 15.52 $ 16.74 $ 16.00
Total investment return based on(b):
Net asset value............................. 5.65% 7.99% 14.91% 5.92%
Market value................................ 6.13% 1.83% 15.02% 9.36%
Ratios and supplemental data:
Net assets applicable to common shareholders,
end of period (000's omitted)............... $968,971 $940,736 $945,037 $891,152
Preferred shares, at redemption value ($25,000
per share liquidation preference) (000's
omitted).................................... $430,000 $430,000 $430,000 $430,000
Ratios to average net assets applicable to
common shareholders:
Net expenses(c)(d).......................... 1.22% 1.23% 1.25% 1.11%
Gross expenses prior to waiver of expenses
by the advisor(c)(d)..................... 1.37% 1.38% 1.40% 1.24%
Net investment income (loss)(c)(d).......... 8.95% 9.55% 10.56% 7.85%
Preferred share dividends(c)................ 1.84% 1.30% 0.65% 0.34%
Net investment income (loss), net of
preferred share dividends(c)............. 7.11% 8.25% 9.91% 7.51%
Portfolio turnover rate....................... 8% 55% 27% 20%
Asset coverage per preferred share, at end of
period(e)................................... $ 81,353 $ 79,708 $ 79,952 $ 76,811
---------------
* Commencement of operations.
(a) Net of sales load of $0.675 on initial shares issued and beginning net asset
value of $14.325.
(b) Total investment return is calculated assuming a purchase of common stock on
the opening of the first day and a sale on the closing of the last day of
the period reported. Dividends and distributions
15
are assumed, for purposes of this calculation, to be reinvested at prices
obtained under the Fund's dividend reinvestment plan. Total return is not
annualized for periods less than one year. Brokerage commissions are not
reflected. NAV per share is determined by dividing the value of the Fund's
portfolio securities, cash and other assets, less all liabilities, by the
total number of common shares outstanding. The common share market price is
the price the market is willing to pay for shares of the Fund at a given
time. Common share market price is influenced by a range of factors,
including supply and demand and market conditions.
(c) Annualized for periods less than one year.
(d) Does not reflect the effect of dividend payments to preferred shareholders.
(e) Calculated by subtracting the Fund's total liabilities (not including
Preferred Shares) from the Fund's total assets and dividing this by the
number of Preferred Shares outstanding.
16
THE FUND
Calamos Convertible and High Income Fund is a diversified, closed-end
management investment company which commenced investment operations in May 2003.
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 27, 2003, the Fund issued an
aggregate of 52,200,000 common shares, no par value, in an initial public
offering and commenced its operations. On June 11, 2003 and July 15, 2003, the
Fund issued an additional 4,000,0000 and 3,800,000 common shares, respectively,
in connection with exercises by the underwriters of their over-allotment option.
The net proceeds of the initial public offering and subsequent exercises of the
over-allotment option were approximately $858.2 million after the payment of
offering expenses. On July 28, 2003, the Fund issued the Preferred Shares,
liquidation preference $25,000 per share ($430,000,000 in the aggregate). The
Fund's common shares are listed on the NYSE under the symbol "CHY." The Fund's
principal office is located at 2020 Calamos Court, Naperville, Illinois 60563,
and its telephone number is 1-800-582-6959.
The following provides information about the Fund's outstanding securities
as of January 31, 2006:
AMOUNT OUTSTANDING
AMOUNT HELD BY THE EXCLUSIVE OF AMOUNT
AMOUNT FUND OR FOR ITS HELD BY THE FUND OR
TITLE OF CLASS AUTHORIZED ACCOUNT FOR ITS ACCOUNT
-------------- ----------- ------------------ -------------------
(UNAUDITED)
Common Shares.......................... Unlimited 0 62,130,161
Preferred Shares....................... Unlimited 0 17,200
Series M............................. 0 3,000
Series TU............................ 0 3,000
Series W............................. 0 3,000
Series TH............................ 0 3,000
Series F............................. 0 3,000
Series A............................. 0 2,200
The following sets forth information about the Fund's outstanding Preferred
Shares as of the dates indicated below:
AVERAGE FAIR
ASSET COVERAGE VALUE PER
PER SHARE $25,000
TOTAL LIQUIDATION ($25,000 DENOMINATION OR
PREFERENCE LIQUIDATION PER SHARE
FISCAL YEAR ENDED OUTSTANDING PREFERENCE) AMOUNT(A)
----------------- ------------------ -------------- ---------------
October 31, 2005........................ $430,000,000 $79,708 $25,000
October 31, 2004........................ $430,000,000 $79,952 $25,000
October 31, 2003(b)..................... $430,000,000 $76,811 $25,000
---------------
(a) Fair value of the Preferred Shares approximates the liquidation preference
because dividend rates payable on the Preferred Shares are determined at
auctions and fluctuate with changes in current market interest rates.
(b) For the period May 28, 2003 (commencement of operations) through October 31,
2003.
17
CAPITALIZATION
The following table sets forth the capitalization of the Fund as of January
31, 2006, and as adjusted to give effect to the issuance of the common shares
offered hereby. As indicated below, common shareholders will bear the offering
costs associated with this offering.
ACTUAL AS ADJUSTED
------------ --------------
(UNAUDITED)
PREFERRED SHARES OUTSTANDING:
Preferred shares, no par value per share, $25,000
stated value per share, at liquidation value;
unlimited shares authorized (no shares issued; and
17,200 shares issued, respectively)............... $430,000,000 $ 430,000,000
COMMON SHAREHOLDERS' EQUITY:
Common shares, no par value per share, unlimited
shares authorized, 62,130,161 (Actual) and
66,030,161 (As Adjusted) shares outstanding*...... $885,876,721 $ 945,863,321
Additional paid-in capital........................... -- --
Undistributed net investment income (loss)........... 1,520,089 1,520,089
Accumulated net realized gain (loss) on investments,
foreign currency transactions and interest rate
swaps............................................. 7,344,692 7,344,692
Net unrealized appreciation (depreciation) on
investments, foreign currency translation and
interest rate swaps............................... 74,229,342 74,229,342
------------ --------------
Net assets applicable to common shares............... $968,970,844 $1,028,957,444
============ ==============
---------------
* None of these outstanding shares are held by or for the account of the Fund.
18
MARKET AND NET ASSET VALUE INFORMATION
The Fund's currently outstanding common shares are, and the common shares
offered by this prospectus, subject to notice of issuance, will be, listed on
the NYSE. The Fund's common shares commenced trading on the NYSE on May 28,
2003.
The Fund's common shares have traded both at a premium and at a discount in
relation to net asset value. Although the Fund's shares recently have been
trading at a premium above net asset value, there can be no assurance that this
will continue after the offering or that the shares will not again trade at a
discount. Shares of closed-end investment companies frequently trade at a
discount from net asset value. See "Risk Factors -- Market Discount Risk."
The following table sets forth for each of the quarters indicated the high
and low closing market prices for common shares of the Fund on the NYSE, and the
net asset value and the premium or discount from net asset value at which the
common shares were trading, expressed as a percentage of net asset value, at
each of the high and low sales price provided. See "Net Asset Value" for
information as to the determination of the Fund's net asset value.
PREMIUM/(DISCOUNT)
MARKET PRICE(1) NET ASSET VALUE TO NET ASSET VALUE(2)
--------------- --------------- ---------------------
QUARTER ENDED HIGH LOW HIGH LOW HIGH LOW
------------- ------ ------ ------ ------ ------- --------
January 31, 2004............... $17.10 $15.72 $15.72 $14.74 8.78% 6.65%
April 30, 2004................. 17.05 14.80 15.26 15.21 11.73% -2.70%
July 31, 2004.................. 15.90 14.00 14.80 14.56 7.43% -3.85%
October 31, 2004............... 16.74 15.72 15.47 14.71 8.21% 6.87%
January 31, 2005............... 17.18 16.25 16.01 15.69 7.31% 3.57%
April 30, 2005................. 17.00 14.72 15.93 15.43 6.72% -4.60%
July 31, 2005.................. 16.83 15.26 15.70 14.64 7.20% 4.23%
October 31, 2005............... 16.74 15.25 15.91 15.05 5.22% 1.33%
January 31, 2006............... 16.31 15.50 15.47 15.29 5.43% 1.37%
April 30, 2006................. 16.60 15.73 15.60 15.24 6.41% 3.22%
---------------
Source of Market Prices: Bloomberg Financial.
(1) Based on high and low closing market price during the respective quarter.
(2) Based on the Fund's computations.
The last reported sale price, net asset value per common share and
percentage premium to net asset value per share of the common shares on June 7,
2006 were $16.86, $15.16 and 11.21%, respectively. As of June 7, 2006, the Fund
had 62,407,199 common shares outstanding and net assets of the Fund were
$946,016,926.
19
PORTFOLIO COMPOSITION
The allocation of the Fund's total investments of $1,343,255,027 by market
sector, as of May 31, 2006, is shown in the following chart. The information in
the chart is unaudited.
(PIE CHART)
Telecommunication Services 2.3
Consumer Discretionary 20.6
Financials 16
Industrials 13.2
Energy 11.3
Information Technology 9.1
Consumer Staples 8.1
Healthcare 7.4
Materials 7.4
Utilities 4.6
The allocation of the Fund's total investments, including cash, of
$1,356,945,056 by security type, as of May 31, 2006, is shown in the following
chart. The information in the chart is unaudited.
(PIE CHART)
Cash 1
Convertible Securities 39.1
High Yield (Fixed Income) 59.9
The Fund is actively managed and the allocations shown in the charts above,
as well as the identity of the market sectors and security types, may change
significantly over time.
20
USE OF PROCEEDS
The net proceeds of this offering will be approximately $59,986,600 (or
approximately $68,796,520 assuming the underwriters exercise the over-allotment
option in full) after payment of offering costs estimated to be approximately
$291,800 and the deduction of the sales load.
The Fund will invest the net proceeds of the offering in accordance with
the Fund's investment objective and policies as stated below. It is presently
anticipated that the Fund will invest substantially all of the net proceeds in
securities that meet the investment objective and policies within two 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. A delay in the anticipated use of
proceeds could lower returns and lower the Fund's distribution for the
outstanding common shares and the common shares offered hereby. See "Investment
Objective and Principal Investment Strategies."
INVESTMENT OBJECTIVE AND PRINCIPAL INVESTMENT STRATEGIES
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.
The Fund starts from a universe of primarily convertible and high yield
non-convertible debt securities, and performs fundamental research to assess
credit. The Fund filters out securities with high probability of bankruptcy,
declining credits, or distressed credits. The Fund also screens issues based on
equity characteristics of the security, such as intrinsic/economic business
value, cash flow generation, and sufficient access to capital. The Fund then
ensures there is sufficient return potential, and assesses relative risk/reward.
Finally, the Fund performs top-down portfolio construction by actively managing
the security mix, overlay macro/industry themes, and diversity 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
21
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 INSTRUMENTS. Calamos may also establish a
"synthetic" convertible instrument by combining separate securities that possess
economic characteristics similar to a convertible security, i.e., an income
component and the right or obligation to convert to an equity security
("convertible component"). The income component, is achieved by investing in
non-convertible, fixed-income securities such as bonds, preferred stocks, money
market instruments and other instruments that provide an income component. The
convertible component is achieved by investing in warrants or options to buy
common stock at a certain exercise price, or options on a stock index. In
establishing a synthetic instrument, Calamos may also pool a basket of
fixed-income securities and a basket of warrants or options that produce the
economic characteristics similar to a convertible security. Within each basket
of fixed-income securities and warrants or options, different companies may
issue the fixed-income and convertible components, which may be purchased
separately and at different times.
The Fund may also purchase synthetic convertible instruments created by
other parties, typically investment banks, including convertible structured
notes. Convertible structured notes are fixed income debentures linked to
equity. Convertible structured notes have the attributes of a convertible
security; however, the investment bank that issued the convertible note assumes
the credit risk associated with the investment, rather than the issuer of the
underlying common stock into which the note is convertible. Purchasing synthetic
convertible instruments may offer more flexibility than purchasing a convertible
security. Different companies may issue the fixed-income and convertible
components, which may be purchased separately and at different times. The Fund's
holdings of synthetic convertible instruments are considered convertible
securities for purposes of the Fund's policy to invest at 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.
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
22
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 ADRs or securities guaranteed by a U.S. person.
RULE 144A SECURITIES. The Fund may invest without limit in Rule 144A
Securities. Calamos, under the supervision of the Board of Trustees, will
consider whether securities purchased under Rule 144A are illiquid and thus
subject to the 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 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,
23
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 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 pro rata portion of the other investment companies' expenses, including
advisory fees. These expenses are in addition to the direct expenses of the
Fund's own operations.
TEMPORARY DEFENSIVE INVESTMENTS. Under unusual market or economic
conditions or for 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
24
repurchase agreement are collateralized with U.S. Treasury and/or agency
obligations with a market value of not less than 100% of the obligations, valued
daily. Collateral is held by the Fund's custodian in a segregated, safekeeping
account for the benefit of the Fund. Repurchase agreements afford the Fund an
opportunity to earn income on temporarily available cash at low risk. In the
event of commencement of bankruptcy or insolvency proceedings with respect to
the seller of the security before repurchase of the security under a repurchase
agreement, the Fund may encounter delay and incur costs before being able to
sell the security. Such a delay may involve loss of interest or a decline in
price of the security. If the court characterizes the transaction as a loan and
the Fund has not perfected a security interest in the security, the Fund may be
required to return the security to the seller's estate and be treated as an
unsecured creditor of the seller. As an unsecured creditor, the Fund would be at
risk of losing some or all of the principal and interest involved in the
transaction.
LENDING OF PORTFOLIO SECURITIES. The Fund may lend portfolio securities to
registered broker-dealers or other institutional investors deemed by Calamos to
be of good standing under agreements which require that the loans be secured
continuously by collateral in cash, cash equivalents or U.S. Treasury bills
maintained on a current basis at an amount at least equal to the market value of
the securities loaned. The Fund continues to receive the equivalent of the
interest or dividends paid by the issuer on the securities loaned as well as the
benefit of an increase and the detriment of any decrease in the market value of
the securities loaned and would also receive compensation based on investment of
the collateral. The Fund would not, however, have the right to vote any
securities having voting rights during the existence of the loan, but 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 or debt securities or borrow to
increase its assets available for investment. The Fund had Preferred Shares
outstanding in an aggregate liquidation preference representing approximately
31% of the Fund's total assets as of June 7, 2006. As a non-fundamental policy,
such preferred shares, debt securities or borrowing may not exceed 38% of the
Fund's total assets. However, the Board of Trustees reserves the right to issue
preferred shares or debt securities or borrow to the extent permitted by the
1940 Act. The Fund generally will not issue preferred shares or debt securities
or borrow unless Calamos expects that the Fund will achieve a greater return on
such leverage than the additional costs the Fund incurs as a result of such
leverage. The Fund also may borrow money as a temporary measure for
extraordinary or emergency purposes, including the payment of dividends and the
settlement of securities transactions which otherwise might require untimely
dispositions of the 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 leverage because Calamos' fees are calculated based on the
Fund's managed assets, which include the proceeds of the issuance of preferred
shares or debt securities or any outstanding borrowings. Consequently, the Fund
and Calamos may have differing interests in determining whether to leverage the
Fund's assets.
The Fund's use of leverage is premised upon the expectation that the Fund's
leverage costs will be lower than the return the Fund achieves on its
investments with the leverage proceeds. Such difference in return may result
from the Fund's higher credit rating or the short-term nature of its borrowing
compared to the long-term nature of its investments. Because Calamos seeks to
invest the Fund's total assets (including the assets obtained from leverage) in
the higher yielding portfolio investments or portfolio investments with the
potential for capital appreciation, the holders of common shares will be the
25
beneficiaries of any incremental return. Should the differential between the
underlying assets and cost of leverage narrow, the incremental return "pick up"
will be reduced. Furthermore, if long-term interest rates rise without a
corresponding increase in the yield on the Fund's portfolio investments 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.
Leverage creates risks which may adversely affect the return for the
holders of common shares, including:
- the likelihood of greater volatility of net asset value and market price
of common shares;
- fluctuations in the dividend rates on any preferred shares or in interest
rates on borrowings and short-term debt;
- increased operating costs, which may reduce the Fund's total return; and
- the potential for a decline in the value of an investment acquired with
borrowed funds, while the Fund's obligations under such borrowing remains
fixed.
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 will be greater than if leverage had not been used. Conversely, if
the income or capital appreciation from the securities purchased with such funds
is not sufficient to cover the cost of leverage or if the Fund incurs capital
losses, the return of the Fund will be less than if leverage had not been used,
and therefore the amount available for distribution to common shareholders as
dividends and other distributions will be reduced or potentially eliminated.
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 debt securities or borrowing will be
subject to dividend payments or interest costs that may or may not exceed the
income and appreciation on the assets purchased. The issuance of additional
classes of preferred shares involves offering expenses and other costs and may
limit the Fund's freedom to pay dividends on common shares or to engage in other
activities. The Fund also may be required to maintain minimum average balances
in connection with borrowings or to pay a commitment or other fee to maintain a
line of credit; either of these requirements would increase the cost of
borrowing over the stated interest rate. The Fund will pay (and common
shareholders will bear) any costs and expenses relating to any borrowings and to
the issuance and ongoing maintenance of preferred shares or debt securities (for
example, distribution related expenses such as a participation fee paid at an
annual rate of 0.25% of Preferred Share liquidation preference to broker-dealers
successfully participating in Preferred Share auctions). Net asset value will be
reduced immediately following any additional offering of preferred shares or
debt securities by the costs of that offering paid by the Fund.
Under the 1940 Act, the Fund is not permitted to issue preferred shares
unless immediately after such issuance the net asset value of the Fund's
portfolio is at least 200% of the liquidation value of the aggregate amount of
outstanding preferred shares (i.e., such liquidation value may not exceed 50% of
the value of the Fund's total assets). Under the 1940 Act, the Fund may only
issue one class of senior securities representing equity. So long as Preferred
Shares are outstanding, additional senior equity securities must rank on a
parity with the Preferred Shares. In addition, the Fund is not permitted to
declare any cash dividend or other distribution on its common shares unless, at
the time of such declaration, the net asset value of the Fund's portfolio
(determined after deducting the amount of such dividend or distribution) is at
least 200% of such liquidation value. Under the 1940 Act, the Fund is not
permitted to incur indebtedness unless immediately after such borrowing the Fund
has an asset coverage of at least 300% of the aggregate outstanding principal
balance of indebtedness (i.e., such indebtedness may not exceed 33 1/3% of the
value of the Fund's total assets). Under the 1940 Act, the Fund may only issue
one class of senior securities representing indebtedness. Additionally, under
the 1940 Act, the Fund may not declare any dividend or other distribution upon
any class of its shares, or purchase any such shares, unless the aggregate
indebtedness of the Fund has, at the time of the declaration of any such
dividend or
26
distribution or at the time of any such purchase, an asset coverage of at least
300% after deducting the amount of such dividend, distribution, or purchase
price, as the case may be.
The Fund is subject to certain restrictions on investments imposed by
guidelines of Standard & Poor's and Fitch, which have issued ratings for the
Preferred Shares and may do so for debt instruments issued by the Fund. These
guidelines 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 that may affect the Fund's
ability to pay dividends and distributions on common shares in certain
instances. The Fund also may be required to pledge its assets to the lenders in
connection with certain types of borrowings. Calamos does not anticipate that
these covenants or restrictions will adversely affect its ability to manage the
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.
The extent to which the Fund employs leverage will depend on many factors,
the most important of which are investment outlook, market conditions and
interest rates. Successful use of a leveraging strategy depends on Calamos'
ability to predict correctly interest rates and market movements. There is no
assurance that a leveraging strategy will be successful during any period in
which it is employed.
EFFECTS OF LEVERAGE
On July 28, 2003, the Fund issued the Preferred Shares with an aggregate
liquidation preference of $430,000,000. The aggregate liquidation preference of
the Preferred Shares represented approximately 31% of the Fund's total assets as
of June 7, 2006. Asset coverage with respect to the Preferred Shares was 320% as
of that date. The dividend rate payable by the Fund on the Preferred Shares
varies based on auctions normally held every 7 or 28 days. As of June 7, 2006, a
dividend rate of 4.65%, 4.80%, 4.85%, 4.80%, 4.65% and 5.00% was in effect for
Preferred Shares Series M, TU, W, TH, F and A, respectively.
The following table illustrates the hypothetical effect on the return to a
holder of the Fund's common shares of the leverage obtained by issuing Preferred
Shares with a liquidation value equal to 33% of the Fund's total assets,
assuming hypothetical annual returns of the Fund's portfolio of minus 10% to
plus 10% and dividends on preferred shares at an annual dividend rate of 4.79%.
The purpose of the table is to assist you in understanding the effects of
leverage. As the table shows, leverage generally increases the return to
shareholders when portfolio return is positive and greater than the cost of
leverage and decreases the return when the portfolio return is negative or less
than the cost of leverage. The figures appearing in the table are hypothetical
and actual returns may be greater or less than those appearing in the table.
Assumed Portfolio Return (Net of Expenses)........... (10)% (5)% 0% 5% 10%
Corresponding Common Share Return.................... (17.29)% (9.82)% (2.36)% 5.10% 12.57%
For further information about leveraging, see "Risk Factors -- Leverage."
INTEREST RATE TRANSACTIONS
In order to reduce the interest rate risk inherent in the Fund's underlying
investments and capital structure, the Fund may, but is not required to, enter
into interest rate swap or cap transactions. Interest rate swaps involve the
Fund's agreement with the swap counterparty to pay a fixed rate payment in
exchange for the counterparty agreeing to pay the Fund a payment at a variable
rate that is expected to approximate the rate of any variable rate payment
obligation on the Fund's leverage. The payment obligations would be based on the
notional amount of the swap.
The Fund may use an interest rate cap, which would require it to pay a
premium to the cap counterparty and would entitle it, to the extent that a
specified variable rate index exceeds a predetermined fixed rate, to receive
from the counterparty payment of the difference based on the notional amount of
such cap. The Fund would use interest rate swaps or caps only with the intent to
reduce or
27
eliminate the risk that an increase in short-term interest rates could have on
common share net earnings as a result of leverage.
The Fund will usually enter into swaps or caps on a net basis; that is, the
two payment streams will be netted out in a cash settlement on the payment date
or dates specified in the instrument, with the Fund receiving or paying, as the
case may be, only the net amount of the two payments. The Fund intends to
maintain in a segregated account with its custodian cash or liquid securities
having a value at least equal to the Fund's net payment obligations under any
swap transaction, marked-to-market daily.
The use of interest rate swaps and caps is a highly specialized activity
that involves investment techniques and risks different from those associated
with ordinary portfolio security transactions. Depending on the state of
interest rates in general, the Fund's use of interest rate swaps or caps could
enhance or harm the overall performance of the common shares. To the extent that
there is a decline in interest rates for maturities equal to the remaining
maturity on the Fund's fixed rate payment obligation under the interest rate
swap or equal to the remaining term of the interest rate cap, the value of the
swap or cap (which initially has a value of zero) could decline, and could
result in a decline in the net asset value of the common shares. If, on the
other hand, such rates were to increase, the value of the swap or cap could
increase, and thereby increase the net asset value of the common shares. As
interest rate swaps or caps approach their maturity, their positive or negative
value due to interest rate changes will approach zero.
In addition, if the short-term interest rates effectively received by the
Fund during the term of an interest rate swap are lower than the Fund's fixed
rate of payment on the swap, the swap will increase the Fund's operating
expenses and reduce common share net earnings. If, on the other hand, the
short-term interest rates effectively received by the Fund are higher than the
Fund's fixed rate of payment on the interest rate swap, the swap would enhance
common share net earnings. In either case, the swap would have the effect of
reducing fluctuations in the Fund's cost of leverage due to changes in
short-term interest rates during the term of the swap.
Buying interest rate caps could enhance the performance of the common
shares by providing a maximum leverage expense. Buying interest rate caps could
also increase the operating expenses of the Fund and decrease the net earnings
of the common shares in the event that the premium paid by the Fund to the
counterparty exceeds the additional amount the Fund would have been required to
pay on its preferred shares due to increases in short-term interest rates during
the term of the cap had it not entered into the cap agreement. The Fund has no
current intention of selling an interest rate swap or cap. The Fund will monitor
any interest rate swaps or caps with a view to ensuring that the Fund remains in
compliance with all applicable tax requirements.
Interest rate swaps and caps do not involve the delivery of securities or
other underlying assets or principal. Accordingly, the risk of loss with respect
to interest rate swaps is limited to the net amount of interest payments that
the Fund is contractually obligated to make. If the counterparty defaults, the
Fund would not be able to use the anticipated net receipts under the swap or cap
to offset the dividend or interest payments on the Fund's leverage. Depending on
whether the Fund would be entitled to receive net payments from the counterparty
on the swap or cap, which in turn would depend on the general state of
short-term interest rates at that point in time, such a default could negatively
impact the performance of the common shares.
Although this will not guarantee that the counterparty does not default,
the Fund will not enter into an interest rate swap or cap transaction with any
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
28
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. An early termination of a cap could result in a termination payment to the
Fund.
29
RISK FACTORS
GENERAL. The Fund is a diversified, closed-end management investment
company designed primarily as a long-term investment and not as a trading tool.
The Fund invests in a diversified portfolio of convertible securities and
non-convertible debt securities. An investment in the Fund's common shares may
be speculative and it involves a high degree of risk. The Fund should not
constitute a complete investment program. Due to the uncertainty in all
investments, there can be no assurance that the Fund will achieve its investment
objective.
MARKET DISCOUNT RISK. The Fund's common shares have traded both at a
premium and at a discount in relation to net asset value. The public offering
price for the common shares represents a 8.27% premium over the per share net
asset value on June 15, 2006; however, there can be no assurance that this
premium will continue after this offering or that the shares will not again
trade at a discount. Shares of closed-end investment companies frequently trade
at a discount from net asset value, but in some cases trade above net asset
value. The risk of the common shares trading at a discount is a risk separate
from the risk of a decline in the Fund's net asset value as a result of
investment activities. Depending on the premium of the Fund's common shares, the
Fund's net asset value may be reduced immediately following this offering by the
offering costs for common shares, including the sales load, which will be borne
entirely by all common shareholders.
Whether shareholders will realize a gain or loss upon the sale of the
Fund's common shares depends upon whether the market value of the shares at the
time of sale is above or below the price the shareholder paid, taking into
account transaction costs for the shares, and is not directly dependent upon the
Fund's net asset value. Because the market value of the Fund's common shares
will be determined by factors such as the relative demand for and supply of the
shares in the market, general market conditions and other factors beyond the
control of the Fund, the Fund cannot predict whether its common shares will
trade at, below or above net asset value, or below or above the public offering
price for the common shares.
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
security's market value tends to reflect the market price of the common stock of
the issuing company when that stock price is greater than the convertible
security's "conversion price." The conversion price is defined as the
predetermined price at which the convertible security could be exchanged for the
associated stock. As the market price of the underlying common stock declines,
the price of the convertible security tends to be influenced more by the yield
of the convertible security. Thus, it may not decline in price to the same
extent as the underlying common stock. In the event of a liquidation of the
issuing company, holders of convertible securities would be paid before the
company's common stockholders. Consequently, the issuer's convertible securities
generally entail less risk than its common stock.
SYNTHETIC CONVERTIBLE INSTRUMENTS. The value of a synthetic convertible
instrument may respond differently to market fluctuations than a convertible
security because a synthetic convertible instrument is composed of two or more
separate securities, each with its own market value. In addition, if the value
of the underlying common stock or the level of the index involved in the
convertible component falls below the exercise price of the warrant or option,
the warrant or option may lose all value. Synthetic convertible instruments
created by other parties have the same attributes of a convertible security;
however, the issuer of the synthetic convertible instrument assumes the credit
risk associated with the investment, rather than the issuer of the underlying
equity security into which the instrument is convertible. Therefore, the Fund is
subject to the credit risk associated with the party creating the synthetic
convertible instrument.
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
30
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 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
31
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 will 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 lower 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
- rising interest rates could result in an increase in the cost of the
Fund's leverage and could adversely affect the ability of the Fund to
meet asset coverage requirements with respect to the leverage.
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.
32
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.
LEVERAGE. The Fund has issued Preferred Shares and may issue additional
preferred shares or borrow money or issue debt securities. The Fund's use of
leverage creates risk. As a non-fundamental policy, such
33
preferred shares, borrowing or debt securities 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.
Leverage creates risks which may adversely affect the return for the
holders of common shares, including:
- the likelihood of greater volatility of net asset value and market price
of common shares;
- fluctuations in the dividend rates on any preferred shares or in interest
rates on borrowings and short-term debt;
- increased operating costs, which may reduce the Fund's total return; and
- the potential for a decline in the value of an investment acquired with
borrowed funds, while the Fund's obligations under such borrowing remain
fixed.
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 debt securities 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. Because Calamos seeks to
invest the Fund's total assets (including the assets obtained from leverage) in
the higher yielding portfolio investments or portfolio investments with the
potential for capital appreciation, the holders of common shares will be the
beneficiaries of the incremental return. Should the differential between the
underlying assets and cost of leverage narrow, the incremental return "pick up"
will be reduced. Furthermore, if long-term interest rates rise without a
corresponding increase in the yield on the Fund's portfolio investments 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 will be greater than if leverage had not been used. Conversely, if
the income or capital appreciation from the securities purchased with such funds
is not sufficient to cover the cost of leverage or if the Fund incurs capital
losses, the return of the Fund will be less than if leverage had not been used,
and therefore the amount available for distribution to common shareholders as
dividends and other distributions will be reduced or potentially eliminated.
Certain types of borrowings may result in the Fund being subject to
covenants in credit agreements, including those relating to asset coverage,
borrowing base and portfolio composition requirements and additional covenants
that may affect the Fund's ability to pay dividends and distributions on common
shares in certain instances. The Fund may also be required to pledge its assets
to the lenders in connection with certain types of borrowings. The Fund is
subject to certain restrictions on investments imposed by guidelines of Standard
& Poor's and Fitch, which have issued ratings for the Preferred Shares and may
do so for short-term debt instruments issued by the Fund. These guidelines may
impose asset coverage or portfolio composition requirements that are more
stringent than those imposed by the 1940 Act.
If the Fund's ability to make dividends and distributions on its common
shares is limited, such limitation could, under certain circumstances, impair
the ability of the Fund to maintain its qualification for taxation as a
regulated investment company, which would have adverse tax consequences for
common shareholders. To the extent that the Fund is required, in connection with
maintaining 1940 Act asset coverage requirements or otherwise, or elects to
redeem any preferred shares or debt securities or prepay any borrowings, the
Fund may need to liquidate investments to fund such redemptions or prepayments.
Liquidation at times of adverse economic conditions may result in capital loss
and reduce returns to common shareholders.
Because Calamos' investment management fee is a percentage of the Fund's
managed assets, Calamos' fee will be higher if the Fund is leveraged and Calamos
will have an incentive to be more aggressive and leverage the Fund. Any
additional use of leverage by the Fund would require approval by
34
the Board of Trustees of the Fund. In considering whether to approve the use of
additional leverage, the Board would be presented with all relevant information
necessary to make a determination whether or not additional leverage would be in
the best interests of the Fund, including information regarding any potential
conflicts of interest.
INTEREST RATE TRANSACTIONS RISK. The Fund may enter into an interest rate
swap or cap transaction in order to reduce the interest rate risk inherent in
the Fund's underlying investments and capital structure. A decline in interest
rates may result in a decline in the value of the swap or cap, which may result
in a decline in the net asset value of the Fund.
Depending on the state of interest rates in general, the Fund's use of
interest rate swap or cap transactions could enhance or harm the overall
performance of the common shares. To the extent there is a decline in interest
rates, the value of the interest rate swap or cap could decline, and could
result in a decline in the net asset value of the common shares. In addition, if
the counterparty to an interest rate swap or cap defaults, the Fund would not be
able to use the anticipated net receipts under the swap or cap to offset the
dividend or interest payments on the Fund's leverage.
Depending on whether the Fund would be entitled to receive net payments
from the counterparty on the swap or cap, which in turn would depend on the
general state of short-term interest rates at that point in time, such a default
could negatively impact the performance of the common shares. In addition, at
the time an interest rate swap or cap transaction reaches its scheduled
termination date, there is a risk that the Fund would not be able to obtain a
replacement transaction or that the terms of the replacement would not be as
favorable as on the expiring transaction. If either of these events occurs, it
could have a negative impact on the performance of the common shares.
If the Fund fails to maintain a required 200% asset coverage of the
liquidation value of the outstanding Preferred Shares or if the Fund loses its
rating on its Preferred Shares or fails to maintain other covenants with respect
to the Preferred Shares, the Fund may be required to redeem some or all of the
Preferred Shares. Similarly, the Fund could be required to prepay the principal
amount of any debt securities or other borrowings. Such redemption or prepayment
would likely result in the Fund seeking to terminate early all or a portion of
any swap or cap transaction. Early termination of a swap could result in a
termination payment by or to the Fund. Early termination of a cap could result
in a termination payment to the Fund. The Fund intends to 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.
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,
35
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 have voting rights in addition to and separate from the voting rights of
common shareholders with respect to certain of these matters. See "Description
of Shares -- Preferred Shares" and "Certain Provisions of the Agreement and
Declaration of Trust and By-Laws." The holders of Preferred Shares, on the one
hand, and the holders of the common shares, on the other, may have interests
that conflict in these situations.
MARKET DISRUPTION RISK. Certain events have a disruptive effect on the
securities markets, such as terrorist attacks (including the terrorist attacks
in the United States on September 11, 2001) war and other geopolitical events,
earthquakes, storms and other disasters. The Fund cannot predict the effects of
similar events in the future on the markets or economy of the U.S. or other
countries. 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.
FORWARD-LOOKING STATEMENTS
Certain statements in this prospectus constitute forward-looking
statements, which involve known and unknown risks, uncertainties and other
factors that may cause the Fund's actual results, levels of activity,
performance or achievements to be materially different from any future results,
levels of activity, performance or achievements expressed or implied by such
forward-looking statements. Such factors include, among others, those listed
under "Risk Factors" in this prospectus and our statement of additional
information. In this prospectus, the Fund uses words such as "anticipates,"
"believes," "expects," "intends" and similar expressions to identify
forward-looking statements.
The forward-looking statements contained in this prospectus include
statements as to:
- the Fund's operating results;
- the Fund's business prospects;
- the impact of investments that the Fund expects to make;
- the Fund's contractual arrangements and relationships with third parties;
- the dependence of the Fund's future success on the general economy and
its impact on the industries in which the Fund invests;
- the Fund's use of financial leverage; and
- the Fund's tax status.
36
The Fund has based the forward-looking statements included in this
prospectus on information available to it on the date of this prospectus, and
the Fund assumes no obligation to update any such forward-looking statements.
Although the Fund undertakes no obligation to revise or update any forward-
looking statements, whether as a result of new information, future events or
otherwise, you are advised to consult any additional disclosures that we may
make directly to you or through reports that we in the future may file with the
Commission, including our annual and semi-annual reports. The Fund acknowledges
that, notwithstanding the foregoing statement, the safe harbor for
forward-looking statements under the Private Securities Litigation Reform Act of
1995 does not apply to the Fund.
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, three of whom are "interested persons" of
the Trust (as defined in the 1940 Act) and four of whom are not "interested
persons." The names and business addresses of the trustees and officers of the
Fund and their principal occupations and other affiliations during the past five
years are set forth under "Management of the Fund" in the statement of
additional information.
INVESTMENT ADVISER
The Fund's investments are managed by Calamos, 2020 Calamos Court,
Naperville, IL. On May 31, 2006 Calamos managed approximately $48.4 billion in
assets of individuals and institutions. Calamos is an indirect subsidiary of
Calamos Asset Management, Inc., whose voting shares are majority-owned by
Calamos Family Partners, Inc., which is controlled by John P. Calamos, Sr. and
the Calamos family. Calamos Asset Management, Inc. is publicly traded on the
NASDAQ exchange under the ticker symbol "CLMS."
INVESTMENT MANAGEMENT AGREEMENT
Subject to the overall authority of the Board of Trustees, Calamos
regularly provides the Fund with investment research, advice and supervision and
furnishes continuously an investment program for the Fund. In addition, Calamos
furnishes for use of the Fund such office space and facilities as the Fund may
require for its reasonable needs, supervises the 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
37
bills; (n) assisting the Fund in determining the amount of dividends and
distributions available to be paid by the Fund to its shareholders, preparing
and arranging for the printing of dividend notices to shareholders, and
providing the transfer and dividend paying agent, the custodian, and the
accounting agent with such information as is required for such parties to effect
the payment of dividends and distributions; and (o) otherwise assisting the Fund
as it may reasonably request in the conduct of the Fund's business, subject to
the direction and control of the Trustees.
Under the investment management agreement, the Fund will pay to Calamos a
fee based on the average weekly managed assets that is computed weekly and paid
on a monthly basis. The fee paid by the Fund is at the annual rate of 0.80% of
managed assets. Because the fees paid to Calamos are determined on the basis of
the Fund's managed assets, Calamos' interest in determining whether to leverage
the Fund may differ from the interests of the Fund 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)
--------------------- --------------- --------------------- ---------------
2006(1)................... 0.10% 2009...................... 0.07%
2007...................... 0.10% 2010...................... 0.05%
2008...................... 0.10% 2011...................... 0.03%
---------------
(1) The annual rate of the management fee waived for the periods ending May 31,
2003, 2004 and 2005 was 0.10%.
Calamos has not agreed to waive any portion of its management fee beyond
May 31, 2011.
38
PORTFOLIO MANAGERS
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
Chairman, CEO and Co-Chief Investment Officer of Calamos and Nick P. Calamos has
been Senior Executive Vice President and Co-Chief Investment Officer of Calamos.
For over 20 years, the Calamos management team has managed money for their
clients in convertible, high yield and global strategies. Furthermore, Calamos
has extensive experience investing in foreign markets through its convertible
securities and high yield securities strategies. Such experience has included
investments in established as well as emerging foreign markets. The Fund's
statement of additional information has additional information about the
portfolio managers, including other accounts they manage, their ownership of the
Fund and their compensation structure.
FUND ACCOUNTING
Under the arrangements with State Street to provide fund accounting
services, State Street provides certain administrative and accounting services
to the Fund and such other funds advised by Calamos that may be part of those
arrangements (the Fund and such other fund are collectively referred to as the
"Calamos Funds") as described more fully in the statement of additional
information. For the services rendered to the Calamos Funds, State Street
receives fees based on the combined managed assets of the Calamos Funds
("Combined Assets"). Each fund of the Calamos Funds pays its pro-rata share of
the fees payable to State Street described below based on relative managed
assets of each fund. State Street receives a fee at the annual rate of .009% for
the first $5.0 billion of Combined Assets, .0075% for the next $5.0 billion of
Combined Assets, .005% for the next $5.0 billion of Combined Assets and .0035%
for the Combined Assets in excess of $15.0 billion. Because the fees payable to
State Street are based on the managed assets of the Calamos Funds, the fees
increase as the Calamos Funds increase their leverage.
In addition, Calamos also provides certain other financial accounting
services to the Calamos Funds described more fully in the statement of
additional information. For providing those services, Calamos receives a fee at
the annual rate of .0175% on the first $1 billion of the daily average net
assets of the Calamos Funds; .0150% on the next $1 billion of the daily average
net assets of the Calamos Funds; and .0110% on the daily average net assets of
the Calamos Funds above $2 billion ("financial accounting service fee"). Each
fund of the Calamos Funds will pay its pro-rata share of the financial
accounting service fee to Calamos based on relative net assets of each fund.
DIVIDENDS AND DISTRIBUTIONS; AUTOMATIC DIVIDEND REINVESTMENT PLAN
DIVIDENDS AND DISTRIBUTIONS
The Fund has made regular monthly distributions to its common shareholders
of $0.1219 per share since August 2003. Additionally, the Fund made a one-time
distribution of $0.0920 per share in January 2006.
The Fund currently intends to make monthly distributions to common
shareholders at a level rate established by the Board of Trustees. The rate may
be modified by the Board of Trustees from time to time. Monthly distributions
may include net investment income, net realized short-term capital gain and, if
necessary, return of capital. Net realized short-term capital gains distributed
to common shareholders will be taxed as ordinary income. In addition, one
distribution per calendar year may include net realized long-term capital gains.
There is no guarantee that the Fund will realize capital gains in any given
year. Pursuant to the requirements of the 1940 Act and other applicable laws, a
notice would accompany each monthly distribution with respect to the estimated
source of the distribution made. Distributions are subject to
re-characterization for federal income tax purposes after the end of the fiscal
year. The Fund may at times in its discretion pay out less than the entire
amount of net investment income earned in any particular period and may at times
pay out such accumulated undistributed income in addition to net investment
income earned in other periods in order to permit the Fund to maintain its level
distribution policy. As a result, the dividend paid by the Fund to holders of
common shares for any particular period may be more or less than the amount of
net investment income earned by the Fund during such period. In
39
addition, in order to make such distributions, the Fund might have to sell a
portion of its investment portfolio at a time when independent investment
judgment might not dictate such action.
For U.S. federal income tax purposes, the Fund is required to distribute
substantially all of its net investment income and net realized gains each year
to both reduce its federal income tax liability and to avoid a potential excise
tax. Accordingly, the Fund intends to distribute all or substantially all of its
net investment income and all net realized capital gains, if any. Therefore, the
Fund's final distribution for each calendar year would include any remaining net
investment income and net realized capital gains, if any, undistributed during
the year.
If, for any calendar year, the Fund's total distributions exceeded net
investment income and net realized capital gains (the "Excess"), the Excess,
distributed from the Fund's assets, would generally be treated as dividend
income to the extent of the Fund's current and accumulated earnings and profits.
Thereafter, such Excess would be treated as a tax-free return of capital up to
the amount of the common shareholder's tax basis in his, her or its common
shares, with any amounts exceeding such basis treated as gain from the sale of
common shares. See "U.S. Federal Income Tax Matters."
In the event the Fund distributed the Excess, such distribution would
decrease the Fund's total assets and, therefore, have the likely effect of
increasing the Fund's expense ratio. There is a risk that the Fund would not
eventually realize capital gains in an amount corresponding to a distribution of
the Excess.
In January 2004, Calamos, on behalf of itself and certain funds, filed an
exemptive application with the Commission seeking an order under the 1940 Act
permitting those funds to make periodic distributions of long-term capital
gains. The application may be amended to include the Fund as a party. There is
no guarantee that the Fund will receive such exemptive order. The staff of the
Commission has indicated that it has suspended the processing of exemptive
applications requesting the type of relief referenced above, pending review by
the staff of the results of an industry-wide inspection focusing on the dividend
practices of closed-end investment companies. There can be no assurance as to
when that review might be completed or whether, following that review, the staff
would process such applications or grant such relief.
Under the 1940 Act, the Fund is not permitted to incur indebtedness unless
immediately after such incurrence the Fund has an asset coverage of at least
300% of the aggregate outstanding principal balance of indebtedness.
Additionally, under the 1940 Act, the Fund may not declare any dividend or other
distribution upon any class of its capital shares, or purchase any such capital
shares, unless the aggregate indebtedness of the Fund has, at the time of the
declaration of any such dividend or distribution or at the time of any such
purchase, an asset coverage of at least 300% after deducting the amount of such
dividend, distribution, or purchase price, as the case may be.
While any Preferred Shares are outstanding, the Fund may not declare any
dividend or other distribution on its common shares, unless at the time of such
declaration, (1) all accumulated preferred dividends have been paid and (2) the
net asset value of the Fund's portfolio (determined after deducting the amount
of such dividend or other distribution) is at least 200% of the liquidation
value of the outstanding preferred shares (expected to be equal to the original
purchase price per share plus any accumulated and unpaid dividends thereon).
In addition to the limitations imposed by the 1940 Act described above,
certain lenders may impose additional restrictions on the payment of dividends
or distributions on the common shares in the event of a default on the Fund's
borrowings. If the Fund's ability to make distributions on its common shares is
limited, such limitation could, under certain circumstances, impair the ability
of the Fund to maintain its qualification for taxation as a regulated investment
company, which would have adverse tax consequences for shareholders. See
"Leverage" and "U.S. Federal Income Tax Matters."
See "-- Automatic Dividend Reinvestment Plan" for information concerning
the manner in which dividends and distributions to common shareholders may be
automatically reinvested in common shares. Dividends and distributions may be
taxable to shareholders whether they are reinvested in shares of the Fund or
received in cash.
40
The yield on the Fund's common shares will vary from period to period
depending on factors including, but not limited to, market conditions, the
timing of the Fund's investment in portfolio securities, the securities
comprising the Fund's portfolio, changes in interest rates including changes in
the relationship between short-term rates and long-term rates, the amount and
timing of the use of borrowings and other leverage by the Fund, the effects of
leverage on the common shares discussed above under "Leverage," the timing of
the investment of leverage proceeds in portfolio securities, the Fund's net
assets and its operating expenses. Consequently, the Fund cannot guarantee any
particular yield on its common shares and the yield for any given period is not
an indication or representation of future yields on the Fund's common shares.
AUTOMATIC DIVIDEND REINVESTMENT PLAN
Pursuant to the Fund's Automatic Dividend Reinvestment Plan ("Plan"),
unless a shareholder is ineligible or elects otherwise, all dividend and capital
gains distributions are automatically reinvested by The Bank of New York, as
agent for shareholders in administering the Plan ("Plan Agent"), in additional
common shares of the Fund. Shareholders who elect not to participate in the Plan
will receive all dividends and distributions payable in cash paid by check
mailed directly to the shareholder of record (or, if the shares are held in
street or other nominee name, then to such nominee) by Plan Agent, as dividend
paying agent. Such shareholders may elect not to participate in the Plan and to
receive all dividends and distributions in cash by sending written instructions
to Plan Agent, as dividend paying agent, at the address set forth below.
Participation in the Plan is completely voluntary and may be terminated or
resumed at any time without penalty by giving notice in writing to the Plan
Agent; such termination will be effective with respect to a particular dividend
or distribution if notice is received prior to the record date for the
applicable distribution.
Whenever the Fund declares a dividend or distribution payable either in
shares or in cash, non-participants in the Plan will receive cash, and
participants in the Plan will receive the equivalent in shares of common shares.
The shares are acquired by the Plan Agent for the participant's account,
depending upon the circumstances described below, either (i) through receipt of
additional common shares from the Fund ("newly issued shares") or (ii) by
purchase of outstanding common shares on the open market ("open-market
purchases") on the NYSE or elsewhere. If, on the payment date, the net asset
value per share of the common shares is equal to or less than the market price
per common share plus estimated brokerage commissions (such condition being
referred to herein as "market premium"), the Plan Agent will receive newly
issued shares from the Fund for each participant's account. The number of newly
issued common shares to be credited to the participant's account will be
determined by dividing the dollar amount of the dividend or distribution by the
greater of (i) the net asset value per common share on the payment date, or (ii)
95% of the market price per common share on the payment date.
If, on the payment date, the net asset value per common share exceeds the
market price plus estimated brokerage commissions (such condition being referred
to herein as "market discount"), the Plan Agent has until the last business day
before the next date on which the shares trade on an "ex-dividend" basis or in
no event more than 30 days after the payment date ("last purchase date") to
invest the dividend or distribution amount in shares acquired in open-market
purchases. It is contemplated that the Fund will pay monthly income dividends.
Therefore, the period during which open-market purchases can be made will exist
only from the payment date on the dividend through the date before the next ex-
dividend date, which typically will be approximately ten days. The weighted
average price (including brokerage commissions) of all common shares purchased
by the Plan Agent as Plan Agent will be the price per common share allocable to
each participant. If, before the Plan Agent has completed its open-market
purchases, the market price of a common share exceeds the net asset value per
share, the average per share purchase price paid by the Plan Agent may exceed
the net asset value of the Fund's shares, resulting in the acquisition of fewer
shares than if the dividend had been paid in newly issued shares on the payment
date. Because of the foregoing difficulty with respect to open-market purchases,
the Plan provides that if the Plan Agent is unable to invest the full dividend
amount in open-market purchases during the purchase period or if the market
discount shifts to a market premium during the purchase
41
period, the Plan Agent will cease making open-market purchases and will invest
the uninvested portion of the dividend or distribution amount in newly issued
shares at the close of business on the last purchase date.
The Plan Agent maintains all shareholders' accounts in the Plan and
furnishes written confirmation of each acquisition made for the participant's
account as soon as practicable, but in no event later than 60 days after the
date thereof. Shares in the account of each Plan participant will be held by the
Plan Agent in non-certificated form in the Plan Agent's name or that of its
nominee, and each shareholder's proxy will include those shares purchased or
received pursuant to the Plan. The Plan Agent will forward all proxy
solicitation materials to participants and vote proxies for shares held pursuant
to the Plan first in accordance with the instructions of the participants then
with respect to any proxies not returned by such participant, in the same
proportion as the Plan Agent votes the proxies returned by the participants.
There will be no brokerage charges with respect to shares issued directly
by the Fund as a result of dividends or distributions payable either in shares
or in cash. However, each participant will pay a pro rata share of brokerage
commissions incurred with respect to the Plan Agent's open-market purchases in
connection with the reinvestment of dividends or distributions. If a participant
elects to have the Plan Agent sell part or all of his or her common shares and
remit the proceeds, such participant will be charged his or her pro rata share
of brokerage commissions on the shares sold, plus a $15 transaction fee.
The automatic reinvestment of dividends and distributions will not relieve
participants of any federal, state or local income tax that may be payable (or
required to be withheld) on such dividends. See "U.S. Federal Income Tax
Matters."
Shareholders participating in the Plan may receive benefits not available
to shareholders not participating in the Plan. If the market price plus
commissions of the Fund's shares is higher than the net asset value,
participants in the Plan will receive shares of the Fund at less than they could
otherwise purchase them and will have shares with a cash value greater than the
value of any cash distribution they would have received on their shares. If the
market price plus commissions is below the net asset value, participants receive
distributions of shares with a net asset value greater than the value of any
cash distribution they would have received on their shares. However, there may
be insufficient shares available in the market to make distributions in shares
at prices below the net asset value. Also, since the Fund does not redeem its
shares, the price on resale may be more or less than the net asset value. See
"U.S. Federal Income Tax Matters" for a discussion of tax consequences of the
Plan.
Experience under the Plan may indicate that changes are desirable.
Accordingly, the Fund reserves the right to amend or terminate the Plan if in
the judgment of the Board of Trustees such a change is warranted. The Plan may
be terminated by the Plan Agent or the Fund upon notice in writing mailed to
each participant at least 60 days prior to the effective date of the
termination. Upon any termination, the Plan Agent will cause a certificate or
certificates to be issued for the full shares held by each participant under the
Plan and cash adjustment for any fraction of a common share at the then current
market value of the common shares to be delivered to him or her. If preferred, a
participant may request the sale of all of the common shares held by the Plan
Agent in his or her Plan account in order to terminate participation in the
Plan. If such participant elects in advance of such termination to have the Plan
Agent sell part or all of his shares, the Plan Agent is authorized to deduct
from the proceeds a $15.00 fee plus the brokerage commissions incurred for the
transaction. If a participant has terminated his or her participation in the
Plan but continues to have common shares registered in his or her name, he or
she may re-enroll in the Plan at any time by notifying the Plan Agent in writing
at the address above. The terms and conditions of the Plan may be amended by the
Plan Agent or the Fund at any time but, except when necessary or appropriate to
comply with applicable law or the rules or policies of the Commission or any
other regulatory authority, only by mailing to each participant appropriate
written notice at least 30 days prior to the effective date thereof. The
amendment shall be deemed to be accepted by each participant unless, prior to
the effective date thereof, the Plan Agent receives notice of the termination of
the participant's account under the Plan. Any such amendment may include an
appointment by the Plan Agent of a successor Plan Agent, subject to the prior
written approval of the successor Plan Agent by the
42
Fund. There is no direct service charge to participants in the Plan; however,
the Fund reserves the right to amend the Plan to include a service charge
payable by the participants.
All correspondence concerning the Plan should be directed to the Plan Agent
at Dividend Reinvestment Department, P.O. Box 1958, Newark, NJ 07101-9774.
CLOSED-END FUND STRUCTURE
The Fund is a diversified, closed-end management investment company
(commonly referred to as a closed-end fund) which commenced investment
operations in May 2003. Closed-end funds differ from open-end management
investment companies (which are generally referred to as mutual funds) in that
closed-end funds generally list their shares for trading on a stock exchange and
do not redeem their shares at the request of the shareholder. This means that if
you wish to sell your shares of a closed-end fund you must trade them on the
market like any other stock at the prevailing market price at that time. In a
mutual fund, if the shareholder wishes to sell shares of the fund, the mutual
fund will redeem or buy back the shares at "net asset value." Also, mutual funds
generally offer new shares on a continuous basis to new investors, and
closed-end funds generally do not. The continuous inflows and outflows of assets
in a mutual fund can make it difficult to manage the fund's investments. By
comparison, closed-end funds are generally able to stay more fully invested in
securities that are consistent with their investment objectives and also have
greater flexibility to make certain types of investments and to use certain
investment strategies, such as financial leverage and investments in illiquid
securities.
Shares of closed-end funds frequently trade at a discount to their net
asset value. To the extent the common shares do trade at a discount, the Fund's
Board of Trustees may from time to time engage in open-market repurchases or
tender offers for shares after balancing the benefit to shareholders of the
increase in the net asset value per share resulting from such purchases against
the decrease in the assets of the Fund and potential increase in the expense
ratio of expenses to assets of the Fund. The Board of Trustees believes that in
addition to the beneficial effects described above, any such purchases or tender
offers may result in the temporary narrowing of any discount but will not have
any long-term effect on the level of any discount. We cannot guarantee or
assure, however, that the Fund's Board of Trustees will decide to engage in any
of these actions. Nor is there any guarantee or assurance that such actions, if
undertaken, would result in the shares trading at a price equal or close to net
asset value per share. The Board of Trustees might also consider converting the
Fund to an open-end mutual fund, which would also require a vote of the
shareholders of the Fund. Conversion of the Fund to an open-end mutual fund
would require an amendment to the Fund's Declaration of Trust. Such an amendment
would require the favorable vote of the holders of at least 75% of the Fund's
outstanding shares (including any preferred shares) entitled to be voted on the
matter, voting as a single class (or a majority of such shares if the amendment
were previously approved, adopted or authorized by 75% of the total number of
Trustees fixed in accordance with the By-laws), and, assuming preferred shares
are issued, the affirmative vote of a majority of outstanding preferred shares,
voting as a separate class.
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 common
shares of the Fund. This 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"), possibly with retroactive effect. No attempt is made to present a
detailed explanation of U.S. federal income tax concerns affecting the Fund and
its shareholders, and the discussion set forth herein does not constitute tax
advice. In addition, no attempt is made to present state, local or foreign tax
concerns or tax concerns applicable to an investor with a special tax status
such as a financial institution, tax-exempt entity, dealer in securities or
non-U.S. investors. Furthermore, this discussion does not reflect possible
application of the alternative minimum tax. INVESTORS ARE URGED TO CONSULT THEIR
OWN TAX ADVISORS TO DETERMINE THE TAX CONSEQUENCES TO THEM BEFORE INVESTING IN
THE FUND.
43
The Fund has elected to be treated, and intends to qualify each year, as a
"regulated investment company" under Subchapter M of the Internal Revenue Code
of 1986, as amended (the "Code"), so that it will not pay U.S. federal income
tax on income and capital gains timely distributed to shareholders. If the Fund
qualifies as a regulated investment company and distributes to its shareholders
at least 90% of the sum of (i) its "investment company taxable income" as that
term is defined in the Code (which includes, among other things, dividends,
taxable interest, the excess of any net short-term capital gains over net
long-term capital losses and certain net foreign exchange gains as reduced by
certain deductible expenses) without regard to the deduction for dividends paid,
and (ii) the excess of its gross tax-exempt interest, if any, over certain
disallowed deductions, the Fund will be relieved of U.S. federal income tax on
any income of the Fund, including long-term capital gains, distributed to
shareholders. However, if the Fund retains any investment company taxable income
or "net capital gain" (i.e., the excess of net long-term capital gain over net
short-term capital loss), it will be subject to U.S. federal income tax at
regular corporate federal income tax rates (currently at the maximum rate of
35%) on the amount retained. The Fund intends to distribute at least annually
all or substantially all of its investment company taxable income, net
tax-exempt interest, and net capital gain. Under the Code, the Fund will
generally be subject to a nondeductible 4% federal excise tax on the portion of
its undistributed ordinary income and capital gains if it fails to meet certain
distribution requirements with respect to each calendar year. The Fund intends
to make distributions in a timely manner and accordingly does not expect to be
subject to this excise tax.
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 such event, the Fund's distributions, to the extent derived from the Fund's
current or accumulated earnings and profits, would generally constitute ordinary
dividends, which would generally be eligible for the dividends received
deduction available to corporate shareholders, and non-corporate shareholders
would generally be able to treat such distributions as "qualified dividend
income" eligible for reduced rates of U.S. federal income taxation in taxable
years beginning on or before December 31, 2010.
Unless a shareholder is ineligible to participate or elects otherwise, all
distributions will be automatically reinvested in additional shares of common
stock of the Fund pursuant to the Plan. For taxpayers subject to U.S. federal
income tax, all dividends will generally be taxable regardless of whether a
shareholder takes them in cash or they are reinvested pursuant to the Plan in
additional shares of the Fund. Distributions of the fund's investment company
taxable income will generally be taxable as ordinary income to the extent of the
Fund's current and accumulated earnings and profits. However, a portion of such
distributions derived from certain corporate dividends, if any, may qualify for
either the dividends received deduction available to corporate shareholders
under Section 243 of the Code or the reduced rates of U.S. federal income
taxation for "qualified dividend income" currently available to noncorporate
shareholders under Section 1(h)(11) of the Code, provided certain holding period
and other requirements are met. Distributions of net capital gain, if any, are
generally taxable as long-term capital gains for U.S. federal income tax
purposes without regard to the length of time a shareholder has held shares of
the Fund. A distribution of an amount in excess of the Fund's current and
accumulated earnings and profits, if any, will be treated by a shareholder as a
tax-free return of capital, which is applied against and reduces the
shareholder's basis in his, her or its shares. To the extent that the amount of
any such distribution exceeds the shareholder's basis in his or her shares, the
excess will be treated by the shareholder as gain from the sale or exchange of
shares. The U.S. federal income tax status of all dividends and distributions
will be designated by the Fund and reported to the shareholders annually.
If the Fund retains any net capital gain, the Fund may designate the
retained amount as undistributed capital gains in a notice to shareholders who,
if subject to U.S. federal income tax on long-term capital gains, (i) will be
required to include in income as long-term capital gain, their proportionate
share of such undistributed amount, and (ii) will be entitled to credit their
proportionate share of the 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
44
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 paid
by the shareholders.
If a shareholder's distributions are automatically reinvested pursuant to
the Plan and the Plan Agent invests the distribution in shares acquired on
behalf of the shareholder in open-market purchases, for U.S. federal income tax
purposes, the shareholder will be treated as having received a taxable
distribution in the amount of the cash dividend that the shareholder would have
received if the shareholder had elected to receive cash. If a shareholder's
distributions are automatically reinvested pursuant to the Plan and the Plan
Agent invests the distribution in newly issued shares of the Fund, the
shareholder will be treated as receiving a taxable distribution equal to the
fair market value of the stock the shareholder receives.
Certain of the Fund's investment practices are subject to special and
complex federal income tax provisions that may, among other things, (i)
disallow, suspend or otherwise limit the allowance of certain losses or
deductions, (ii) convert tax-advantaged, long-term capital gains and qualified
dividend income into higher taxed short-term capital gain or ordinary income,
(iii) convert an ordinary loss or a deduction into a capital loss (the
deductibility of which is more limited), (iv) cause the Fund to recognize income
or gain without a corresponding receipt of cash, (v) adversely affect the timing
as to when a purchase or sale of stock or securities is deemed to occur, and
(vi) adversely alter the characterization of certain complex financial
transactions. The Fund will monitor its transactions and may make certain tax
elections where applicable in order to mitigate the effect of these provisions,
if possible.
Dividends, interest and some capital gains received by the Fund on foreign
securities may be subject to foreign tax withholdings or other foreign taxes. If
applicable, the Fund may make an election under the Code to pass through such
taxes to shareholders of the Fund. If such an election is not made, any foreign
taxes paid or accrued by the Fund will represent an expense of the Fund. If an
election is made, shareholders will generally be able to claim a credit or
deduction on their federal income tax return for, and will be required to treat
as part of the amounts distributed to them, their pro rata portion of the taxes
paid by the Fund to foreign countries with respect to such income. The Fund does
not currently anticipate that it will qualify to make such an election.
Sales and other dispositions of the Fund's shares generally are taxable
events for shareholders that are subject to U.S. federal income tax.
Shareholders should consult their own tax advisors with reference to their
individual circumstances to determine whether any particular transaction in the
Fund's shares is properly treated as a sale or exchange for federal income tax
purposes, as the following discussion assumes, and the tax treatment of any
gains or losses recognized in such transactions. Gain or loss will generally be
equal to the difference between the amount of cash and the fair market value of
other property received and the shareholder's adjusted tax basis in the shares
sold or exchanged. Such gain or loss will generally be characterized as capital
gain or loss and will be long-term or short-term depending on the shareholder's
holding period in the shares disposed. However, 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. The ability to deduct capital losses may be limited. In
addition, losses on sales or other dispositions of shares may be disallowed
under the "wash sale" rules in the event that substantially identical shares are
acquired (including those made pursuant to reinvestment of dividends) within a
period of 61 days beginning 30 days before and ending 30 days after a sale or
other disposition of shares. In such a case, the disallowed portion of any loss
generally would be included in the U.S. federal tax basis of the shares
acquired.
The Fund is required in certain circumstances to backup withhold at a
current rate of 28% on reportable payments including dividends, capital gain
distributions, and proceeds of sales or other dispositions of the Fund's shares
paid to certain holders of the Fund's 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
45
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 THEREUNDER CURRENTLY 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 FEDERAL INCOME 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
BEFORE MAKING AN INVESTMENT IN THE FUND.
NET ASSET VALUE
Net asset value per share is determined no less frequently than the close
of regular session trading on the New York Stock Exchange (usually 4:00 p.m.,
Eastern time), on the last business day in each week, or such other time as the
Fund may determine. Net asset value is calculated by dividing the value of all
of the securities and other assets of the Fund, less its liabilities (including
accrued expenses and indebtedness) and the aggregate liquidation value of any
outstanding preferred shares, by the total number of common shares outstanding.
Currently, the net asset values of shares of publicly traded closed-end
investment companies investing in debt securities are published in Barron's, the
Monday edition of The Wall Street Journal and the Monday and Saturday editions
of The New York Times.
The values of the securities in the Fund are based on market prices from
the primary market in which they are traded. As a general rule, equity
securities listed on a U.S. securities exchange are valued at the last current
reported sale price as of the time of valuation. Securities quoted on the NASDAQ
National Market System are valued at the Nasdaq Official Closing Price ("NOCP"),
as determined by Nasdaq, or lacking an NOCP, at the last current reported sale
price as of the time of valuation. Bonds and other fixed-income securities that
are traded over the counter and on an exchange will be valued according to the
broadest and most representative market, and it is expected this will ordinarily
be the over-the-counter market. The foreign securities held by the Fund are
traded on exchanges throughout the world. Trading on these foreign securities
exchanges is completed at various times throughout the day and often does not
coincide with the close of trading on the NYSE. The value of foreign securities
is generally determined at the close of trading of the exchange on which the
securities are traded or at the close of trading on the NYSE, whichever is
earlier.
If market prices are not readily available or the 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 determined in accordance with
procedures adopted by the Board of Trustees, which may include a systematic fair
valuation model provided by an independent service provider.
The Fund also may use fair value pricing if the value of a security it
holds has been affected by events occurring before the Fund's pricing time, but
after the close of the primary markets or exchanges on which the security is
traded. When fair value pricing is employed, the prices of portfolio securities
used to calculate the Fund's net asset value may differ from market quotations
or official closing prices for the same securities. This means that the Fund may
value those securities higher or lower than another fund that uses market
quotations or official closing prices.
The fair value pricing procedures recognize that volatility in the U.S.
markets may cause prices of foreign securities determined at the close of the
foreign market or exchange on which the securities are traded to no longer be
reliable when the Fund's net asset value is determined. As a result, at least
some of the Fund's foreign securities may be valued at their fair value in
accordance with the fair value pricing procedures on any day the Fund calculates
its net asset value.
Values of foreign securities are translated from local currencies into U.S.
dollars using current exchange rates. Trading in securities in foreign markets
takes place on some days (including some
46
weekend days and U.S. holidays) when the NYSE is not open, and does not take
place on some days when the NYSE is open. So, the value of the Fund's portfolio
may be affected on days when the Fund does not calculate its net asset value.
DESCRIPTION OF SHARES
The Fund is authorized to issue an unlimited number of common shares,
without par value. The Fund is also authorized to issue preferred shares. The
Board of Trustees is authorized to classify and reclassify any unissued shares
into one or more additional classes or series of shares. As of June 7, 2006, the
Fund had 62,407,199 common shares outstanding and 17,200 Preferred Shares
outstanding. The Board of Trustees may establish such series or class from time
to time by setting or changing in any one or more respects the designations,
preferences, conversion or other rights, voting powers, restrictions,
limitations as to dividends, qualifications or terms or conditions of redemption
of such shares and pursuant to such classification or reclassification to
increase or decrease the number of authorized shares of any existing class or
series. The Board of Trustees, without shareholder approval, is authorized to
amend the Agreement and Declaration of Trust and By-laws to reflect the terms of
any such class or series. The Fund is also authorized to issue other securities,
including debt securities.
COMMON SHARES
Common shares, when issued and outstanding, will be fully paid and
non-assessable. Shareholders are entitled to share pro rata in the net assets of
the Fund available for distribution to common shareholders upon liquidation of
the Fund. Common shareholders are entitled to one vote for each share held.
So long as any shares of the Fund's Preferred Shares are outstanding,
holders of common shares will not be entitled to receive any net income of or
other distributions from the Fund unless all accumulated dividends on Preferred
Shares have been paid, and unless asset coverage (as defined in the 1940 Act)
with respect to Preferred Shares would be at least 200% after giving effect to
such distributions. See "Leverage."
The Fund will send unaudited reports at least semiannually and audited
annual financial statements to all of its shareholders.
Other offerings of common shares, if made, will require approval of the
Board of Trustees and will be subject to the requirement of the 1940 Act that
common shares may not be sold at a price below the then-current net asset value,
exclusive of underwriting discounts and commissions, except in limited
circumstances including in connection with an offering to existing shareholders.
PREFERRED SHARES
On July 28, 2003, the Fund issued the Preferred Shares, liquidation
preference of $25,000 per share ($430,000,000 in the aggregate). As a
non-fundamental policy, the Fund may not issue preferred shares (or borrow money
and issue debt securities) with an aggregate liquidation preference (or
aggregate principal amount) exceeding 38% of the Fund's total assets. However,
the Board of Trustees reserves the right to issue preferred shares to the extent
permitted by the 1940 Act, which currently limits the aggregate liquidation
preference of all outstanding preferred shares to 50% of the value of the Fund's
total assets less the Fund's liabilities and indebtedness. The Preferred Shares
pay dividends at dividend rates based on auctions normally held every 7 or 28
days. Under the 1940 Act, the Fund may only issue one class of preferred shares.
So long as Preferred Shares are outstanding, additional issuances of preferred
shares must be of the same class as Preferred Shares and may not have preference
or priority over the Preferred Shares upon the distribution of assets of the
Fund. It is expected that any additional issuance of preferred shares would be
additional shares of an existing series of Preferred Shares or shares of an
additional series of Preferred Shares.
In the event of any voluntary or involuntary liquidation, dissolution or
winding up of the Fund, the holders of Preferred Shares will be entitled to
receive a preferential liquidating distribution, which is
47
expected to equal the original purchase price per Preferred Share plus
accumulated and unpaid dividends, whether or not declared, before any
distribution of assets is made to holders of common shares. After payment of the
full amount of the liquidating distribution to which they are entitled, the
holders of Preferred Shares will not be entitled to any further participation in
any distribution of assets by the Fund.
The 1940 Act requires that the holders of any Preferred Shares, voting
separately as a single class, have the right to elect at least two Trustees at
all times. The remaining Trustees will be elected by holders of common shares
and Preferred Shares, voting together as a single class. In addition, subject to
the prior rights, if any, of the holders of any other class of senior securities
outstanding, the holders of any Preferred Shares have the right to elect a
majority of the Trustees at any time two years' accumulated dividends on any
preferred shares are unpaid. The 1940 Act also requires that, in addition to any
approval by shareholders that might otherwise be required, the approval of the
holders of a majority of any outstanding Preferred Shares, voting separately as
a class, would be required to (1) adopt any plan of reorganization that would
adversely affect the Preferred Shares, and (2) take any action requiring a vote
of security holders under Section 13(a) of the 1940 Act, including, among other
things, changes in the Fund's subclassification as a closed-end investment
company or changes in its fundamental investment restrictions. See "Certain
Provisions of the Agreement and Declaration of Trust and By-Laws." As a result
of these voting rights, the Fund's ability to take any such actions may be
impeded to the extent that there are any Preferred Shares outstanding. Except as
otherwise indicated in this prospectus and except as otherwise required by
applicable law, holders of Preferred Shares have equal voting rights with
holders of common shares (one vote per share, unless otherwise required by the
1940 Act) and will vote together with holders of common shares as a single
class.
The affirmative vote of the holders of a majority of the outstanding
Preferred Shares, voting as a separate class, will be required to amend, alter
or repeal any of the preferences, rights or powers of holders of Preferred
Shares so as to affect materially and adversely such preferences, rights or
powers, or to increase or decrease the authorized number of Preferred Shares.
The class vote of holders of Preferred Shares described above will in each case
be in addition to any other vote required to authorize the action in question.
The terms of the Preferred Shares provide that (i) they are redeemable by
the Fund in whole or in part at the original purchase price per share plus
accrued dividends per share, (ii) the Fund may tender for or purchase Preferred
Shares and (iii) the Fund may subsequently resell any shares so tendered for or
purchased. Any redemption or purchase of Preferred Shares by the Fund will
reduce the leverage applicable to the common shares, while any resale of shares
by the Fund will increase that leverage.
48
CERTAIN PROVISIONS OF THE AGREEMENT AND
DECLARATION OF TRUST AND BY-LAWS
The Fund's Agreement and Declaration of Trust includes provisions that
could have the effect of limiting the ability of other entities or persons to
acquire control of the Fund or to change the composition of its Board of
Trustees and could have the effect of depriving shareholders of an opportunity
to sell their shares at a premium over prevailing market prices by discouraging
a third party from seeking to obtain control of the Fund. These provisions,
however, have the advantage of potentially requiring persons seeking control of
the Fund to negotiate with its management regarding the price to be paid and
facilitating the continuity of the Fund's investment objective and policies. The
Board of Trustees of the Fund has considered these provisions and concluded that
they are in the best interests of the Fund.
The Board of Trustees is divided into three classes. The terms of the
Trustees of the different classes are staggered. A Trustee may be removed from
office with or without cause by a vote of at least a majority of the then
Trustees if such removal is approved by the holders of at least 75% of the
shares entitled to vote with respect to the election of such Trustee and present
in person or by proxy at a meeting of shareholders called for such purpose.
In addition, the Agreement and Declaration of Trust requires the
affirmative vote of at least 75% of the outstanding shares entitled to vote on
the matter for the 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 by
the affirmative vote of at least 75% of the Trustees then in office, in which
case, the affirmative vote of a majority of the outstanding shares entitled to
vote on the matter is required.
In addition, conversion of the Fund to an open-end investment company would
require an amendment to the Fund's Agreement and Declaration of Trust. Such an
amendment would require the favorable vote of a majority of the then Trustees
followed by a favorable vote of the holders of at least 75% of the shares
entitled to vote on the matter, voting as separate classes or series (or a
majority of such shares if the amendment was previously approved by 75% of the
Trustees). Such a vote also would satisfy a separate requirement in the 1940 Act
that the change be approved by the shareholders.
Under the 1940 Act, shareholders of an open-end investment company may
require the company to redeem their shares of common stock at any time (except
in certain circumstances as authorized by or under the 1940 Act) at their net
asset value, less such redemption charge, if any, as might be in effect at the
time of a redemption. If the Fund is converted to an open-end investment
company, it could be required to liquidate portfolio securities to meet requests
for redemption, and the common shares would no longer be listed on the NYSE.
Conversion to an open-end investment company would also require changes in
certain of the Fund's investment policies and restrictions. In addition, the
Fund would be required to redeem all of its outstanding Preferred Shares prior
to conversion to an open-end investment company.
In addition, the Agreement and Declaration of Trust requires the
affirmative vote or consent of a majority of the then Trustees followed by the
affirmative vote or consent of the holders of at least 75% of the shares of each
affected class or series of the Fund outstanding, voting separately as a class
or series, to approve certain transactions with a Principal Shareholder, unless
the transaction has been approved by at least 75% of the Trustees, in which case
a majority of the outstanding shares entitled to vote shall be required. For
purposes of these provisions, a Principal Shareholder refers to any person who,
whether directly or indirectly and whether alone or together with its affiliates
and associates, beneficially owns 5% or more of the outstanding shares of any
class or series of shares of beneficial interest of the Fund. The 5% holder
transactions subject to these special approval requirements are:
- the merger or consolidation of the Fund or any subsidiary of the Fund
with or into any Principal Shareholder;
- the issuance of any securities of the Fund to any Principal Shareholder
for cash (other than pursuant to any automatic dividend reinvestment
plan); or
49
- the sale, lease or exchange to the Fund or any subsidiary of the Fund in
exchange for securities of the Fund, of any assets of any Principal
Shareholder, except assets having an aggregate fair market value of less
than $1,000,000, aggregating for the purpose of such computation all
assets sold, leased or exchanged in any series of similar transactions
within a 12-month period.
The Fund may be terminated by the affirmative vote of not less than 75% of
the Trustees then in office by written notice to the shareholders.
The Agreement and Declaration of Trust and By-laws provide that the Board
of Trustees has the power, to the exclusion of shareholders, to make, alter or
repeal any of the By-laws, except for any By-law that requires a vote of the
shareholders to be amended, adopted or repealed by the terms of the Agreement
and Declaration of Trust, By-Laws or applicable law. Neither this provision of
the Agreement and Declaration of Trust, nor any of the foregoing provisions
thereof requiring the affirmative vote of 75% of outstanding shares of the Fund,
can be amended or repealed except by the vote of such required number of shares.
With respect to proposals by shareholders submitted outside the process of
Rule 14a-8 of the Securities Exchange Act of 1934, 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 the principal executive
offices of the Fund not less than 90 calendar days nor more than 120 calendar
days prior to the anniversary date of the mailing of the notice for the prior
year's annual meeting (subject to certain exceptions). Any notice by a
shareholder must be accompanied by certain information as provided in the
By-laws.
UNDERWRITING
Citigroup Global Markets Inc., A.G. Edwards & Sons, Inc., Merrill Lynch,
Pierce, Fenner & Smith Incorporated, RBC Capital Markets Corporation and UBS
Securities LLC are acting as representatives of the underwriters named below.
Subject to the terms and conditions stated in the underwriting agreement dated
the date of this prospectus, each underwriter named below has agreed to
purchase, and the Fund has agreed to sell to that underwriter, the number of
common shares set forth opposite the underwriter's name.
UNDERWRITERS NUMBER OF COMMON SHARES
------------ -----------------------
Citigroup Global Markets Inc. .............................. 2,000,000
Merrill Lynch, Pierce, Fenner & Smith
Incorporated................................... 1,000,000
UBS Securities LLC.......................................... 650,000
RBC Capital Markets Corporation............................. 200,000
A.G. Edwards & Sons, Inc.................................... 50,000
---------
Total.......................................... 3,900,000
=========
The underwriting agreement provides that the obligations of the
underwriters to purchase the common shares included in this offering are subject
to approval of legal matters by counsel and to other conditions. The
underwriters are obligated to purchase all the common shares (other than those
covered by the over-allotment option described below) if they purchase any of
the common shares.
The underwriters propose to offer some of the common shares directly to the
public at the public offering price set forth on the cover page of this
prospectus and some of the common shares to dealers at the public offering price
less a concession not to exceed $0.38 per common share. The sales load the Fund
will pay of $0.644 per common share is equal to 4% of the initial offering
price. The underwriters may allow, and dealers may reallow, a concession not to
exceed $0.10 per common share on sales to other dealers. If all of the common
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 common shares
50
purchased on or before June 20, 2006. The representatives have advised the Fund
that the underwriters do not intend to confirm any sales to any accounts over
which they exercise discretionary authority.
The Fund has granted to the underwriters an option, exercisable for 30 days
from the date of this prospectus, to purchase up to 570,000 additional common
shares at the public offering price less the sales load. The underwriters may
exercise the option solely for the purpose of covering over-allotments, if any,
in connection with this offering. To the extent such option is exercised, each
underwriter must purchase a number of additional common shares approximately
proportionate to that underwriter's initial purchase commitment.
The Fund and Calamos have agreed that, for a period of 180 days from the
date of this prospectus, they will not, without the prior written consent of
Citigroup Global Markets Inc., dispose of or hedge any common shares or any
securities convertible into or exchangeable for common shares. Citigroup Global
Markets Inc. in its sole discretion may release any of the securities subject to
these lock-up agreements at any time without notice.
The Fund's common shares are, and the common shares sold pursuant to this
prospectus will be, listed on the NYSE under the symbol "CHY."
The following table shows the sales load that the Fund will pay to the
underwriters in connection with this offering. These amounts are shown assuming
both no exercise and full exercise of the underwriters' option to purchase
additional common shares.
PAID BY FUND
---------------------------
NO EXERCISE FULL EXERCISE
----------- -------------
Per share................................................... $ 0.644 $ 0.644
Total....................................................... $2,511,600 $2,878,680
The Fund and Calamos have agreed to indemnify the underwriters against
certain liabilities, including liabilities under the Securities Act of 1933, or
to contribute to payments the underwriters may be required to make because of
any of those liabilities.
Certain underwriters may make a market in the common shares after trading
in the common shares has commenced on the NYSE. No underwriter is, however,
obligated to conduct market-making activities and any such activities may be
discontinued at any time without notice, at the sole discretion of the
underwriter. No assurance can be given as to the liquidity of, or the trading
market for, the common shares as a result of any market-making activities
undertaken by any underwriter. This prospectus is to be used by any underwriter
in connection with the offering and, during the period in which a prospectus
must be delivered, with offers and sales of the common shares in market-making
transactions in the over-the-counter market at negotiated prices related to
prevailing market prices at the time of the sale.
In connection with the offering, Citigroup Global Markets Inc., on behalf
of itself and the other underwriters, may purchase and sell common shares in the
open market. These transactions may include short sales, syndicate covering
transactions and stabilizing transactions. Short sales involve syndicate sales
of common shares in excess of the number of common shares to be purchased by the
underwriters in the offering, which creates a syndicate short position.
"Covered" short sales are sales of common shares made in an amount up to the
number of common shares represented by the underwriters' over-allotment option.
In determining the source of common shares to close out the covered syndicate
short position, the underwriters will consider, among other things, the price of
common shares available for purchase in the open market as compared to the price
at which they may purchase common shares through the over-allotment option.
Transactions to close out the covered syndicate short position involve either
purchases of common shares in the open market after the distribution has been
completed or the exercise of the over-allotment option. The underwriters may
also make "naked" short sales of common shares in excess of the over-allotment
option. The underwriters must close out any naked short position by purchasing
common shares in the open market. A naked short position is more likely to be
created if the underwriters are concerned that there may be downward pressure on
the price of common shares in the open market after
51
pricing that could adversely affect investors who purchase in the offering.
Stabilizing transactions consist of bids for or purchases of common shares in
the open market while the offering is in progress.
The underwriters also may impose a penalty bid. Penalty bids permit the
underwriters to reclaim a selling concession from a syndicate member when
Citigroup Global Markets Inc. repurchases common shares originally sold by that
syndicate member in order to cover syndicate short positions or make stabilizing
purchases.
Any of these activities may have the effect of preventing or retarding a
decline in the market price of common shares. They may also cause the price of
common shares to be higher than the price that would otherwise exist in the open
market in the absence of these transactions. The underwriters may conduct these
transactions on the NYSE or in the over-the-counter market, or otherwise. If the
underwriters commence any of these transactions, they may discontinue them at
any time.
A prospectus in electronic format may be made available on the websites
maintained by one or more of the underwriters. Other than the prospectus in
electronic format, the information on any such underwriter's website is not part
of this prospectus. The representatives may agree to allocate a number of common
shares to underwriters for sale to their online brokerage account holders. The
representatives will allocate common shares to underwriters that may make
Internet distributions on the same basis as other allocations. In addition,
common shares may be sold by the underwriters to securities dealers who resell
common shares to online brokerage account holders.
The Fund anticipates that, from time to time, certain 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.
Certain underwriters have performed investment banking and advisory
services for Calamos and its affiliates from time to time, for which they have
received customary fees and expenses. Certain underwriters may, from time to
time, engage in transactions with or perform services for Calamos and its
affiliates in the ordinary course of business. An affiliate of Citigroup Global
Markets Inc. is counterparty to the Fund in interest rate swap transactions with
an aggregate notional value of $400 million.
The principal business address of Citigroup Global Markets Inc. is 388
Greenwich Street, New York, NY 10013.
CUSTODIAN, TRANSFER AGENT, DIVIDEND DISBURSING 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 disbursing agent and registrar for the Fund's shares is also The
Bank of New York.
LEGAL OPINIONS
Bell, Boyd & Lloyd LLC, Chicago, Illinois, serves as counsel to the Fund
and to the non-interested Trustees. Vedder, Price, Kaufman & Kammholz, P.C.
("Vedder Price"), Chicago, Illinois, which is serving as special counsel to the
Fund in connection with the offering, will pass on the legality of the shares
offered hereby. Vedder Price is also counsel to Calamos. Certain matters will be
passed upon for the underwriters by Simpson Thacher & Bartlett LLP, New York,
New York. Vedder Price and Simpson Thacher & Bartlett LLP may rely on matters of
Delaware law on the opinion of Morris, Nichols, Arsht & Tunnell, Wilmington,
Delaware.
52
TABLE OF CONTENTS FOR STATEMENT OF ADDITIONAL INFORMATION
Use of Proceeds............................................. S-1
Investment Objective and Policies........................... S-1
Investment Restrictions..................................... S-21
Management of the Fund...................................... S-23
Portfolio Transactions...................................... S-33
Repurchase of Common Shares................................. S-34
U.S. Federal Income Tax Matters............................. S-35
Custodian, Transfer Agent, Dividend Paying Agent and
Registrar................................................. S-42
Experts..................................................... S-42
Additional Information...................................... S-42
Financial Statements and Report of Independent Registered
Public Accounting Firm.................................... S-42
Appendix A -- Description of Ratings........................ A-1
53
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
3,900,000 SHARES
CALAMOS CONVERTIBLE AND HIGH
INCOME FUND
COMMON SHARES OF BENEFICIAL INTEREST
------------
PROSPECTUS
JUNE 15, 2006
------------
CITIGROUP
A.G. EDWARDS
MERRILL LYNCH & CO.
RBC CAPITAL MARKETS
UBS INVESTMENT BANK
SEC FILE NUMBER: 811-21319
333-132636
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
CALAMOS CONVERTIBLE AND HIGH INCOME FUND
STATEMENT OF ADDITIONAL INFORMATION
Calamos Convertible and High Income Fund (the "Fund") is a diversified,
closed-end management investment company which commenced investment operations
in May 2003. This Statement of Additional Information relating to common shares
does not constitute a prospectus, but should be read in conjunction with the
Prospectus relating thereto dated June 15, 2006. This Statement of Additional
Information does not include all information that a prospective investor should
consider before purchasing common shares, 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).
TABLE OF CONTENTS
Use of Proceeds......................................................................................S-1
Investment Objective and Policies....................................................................S-1
Investment Restrictions.............................................................................S-21
Management of the Fund..............................................................................S-23
Portfolio Transactions..............................................................................S-33
Repurchase of Common Shares.........................................................................S-34
U.S. Federal Income Tax Matters.....................................................................S-35
Custodian, Transfer Agent, Dividend Paying Agent and Registrar......................................S-42
Experts ...........................................................................................S-42
Additional Information..............................................................................S-42
Financial Statements and Report of Independent Registered Public Accounting Firm.....................F-1
Appendix A--Description of Ratings...................................................................A-1
This Statement of Additional Information is dated June 15, 2006.
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 invest substantially all of the net
proceeds in securities that meet the investment objective and policies within
two months after completion of the offering. Pending such investment, the net
proceeds may be invested in U.S. government securities and high grade,
short-term money market instruments. If necessary, the Fund may also purchase,
as temporary investments, securities of other open- or closed-end investment
companies that invest primarily in the types of securities in which the Fund may
invest directly.
INVESTMENT OBJECTIVE AND POLICIES
The prospectus presents the investment objective and the principal
investment strategies and risks of the Fund. This section supplements the
disclosure in the 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.
S-1
The value of convertible securities is influenced by both the yield of
non-convertible securities of comparable issuers and by the value of the
underlying common stock. The value of a convertible security viewed without
regard to its conversion feature (i.e., strictly on the basis of its yield) is
sometimes referred to as its "investment value." The investment value of the
convertible security typically will fluctuate inversely with changes in
prevailing interest rates. However, at the same time, the convertible security
will be influenced by its "conversion value," which is the market value of the
underlying common stock that would be obtained if the convertible security were
converted. Conversion value fluctuates directly with the price of the underlying
common stock.
If, because of a low price of the common stock, the conversion value is
substantially below the investment value of the convertible security, the price
of the convertible security is governed principally by its investment value. If
the conversion value of a convertible security increases to a point that
approximates or exceeds its investment value, the value of the security will be
principally influenced by its conversion value. A convertible security will sell
at a premium over its conversion value to the extent investors place value on
the right to acquire the underlying common stock while holding a fixed income
security. Holders of convertible securities have a claim on the assets of the
issuer prior to the common stockholders, but may be subordinated to holders of
similar non-convertible securities of the same issuer.
SYNTHETIC CONVERTIBLE INSTRUMENTS
Calamos Advisors LLC ("Calamos") may establish a "synthetic"
convertible instrument by combining fixed income securities with the right to
acquire equity securities. In establishing a synthetic instrument, the Fund may
pool a basket of fixed-income securities and a basket of warrants or options
that produce the economic characteristics similar to a convertible security.
Within each basket of fixed-income securities and warrants or options, different
companies may issue the fixed-income and convertible components, which may be
purchased separately and at different times.
More flexibility is possible in the assembly of a synthetic convertible
instrument than in the purchase of a convertible security. Although synthetic
convertible instruments may be selected where the two components are issued by a
single issuer, thus making the synthetic convertible instrument similar to the
true convertible security, the character of a synthetic convertible instrument
allows the combination of components representing distinct issuers when Calamos
believes that such a combination would better promote the Fund's investment
objective. A synthetic convertible instrument also is a more flexible investment
in that its two components may be purchased separately. For example, the Fund
may purchase a warrant for inclusion in a synthetic convertible instrument but
temporarily hold short-term investments while postponing the purchase of a
corresponding bond pending development of more favorable market conditions.
A holder of a synthetic convertible instrument faces the risk of a
decline in the price of the instrument or the level of the index involved in the
convertible component, causing a decline in the value of the call option or
warrant purchased to create the synthetic convertible instrument. Should the
price of the stock fall below the exercise price and remain there throughout the
exercise period, the entire amount paid for the call option or warrant would be
lost. Because a synthetic convertible instrument includes the fixed-income
component as well, the holder of a synthetic convertible instrument also faces
the risk that interest rates will rise, causing a decline in the value of the
fixed-income instrument.
The Fund may also purchase synthetic convertible instruments
manufactured by other parties, including convertible structured notes.
Convertible structured notes are fixed income debentures linked to equity, and
are typically issued by investment banks. Convertible structured notes have the
attributes of a convertible security; however, the investment bank that issued
the convertible note assumes the credit risk associated with the investment,
rather than the issuer of the underlying common stock into which the note is
convertible.
When identifying the issuer of synthetic convertible instruments
created by other parties for purposes of concentration and diversification, the
Fund analyzes synthetic convertible instruments by focusing on the overall risk
to the initial principal investment. In that regard, the Fund analyzes synthetic
convertible instruments on a case-by-case basis and considers a variety of
factors based on the structure of the synthetic convertible, including the
extent of any principal protection or guarantee by the third party and the
counter-party risk associated with any put, calls or other security features
inherent in the structure. Based on the types of third party instruments that
the Fund ordinarily purchases, this analysis typically results in the financial
entity creating and issuing the convertible product being treated as the issuer
of the security. However, under certain circumstances, the Fund may, due to the
factors noted above, look through to the underlying credit in determining the
identity of the issuer for concentration and diversification purposes.
S-2
The Fund's holdings of synthetic convertible instruments are considered
convertible securities for purposes of the Fund's policy to invest at 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.
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.
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:
o increased price sensitivity to changing interest rates and to
a deteriorating economic environment;
o greater risk of loss due to default or declining credit
quality;
o adverse company specific events are more likely to render the
issuer unable to make interest and/or principal payments; and
o if a negative perception of the high yield market develops,
the price and liquidity of high yield securities may be
depressed. This negative perception could last for a
significant period of time.
Securities rated below investment grade are speculative with respect to
the capacity to pay interest and repay principal in accordance with the terms of
such securities. A rating of C from Moody's means that the issue so rated can be
regarded as having extremely poor prospects of ever attaining any real
investment standing. Standard & Poor's assigns a rating of C to issues that are
currently highly vulnerable to nonpayment, and the C rating may be used to cover
a situation where a bankruptcy petition has been filed or similar action taken,
but payments on the obligation are being continued (a C rating is also assigned
to a preferred stock issue in arrears on dividends or sinking fund payments, but
that is currently paying). See Appendix A to this statement of additional
information for a description of Moody's and Standard & Poor's ratings.
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
S-3
lower quality debt securities tend to reflect individual developments of the
issuer to a greater extent than do higher quality securities, which react
primarily to fluctuations in the general level of interest rates. Factors having
an adverse impact on the market value of lower quality securities may have an
adverse effect on the Fund's net asset value and the market value of its common
shares. In addition, the Fund may incur additional expenses to the extent it is
required to seek recovery upon a default in payment of principal or interest on
its portfolio holdings. In certain circumstances, the Fund may be required to
foreclose on an issuer's assets and take possession of its property or
operations. In such circumstances, the Fund would incur additional costs in
disposing of such assets and potential liabilities from operating any business
acquired.
The secondary market for high yield securities may not be as liquid as
the secondary market for more highly rated securities, a factor which may have
an adverse effect on the Fund's ability to dispose of a particular security when
necessary to meet its liquidity needs. There are fewer dealers in the market for
high yield securities than investment grade obligations. The prices quoted by
different dealers may vary significantly and the spread between the bid and
asked price is generally much larger than higher quality instruments. Under
adverse market or economic conditions, the secondary market for high yield
securities could contract further, independent of any specific adverse changes
in the condition of a particular issuer, and these instruments may become
illiquid. As a result, the Fund could find it more difficult to sell these
securities or may be able to sell the securities only at prices lower than if
such securities were widely traded. Prices realized upon the sale of such lower
rated or unrated securities, under these circumstances, may be less than the
prices used in calculating the Fund's net asset value.
Since investors generally perceive that there are greater risks
associated with lower quality debt securities of the type in which the Fund may
invest a portion of its assets, the yields and prices of such securities may
tend to fluctuate more than those for higher rated securities. In the lower
quality segments of the debt securities market, changes in perceptions of
issuers' creditworthiness tend to occur more frequently and in a more pronounced
manner than do changes in higher quality segments of the debt securities market,
resulting in greater yield and price volatility.
If the Fund invests in high yield securities that are rated C or below,
the Fund will incur significant risk in addition to the risks associated with
investments in high yield securities and corporate loans. Distressed securities
frequently do not produce income while they are outstanding. The Fund may
purchase distressed securities that are in default or the issuers of which are
in bankruptcy. The Fund may be required to bear certain extraordinary expenses
in order to protect and recover its investment.
DISTRESSED SECURITIES
The Fund may, but currently does not intend to, invest up to 5% of its
total assets in distressed securities, including corporate loans, which are the
subject of bankruptcy proceedings or otherwise in default as to the repayment of
principal and/or payment of interest at the time of acquisition by the Fund or
are rated in the lower rating categories (Ca or lower by Moody's or CC or lower
by Standard & Poor's) or which are unrated investments considered by Calamos to
be of comparable quality. Investment in distressed securities is speculative and
involves significant risk. Distressed securities frequently do not produce
income while they are outstanding and may require the Fund to bear certain
extraordinary expenses in order to protect and recover its investment.
Therefore, to the extent the Fund seeks capital appreciation through investment
in distressed securities, the Fund's 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
S-4
respect to distressed securities held by the Fund, there can be no assurance
that the securities or other assets received by the Fund in connection with such
exchange offer or plan of reorganization will not have a lower value or income
potential than may have been anticipated when the investment was made. Moreover,
any securities received by the Fund upon completion of an exchange offer or plan
of reorganization may be restricted as to resale. As a result of the Fund's
participation in negotiations with respect to any exchange offer or plan of
reorganization with respect to an issuer of distressed securities, the Fund may
be restricted from disposing of such securities.
LOANS
The Fund may invest up to 5% of its total assets in loan participations
and other direct claims against a borrower. The corporate loans in which the
Fund invests primarily consist of direct obligations of a borrower and may
include debtor in possession financings pursuant to Chapter 11 of the U.S.
Bankruptcy Code, obligations of a borrower issued in connection with a
restructuring pursuant to Chapter 11 of the U.S. Bankruptcy Code, leveraged
buy-out loans, leveraged recapitalization loans, receivables purchase
facilities, and privately placed notes. The Fund may invest in a corporate loan
at origination as a co-lender or by acquiring in the secondary market
participations in, assignments of or novations of a corporate loan. By
purchasing a participation, the Fund acquires some or all of the interest of a
bank or other lending institution in a loan to a corporate or government
borrower. The participations typically will result in the Fund having a
contractual relationship only with the lender not the borrower. The Fund will
have the right to receive payments of principal, interest and any fees to which
it is entitled only from the lender selling the participation and only upon
receipt by the lender of the payments from the borrower. Many such loans are
secured, although some may be unsecured. Such loans may be in default at the
time of purchase. Loans that are fully secured offer the Fund more protection
than an unsecured loan in the event of non-payment of scheduled interest or
principal. However, there is no assurance that the liquidation of collateral
from a secured loan would satisfy the corporate borrower's obligation, or that
the collateral can be liquidated. Direct debt instruments may involve a risk of
loss in case of default or insolvency of the borrower and may offer less legal
protection to the Fund in the event of fraud or misrepresentation. In addition,
loan participations involve a risk of insolvency of the lending bank or other
financial intermediary. The markets in loans are not regulated by federal
securities laws or the Securities and Exchange Commission (SEC).
As in the case of other high yield investments, such corporate loans
may be rated in the lower rating categories of the established rating services
(Ba or lower by Moody's or BB or lower by Standard & Poor's), or may be unrated
investments considered by Calamos to be of comparable quality. As in the case of
other high yield investments, such corporate loans can be expected to provide
higher yields than lower yielding, higher rated fixed income securities, but may
be subject to greater risk of loss of principal and income. There are, however,
some significant differences between corporate loans and high yield bonds.
Corporate loan obligations are frequently secured by pledges of liens and
security interests in the assets of the borrower, and the holders of corporate
loans are frequently the beneficiaries of debt service subordination provisions
imposed on the borrower's bondholders. These arrangements are designed to give
corporate loan investors preferential treatment over high yield investors in the
event of a deterioration in the credit quality of the issuer. Even when these
arrangements exist, however, there can be no assurance that the borrowers of the
corporate loans will repay principal and/or pay interest in full. Corporate
loans generally bear interest at rates set at a margin above a generally
recognized base lending rate that may fluctuate on a day-to-day basis, in the
case of the prime rate of a U.S. bank, or which may be adjusted on set dates,
typically 30 days but generally not more than one year, in the case of the
London Interbank Offered Rate. Consequently, the value of corporate loans held
by the Fund may be expected to 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
S-5
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 managed assets in securities of
foreign issuers. The Fund may invest up to 15% of its managed assets in
securities of foreign issuers in emerging markets. For these purposes, foreign
securities do not include American Depositary Receipts ("ADRs") or securities
guaranteed by a United States person, but may include foreign securities in the
form of European Depositary Receipts ("EDRs"), Global Depositary Receipts
("GDRs") or other securities representing underlying shares of foreign issuers.
Positions in those securities are not necessarily denominated in the same
currency as the common stocks into which they may be converted. ADRs are
receipts typically issued by an American bank or trust company evidencing
ownership of the underlying securities. EDRs are European receipts listed on the
Luxembourg Stock Exchange evidencing a similar arrangement. GDRs are U.S.
dollar-denominated receipts evidencing ownership of foreign securities.
Generally, ADRs, in registered form, are designed for the U.S. securities
markets and EDRs and GDRs, in bearer form, are designed for use in foreign
securities markets. The Fund may invest in sponsored or unsponsored ADRs. In the
case of an unsponsored ADR, the Fund is likely to bear its proportionate share
of the expenses of the depository and it may have greater difficulty in
receiving shareholder communications than it would have with a sponsored ADR.
To the extent positions in portfolio securities are denominated in
foreign currencies, the Fund's investment performance is affected by the
strength or weakness of the U.S. dollar against those currencies. For example,
if the dollar falls in value relative to the Japanese yen, the dollar value of a
Japanese stock held in the portfolio will rise even though the price of the
stock remains unchanged. Conversely, if the dollar rises in value relative to
the yen, the dollar value of the Japanese stock will fall. (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
S-6
stringent than in the U.S. and other major markets. There also may be a lower
level of monitoring and regulation of emerging markets and the activities of
investors in such markets, and enforcement of existing regulations has been
extremely limited. Economies in individual emerging markets may differ favorably
or unfavorably from the U.S. economy in such respects as growth of gross
domestic product, rates of inflation, currency depreciation, capital
reinvestment, resource self-sufficiency and balance of payments positions. Many
emerging market countries have experienced high rates of inflation for many
years, which has had and may continue to have very negative effects on the
economies and securities markets of those countries.
CURRENCY EXCHANGE TRANSACTIONS
Currency exchange transactions may be conducted either on a spot (i.e.,
cash) basis at the spot rate for purchasing or selling currency prevailing in
the foreign exchange market or through forward currency exchange contracts
("forward contracts"). Forward contracts are contractual agreements to purchase
or sell a specified currency at a specified future date (or within a specified
time period) and price set at the time of the contract. Forward contracts are
usually entered into with banks, foreign exchange dealers and broker-dealers,
are not exchange traded, and are usually for less than one year, but may be
renewed.
Forward currency exchange transactions may involve currencies of the
different countries in which the Fund may invest and serve as hedges against
possible variations in the exchange rate between 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
S-7
is made to sell the security and make delivery of the currency. Conversely, it
may be necessary to sell on the spot market some of the currency received upon
the sale of the portfolio security if its market value exceeds the amount of
currency the Fund is obligated to deliver.
If the Fund retains the portfolio security and engages in an offsetting
transaction, the Fund will incur a gain or a loss to the extent that there has
been movement in forward contract prices. If the Fund engages in an offsetting
transaction, it may subsequently enter into a new forward contract to sell the
currency. Should forward prices decline during the period between the Fund's
entering into a forward contract for the sale of a currency and the date it
enters into an offsetting contract for the purchase of the currency, the Fund
will realize a gain to the extent the price of the currency it has agreed to
sell exceeds the price of the currency it has agreed to purchase. Should forward
prices increase, the Fund will suffer a loss to the extent the price of the
currency it has agreed to purchase exceeds the price of the currency it has
agreed to sell. A default on the contract would deprive the Fund of unrealized
profits or force the Fund to cover its commitments for purchase or sale of
currency, if any, at the current market price.
Hedging against a decline in the value of a currency does not eliminate
fluctuations in the value of a portfolio security traded in that currency or
prevent a loss if the value of the security declines. Hedging transactions also
preclude the opportunity for gain if the value of the hedged currency should
rise. Moreover, it may not be possible for 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.
S-8
A sovereign debtor's willingness or ability to repay principal and pay
interest in a timely manner may be affected by, among other factors, its cash
flow situation, the extent of its foreign currency reserves, the availability of
sufficient non-U.S. currency, the relative size of the debt service burden, the
sovereign debtor's policy toward its principal international lenders and local
political constraints. Sovereign debtors may also be dependent on expected
disbursements from non-U.S. governments, multilateral agencies and other
entities to reduce principal and interest arrearages on their debt. The failure
of a sovereign debtor to implement economic reforms, achieve specified levels of
economic performance or repay principal or interest when due may result in the
cancellation of third-party commitments to lend funds to the sovereign debtor,
which may further impair such debtor's ability or willingness to service its
debts.
Eurodollar Instruments and Samurai and Yankee Bonds. The Fund may
invest in Eurodollar instruments and Samurai and Yankee bonds. Eurodollar
instruments are bonds of corporate and government issuers that pay interest and
principal in U.S. dollars but are issued in markets outside the United States,
primarily in Europe. Samurai bonds are yen-denominated bonds sold in Japan by
non-Japanese issuers. Yankee bonds are U.S. dollar-denominated bonds typically
issued in the U.S. by non-U.S. governments and their agencies and non-U.S. banks
and corporations. The Fund may also invest in Eurodollar Certificates of Deposit
("ECDs"), Eurodollar Time Deposits ("ETDs") and Yankee Certificates of Deposit
("Yankee CDs"). ECDs are U.S. dollar-denominated certificates of deposit issued
by non-U.S. branches of domestic banks; ETDs are U.S. dollar-denominated
deposits in a non-U.S. branch of a U.S. bank or in a non-U.S. bank; and Yankee
CDs are U.S. dollar-denominated certificates of deposit issued by a U.S. branch
of a non-U.S. bank and held in the U.S. These investments involve risks that are
different from investments in securities issued by U.S. issuers, including
potential unfavorable political and economic developments, non-U.S. withholding
or other taxes, seizure of non-U.S. deposits, currency controls, interest
limitations or other governmental restrictions 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'
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.
S-9
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.
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
S-10
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
assets sufficient to purchase and deliver the securities if the call is
exercised. A call option sold by a fund on an index will require the Fund to own
portfolio securities which correlate with the index or to segregate cash or
liquid assets equal to the excess of the index value over the exercise price on
a current basis. A put option written by the Fund requires the Fund to segregate
cash or liquid assets equal to the exercise price.
OTC options entered into by the Fund and OCC issued and exchange listed
index options will generally provide for cash settlement. As a result, when the
Fund sells these instruments it will only segregate an amount of cash or liquid
assets equal to its accrued net obligations, as there is no requirement for
payment or delivery of amounts in excess of the net amount. These amounts will
equal 100% of the exercise price in the case of a non cash-settled put, the same
as an OCC guaranteed listed option sold by the Fund, or the in-the-money amount
plus any sell-back formula amount in the case of a cash-settled put or call. In
addition, when the Fund sells a call option on an index at a time when the
in-the-money amount exceeds the exercise price, the Fund will segregate, until
the option expires or is closed out, cash or cash equivalents equal in value to
such excess. OCC issued and exchange listed options sold by the Fund other than
those above generally settle with physical delivery, or with an election of
either physical delivery or cash settlement and the Fund will segregate an
amount of cash or liquid assets equal to the full value of the option. OTC
options settling with physical delivery, or with an election of either physical
delivery or cash settlement, will be treated the same as other options settling
with physical delivery.
If an option written by the Fund expires, the Fund realizes a capital
gain equal to the premium received at the time the option was written. If an
option purchased by the Fund expires, the Fund realizes a capital loss equal to
the premium paid.
The Fund will realize a capital gain from a closing purchase
transaction if the cost of the closing option is less than the premium received
from writing the option, or, if it is more, the Fund will realize a capital
loss. If the premium received from a closing sale transaction is more than the
premium paid to purchase the option, the Fund will realize a capital gain or, if
it is less, the Fund will realize a capital loss. The principal factors
affecting the market value of a put or a call option include supply and demand,
interest rates, the current market price of the underlying security or index in
relation to the exercise price of the option, the volatility of the underlying
security or index, and the time remaining until the expiration date.
A put or call option purchased by the Fund is an asset of the Fund,
valued initially at the premium paid for the option. The premium received for an
option written by the Fund is recorded as a deferred credit. The value of an
option purchased or written is marked-to-market daily and is valued at the
closing price on the exchange on which it is traded or, if not traded on an
exchange or no closing price is available, at the mean between the last bid and
asked prices.
RISKS ASSOCIATED WITH OPTIONS
There are several risks associated with transactions in options. For
example, there are significant differences between the securities markets, the
currency markets and the options markets that could result in an imperfect
correlation among these markets, causing a given transaction not to achieve its
objectives. A decision as to whether, when and how to use options involves the
exercise of skill and judgment, and even a well-conceived transaction may be
unsuccessful to some degree because of market behavior or
S-11
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
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 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
--------
(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
borrowing or loan by the Fund but is instead settlement between the Fund and the
broker of the amount one would owe the other if the futures contract had expired
at the close of the previous day. In computing daily net asset value, the Fund
will mark-to-market its open futures positions.
The Fund is also required to deposit and maintain margin with respect
to put and call options on futures contracts written by it. Such margin deposits
will vary depending on the nature of the underlying futures contract (and the
related initial margin requirements), the current market value of the option and
other futures positions held by the Fund.
Although some futures contracts call for making or taking delivery of
the underlying securities, usually these obligations are closed out prior to
delivery by offsetting purchases or sales of matching futures contracts (same
exchange, underlying security or index, and delivery month). If an offsetting
purchase price is less than the original sale price, the Fund engaging in the
transaction realizes a capital gain, or if it is more, the Fund realizes a
capital loss. Conversely, if an offsetting sale price is more than the original
purchase price, the Fund engaging in the transaction realizes a capital gain, or
if it is less, the Fund realizes a capital loss. The transaction costs must also
be included in these calculations.
RISKS ASSOCIATED WITH FUTURES
There are several risks associated with the use of futures contracts
and futures options. A purchase or sale of a futures contract may result in
losses in excess of the amount invested in the futures contract. In trying to
increase or reduce market exposure, there can be no guarantee that there will be
a correlation between price movements in the futures contract and in the
portfolio exposure sought. In addition, there are significant differences
between the securities and futures markets that could result in an imperfect
correlation between the markets, causing a given transaction not to achieve its
objectives. The degree of imperfection of correlation depends on circumstances
such as: variations in speculative market demand for futures, futures options
and the related securities, including technical influences in futures and
futures options trading and differences between the securities markets and the
securities underlying the standard contracts available for trading. For example,
in the case of index futures contracts, the composition of the index, including
the issuers and the weighing of each issue, may differ from the composition of
the Fund's portfolio, and, in the case of interest rate futures contracts, the
interest rate levels, maturities and creditworthiness of the issues underlying
the futures contract may differ from the financial instruments held in the
Fund's portfolio. A decision as to whether, when and how to use futures
contracts involves the exercise of skill and judgment, and even a well-conceived
transaction may be unsuccessful to some degree because of market behavior or
unexpected stock price or interest rate trends.
Futures exchanges may limit the amount of fluctuation permitted in
certain futures contract prices during a single trading day. The daily limit
establishes the maximum amount that the price of a futures contract may vary
either up or down from the previous day's settlement price at the end of the
current trading session. Once the daily limit has been reached in a futures
contract subject to the limit, no more trades may be made on that day at a price
beyond that limit. The daily limit governs only price movements during a
particular trading day and therefore does not limit potential losses because the
limit may work to prevent the liquidation of unfavorable positions. For example,
futures prices have occasionally moved to the daily limit for several
consecutive trading days with little or no trading, thereby preventing prompt
liquidation of positions and subjecting some holders of futures contracts to
substantial losses. Stock index futures contracts are not normally subject to
such daily price change limitations.
There can be no assurance that a liquid market will exist at a time
when the Fund seeks to close out a futures or futures option position. The Fund
would be exposed to possible loss on the position during the interval of
inability to close, and would continue to be required to meet margin
requirements until the position is closed. In addition, many of the contracts
discussed above are relatively new
S-14
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 ("CFTC")
Regulation 4.5 and thereby avoid being deemed a "commodity pool operator," the
Fund may use commodity futures or commodity options contracts for either risk
management or speculative purposes without any limitation on the notional value
of such positions. The Fund has qualified for an exemption from registration as
a "commodity pool operator" pursuant to CFTC Regulation 4.5 and, therefore, is
not subject to registration or regulation under the Commodity Exchange Act, as
amended.
WARRANTS
The Fund may invest in warrants. A warrant is a right to purchase
common stock at a specific price (usually at a premium above the market value of
the underlying common stock at time of issuance) during a specified period of
time. A warrant may have a life ranging from less than a year to twenty years or
longer, but a warrant becomes worthless unless it is exercised or sold before
expiration. In addition, if the market price of the common stock does not exceed
the warrant's exercise price during the life of the warrant, the warrant will
expire worthless. Warrants have no voting rights, pay no dividends and have no
rights with respect to the assets of the corporation issuing them. The
percentage increase or decrease in the value of a warrant may be greater than
the percentage increase or decrease in the value of the underlying common stock.
PORTFOLIO TURNOVER
Although the Fund does not purchase securities with a view to rapid
turnover, there are no limitations on the length of time that portfolio
securities must be held. Portfolio turnover can occur for a number of reasons,
including calls for redemption, general conditions in the securities markets,
more favorable investment opportunities in other securities, or other factors
relating to the desirability of holding or changing a portfolio investment. The
portfolio turnover rates may vary greatly from year to year. A high rate of
portfolio turnover in the Fund would result in increased transaction expense,
which must be borne by that Fund. High portfolio turnover may also result in the
realization of capital gains or
S-15
losses and, to the extent net short-term capital gains are realized, any
distributions resulting from such gains will be considered ordinary income for
federal income tax purposes.
SHORT SALES
The Fund may from time to time sell securities short to enhance income
and protect against market risk by hedging a portion of the equity risk inherent
in the Fund's portfolio. A short sale is effected when Calamos believes that the
price of a security will decline, and involves the sale of securities that the
Fund does not own, in the hope of purchasing the same securities at a later date
at a lower price. There can be no assurance that the Fund will be able to close
out a short position (i.e., purchase the same securities) at any particular time
or at an acceptable or advantageous price. To make delivery to the buyer, the
Fund must borrow the securities from a broker-dealer through which the short
sale is executed, and the broker-dealer delivers the securities, on behalf of
the Fund, to the buyer. The broker-dealer is entitled to retain the proceeds
from the short sale until the Fund delivers to it the securities sold short. In
addition, the Fund is required to pay to the broker-dealer the amount of any
dividends or interest paid on the securities sold short.
To secure its obligation to deliver to the broker-dealer the securities
sold short, the Fund must segregate an amount of cash or liquid securities with
its custodian equal to any excess of the current market value of the securities
sold short over any cash or liquid securities deposited as collateral with the
broker in connection with the short sale (not including the proceeds of the
short sale). As a result of that requirement, the Fund will not gain any
leverage merely by selling short, except to the extent that it earns interest or
other income or gains on the segregated cash or liquid securities while also
being subject to the possibility of gain or loss from the securities sold short.
The Fund is said to have a short position in the securities sold until
it delivers to the broker-dealer the securities sold, at which time the Fund
receives the proceeds of the short sale. The Fund will normally close out a
short position by purchasing on the open market and delivering to the
broker-dealer an equal amount of the securities sold short.
The Fund will realize a gain if the price of the securities declines
between the date of the short sale and the date on which the Fund purchases
securities to replace the borrowed securities. On the other hand, a Fund will
incur a loss if the price of the securities increases between those dates. The
amount of any gain will be decreased and the amount of any loss increased by any
premium or interest that the Fund may be required to pay in connection with the
short sale. It should be noted that possible losses from short sales differ from
those that could arise from a cash investment in a security in that losses from
a short sale may be limitless, while the losses from a cash investment in a
security cannot exceed the total amount of the investment in the security.
There is also a risk that securities borrowed by the Fund and delivered
to the buyer of the securities sold short will need to be returned to the
broker-dealer on short notice. If the request for the return of securities
occurs at a time when other short sellers of the security are receiving similar
requests, a "short squeeze" can occur, meaning that the Fund might be compelled,
at the most disadvantageous time, to replace the borrowed securities with
securities purchased on the open market, possibly at prices significantly in
excess of the proceeds received earlier.
Rule 10a-1 under the Securities Exchange Act of 1934 provides that
exchange-traded securities can be sold short only at a price that is higher than
the last trade or the same as the last trade price if that price is higher than
the price of the previous reported trade. The requirements of Rule 10a-1 can
delay, or in some cases prevent, execution of short sales, resulting in
opportunity costs and increased exposure to market action.
S-16
The Fund may also make short sales "against the box," meaning that at
all times when a short position is open the Fund owns an equal amount of such
securities or securities convertible into or exchangeable, without payment of
further consideration, for securities of the same issue as, and in an amount
equal to, the securities sold short. Short sales "against the box" result in a
"constructive sale" and require the Fund to recognize any taxable gain unless an
exception to the constructive sale rule applies.
The Fund will not make a short sale of securities (other than a short
sale "against the box"), if more than 20% of its net assets would be deposited
with brokers as collateral or allocated to segregated accounts in connection
with all outstanding short sales (other than short sales "against the box").
In addition to enabling the Fund to hedge against market risk, short
sales may afford the Fund an opportunity to earn additional current income to
the extent it is able to enter into arrangements with broker-dealers through
which the short sales are executed to receive income with respect to the
proceeds of the short sales during the period the Fund's short positions remain
open. The Fund believes that some broker-dealers may be willing to enter into
such arrangements, but there is no assurance that they will be able to enter
into such arrangements to the desired degree.
INTEREST RATE TRANSACTIONS
In order to reduce the interest rate risk inherent in the Fund's
underlying investments and capital structure, the Fund, if market conditions are
deemed favorable, may enter into interest rate swap or cap transactions.
Interest rate swaps involve the Fund's agreement with the swap counterparty to
pay a fixed rate payment in exchange for the counterparty agreeing to pay the
Fund a payment at a variable rate that is expected to approximate the rate on
any variable rate payment obligation on the Fund's leverage. The payment
obligations would be based on the notional amount of the swap. The Fund may use
an interest rate cap, which would require it to pay a premium to the cap
counterparty and would entitle it, to the extent that a specified variable rate
index exceeds a predetermined fixed rate, to receive from the counterparty
payment of the difference based on the notional amount. The Fund would use
interest rate swaps or caps only with the intent to reduce or eliminate the risk
that an increase in short-term interest rates could have on common share net
earnings as a result of leverage.
The Fund will usually enter into swaps or caps on a net basis; that is,
the two payment streams will be netted out in a cash settlement on the payment
date or dates specified in the instrument, with the Fund receiving or paying, as
the case may be, only the net amount of the two payments. The Fund intends to
maintain in a segregated account with its custodian cash or liquid securities
having a value at least equal to the Fund's net payment obligations under any
swap transaction, marked-to-market daily.
The use of interest rate swaps and caps is a highly specialized
activity that involves investment techniques and risks different from those
associated with ordinary portfolio security transactions. Depending on the state
of interest rates in general, the Fund's use of interest rate swaps or caps
could enhance or harm the overall performance on the common shares. To the
extent there is a decline in interest rates, the value of the interest rate swap
or cap could decline, and could result in a decline in the net asset value of
the common shares. In addition, if short-term interest rates are lower than the
Fund's fixed rate of payment on the interest rate swap, the swap will reduce
common share net earnings. If, on the other hand, short-term interest rates are
higher than the fixed rate of payment on the interest rate swap, the swap will
enhance common share net earnings. Buying interest rate caps could enhance the
performance of the common shares by providing a maximum leverage expense. Buying
interest rate caps could also decrease the net earnings of the common shares in
the event that the premium paid by the Fund to the counterparty exceeds the
additional amount the Fund would have been required to pay had it not entered
into the cap agreement. The Fund has no current intention of selling an interest
rate swap or cap.
S-17
Interest rate swaps and caps do not involve the delivery of securities
or other underlying assets or principal. Accordingly, the risk of loss with
respect to interest rate swaps is limited to the net amount of interest payments
that the Fund is contractually obligated to make. If the counterparty defaults,
the Fund would not be able to use the anticipated net receipts under the swap or
cap to offset the dividend or interest payments on the Fund's leverage.
Depending on whether the Fund would be entitled to receive net payments from the
counterparty on the swap or cap, which in turn would depend on the general state
of short-term interest rates at that point in time, such a default could
negatively impact the performance of the common shares.
Although this will not guarantee that the counterparty does not
default, the Fund will not enter into an interest rate swap or cap transaction
with any counter-party that Calamos believes does not have the financial
resources to honor its obligation under the interest rate swap or cap
transaction. Further, Calamos will continually monitor the financial stability
of a counterparty to an interest rate swap or cap transaction in an effort to
proactively protect the Fund's investments.
In addition, at the time the interest rate swap or cap transaction
reaches its scheduled termination date, there is a risk that the Fund would not
be able to obtain a replacement transaction or that the terms of the replacement
would not be as favorable as on the expiring transaction. If this occurs, it
could have a negative impact on the performance of the Fund's common shares.
The Fund may choose or be required to redeem some or all of the
preferred shares or prepay any borrowings. Such redemption or prepayment would
likely result in the Fund seeking to terminate early all or a portion of any
swap or cap transaction. Such early termination of a swap could result in
termination payment by or to the Fund. An early termination of a cap could
result in a termination payment to the Fund.
"WHEN-ISSUED" AND DELAYED DELIVERY SECURITIES AND REVERSE REPURCHASE AGREEMENTS
The Fund may purchase securities on a when-issued or delayed-delivery
basis. Although the payment and interest terms of these securities are
established at the time the Fund enters into the commitment, the securities may
be delivered and paid for a month or more after the date of purchase, when their
value may have changed. The Fund makes such commitments only with the intention
of actually acquiring the securities, but may sell the securities before
settlement date if Calamos deems it advisable for investment reasons. The Fund
may utilize spot and forward foreign currency exchange transactions to reduce
the risk inherent in fluctuations in the exchange rate between one currency and
another when securities are purchased or sold on a when-issued or
delayed-delivery basis.
The Fund may enter into reverse repurchase agreements with banks and
securities dealers. A reverse repurchase agreement is a repurchase agreement in
which the Fund is the seller of, rather than the investor in, securities and
agrees to repurchase them at an agreed-upon time and price. Use of a reverse
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.
S-18
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.
TEMPORARY DEFENSIVE INVESTMENTS
The Fund may make temporary investments without limitation when Calamos
determines that a defensive position is warranted or pending the investment of
offering proceeds. 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
S-19
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.
REAL ESTATE INVESTMENT FUNDS ("REITS") AND ASSOCIATED RISK FACTORS
REITs are pooled investment vehicles which invest primarily in income
producing real estate or real estate related loans or interests. REITs are
generally classified as equity REITs, mortgage REITs or a combination of equity
and mortgage REITs. Equity REITs invest the majority of their assets directly in
real property and derive income primarily from the collection of rents. Equity
REITs can also realize capital gains by selling properties that have appreciated
in value. Mortgage REITs invest the majority of their assets in real estate
mortgages and derive income from the collection of interest payments. REITs are
not taxed on income distributed to shareholders provided they comply with the
applicable requirements of the Code. The Fund will indirectly bear its
proportionate share of any management and other expenses paid by REITs in which
it invests in addition to the expenses paid by the Fund. Debt securities issued
by REITs are, for the most part, general and unsecured obligations and are
subject to risks associated with REITs.
Investing in REITs involves certain unique risks in addition to those
risks associated with investing in the real estate industry in general. An
equity REIT may be affected by changes in the value of the underlying properties
owned by the REIT. A mortgage REIT may be affected by changes in interest rates
and the ability of the issuers of its portfolio mortgages to repay their
obligations. REITs are dependent upon the skills of their managers and are not
diversified. REITs are generally dependent upon maintaining cash flows to repay
borrowings and to make distributions to shareholders and are subject to 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.
S-20
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 pro rata portion of the other investment companies' expenses,
including advisory fees. These expenses are in addition to the direct expenses
of the Fund's own operations.
INVESTMENT RESTRICTIONS
The following are the Fund's fundamental investment restrictions. These
restrictions may not be changed without the approval of the holders of a
majority of the Fund's outstanding voting securities (which for this purpose and
under the 1940 Act means the lesser of (i) 67% of the common shares represented
at a meeting at which more than 50% of the outstanding common shares are
represented or (ii) more than 50% of the outstanding common shares). If the Fund
were to issue a class of preferred shares, the investment restrictions could not
be changed without the approval of a majority of the outstanding common and
preferred shares, voting together as a class, and the approval of a majority of
the outstanding preferred shares, voting separately by class.
The Fund may not:
(1) Issue senior securities, except as permitted by the 1940 Act
and the rules and interpretive positions of the SEC
thereunder.
(2) Borrow money, except as permitted by the 1940 Act and the
rules and interpretive positions of the 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.
S-21
(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 Fund's total assets,
less all liabilities and indebtedness not represented by senior securities, are
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 Fund's total assets, less
all liabilities and indebtedness not represented by senior securities
(determined after deducting the amount of such dividend or distribution), are 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 or
issuance of securities representing indebtedness 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 interpretative positions of the SEC, the
Fund may not have on loan at any given time securities representing more than
one-third of its total assets.
Currently under the 1940 Act, a "senior security" does not include any
promissory note or evidence of indebtedness where such loan is for temporary
purposes only and in an amount not exceeding 5% of the value of the total assets
of the issuer at the time the loan is made. A loan is presumed to be for
temporary purposes if it is repaid within sixty days and is not extended or
renewed.
Currently, the Fund would be deemed to "concentrate" in a particular
industry if it invested 25% or more of its total assets in that industry.
Currently under the 1940 Act, a "diversified company" means a
management company 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
S-22
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 (14 U.S. registered investment
portfolios) for which Calamos serves as investment adviser (collectively, the
"Calamos Funds"). The address for all independent and Interested Trustees and
all officers of the Fund is 2020 Calamos Court, Naperville, Illinois 60563.
PRINCIPAL OCCUPATION DURING
NAME AND AGE AT POSITIONS HELD TERM OF OFFICE AND PAST FIVE YEARS AND OTHER
JANUARY 31, 2006 WITH THE FUND LENGTH OF SERVICE DIRECTORSHIPS HELD BY THE TRUSTEE
---------------------- ----------------- ------------------- -------------------------------------
INTERESTED TRUSTEES:
*John P. Calamos (65) Trustee and Trustee since March President and CEO, Calamos Asset
President 2003. Term expires Management, Inc., Calamos Holdings,
in 2008. LLC, Calamos Advisors LLC and its
predecessor, and Calamos Financial
Services LLC and its predecessor;
Director, Calamos Asset Management,
Inc.
*Nick P. Calamos (44) Trustee and Vice Trustee since March Senior Executive Vice President,
President 2003. Term expires Calamos Asset Management, Inc.,
in 2007. Calamos Holdings LLC, Calamos
Advisors LLC and its predecessor, and
Calamos Financial Services LLC and
its predecessor, Director, Calamos
Asset Management, Inc.
**Weston W. Marsh (55) Trustee Trustee since March Of Counsel, Freeborn & Peters (law
2003. Term expires firm).
in 2008.
S-23
PRINCIPAL OCCUPATION DURING
NAME AND AGE AT POSITIONS HELD TERM OF OFFICE AND PAST FIVE YEARS AND OTHER
JANUARY 31, 2006 WITH THE FUND LENGTH OF SERVICE DIRECTORSHIPS HELD BY THE TRUSTEE
---------------------- ----------------- ------------------- -------------------------------------
INDEPENDENT TRUSTEES:
Joe F. Hanauer (68) Trustee Trustee since March Private investor; Director, MAF
2003. Term expires Bancorp (banking); Chairman and
in 2009. Director, Homestore.com, Inc.
(Internet provider of real estate
information and products); Director,
Combined Investments, L.P.
(investment management).
John E. Neal (55) Trustee Trustee since March Private investor; Managing Director,
2003. Term expires Bank One Capital Markets, Inc.
in 2009. (investment banking) (2000-2004);
Executive Vice President and Head of
Real Estate Department, Bank One
(1998-2000); Director, the Brickman
Group, Ltd. (landscaping company).
William R. Rybak (55) Trustee Trustee since March Private investor; formerly Executive
2003. Term expires Vice President and CFO, Van Kampen
in 2008. Investments, Inc. (investment
manager); Director, Howe Barnes
Investments (investment services
firm); Director, PrivateBancorp, Inc.
(bank holding company).
Stephen B. Timbers (61) Lead Independent Trustee since Private investor; formerly Vice
Trustee 2004. Term expires Chairman, Northern Trust Corporation
in 2007. (bank holding company); President and
Chief Executive Officer, Northern
Trust Investments, N.A. (investment
manager) formerly President, Northern
Trust Global Investments, a division
of Northern Trust Corporation and
Executive Vice President, The
Northern Trust Corporation.
David D. Tripple (61) Trustee Trustee since Private investor; Trustee, Century
January 1, 2006. Shares Trust and Century Small Cap
Term expires in Select Fund***; Chief Executive
2009. Officer and Trustee of all U.S.
Pioneer mutual funds (2000-2001),
Pioneer Investment Management, a
subsidiary of UniCredito Italiano
(investment adviser); prior
thereto, The Pioneer Group, Inc.
(asset management).
FUND OFFICERS:
Nimish Bhatt (42) Treasurer Since 2004. Senior Vice President and Director of
Serves at Operations, Calamos Asset Management,
the discretion Inc., Calamos Holdings LLC, Calamos
of the Board. Advisors LLC and its predecessor, and
Calamos Financial Services LLC and its
predecessor (since 2004); Senior Vice
President, Alternative Investments and
Tax Services, BISYS (financial services
firm)(1996-2004).
S-24
PRINCIPAL OCCUPATION DURING
NAME AND AGE AT POSITIONS HELD TERM OF OFFICE AND PAST FIVE YEARS AND OTHER
JANUARY 31, 2006 WITH THE FUND LENGTH OF SERVICE DIRECTORSHIPS HELD BY THE TRUSTEE
---------------------- ----------------- ------------------- -------------------------------------
Patrick H. Dudasik (50) Vice President Since March 2003. Executive Vice President, Chief
Serves at the Financial Officer and Treasurer of
discretion of the Calamos Asset Management, Inc.,
Board. Calamos Holdings LLC, Calamos
Advisors LLC and its predecessor,
and Calamos Financial Services LLC
and its predecessor.
James S. Hamman, Jr. (36) Secretary Since March 2003. Executive Vice President, Secretary
Serves at the and General Counsel, Calamos Asset
discretion of the Management, Inc., Calamos Holdings
Board LLC, Calamos Advisors LLC and its
predecessor, and Calamos Financial
Services LLC and its predecessor.
Chief Compliance Officer (2004-2005).
Mark Mickey (54) Chief Compliance Since June 2005. Chief Compliance Officer, Calamos
Officer Serves at the Advisors LLC (since 2005); Director
discretion of the of Risk Assessment and Internal
board. Audit, Calamos Advisors LLC
(2003-2005); President, Mark
Mickey Consulting (2002-2003);
Executive Vice President and
Head of Compliance, ABN AMRO,
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 a
number of underwriters and may be deemed to be an interested person in
accordance with Section 2(a)(19) of the 1940 Act. In addition, Mr.
Marsh's law firm has performed work for John P. Calamos, the chief
executive and a controlling person of Calamos (such work was not with
respect to 1940 Act or Investment Advisers Act of 1940 matters). Upon
the advice of counsel to the Fund, the Fund does not believe that Mr.
Marsh is an "interested person" of Calamos.
*** Overseeing two portfolios in fund complex.
The Fund's Board of Trustees consists of eight members. The Fund's
Trustees are divided into three classes. Each class of Trustees will hold office
for a three year term. Each class of Trustees will stand for election at the
conclusion of its respective term. Such classification may prevent replacement
of a majority of the Trustees for up to a two-year period. Each officer serves
until his or her successor is chosen and qualified or until his or her
resignation or removal by the Board of Trustees.
COMMITTEES OF THE BOARD OF TRUSTEES. The Funds Board of Trustees
currently has four standing committees. The committees are described below and
the members of each committee constitute the entire committee.
Executive Committee. Messrs. John Calamos, Nick Calamos and Stephen
Timbers are members of the Executive Committee, which has authority during
intervals between meetings of the Board of Trustees to exercise the powers of
the Board, with certain exceptions. Both John Calamos and Nick Calamos are
Interested Trustees of the Fund.
Audit Committee. Messrs. Hanauer, Marsh, Neal, Rybak, Timbers and
Tripple serve on the Audit Committee. The Audit Committee operates under a
written charter adopted and approved by the Board. The Audit Committee selects
independent auditors, approves services to be rendered by the auditors, monitors
the auditors' performance, reviews the results of the Fund's audit, determines
whether to recommend to the Board that the Fund's audited financial statements
be included in the Fund's annual report and responds to other matters deemed
appropriate by the Board of Trustees. All members of the Audit Committee are
Independent Trustees of the Fund.
S-25
Governance Committee. Messrs. Hanauer, Marsh, Neal, Rybak, Timbers and
Tripple serve on the Governance Committee. The Governance Committee operates
under a written charter adopted and approved by the Board. The Governance
Committee oversees the independence and effective functioning of the Board of
Trustees and endeavors to be informed about good practices for mutual fund
boards. The Governance Committee also functions as a nominating committee by
making recommendations to the Board of Trustees regarding candidates for
election as non-interested Trustees. In making such recommendations, the
Governance Committee considers a number of factors, including a candidate's
background, integrity, knowledge and relevant experience. These factors are set
forth in an appendix to the written charter. Any prospective candidate is
interviewed by the Trustees, and references are checked. The Governance
Committee will consider shareholder recommendations regarding potential trustee
candidates that are properly submitted to the Governance Committee for its
consideration.
A shareholder of the Fund who wishes to propose a trustee candidate
must submit any such recommendation in writing via regular mail to the attention
of the Fund's Secretary, at the address of the Fund's principal executive
offices. The shareholder recommendation must include:
- the number and class of Fund shares owned beneficially or of
record by the nominating shareholder at the time the
recommendation is submitted and the dates on which such shares
were acquired, specifying the number of shares owned
beneficially;
- a full listing of the proposed candidate's education,
experience (including knowledge of the investment company
industry, experience as a director or senior officer of public
or private companies, and directorships on other boards of
other registered investment companies), current employment,
date of birth, business and residence address, and the names
and addresses of at least three professional references;
- information as to whether the candidate is, has been or may be
an "interested person" (as such term is defined in the 1940
Act) of the Fund, Calamos or any of its affiliates, and, if
believed not to be or have been an "interested person,"
information regarding the candidate that will be sufficient
for the committee to make such determination;
- the written and signed consent of the candidate to be named as
a nominee and to serve as a trustee of the Fund, if elected;
- a description of all arrangements or understandings between
the nominating shareholder, the candidate and/or any other
person or persons (including their names) pursuant to which
the shareholder recommendation is being made, and if none, so
specify;
- the class or series and number of all shares of the Fund owned
of record or beneficially by the candidate, as reported by the
candidate; and
- such other information that would be helpful to the Governance
Committee in evaluating the candidate.
Unless otherwise specified by the Governance Committee's chairman or by
legal counsel to the non-interested trustees, the Fund's Secretary will promptly
forward all shareholder recommendations to the Governance Committee's chairman
and the legal counsel to the non-interested trustees, indicating whether the
shareholder recommendation has been properly submitted pursuant to the
procedures adopted by the Governance Committee for the consideration of trustee
candidates nominated by shareholders.
Recommendations for candidates as trustees will be evaluated, among
other things, in light of whether the number of trustees is expected to change
and whether the trustees expect any vacancies. During periods when the
Governance Committee are not actively recruiting new trustees, shareholder
recommendations will be kept on file until active recruitment is under way.
After consideration of a shareholder recommendation the Governance Committee may
dispose of the shareholder recommendation.
Dividend Committee. Messrs. John Calamos and Nick Calamos serve on the
Dividend Committee, which has the authority to declare dividends, capital gains
distributions and return of capital distributions on behalf of the Fund. Both
John Calamos and Nick Calamos are Interested Trustees of the Fund.
In addition to the above committees, there is a pricing committee
comprised of officers of the Fund and employees of Calamos.
During the fiscal year ended October 31, 2005, the Fund's Board of
Trustees held five meetings, the Executive Committee held no meetings, the Audit
Committee held four meetings, the Governance Committee held three meetings and
the Dividend Committee held no meetings. All of the Trustees and committee
members then serving attended at least 75% of the meetings of the Board of
Trustees and applicable committees held during the fiscal year, except for Nick
Calamos, who attended 60% of the meetings held by the Board of Trustees.
The Fund's Agreement and Declaration of Trust provides that the Fund
will indemnify the Trustees and officers against liabilities and expenses
incurred in connection with any claim in which they may be involved because of
their offices with the Fund, unless it is determined in the manner specified in
the Agreement and Declaration of Trust that they have not acted in good faith in
the reasonable belief that their actions were in the best interests of the Fund
or that such indemnification would relieve any officer or Trustee of any
liability to the Fund or its shareholders by reason of willful misfeasance, bad
faith, gross negligence or reckless disregard of his or her duties.
COMPENSATION OF OFFICERS AND TRUSTEES
The Fund pays no salaries or compensation to any of its officers or to
the Trustees who are affiliated persons of Calamos. Although they are
compensated, the Independent Trustees do not receive any pension or retirement
benefits from the Fund. The following table sets forth the total compensation
paid to each Trustee (including any amounts deferred, as described below) by the
Fund and the Calamos Funds as a group. Total compensation from the Calamos Funds
as a group is for the calendar year ended December 31, 2005.
S-26
AGGREGATE TOTAL COMPENSATION
COMPENSATION FROM CALAMOS
NAME FROM THE TRUST+ FUND COMPLEX+*
---------------------------- ---------------------- -----------------------
John P. Calamos $ 0 $ 0
Nick P. Calamos 0 0
Joe F. Hanauer 5,801 86,000
Weston W. Marsh 5,801 86,000
John E. Neal 6,223 93,500
William R. Rybak 6,128 91,625
Steve B. Timbers 7,123 111,000
David D. Tripple** 0 0
------------------
+ 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, 2005, the value of Mr. Neal's deferred
compensation accounts was $270,168 and the value of Mr. Marsh's deferred
compensation accounts was $124,070.
* Consisting of 14 portfolios.
** Appointed trustee in January 2006.
The compensation paid to the Independent Trustees of Calamos Funds for
their services as such consists of an annual retainer fee in the amount of
$50,000. In addition, the lead Independent Trustee receives a supplemental
annual retainer of $40,000, the chair of the Audit Committee receives a
supplemental annual retainer of $15,000 and the chair of any other committee
receives a supplemental annual retainer of $7,500. Independent Trustees receive
a meeting attendance fee of $6,000 for any board meeting attended in person and
$3,000 for any board meeting attended by telephone. In addition, Independent
Trustees receive $3,000 for any committee meeting attended (even if by
telephone).
Compensation is paid only to Trustees who are not affiliated with
Calamos or Calamos Asset Management, Inc. and is allocated among the portfolios
of the Calamos Funds in accordance with a procedure determined from time to time
by the Board.
The Fund has adopted a deferred compensation plan (the "Plan"). Under
the Plan, a Trustee who is not an "interested person" of Calamos and who has
elected to participate in the Plan ("participating Trustees") may defer receipt
of all or a portion of his compensation from the Fund in order to defer payment
of income taxes or for other reasons. The deferred compensation payable to the
participating Trustee is credited to the Trustee's deferral account as of the
business day such compensation would have been paid to the Trustee. The value of
a Trustee's deferred compensation account at any time is equal to what would be
the value if the amounts credited to the account had instead been invested in
shares of one or more of the portfolios of Calamos Investment Trust as
designated by the Trustee. Thus, the value of the account increases with
contributions to the account or with increases in the value of the measuring
shares, and the value of the account decreases with withdrawals from the account
or with declines in the value of the measuring shares. If a participating
trustee retires, the Trustee may elect to receive payments under the Plan in a
lump sum or in equal installments over a period of five years. If a
participating Trustee dies, any amount payable under the Plan will be paid to
the Trustee's beneficiaries.
OWNERSHIP OF SHARES OF THE FUND AND OTHER CALAMOS FUNDS
The following table indicates the value of shares that each Trustee
beneficially owns in the Fund and the Calamos 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 February 1, 2006. The value of the shares
held are stated in ranges in accordance with the requirements of the Securities
and Exchange Commission
S-27
(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 Commission.
AGGREGATE DOLLAR RANGE
OF EQUITY SECURITIES
IN ALL REGISTERED
DOLLAR RANGE OF EQUITY INVESTMENT COMPANIES
NAME OF TRUSTEE SECURITIES IN THE FUND IN THE CALAMOS FUNDS
--------------------------- -------------------------- ------------------------
INTERESTED TRUSTEES:
John P. Calamos............ $50,001 - $100,000 Over $100,000
Nick P. Calamos............ None Over $100,000
Weston W. Marsh............ $50,001 - $100,000 Over $100,000
NON-INTERESTED TRUSTEES:
Joe F. Hanauer............. None Over $100,000
John E. Neal............... None Over $100,000
William Rybak.............. $10,001 - $50,000 Over $100,000
Stephen B. Timbers......... Over $100,000 Over $100,000
David D. Tripple........... $10,001 - $50,000 Over $100,000
CODE OF ETHICS
The Fund and Calamos have adopted a code of ethics under Rule 17j-1 of
the 1940 Act which is applicable to officers, directors/Trustees and designated
employees of Calamos and Calamos Financial Services, LLC ("CFS"). Employees of
Calamos and CFS are permitted to make personal securities transactions,
including transactions in securities that the Fund may purchase, sell or hold,
subject to requirements and restrictions set forth in the code of ethics of
Calamos and CFS. The code of ethics contains provisions and requirements
designed to identify and address certain conflicts of interest between personal
investment activities of Calamos and CFS employees and the interests of
investment advisory clients such as the Fund. Among other things, the code of
ethics prohibits certain types of transactions absent prior approval, imposes
time periods during which personal transactions may not be made in certain
securities, and requires the submission of duplicate broker confirmations and
statements and quarterly reporting of securities transactions. Additional
restrictions apply to portfolio managers, traders, research analysts and others
involved in the investment advisory process. Exceptions to these and other
provisions of the code of ethics may be granted in particular circumstances
after review by appropriate personnel.
The Fund's code of ethics can be reviewed and copied at the Securities
and Exchange Commission's Public Reference Room in Washington, D.C. Information
on the operation of the Public Reference Room may be obtained by calling the
Securities and Exchange Commission at (202) 942-8090. The Fund's code of ethics
is also available on the EDGAR Database on the Securities and Exchange
Commission's Internet site at http://www.sec.gov, and, upon payment of a
duplicating fee, by electronic request at the following e-mail address:
publicinfo@sec.gov or by writing the Securities and Exchange Commission's Public
Reference Section, Washington, D.C. 20549-0102.
PROXY VOTING PROCEDURES
The Fund has delegated proxy voting responsibilities to Calamos,
subject to the Board of Trustees' general oversight. The Fund expects Calamos to
vote proxies related to the Fund's portfolio securities for which the Fund has
voting authority consistent with the Fund's best economic interests. Calamos has
adopted its own Proxy Voting Policies and Procedures ("Policies"). The Policies
address, among other things, conflicts of interest that may arise between the
interests of the Fund, and the interests of the adviser and its affiliates.
The following is a summary of the Policies used by Calamos in voting
proxies.
To assist it in voting proxies, Calamos has established a Committee
comprised of members of its Portfolio Management and Research Departments. The
Committee and/or its members will vote proxies using the following guidelines.
In general, if Calamos believes that a company's management and board
have interests sufficiently aligned with the Fund's interest, Calamos will vote
in favor of proposals recommended by a company's board. More specifically,
Calamos seeks to ensure that the board of directors of a company is
S-28
sufficiently aligned with security holders' interests and provides proper
oversight of the company's management. In many cases this may be best
accomplished by having a majority of independent board members. Although Calamos
will examine board member elections on a case-by-case basis, it will generally
vote for the election of directors that would result in a board comprised of a
majority of independent directors.
Because of the enormous variety and complexity of transactions that are
presented to shareholders, such as mergers, acquisitions, reincorporations,
adoptions of anti-take over measures (including adoption of a shareholder rights
plan, requiring supermajority voting on particular issues, adoption of fair
price provisions, issuance of blank check preferred stocks and the creation of a
separate class of stock with unequal voting rights), changes to capital
structures (including authorizing additional shares, repurchasing stock or
approving a stock split), executive compensation and option plans, that occur in
a variety of industries, companies and market cycles, it is extremely difficult
to foresee exactly what would be in the best interests of the Fund in all
circumstances. Moreover, voting on such proposals involves considerations unique
to each transaction. Accordingly, Calamos will vote on a case-by-case basis on
proposals presenting these transactions.
Finally, Calamos has established procedures to help resolve conflicts
of interests that might arise when voting proxies for the Fund. These procedures
provide that the Committee, along with Calamos' Legal and Compliance
Departments, will examine conflicts of interests with the Fund of which Calamos
is aware and seek to resolve such conflicts in the best interests of the Fund,
irrespective of any such conflict. If a member of the Committee has a personal
conflict of interest, that member will refrain from voting and the remainder of
the Committee will determine how to vote the proxy solely on the investment
merits of any proposal. The Committee will then memorialize the conflict and the
procedures used to address the conflict.
The Fund is required to file with the SEC its complete proxy voting
record for the twelve-month period ending June 30, by no later than August 31 of
each year. The Fund's proxy voting record for the most recent twelve-month
period ending June 30 is available by August 31 of each year (1) on the SEC's
website at www.sec.gov and (2) without charge, upon request, by calling
800-582-6959.
You may obtain a copy of Calamos' Policies by calling (800) 582-6959,
by visiting the Fund's website at www.calamos.com, by writing Calamos at:
Calamos Investments, Attn: Client Services, 2020 Calamos Court, Naperville, IL
60563, and on the Commission's website at www.sec.gov.
INVESTMENT ADVISER AND INVESTMENT MANAGEMENT AGREEMENT
Subject to the overall authority of the board of trustees, Calamos
provides the Fund with investment research, advice and supervision and furnishes
continuously an investment program for the Fund. In addition, Calamos furnishes
for use of the Fund such office space and facilities as the Fund may require for
its reasonable needs and supervises the business and affairs of the Fund and
provides the following other services on behalf of the Fund and not provided by
persons not a party to the investment management agreement: (i) preparing or
assisting in the preparation of reports to and meeting materials for the
Trustees; (ii) supervising, negotiating contractual arrangements with, to the
extent appropriate, and monitoring the performance of, accounting agents,
custodians, depositories, transfer agents and pricing agents, accountants,
attorneys, printers, underwriters, brokers and dealers, insurers and other
persons in any capacity deemed to be necessary or desirable to Fund operations;
(iii) assisting in the preparation and making of filings with the Commission and
other regulatory and self-regulatory organizations, including, but not limited
to, preliminary and definitive proxy materials, amendments to the Fund's
registration statement on Form N-2 and semi-annual reports on Form N-SAR; (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
S-29
pursuant to Section 4982 of the Code; (vii) providing assistance with investor
and public relations matters; (viii) monitoring the valuation of portfolio
securities and the calculation of net asset value; (ix) monitoring the
registration of shares of beneficial interest of the Fund under applicable
federal and state securities laws; (x) maintaining or causing to be maintained
for the Fund all books, records and reports and any other information required
under the 1940 Act, to the extent that such books, records and reports and other
information are not maintained by the Fund's custodian or other agents of the
Fund; (xi) assisting in establishing the accounting policies of the Fund; (xii)
assisting in the resolution of accounting issues that may arise with respect to
the Fund's operations and consulting with the Fund's independent accountants,
legal counsel and the Fund's other agents as necessary in connection therewith;
(xiii) reviewing the Fund's bills; (xiv) assisting the Fund in determining the
amount of dividends and distributions available to be paid by the Fund to its
shareholders, preparing and arranging for the printing of dividend notices to
shareholders, and providing the transfer and dividend paying agent, the
custodian, and the accounting agent with such information as is required for
such parties to effect the payment of dividends and distributions; and (xv)
otherwise assisting the Fund as it may reasonably request in the conduct of the
Fund's business, subject to the direction and control of the Trustees.
Under the investment management agreement, the Fund pays to Calamos a
fee based on the average weekly managed assets that is computed weekly and paid
on a monthly basis. The fee paid by the Fund is at the annual rate of 0.80% of
managed assets. Because the fees paid to Calamos are determined on the basis of
the Fund's managed assets, Calamos' interest in determining whether to leverage
the Fund may differ from the interests of the Fund and its common shareholders.
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 A FEE WAIVED (AS A
PERCENTAGE OF PERCENTAGE OF
AVERAGE WEEKLY AVERAGE WEEKLY
PERIOD ENDING MAY 31 MANAGED ASSETS) PERIOD ENDING MAY 31 MANAGED ASSETS)
---------------------- -------------------- --------------------- --------------------
2006(1) 0.10% 2009 0.07%
2007 0.10% 2010 0.05%
2008 0.10% 2011 0.03%
------------------
(1) The annual rate of the management fee waived for the periods ending
May 31, 2003, 2004 and 2005 was 0.10%.
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
S-30
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.
The renewal of the investment management agreement was last approved on
June 30, 2005. A discussion regarding the basis of the Board's decision to
approve the renewal of the investment management agreement is available in the
Fund's Annual Report to shareholders for the twelve-month period ended October
31, 2005. Unless earlier terminated as described below, the investment
management agreement will remain in effect until August 1, 2006. The investment
management agreement continues in effect from year to year so long as such
continuation is approved at least annually by (1) the board of trustees or the
vote of a majority of the outstanding voting securities (as defined in the 1940
Act) of the Fund, and (2) a majority of the trustees who are not interested
persons of any party to the investment management agreement, cast in person at a
meeting called for the purpose of voting on such approval. The investment
management agreement may be terminated at any time, without penalty, by either
the Fund or Calamos upon 60 days' written notice, and is automatically
terminated in the event of its assignment as defined in the 1940 Act.
PORTFOLIO MANAGERS
John P. Calamos and Nick P. Calamos share responsibility for managing
the Fund's portfolio. The portfolio managers are supported by and lead a team of
investment professionals whose valuable contributions create a synergy of
expertise that can be applied across many different investment strategies.
The portfolio managers also have responsibility for the day-to-day
management of accounts other than the Fund. Information regarding these other
accounts is set forth below.
NUMBER OF OTHER ACCOUNTS MANAGED AND ASSETS BY ACCOUNT TYPE AS OF OCTOBER 31, 2005
--------------------------------------------------------------------------------------------------------------------
PORTFOLIO REGISTERED INVESTMENT OTHER POOLED INVESTMENT
MANAGER COMPANIES VEHICLES OTHER ACCOUNTS
--------------- --------------------------- --------------------------- ------------------------------
ACCOUNTS ASSETS ACCOUNTS ASSETS ACCOUNTS ASSETS
-------- -------------- -------- ----------- -------- --------------
John P. Calamos 18 30,531,621,967 3 145,711,009 25,917 10,632,214,331
Nick P. Calamos 18 30,531,621,967 3 145,711,009 25,917 10,632,214,331
NUMBER OF ACCOUNTS AND ASSETS FOR WHICH ADVISORY FEE IS PERFORMANCE BASED AS OF OCTOBER 31, 2005
--------------------------------------------------------------------------------------------------------------------
PORTFOLIO REGISTERED INVESTMENT OTHER POOLED INVESTMENT
MANAGER COMPANIES VEHICLES OTHER ACCOUNTS
--------------- --------------------------- --------------------------- ------------------------------
ACCOUNTS ASSETS ACCOUNTS ASSETS ACCOUNTS ASSETS
-------- -------------- -------- ----------- -------- --------------
John P. Calamos 1 122,169,844 2 86,355,635 1 8,101,609
Nick P. Calamos 1 122,169,844 2 86,355,635 1 8,101,609
S-31
The Fund's portfolio managers are responsible for managing the Fund and
other accounts, including separate accounts and unregistered funds.
Other than potential conflicts between investment strategies, the
side-by-side management of both the Fund and other accounts may raise potential
conflicts of interest due to the interest held by Calamos in an account and
certain trading practices used by the portfolio managers (e.g., cross trades
between the Fund and another account and allocation of aggregated trades).
Calamos has developed policies and procedures reasonably designed to mitigate
those conflicts. For example, Calamos will only place cross-trades in securities
held by the Fund in accordance with the rules promulgated under the 1940 Act and
has adopted policies designed to ensure the fair allocation of securities
purchased on an aggregated basis.
The portfolio managers advise certain accounts under a performance fee
arrangement. A performance fee arrangement may create an incentive for a
portfolio manager to make investments that are riskier or more speculative than
would be the case in the absence of performance fees. A performance fee
arrangement may result in increased compensation to the portfolio managers from
such accounts due to unrealized appreciation as well as realized gains in the
client's account.
The portfolio managers have each entered into employment agreements
that provide for compensation in the form of a minimum annual base salary and a
maximum discretionary target bonus. The amounts paid to portfolio managers and
the criteria utilized to determine the amounts are benchmarked against industry
specific data provided by third party analytical agencies. The discretionary
target bonus is set at a percentage of base salary, ranging from 300% to 600% of
base salary, with a maximum annual bonus opportunity of at least 150% of the
target bonus. Portfolio performance, as measured by risk-adjusted portfolio
performance over a rolling three-year period, is utilized to determine the
discretionary target bonus. Also, due to the portfolio managers' ownership and
executive management positions with Calamos and its parent companies, additional
multiple corporate objectives are utilized to determine the discretionary target
bonus. For 2005, the additional corporate objectives were advisory fee revenue,
measured by growth in revenues compared to industry percentages; marketing
effectiveness, as measured by growth in assets under management relative to
industry percentages; operating efficiencies, as measured by operating margin
relative to industry levels; and stock price performance.
The portfolio managers are also eligible to receive annual equity
awards under a long term incentive compensation program. The target annual
equity awards are set at a percentage of base salary, ranging from 225% to 300%.
At October 31, 2005, each portfolio manager beneficially owned (as
determined pursuant to Rule 16a-1(a)(2) under the 1934 Act) shares of the Fund
having values within the indicated dollar ranges.
FUND
----
John P. Calamos $50,000 - $100,000
Nick P. Calamos $0
FUND ACCOUNTANT
Under the arrangements with State Street Bank and Trust Company ("State
Street") to provide fund accounting services, State Street provides certain
administrative and accounting services including providing daily reconciliation
of cash, trades and positions; maintaining general ledger and capital stock
accounts; preparing daily trial balance; calculating net asset value; providing
selected general ledger reports; preferred share compliance; calculating total
returns; and providing monthly distribution analysis to the Fund and such other
funds advised by Calamos that may be part of those arrangements (the Fund
S-32
and such other funds are collectively referred to as the "Calamos Funds"). For
the services rendered to the Calamos Funds, State Street receives fees based on
the combined managed assets of the Calamos Funds ("Combined Assets"). State
Street receives a fee at the annual rate of .009% for the first $5.0 billion of
Combined Assets, .0075% for the next $5.0 billion of Combined Assets, .005% for
the next $5.0 billion of Combined Assets and .0035% for the Combined Assets in
excess of $15.0 billion. Each fund of the Calamos Funds pays its pro-rata share
of the fees payable to State Street described below based on relative managed
assets of each fund.
Calamos will provide the following financial accounting services to
Calamos Funds, rather than State Street: management of expenses and expense
payment processing; monitor the calculation of expense accrual amounts for any
fund and make any necessary modifications; coordinate any expense reimbursement
calculations and payment; calculate yields on the funds in accordance with rules
and regulations of the Commission; calculate net investment income dividends and
capital gains distributions; calculate, track and report tax adjustments on all
assets of each fund, including but not limited to contingent debt and preferred
trust obligations; prepare excise tax and fiscal year distributions schedules;
prepare tax information required for financial statement footnotes; prepare
state and federal income tax returns; prepare specialized calculations of
amortization on convertible securities; prepare year-end dividend disclosure
information; calculate trustee deferred compensation plan accruals and
valuations; and prepare Form 1099 information statements for Board members and
service providers. For providing those financial accounting services, Calamos
will receive a fee payable monthly at the annual rate of 0.0175% on the first $1
billion of the average daily net assets of the Calamos Funds; 0.0150% on the
next $1 billion of the average daily net assets of the Calamos Funds; and
0.0110% on the average daily net assets of the Calamos Funds above $2 billion
("financial accounting service fee"). Each fund of the Calamos Funds will pay
its pro-rata share of the financial accounting service fee payable to Calamos
based on relative managed assets of each fund.
PORTFOLIO TRANSACTIONS
Portfolio transactions on behalf of the Fund effected on stock
exchanges involve the payment of negotiated brokerage commissions. There is
generally no stated commission in the case of securities traded in the
over-the-counter markets, but the price paid by the Fund usually includes an
undisclosed dealer commission or mark-up. In underwritten offerings, the price
paid by the Fund includes a disclosed, fixed commission or discount retained by
the underwriter or dealer.
In executing portfolio transactions, Calamos uses its best efforts to
obtain for the Fund the most favorable combination of price and execution
available. In seeking the most favorable combination of price and execution,
Calamos considers all factors it deems relevant, including price, the size of
the transaction, the nature of the market for the security, the amount of
commission, the timing of the transaction taking into account market prices and
trends, the execution capability of the broker-dealer and the quality of service
rendered by the broker-dealer in other transactions.
In allocating the Fund's portfolio brokerage transactions to
unaffiliated broker-dealers, Calamos may take into consideration the research,
analytical, statistical and other information and services provided by the
broker-dealer, such as general economic reports and information, reports or
analyses of particular companies or industry groups, market timing and technical
information, and the availability of the brokerage firm's analysts for
consultation. Although Calamos believes these services have substantial value,
they are considered supplemental to Calamos' own efforts in the performance of
its duties under the management agreement. As permitted by Section 28(e) of the
Securities Exchange Act of 1934 ("1934 Act"), Calamos may pay a broker-dealer
that provides brokerage and research services an amount of commission for
effecting a securities transaction for the Fund in excess of the commission that
another broker-dealer would have charged for effecting that transaction if the
amount is believed by Calamos to
S-33
be reasonable in relation to the value of the overall quality of the brokerage
and research services provided. Other clients of Calamos may indirectly benefit
from the provision of these services to Calamos, and the Fund may indirectly
benefit from services provided to Calamos as a result of transactions for other
clients.
In certain cases, Calamos may obtain products or services from a broker
that have both research and non-research uses. Examples of non-research uses are
administrative and marketing functions. These are referred to as "mixed use"
products. In each case, Calamos makes a good faith effort to determine the
proportion of such products or services that may be used for research and
non-research purposes. That determination is based upon the time spent by
Calamos personnel for research and non-research uses. The portion of the costs
of such products or services attributable to research usage may be defrayed by
Calamos through brokerage commissions generated by transactions of its clients,
including the Fund. Calamos pays the provider in cash for the non-research
portion of its use of these products or services.
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 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
S-34
level in addition to the taxation of shareholders who receive dividends from the
Fund) or as a registered closed-end investment company under the 1940 Act; (2)
the Fund would not be able to liquidate portfolio securities in an orderly
manner and consistent with the Fund's investment objective and policies in order
to repurchase shares; or (3) there is, in the board's judgment, any (a) material
legal action or proceeding instituted or threatened challenging such
transactions or otherwise materially adversely affecting the Fund, (b) general
suspension of or limitation on prices for trading securities on the New York
Stock Exchange, (c) declaration of a banking moratorium by federal or state
authorities or any suspension of payment by United States or New York banks, (d)
material limitation affecting the Fund or the issuers of its portfolio
securities by federal or state authorities on the extension of credit by lending
institutions or on the exchange of foreign currency, (e) commencement of war,
armed hostilities or other international or national calamity directly or
indirectly involving the United States, or (f) other event or condition which
would have a material adverse effect (including any adverse tax effect) on the
Fund or its shareholders if shares were repurchased.
The repurchase by the Fund of its shares at prices below net asset
value will result in an increase in the net asset value of those shares that
remain outstanding. However, there can be no assurance that share repurchases or
tender offers at or below net asset value will result in the Fund's shares
trading at a price equal to their net asset value. Nevertheless, the fact that
the Fund's shares may be the subject of repurchase or tender offers from time to
time, or that the Fund may be converted to an open-end investment company, may
reduce any spread between market price and net asset value that might otherwise
exist.
In addition, a purchase by the Fund of its common shares will decrease
the Fund's total managed assets which would likely have the effect of increasing
the Fund's expense ratio. Any purchase by the Fund of its common shares at a
time when preferred shares are outstanding will increase the leverage applicable
to the outstanding common shares then remaining.
Before deciding whether to take any action if the common shares trade
below net asset value, the Fund's Board of Trustees would likely consider all
relevant factors, including the extent and duration of the discount, the
liquidity of the Fund's portfolio, the impact of any action that might be taken
on the Fund or its shareholders and market considerations. Based on these
considerations, even if the Fund's shares should trade at a discount, the Board
of Trustees may determine that, in the interest of the Fund and its
shareholders, no action should be taken.
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 common 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, banks and 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
hereof, which tax laws may be changed or subject to new interpretations by the
courts or the Internal Revenue Service ("IRS") retroactively or prospectively
and could affect the continued validity of this summary. 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
S-35
tax advice. INVESTORS ARE URGED TO CONSULT THEIR OWN TAX ADVISERS BEFORE MAKING
AN INVESTMENT IN THE FUND TO DETERMINE THE SPECIFIC TAX CONSEQUENCES TO THEM OF
INVESTING IN THE FUND, INCLUDING THE APPLICABLE FEDERAL, STATE, LOCAL AND
FOREIGN TAX CONSEQUENCES AS WELL AS THE EFFECT OF POSSIBLE CHANGES IN TAX LAWS.
The Fund has elected to be treated, and intends to qualify each year,
as a "regulated investment company" under Subchapter M of the Internal Revenue
Code of 1986, as amended (the "Code") so that it will not pay U.S. federal
income tax on income and capital gains timely distributed to shareholders. 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 and net income derived from an interest in a
qualified publicly traded partnership (collectively, 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.,
certain 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 value of the
Fund's total assets is represented by cash and cash items, U.S. government
securities, securities of other regulated investment companies and other
securities, with such other securities of any one issuer limited for the
purposes of this calculation to an amount not greater in value than 5% of the
value of the Fund's total assets and to not more than 10% of the outstanding
voting securities of such issuer, and (ii) not more than 25% of the value of its
total assets is invested in the securities of any one issuer (other than U.S.
government securities or securities of other regulated investment companies) or
of two or more issuers controlled by the Fund and engaged in the same, similar
or related trades or businesses or the securities of one or more qualified
publicly traded partnerships.
If the Fund qualifies as a regulated investment company and distributes
to its shareholders at least 90% of the sum of (i) its "investment company
taxable income" as that term is defined in the Code (which includes, among other
things, dividends, taxable interest, and the excess of any net short-term
capital gains over net long-term capital losses as reduced by certain deductible
expenses) without regard to the deduction for dividends paid and (ii) the excess
of its gross tax-exempt interest, if any, over certain disallowed deductions,
the Fund will be relieved of U.S. federal income tax on any income of the Fund,
including long-term capital gains, distributed to shareholders. However, if the
Fund retains any investment company taxable income or "net capital gain" (i.e.,
the excess of net long-term capital gains over net short-term capital losses),
it will be subject to U.S. federal income tax at regular corporate federal
income tax rates (currently at a maximum rate of 35%) on the amount retained.
The Fund intends to distribute at least annually, all or substantially all of
its investment company taxable income, net tax-exempt interest, and net capital
gain. Under the Code, the Fund will be subject to a nondeductible 4% federal
excise tax on a portion of its undistributed ordinary income and capital gains
for any calendar year if it fails to meet certain distribution requirements with
respect to such calendar year. The Fund intends to make distributions in a
timely manner and accordingly does not expect to be subject to this excise tax.
If for any taxable year the Fund does not qualify as a regulated
investment company for U.S. federal income tax purposes, it would be treated 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 such event, the Fund's distributions, to the extent derived from the
Fund's current or accumulated earnings and profits, would generally constitute
ordinary dividends, which would be eligible for the
S-36
dividends received deduction available to corporate shareholders under Section
243 of the Code, and non-corporate shareholders of the Fund generally would be
able to treat such distributions as "qualified dividend income" under Section
1(h)(11) of the Code as discussed below.
Unless a shareholder is ineligible to participate or elects otherwise,
all distributions will be automatically reinvested in additional common shares
of the Fund pursuant to the Automatic Dividend Reinvestment Plan (the "Plan").
For U.S. federal income tax purposes, all dividends are generally taxable
regardless of whether a shareholder takes them in cash or they are reinvested
pursuant to the Plan in additional shares of the Fund. Distributions of
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, except as provided below are generally taxable as
ordinary income to the extent of the Fund's current and accumulated earnings and
profits. Under Section 1(h)(11) of the Code, for taxable years beginning on or
before December 31, 2010, qualified dividend income, if any, received by
non-corporate shareholders is taxed at rates equivalent to long-term capital
gain tax rates, which reach a maximum of 15%. "Qualified dividend income"
generally includes dividends from certain domestic corporations and dividends
from "qualified foreign corporations," although dividends paid by REITs will not
generally be eligible to qualify as qualified dividend income. For these
purposes, a "qualified foreign corporation" is a foreign corporation (i) that is
incorporated in a possession of the United States or is eligible for benefits
under a qualifying income tax treaty with the United States, or (ii) whose stock
with respect to which such dividend is paid is readily tradable on an
established securities market in the United States. A qualified foreign
corporation does not include a foreign corporation that for the taxable year of
the corporation in which the dividend was paid, or the preceding taxable year,
is a "passive foreign investment company," as defined in the Code. The Fund
generally can pass the tax treatment of qualified dividend income it receives
through to Fund shareholders to the extent of the aggregate dividends received
by the Fund. For the Fund to receive qualified dividend income, the Fund must
meet certain holding period requirements for the stock on which the otherwise
qualified dividend is paid. In addition, the Fund cannot be obligated to make
payments (pursuant to a short sale or otherwise) with respect to substantially
similar or related property. If the Fund lends portfolio securities, amounts
received by the Fund that is the equivalent of the dividends paid by the issuer
on the securities loaned will not be eligible for qualified dividend income
treatment. The same provisions, including the holding period requirements, apply
to each shareholder's investment in the Fund. For taxable years beginning after
December 31, 2010, "qualified dividend income" will no longer be taxed at the
rates applicable to long-term capital gains, but rather will be taxed at
ordinary income tax rates, which can reach a maximum rate of 35%, unless
Congress enacts legislation providing otherwise. Distributions of net capital
gain, if any, are taxable at long-term capital gain rates for U.S. federal
income tax purposes without regard to the length of time the shareholder has
held shares of the Fund. A distribution of an amount in excess of the Fund's
current and accumulated earnings and profits, if any, will be treated by a
shareholder as a tax-free return of capital, which is applied against and
reduces the shareholder's basis in his, her or its shares. To the extent that
the amount of any such distribution exceeds the shareholder's basis in his, her
or its shares, the excess will be treated by the shareholder as gain from the
sale or exchange of such shares. The U.S. federal income tax status of all
distributions will be designated by the Fund and reported to the shareholders
annually.
Certain distributions by the Fund, if any, may qualify for the
dividends received deduction available to corporate shareholders under Section
243 of the Code, subject to certain holding period and other requirements, but
generally only to the extent the Fund earned dividend income from stock
investments in U.S. domestic corporations (other than REITs).
If a shareholder's distributions are automatically reinvested pursuant
to the Plan and the Plan Agent invests the distribution in shares acquired on
behalf of the shareholder in open-market purchases, for U.S. federal income tax
purposes, the shareholder will be treated as having received a taxable
distribution in the amount of the cash dividend that the shareholder would have
received if the
S-37
shareholder had elected to receive cash. If a shareholder's distributions are
automatically reinvested pursuant to the Plan and the Plan Agent invests the
distribution in newly issued shares of the Fund, the shareholder will be treated
as receiving a taxable distribution equal to the fair market value of the stock
the shareholder receives.
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.
Any dividend declared by the Fund in October, November or December with
a record date in such a month and paid during the following January will be
treated for U.S. federal income tax purposes as paid by the Fund and received by
shareholders on December 31 of the calendar year in which it is declared.
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 gain and loss to be treated as ordinary income
or loss and may affect the amount, timing and character of distributions to
shareholders.
If the Fund acquires any equity interest (generally including not only
stock but also an option to acquire stock such as is inherent in a convertible
bond) in certain foreign corporations that receive at least 75% of their annual
gross income from passive sources (such as interest, dividends, certain rents
and royalties, or capital gains) or that hold at least 50% of their assets in
investments producing such passive income ("passive foreign investment
companies"), the Fund could be subject to U.S. federal income tax and additional
interest charges on "excess distributions" received from such companies or on
gain from the sale of stock in such companies, even if all income or gain
actually received by the Fund is timely distributed to its shareholders. The
Fund would not be able to pass through to its shareholders any credit or
deduction for such a tax. An election may generally be available that would
ameliorate these adverse tax consequences, but any such election could require
the Fund to recognize taxable income or gain (subject to tax distribution
requirements) without the concurrent receipt of cash and would also require the
foreign corporation to provide the Fund with certain information necessary for
such treatment, which such foreign corporation may or may not provide. These
investments could also result in the treatment of associated capital gains as
ordinary income. The Fund may limit and/or manage its holdings in passive
foreign investment companies to limit its tax liability or maximize its return
from these investments.
The Fund may invest in debt obligations that are in the lowest rating
categories or are unrated, including debt obligations of issuers not currently
paying interest or who are in default. Investments in debt obligations that are
at risk of or in default present special tax issues for the 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,
S-38
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 or distributions could
potentially limit or eliminate the Fund's ability to make distributions on its
common shares until the asset coverage is restored. These limitations could
prevent the Fund from distributing at least 90% of its investment company
taxable income as is required under the Code and therefore might jeopardize the
Fund's qualification as a regulated investment company and/or might subject the
Fund to a nondeductible 4% federal excise tax. Upon any failure to meet the
asset coverage requirements imposed by the 1940 Act, the Fund may, in its sole
discretion and to the extent permitted under the 1940 Act, purchase or redeem
shares of preferred stock in order to maintain or restore the requisite asset
coverage and avoid the adverse consequences to the Fund and its shareholders of
failing to meet the distribution requirements. There can be no assurance,
however, that any such action would achieve these objectives. The Fund will
endeavor to avoid restrictions on its ability to distribute dividends.
If the Fund invests in certain pay-in-kind securities, zero coupon
securities, deferred interest securities or, in general, any other securities
with original issue discount (or with market discount if the Fund elects to
include market discount in income currently), the Fund must accrue income on
such investments for each taxable year, which generally will be prior to the
receipt of the corresponding cash payments. However, the Fund must distribute,
at least annually, all or substantially all of its net investment income,
including such accrued income, to shareholders to avoid U.S. federal income and
excise taxes. Therefore, the Fund may have to dispose of its portfolio
securities under disadvantageous circumstances to generate cash, or may have to
leverage itself by borrowing the cash, to satisfy distribution requirements.
At the time of an investor's purchase of the Fund's 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. Sales and other
dispositions of the Fund's shares generally are taxable events for shareholders
that are subject to federal income tax. Shareholders should consult their own
tax advisors regarding their individual circumstances to determine whether any
particular transaction in the Fund's shares is properly treated as a sale or
exchange for tax purposes (as the following discussion assumes) and the tax
treatment of any gains or losses recognized in such transactions. Generally,
gain or loss will be equal to the difference between the amount of cash and the
fair market value of other property received and the shareholder's adjusted tax
basis in the shares sold or exchanged. In general, any gain or loss realized
upon a taxable disposition of shares will be treated as long-term capital gain
or loss if the shares have been held for more than one year. Otherwise, the gain
or loss on the taxable disposition of the Fund's shares will be treated as
short-term capital gain or loss. However, 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. Long-term capital gain rates applicable to noncorporate shareholders
have been reduced--in general, to 15% with lower rates applying to taxpayers in
the 10% and 15% rate brackets--for taxable years beginning on or before December
31, 2010. For taxable years beginning after December 31, 2010, the maximum
noncorporate tax rate on long term capital gains will increase to 20%, unless
Congress enacts legislation providing otherwise. The ability to deduct capital
losses may be subject to limitations. In addition, losses on sales or other
dispositions of shares may be disallowed under the "wash sale" rules in the
event a shareholder acquires substantially identical shares (including those
made pursuant to reinvestment of dividends) within a period of 61 days
S-39
beginning 30 days before and ending 30 days after a sale or other disposition of
shares. In such a case, the disallowed portion of any loss generally would be
included in the U.S. federal income tax basis of the shares acquired.
From time to time the Fund may repurchase its shares. Shareholders who
tender all shares held, and those considered to be held (through attribution),
by them will be treated as having sold their shares and generally will realize a
capital gain or loss. If a shareholder tenders fewer than all of its shares
(including those considered held through attribution), such shareholder may be
treated as having received a taxable dividend upon the tender of its shares. In
such a case, there is a remote risk that non-tendering shareholders will be
treated as having received taxable distributions from the Fund. To the extent
that the Fund recognizes net gains on the liquidation of portfolio securities to
meet such tenders of shares, the Fund will be required to make additional
distributions to its shareholders.
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 or 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. In
addition, certain Fund investments may produce income that will not qualify as
good income for the 90% income test. 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, if possible.
The IRS has taken the position that if a regulated investment company
has two classes of shares, it must designate distributions made to each class in
any year as consisting of no more than such class's proportionate share of
particular types of income (e.g., ordinary income and net capital gains).
Consequently, if both common shares and preferred shares are outstanding, the
Fund intends to designate distributions made to each class of particular types
of income in accordance with each class' proportionate shares of such income.
Thus, the Fund will designate to the extent applicable, dividends qualifying for
the corporate dividends received deduction (if any), income not qualifying for
the dividends received deduction, "qualified dividend income," ordinary income
and net capital gain in a manner that allocates such income between the holders
of common shares and preferred shares in proportion to the total dividends made
to each class during or for the taxable year, or otherwise as required by
applicable law. However, for purposes of determining whether distributions are
out of the Fund's current or accumulated earnings and profits, the Fund's
earnings and profits will be allocated first to the Fund's preferred shares, if
any, and then to the Fund's common shares. In such a case, since the Fund's
current and accumulated earnings and profits will first be used to pay dividends
on the preferred shares, distributions in excess of such earnings and profits,
if any, will be made disproportionately to holders of common shares.
The Fund may invest in REITs that hold residual interests in real
estate mortgage investment conduits ("REMICs"). Under Treasury regulations that
have not yet been issued, but may apply retroactively, a portion of the Fund's
income from a REIT that is attributable to the REIT's residual interest in a
REMIC (referred to in the Code as an "excess inclusion") will be subject to
federal income tax in all events. These regulations are also expected to provide
that excess inclusion income of a
S-40
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 pro rata share of qualified foreign taxes paid by the Fund,
with the result that shareholders will not be able to include such taxes in
their gross incomes and will not be entitled to a tax deduction or credit for
such taxes on their own federal income tax returns.
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 Fund's shares paid to
shareholders who have not complied with IRS regulations. In order to avoid this
withholding requirement, shareholders must certify on their Account
Applications, or on a separate IRS Form W-9, that the Social Security Number or
other Taxpayer Identification Number they provide is their correct number and
that they are not currently subject to backup withholding, or that they are
exempt from backup withholding. The Fund may nevertheless be required to
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. Backup withholding is not an
additional tax. Any amount withheld may be allowed as a refund or a credit
against the shareholder's U.S. federal income tax liability if the appropriate
information (such as the filing the appropriate federal income tax return) is
provided to the IRS.
Under Treasury regulations, if a shareholder recognizes a loss with
respect to shares of $2 million or more in a single taxable year (or $4 million
or more in any combination of taxable years) for an individual shareholder, S
corporation or trust or $10 million or more in a single taxable year (or $20
million or more in any combination of years) for a shareholder who is a C
corporation, such shareholder will generally be required to file with the IRS a
disclosure statement on Form 8886. Direct shareholders of portfolio securities
are generally excepted from this reporting requirement, but under current
guidance, shareholders of a regulated investment company are not excepted.
Future guidance may extend the current exception from this reporting requirement
to shareholders of most or all regulated investment companies. The fact that a
loss is reportable under these regulations does not affect the legal
determination of whether the taxpayer's treatment of the loss is proper.
Shareholders should consult their tax advisors to determine the applicability of
these regulations in light of their individual circumstances.
S-41
The description of certain U.S. federal income tax provisions above
relates only to U.S. federal income tax consequences for shareholders who are
U.S. persons (i.e., U.S. citizens or residents or U.S. corporations,
partnerships, trusts or estates). Investors other than U.S. persons may be
subject to different U.S. tax treatment, including a non-resident alien U.S.
withholding tax at the rate of 30% or at a lower treaty rate on amounts treated
as ordinary dividends from the Fund provided a valid and effective IRS Form
W-8BEN is on file with the Fund. SHAREHOLDERS SHOULD CONSULT THEIR OWN TAX
ADVISORS ON THESE MATTERS AND ON ANY SPECIFIC QUESTION OF U.S. FEDERAL, STATE,
LOCAL, FOREIGN AND OTHER APPLICABLE TAX LAWS BEFORE MAKING AN INVESTMENT IN THE
FUND.
CUSTODIAN, TRANSFER AGENT, DIVIDEND PAYING AGENT AND REGISTRAR
The Fund's securities and cash are held under a custodian agreement
with The Bank of New York, One Wall Street, New York, New York 10286. The
transfer agent, dividend paying agent and registrar for the Fund's common shares
and the Preferred Shares is also The Bank of New York. In addition, The Bank of
New York is the auction agent with respect to the Preferred Shares.
EXPERTS
The financial statements of the Fund as of October 31, 2005 and for the
year then ended appearing in this statement of additional information have been
audited by Deloitte & Touche LLP, independent registered public accounting firm,
as set forth in their report thereon appearing elsewhere herein, and is included
in reliance upon such report given upon the authority of such firm as experts in
accounting and auditing.
ADDITIONAL INFORMATION
A Registration Statement on Form N-2, including amendments thereto,
relating to the shares offered hereby, has been filed by the Fund with the
Commission, Washington, D.C. The prospectus and this statement of additional
information do not contain all of the information set forth in the Registration
Statement, including any exhibits and schedules thereto. For further information
with respect to the Fund and the shares offered hereby, reference is made to the
Registration Statement. Statements contained in the prospectus and this
statement of additional information as to the contents of any contract or other
document referred to are not necessarily complete and in each instance reference
is made to the copy of such contract or other document filed as an exhibit to
the Registration Statement, each such statement being qualified in all respects
by such reference. A copy of the Registration Statement may be inspected without
charge at the Commission's principal office in Washington, D.C., and copies of
all or any part thereof may be obtained from the Commission upon the payment of
certain fees prescribed by the Commission.
S-42
FINANCIAL STATEMENTS AND REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Report of Independent Registered Public Accounting Firm
To the Board of Trustees and Shareholders of Calamos Convertible and High Income
Fund
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of Calamos Convertible and High Income Fund (the
"Fund") as of October 31, 2005, and the related statement of operations for the
year then ended, the statements of changes in net assets for each of the two
years then ended and the financial highlights for each of the two years then
ended and for the period from May 28, 2003 (commencement of operations) through
October 31, 2003. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. The Fund
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audit included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Fund's internal control over
financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. Our procedures included confirmation
of securities owned as of October 31, 2005, by correspondence with the Fund's
custodian and brokers. We believe that our audit provides a reasonable basis for
our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
Fund as of October 31, 2005, the results of its operations for the year then
ended, the changes in its net assets for each of the two years then ended, and
the financial highlights for each of the two years then ended and for the period
from May 28, 2003 (commencement of operations) through October 31, 2003, in
conformity with accounting principles generally accepted in the United States of
America.
/s/ [DELOITTE & TOUCHE LLP]
Chicago, Illinois
December 16, 2005
F-1
Statement of Assets and Liabilities
OCTOBER 31, 2005
----------------
ASSETS
Investments, at value* (cost $1,464,576,748) $ 1,502,794,171
Cash with custodian (interest bearing) 2,296,461
Restricted cash for open options (interest bearing) 150,000
Foreign currency (cost $116,156) 116,156
Unrealized appreciation on interest rate swaps 10,410,916
Receivable for investments sold 827,861
Accrued interest and dividends receivable 24,433,973
Prepaid expenses 54,212
Other assets 17,589
---------------
Total assets 1,541,101,339
---------------
LIABILITIES
Payable upon return of securities loaned 165,899,284
Payable for investments purchased 3,140,959
Payable to investment advisor 819,136
Payable to financial accountant 13,323
Payable for deferred compensation to Trustees 17,589
Other accounts payable and accrued liabilities 229,545
---------------
Total liabilities 170,119,836
---------------
PREFERRED SHARES
$25,000 liquidation value per share applicable to 17,200 shares, including dividends payable 430,245,811
---------------
NET ASSETS APPLICABLE TO COMMON SHAREHOLDERS 940,735,692
===============
COMPOSITION OF NET ASSETS APPLICABLE TO COMMON SHAREHOLDERS
Common stock, no par value, unlimited shares authorized 61,867,557 shares issued and outstanding $ 881,846,465
Undistributed net investment income (loss) (362,062)
Accumulated net realized gain (loss) on investments, foreign currency transactions and interest rate swaps 10,631,219
Net unrealized appreciation (depreciation) on investments, foreign currency translation and interest rate swaps 48,620,070
---------------
NET ASSETS APPLICABLE TO COMMON SHAREHOLDERS $ 940,735,692
===============
Net asset value per common share based on 61,867,557 shares issued and outstanding $ 15.21
===============
* Includes $162,482,912 of securities loaned, at value.
See accompanying Notes to Financial Statements.
F-2
Statement of Operations
YEAR ENDED OCTOBER 31, 2005
---------------------------
INVESTMENT INCOME
Interest $ 88,147,478
Dividends (net of foreign taxes withheld of $23,452) 14,317,767
Securities lending income 899,612
---------------
Total investment income 103,364,857
---------------
EXPENSES
Investment advisory fees 11,105,961
Financial accounting fees 159,554
Auction agent and rating agency fees 1,121,377
Printing and mailing fees 212,749
Accounting fees 197,696
Audit and legal fees 138,005
Custodian fees 81,413
Registration fees 61,722
Transfer agent fees 36,355
Trustees' fees 33,460
Other 71,914
---------------
Total expenses 13,220,206
Less investment advisory fees waived (1,388,245)
---------------
Net expenses 11,831,961
---------------
NET INVESTMENT INCOME (LOSS) 91,532,896
===============
REALIZED AND UNREALIZED GAIN (LOSS) FROM INVESTMENTS, FOREIGN CURRENCY AND INTEREST RATE SWAPS
NET REALIZED GAIN (LOSS) FROM:
Investments 29,946,434
Foreign currency transactions (2,736)
Interest rate swaps (1,349,993)
CHANGE IN NET UNREALIZED APPRECIATION/DEPRECIATION ON:
Investments (45,960,353)
Foreign currency translation (58,261)
Interest rate swaps 11,890,450
---------------
NET REALIZED AND UNREALIZED GAIN (LOSS) FROM INVESTMENTS, FOREIGN CURRENCY AND INTEREST RATE SWAPS (5,534,459)
===============
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 85,998,437
===============
DIVIDENDS TO PREFERRED SHAREHOLDERS FROM
Net investment income (12,501,709)
---------------
NET INCREASE (DECREASE) IN NET ASSETS APPLICABLE TO COMMON SHAREHOLDERS RESULTING FROM OPERATIONS $ 73,496,728
===============
See accompanying Notes to Financial Statements.
F-3
Statement of Changes in Net Assets
Year Ended October 31,
2005 2004
------------- ------------
OPERATIONS
Net investment income (loss) $ 91,532,896 $ 96,162,030
Net realized gain (loss) from investments, foreign currency transactions and interest rate swaps 28,593,705 (8,534,111)
Change in net unrealized appreciation/depreciation on investments, foreign currency
translation and interest rate swaps (34,128,164) 47,353,283
Dividends to preferred shareholders from
Net investment income (12,501,709) (6,021,235)
------------- ------------
Net increase (decrease) in net assets applicable to common shareholders resulting from operations 73,496,728 128,959,967
------------- ------------
DISTRIBUTIONS TO COMMON SHAREHOLDERS FROM
Net investment income (82,338,867) (88,670,835)
Capital gains (7,532,898) --
------------- ------------
Net decrease in net assets from distributions to common shareholders (89,871,765) (88,670,835)
CAPITAL STOCK TRANSACTIONS
Reinvestment of dividends resulting in the issuance of common stock 12,074,203 13,595,460
Net increase (decrease) in net assets from capital stock transactions 12,074,203 13,595,460
------------- ------------
TOTAL INCREASE (DECREASE) IN NET ASSETS APPLICABLE TO COMMON SHAREHOLDERS (4,300,834) 53,884,592
------------- ------------
NET ASSETS APPLICABLE TO COMMON SHAREHOLDERS
Beginning of period 945,036,526 891,151,934
------------- ------------
End of period $ 940,735,692 $945,036,526
============= ============
Undistributed net investment income (loss) $ (362,062) $ 129,801
See accompanying Notes to Financial Statements.
F-4
Notes to Financial Statements
NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION. CALAMOS Convertible and High Income Fund (the "Fund") was
organized as a Delaware statutory trust on March 12, 2003 and is registered
under the Investment Company Act of 1940 (the "1940 Act") as a diversified,
closed-end management investment company. The Fund commenced operations on May
28, 2003.
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 and non-convertible income securities. "Managed assets" means the
Fund's total assets (including any assets attributable to any leverage that may
be outstanding) minus total liabilities (other than debt representing financial
leverage).
PORTFOLIO VALUATION. In computing the Fund's net asset value, portfolio
securities that are traded on a securities exchange in the United States, except
for option securities, are valued at the last reported sale price as of the time
of valuation, or lacking any current reported sale at the time of valuation, at
the mean between the most recent bid and asked quotations. Each option security
traded on a securities exchange in the United States is valued at the last
current reported sale price as of the time of valuation if the last current
reported sale price falls within the consolidated bid/ask quote for the option
security. If the last current reported sale price as of the time of valuation
does not fall within the consolidated bid/ask quote for the option security, the
security is valued at the mid-point of the consolidated bid/ask quote for the
option security. Each security traded in the over-the-counter market and quoted
on the NASDAQ National Market System, is valued at the NASDAQ Official Closing
Price ("NOCP"), as determined by NASDAQ, or lacking an NOCP, the last current
reported sale price as of the time of valuation by NASDAQ, or lacking any
current reported sale on NASDAQ at the time of valuation, at the mean between
the most recent bid and asked quotations. Each over-the-counter option that is
not traded through the Options Clearing Corporation is valued by the
counterparty, or if the counterparty's price is not readily available then by
using the Black-Scholes method. Each other security traded over-the-counter is
valued at the mean between the most recent bid and asked quotations. Short-term
securities with maturities of 60 days or less are valued at amortized cost,
which approximates market value.
When market quotations are not readily available or when the valuation methods
mentioned above are not reflective of the fair value of the security, the
security is priced at a fair value following procedures and/or guidelines
approved by the Board of Trustees, which may include utilizing a systematic fair
valuation model provided by an independent pricing system. The Funds' may also
use fair value pricing if the value of a security it holds is, pursuant to Board
of Trustees' guidelines, materially affected by events occurring before the
Funds' pricing time but after the close of the primary market or exchange on
which the security is traded. These procedures may utilize valuations furnished
by pricing services approved by the Board of Trustees, which may be based on
market transactions for comparable securities and various relationships between
securities that are generally recognized by institutional traders, a
computerized matrix system, or appraisals derived from information concerning
the securities or similar securities received from recognized dealers in those
securities. When fair value pricing is employed, the value of the portfolio
security used to calculate the Funds' net asset value may differ from quoted or
official closing prices.
Securities that are principally traded in a foreign market are valued at the
last current sale price at the time of valuation or lacking any current or
reported sale, at the time of valuation, at the mean between the most recent bid
and asked quotations as of the close of the appropriate exchange or other
designated time. Trading in securities on European and Far Eastern securities
exchanges and over-the-counter markets is normally completed at various times
before the close of business on each day on which the New York Stock Exchange
("NYSE") is open. Trading of these securities may not take place on every NYSE
business day. In addition, trading may take place in various foreign markets on
Saturdays or on other days when the NYSE is not open and on which the Fund's net
asset value is not calculated. As stated above, if the market prices are not
readily available or are not reflective of the fair value of the security, the
security will be priced at a fair value following procedures approved by the
Board of Trustees. In light of the judgment involved in fair value decisions,
there can be no assurance that a fair value assigned to a particular security is
accurate.
F-5
Notes to Financial Statements
INVESTMENT TRANSACTIONS AND INVESTMENT INCOME. Short-term investment
transactions are recorded on a trade date basis. Long-term investment
transactions are recorded on a trade date plus one basis, except for fiscal
quarter ends, which are recorded on trade date. Net realized gains and losses
from investment transactions are reported on an identified cost basis. Interest
income is recognized using the accrual method and includes accretion of original
issue and market discount and amortization of premium. Dividend income is
recognized on the ex-dividend date, except that certain dividends from foreign
securities are recorded as soon as the information becomes available.
FOREIGN CURRENCY TRANSLATION. Except for securities of foreign issuers valued by
a pricing service, values of investments and other assets and liabilities
denominated in foreign currencies are translated into U.S. dollars using a rate
selected by the advisor from rates quoted by any major bank or dealer in the
particular currency market, as reported by a recognized quotation dissemination
service.
The Fund does not isolate that portion of the results of operations resulting
from changes in foreign exchange rates on investments from the fluctuations
arising from changes in market prices of securities held. Such fluctuations are
included with the net realized and unrealized gain or loss from investments.
Reported net realized foreign currency gains or losses arise from disposition of
foreign currency, foreign currency gains or losses realized between the trade
and settlement dates on securities transactions, and the difference between the
amounts of dividends, interest and foreign withholding taxes recorded on the
Fund's books on the transaction date and the U.S. dollar equivalent of the
amounts actually received or paid. Net unrealized foreign currency appreciation
and depreciation arise from changes (due to the changes in the exchange rate) in
the value of foreign currency and other assets and liabilities denominated in
foreign currencies held at period end.
OPTION TRANSACTIONS. For hedging and investment purposes, the Fund may purchase
or write (sell) put and call options. One of the risks associated with
purchasing an option among others, is that the Fund pays a premium whether or
not the option is exercised. Additionally, the Fund bears the risk of loss of
premium and change in market value should the counterparty not perform under the
contract. Put and call options purchased are accounted for in the same manner as
portfolio securities. The cost of securities acquired through the exercise of
purchased call options is increased by premiums paid. The proceeds from
securities sold through the exercise of purchased put options are decreased by
the premiums paid.
When the Fund writes an option, an amount equal to the premium received by the
Fund is recorded as a liability and is subsequently adjusted to the current
value of the option written. Premiums received from writing options that expire
unexercised are treated by the Fund on the expiration date as realized gains
from written options. The difference between the premium and the amount paid on
effecting a closing purchase transaction, including brokerage commissions, is
also treated as a realized gain, or, if the premium is less than the amount paid
for the closing purchase transaction, as a realized loss. If a call option is
exercised, the premium is added to the proceeds from the sale of the underlying
security or currency in determining whether the Fund has realized a gain or
loss. If a put option is exercised, the premium reduces the cost basis of the
securities purchased by the Fund. The Fund as writer of an option bears the
market risk of an unfavorable change in the price of the security underlying the
written option.
USE OF ESTIMATES. The preparation of financial statements in conformity with
U.S. generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results may differ from those
estimates.
INCOME TAXES. No provision has been made for income taxes because the Fund's
policy is to qualify as a regulated investment company under Subchapter M of the
Internal Revenue Code and distribute to shareholders substantially all of its
taxable income and gains.
Dividends and distributions paid to shareholders are recorded on the ex-dividend
date. The amount of dividends and distributions from net investment income and
net realized capital gains is determined in accordance with federal income tax
regulations, which may differ from U.S. generally accepted accounting
principles. To the extent these "book/tax" differences are permanent in nature,
F-6
Notes to Financial Statements
such amounts are reclassified within the capital accounts based on their federal
tax-basis treatment. These differences are primarily due to differing treatments
for foreign currency transactions, contingent payment debt instruments and
methods of amortizing and accreting fixed income securities. Financial records
are not adjusted for temporary differences.
Effective June 1, 2005, the Fund adopted a level rate monthly distribution to
common shareholders, which may be modified by the Board of Trustees from time to
time. Monthly distributions may include net investment income, net realized
short-term capital gains and, if necessary, return of capital. In addition,
distributions may include net realized long-term capital gains to the extent
permitted by the 1940 Act.
In order to make these monthly distributions, the Fund might have to sell a
portion of its investment portfolio at a time when independent investment
judgment might not dictate such action. Also, for purposes of maintaining level
rate distributions the Fund may realize short-term capital gains on securities
that, if sold at a later date, would have resulted in long-term capital gains.
Maintenance of level rate distributions may increase transaction and tax costs
associated with the Fund.
INDEMNIFICATIONS. Under the Fund's organizational documents, its Officers and
Trustees are indemnified against certain liabilities arising out of the
performance of their duties to the Fund. In addition, in the normal course of
business, the Fund enters into contracts that provide general indemnifications
to other parties. The Fund's maximum exposure under these arrangements is
unknown as this would involve future claims that may be made against the Fund
that have not yet occurred. However, the Fund has not had prior claims or losses
pursuant to these contracts and expects the risk of loss to be remote.
NOTE 2 - INVESTMENT ADVISOR TRANSACTIONS WITH AFFILIATES OR CERTAIN OTHER
PARTIES
Pursuant to an investment advisory agreement with Calamos Advisors LLC
("Calamos Advisors"), the Fund pays an annual fee, payable monthly, equal to
0.80% based on the average weekly managed assets. "Managed assets" means the
Fund's total assets (including any assets attributable to any leverage that may
be outstanding) minus total liabilities (other than debt representing financial
leverage). Calamos Advisors has contractually agreed to waive a portion of its
management fee at the annual rate of 0.10% of the average weekly managed assets
of the Fund for the first five full years of the Fund's operation (through May
31, 2008) and to waive a declining amount for an additional three years (0.07%
of the average weekly managed assets in 2009, 0.05% in 2010, and 0.03% in 2011).
Calamos Advisors receives a fee payable monthly at the annual rate of 0.0175% on
the first $1 billion of combined assets; 0.0150% on the next $1 billion of
combined assets; and 0.0110% on combined assets above $2 billion for financial
accounting services (for purposes of this calculation "combined assets" means
the total average daily net assets of Calamos Investment Trust and Calamos
Advisors Trust and the average weekly managed assets of Calamos Convertible and
High Income Fund, Calamos Convertible Opportunities and Income Fund, Calamos
Strategic Total Return Fund and Calamos Global Total Return Fund). Financial
accounting services include, but are not limited to, the following: managing
expenses and expense payment processing; monitoring the calculation of expense
accrual amounts; calculating, tracking, and reporting tax adjustments on all
assets and liabilities and monitoring trustee deferred compensation plan
accruals and valuations. The Fund will pay its pro rata share of the financial
accounting service fee payable to Calamos Advisors based on the Fund's relative
portion of combined assets.
Effective August 1, 2005, the Fund began reimbursing the advisor for a portion
of the compensation paid to the Chief Compliance Officer of the Fund. This
compensation is reported as part of "Other" expenses on the Statement of
Operations.
Certain officers and trustees of the Fund are also officers and directors of
Calamos Financial Services LLC ("CFS") and Calamos Advisors. All officers and
affiliated trustees serve without direct compensation from the Fund.
The Fund has adopted a deferred compensation plan (the "Plan"). Under the
Plan, a trustee who is not an interested person" (as defined in the 1940 Act)
of CFS or Calamos Advisors and has elected to participate in the Plan (a
"participating trustee") may defer receipt of all or a portion of his
compensation from the Fund. The deferred compensation payable to the
participating trustee is
F-7
Notes to Financial Statements
credited to the trustee's deferral account as of the business day such
compensation would have been paid to the participating trustee. The value of a
participating trustee's deferred compensation account at any time is equal to
what would be the value if the amounts credited to the account had instead been
invested in shares of one or more of the Funds of the Calamos Investment Trust
as designated by the trustee. Thus, the value of the account increases with
contributions to the account or with increases in the value of the measuring
shares, and the value of the account decreases with withdrawals from the account
or with declines in the value of the measuring shares. If a participating
trustee retires, the trustee may elect to receive payments under the plan in a
lump sum or in equal installments over a period of five years. If a
participating trustee dies, any amount payable under the Plan will be paid to
the trustee's beneficiaries. Deferred compensation investments of $17,589 are
included in "Other assets" on the Statement of Assets and Liabilities at October
31, 2005. The Fund's obligation to make payments under the Plan is a general
obligation of the Fund and is included in "Payable for deferred compensation to
Trustees" on the Statement of Assets and Liabilities at October 31, 2005.
NOTE 3 - INVESTMENTS
Purchases and sales of investments, other than short-term obligations, for the
year ended October 31, 2005 were as follows:
Purchases $ 740,606,407
Proceeds from sales 738,298,905
The following information is presented on an income tax basis as of October 31,
2005. Differences between amounts for financial statements and Federal income
tax purposes are primarily due to timing differences.
The cost basis of investments for federal income tax purposes at October 31,
2005 was as follows:
Cost basis of investments $ 1,470,205,976
----------------
Gross unrealized appreciation 63,500,010
Gross unrealized depreciation (30,911,815)
----------------
Net unrealized appreciation (depreciation) $ 32,588,195
================
NOTE 4 - INCOME TAXES
For the year ended October 31, 2005, the Fund recorded the following permanent
reclassifications to reflect tax character. Results of operations and net assets
were not affected by these reclassifications.
Paid-in capital $ 4,837
Undistributed net investment income (loss) 2,815,817
Accumulated net realized gain (loss) on investments, foreign
currency transactions and interest rate swaps (2,820,654)
As of October 31, 2005, the components of net assets on a tax basis were as follows:
Undistributed ordinary income $ 11,346,482
Undistributed capital gains 4,913,401
-------------
Total undistributed earnings 16,259,883
Accumulated capital and other losses --
Unrealized gains/(losses) 42,945,702
-------------
Total accumulated earnings/(losses) 59,205,585
Other (316,358)
Paid-in capital 881,846,465
-------------
Net assets applicable to common shareholders $ 940,735,692
-------------
F-8
Notes to Financial Statements
Distributions during the fiscal years ended October 31, 2005 and October 31,
2004 were characterized for income tax purposes as follows:
2005 2004
------------- -------------
DISTRIBUTIONS PAID FROM:
Ordinary income $ 94,726,155 $ 94,560,679
Long-Term capital gain 7,532,898 --
For the tax year ended October 31, 2005, the Fund utilized capital losses of
$5,148,747. As of October 31, 2005, the Fund had no capital loss carryforwards.
NOTE 5 - COMMON STOCK
There are unlimited common shares of beneficial interest authorized and
61,867,557 shares outstanding at October 31, 2005. Calamos Advisors owned 16,644
of the outstanding shares at October 31, 2005. Transactions in common shares
were as follows:
FOR THE YEAR ENDED FOR THE YEAR ENDED
OCTOBER 31, 2005 OCTOBER 31, 2004
------------------ ------------------
Beginning shares 61,091,942 60,208,549
Shares sold -- --
Shares issued through reinvestment of distributions 775,615 883,393
---------- ----------
Ending shares 61,867,557 61,091,942
========== ==========
NOTE 6 - FORWARD FOREIGN CURRENCY CONTRACTS
The Fund may engage in portfolio hedging with respect to changes in currency
exchange rates by entering into forward foreign currency contracts to purchase
or sell currencies. A forward foreign currency contract is a commitment to
purchase or sell a foreign currency at a future date at a negotiated forward
rate. Risks associated with such contracts include, among other things, movement
in the value of the foreign currency relative to the U.S. dollar and the ability
of the counterparty to perform. The net unrealized gain, if any, represents the
credit risk to the Fund on a forward foreign currency contract. The contracts
are valued daily at forward exchange rates, and an unrealized gain or loss is
recorded. The Fund realizes a gain or loss upon settlement of the contracts.
There were no open forward foreign currency contracts at October 31, 2005.
NOTE 7 - SYNTHETIC CONVERTIBLE SECURITIES
The Fund may establish a "synthetic" convertible instrument by combining
separate securities that possess the economic characteristics similar to a
convertible security, i.e., fixed-income securities ("fixed-income component")
and the right to acquire equity securities ("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. In
establishing a synthetic instrument, the Fund may pool a basket of fixed-income
securities and a basket of warrants or options that produce the economic
characteristics similar to a convertible security. Within each basket of
fixed-income securities and warrants or options, different companies may issue
the fixed-income and convertible components, which may be purchased separately
and at different times.
The Fund may 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. Purchasing synthetic convertible securities may offer more
flexibility than purchasing a convertible security. Different companies may
issue the fixed-income and convertible components, which may be purchased
separately and at different times.
F-9
Notes to Financial Statements
NOTE 8 - PREFERRED SHARES
PREFERRED SHARES. There are unlimited shares of Auction Market Preferred Shares
("Preferred Shares") authorized. The Preferred Shares have rights as determined
by the Board of Trustees. The 17,200 shares of Preferred Shares outstanding
consist of six series, 3,000 shares of M, 3,000 shares of TU, 3,000 shares of W,
3,000 shares of TH, 3,000 shares of F, and 2,200 shares of A. The Preferred
Shares have a liquidation value of $25,000 per share plus any accumulated but
unpaid dividends, whether or not declared.
Dividends on the Preferred Shares are cumulative at a rate typically reset every
seven or twenty-eight days based on the results of an auction. Dividend rates
ranged from 1.65% to 3.96% for the year ended October 31, 2005. Under the 1940
Act, the Fund may not declare dividends or make other distributions on shares of
common stock or purchases any such shares if, at the time of the declaration,
distribution or purchase, asset coverage with respect to the outstanding
Preferred Shares would be less than 200%.
The Preferred Shares are redeemable at the Fund's option, in whole or in part,
on any dividend payment date at $25,000 per share plus any accumulated but
unpaid dividends. The Preferred Shares are also subject to mandatory redemption
at $25,000 per share plus any accumulated but unpaid dividends, whether or not
declared, if certain requirements relating to the composition of the assets and
liabilities of the Fund as set forth in the Statement of Preferences are not
satisfied.
The holders of Preferred Shares have voting rights equal to the holders of
common stock (one vote per share) and will vote together with holders of shares
of common stock as a single class except on matters affecting only the holders
of Preferred Shares or the holders of common shares.
NOTE 9 - INTEREST RATE TRANSACTIONS
The Fund may enter into interest rate swap or cap transactions to attempt to
protect itself from increasing dividend or interest expense on its leverage
resulting from increasing short-term interest rates. A decline in interest rates
may result in a decline in the value of the swap or cap, which may result in a
decline in the Fund's net asset value. In addition, if the counterparty to an
interest rate swap or cap defaults, the Fund would not be able to use the
anticipated receipts under the swap or cap to offset the dividend or interest
payments on the Fund's leverage. At the time an interest rate swap or cap
reaches its scheduled termination, 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. In addition, if the
Fund is required to terminate any swap or cap early due to the Fund failing to
maintain a required 200% asset coverage of the liquidation value of the
outstanding Preferred Shares or the Fund loses its credit rating on its
Preferred Shares, then the Fund could be required to make a termination payment,
in addition to redeeming all or some of the Preferred Shares. Net unrealized
gains are reported as an asset or net unrealized losses are reported as a
liability on the Statement of Assets and Liabilities. The change in the value of
the swaps, including periodic amounts of interest to be paid or received on
swaps is reported as unrealized gains or losses in the Statement of Operations.
A realized gain or loss is recorded upon payment or termination of swap
agreements. Details of the swap agreements outstanding as of October 31, 2005
were as follows:
UNREALIZED
TERMINATION NOTIONAL FIXED RATE FLOATING RATE APPRECIATION
COUNTERPARTY DATE AMOUNT (000) (FUND PAYS) (FUND RECEIVES) (DEPRECIATION)
------------ ---------------- ------------ ---------- -------------- --------------
Citibank NA October 27, 2006 $ 100,000 2.80% 1month LIBOR $ 1,779,680
Citibank NA October 27, 2007 200,000 3.27% 1month LIBOR 5,537,627
Citibank NA October 27, 2008 100,000 3.65% 1month LIBOR 3,093,609
--------------
$ 10,410,916
==============
F-10
Notes to Financial Statements
NOTE 10 - SECURITIES LENDING
During the year ended October 31, 2005 the Fund lent certain of its securities
to broker-dealers and banks. Any such loan must be continuously secured by
collateral in cash or cash equivalents maintained on a current basis in an
amount at least equal to the market value of the securities loaned by the Fund.
The Fund continues to receive the equivalent of the interest or dividends paid
by the issuer on the securities loaned and also receives an additional return
that may be in the form of a fixed fee or a percentage of the collateral. The
Fund may pay reasonable fees to persons unaffiliated with the Fund for services
in arranging these loans. The Fund has the right to call the loan and obtain the
securities loaned at any time on notice of not more than five business days. The
Fund does not have the right to vote the securities during the existence of the
loan but could call the loan in an attempt to permit voting of the securities in
certain circumstances. Upon return of the securities loaned, the cash or cash
equivalent collateral will be returned to the borrower. In the event of
bankruptcy or other default of the borrower, the Fund could experience both
delays in liquidating the loan collateral or recovering the loaned securities
and losses, including (a) possible decline in the value of the collateral or in
the value of the securities loaned during the period while the Fund seeks to
enforce its rights thereto, (b) possible subnormal levels of income and lack of
access to income during this period, and (c) the expenses of enforcing its
rights. In an effort to reduce these risks, Calamos Advisors and the security
lending agent will monitor the creditworthiness of the firms to which the Fund
lends securities. At October 31, 2005, the Fund had securities valued at
$162,482,912 that were on loan to broker-dealers and banks and $165,899,284 in
cash or cash equivalent collateral.
F-11
Financial Highlights
SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD WERE AS FOLLOWS:
May 28, 2003*
through
For the Year Ended October 31,
------------------------- -------------
2005 2004 2003
---------- --------- -------------
Net asset value, beginning of period $ 15.47 $ 14.80 $ 14.32(a)
Income from investment operations:
Net investment income (loss) 1.49 1.60 0.44
Net realized and unrealized gain (loss) from investments,
foreign currency and interest rate swaps (0.09) 0.63 0.46
Dividends to preferred shareholders from:
Net investment income (common share equivalent basis) (0.20) (0.10) (0.02)
Total from investment operations 1.20 2.13 0.88
Less dividends to common shareholders from:
Net investment income (1.34) (1.46) (0.37)
Capital gains (0.12) -- --
Capital charge resulting from issuance of common and preferred shares -- -- (0.03)
Net asset value, end of period $ 15.21 $ 15.47 $ 14.80
Market value, end of period $ 15.52 $ 16.74 $ 16.00
Total investment return based on(b) :
Net asset value 7.99% 14.91% 5.92%
Market value 1.83% 15.02% 9.36%
Ratios and supplemental data:
Net assets applicable to common shareholders, end of period (000's omitted) $ 940,736 $ 945,037 $ 891,152
Preferred shares, at redemption value ($25,000 per share liquidation preference)
(000's omitted) $ 430,000 $ 430,000 $ 430,000
Ratios to average net assets applicable to common shareholders:
Net expenses (c)(d) 1.23% 1.25% 1.11%
Gross expenses prior to waiver of expenses by the advisor (c)(d) 1.38% 1.40% 1.24%
Net investment income (loss)(c)(d) 9.55% 10.56% 7.85%
Preferred share dividends(c) 1.30% 0.65% 0.34%
Net investment income (loss), net of preferred share dividends(c) 8.25% 9.91% 7.51%
Portfolio turnover rate 55% 27% 20%
Asset coverage per preferred share, at end of period(e) $ 79,708 $ 79,952 $ 76,811
* Commencement of operations.
(a) Net of sales load of $0.675 on initial shares issued and beginning net
asset value of $14.325.
(b) Total investment return is calculated assuming a purchase of common stock
on the opening of the first day and a sale on the closing of the last day
of the period reported. Dividends and distributions are assumed, for
purposes of this calculation, to be reinvested at prices obtained under
the Fund's dividend reinvestment plan. Total return is not annualized for
periods less than one year. Brokerage commissions are not reflected. NAV
per share is determined by dividing the value of the Fund's portfolio
securities, cash and other assets, less all liabilities, by the total
number of common shares outstanding. The common share market price is the
price the market is willing to pay for shares of the Fund at a given time.
Common share market price is influenced by a range of factors, including
supply and demand and market conditions.
(c) Annualized for periods less than one year.
(d) Does not reflect the effect of dividend payments to preferred
shareholders.
(e) Calculated by subtracting the Fund's total liabilities (not including
Preferred Shares) from the Fund's total assets and dividing this by the
number of Preferred Shares outstanding.
F-12
APPENDIX A--DESCRIPTION OF RATINGS(1)
MOODY'S PRIME RATING SYSTEM
Moody's short-term ratings are opinions of the ability of issuers to
honor senior financial obligations and contracts. Such obligations generally
have an original maturity not exceeding one year, unless explicitly noted.
Moody's employs the following designations, all judged to be investment
grade, to indicate the relative repayment ability of rated issuers:
PRIME-1: Issuers rated Prime-1 (or supporting institutions) have a
superior ability for repayment of senior short-term debt obligations. Prime-1
repayment ability will often be evidenced by many of the following
characteristics:
Leading market positions in well-established industries. High rates of
return on funds employed. Conservative capitalization structure with moderate
reliance on debt and ample asset protection. Broad margins in earnings coverage
of fixed financial charges and high internal cash generation. Well-established
access to a range of financial markets and assured sources of alternate
liquidity.
PRIME-2: Issuers (or supporting institutions) rated Prime-2 have a
strong ability to repay senior short-term debt obligations. This will normally
be evidenced by many of the characteristics cited above, but to a lesser degree.
Earnings trends and coverage ratios, while sound, may be more subject to
variation than is the case for Prime-2 securities. Capitalization
characteristics, while still appropriate, may be more affected by external
conditions. Ample alternate liquidity is maintained.
PRIME-3: Issuers (or supporting institutions) rated Prime-3 have an
acceptable ability for repayment of senior short-term obligations. The effect of
industry characteristics and market compositions may be more pronounced.
Variability in earnings and profitability may result in changes in the level of
debt-protection measurements and may require relatively high financial leverage.
Adequate alternate liquidity is maintained.
NOT PRIME: Issuers rated Not Prime do not fall within any of the Prime
rating categories.
In addition, in certain countries the prime rating may be modified by
the issuer's or guarantor's senior unsecured long-term debt rating.
MOODY'S DEBT RATINGS
Aaa: Bonds and preferred stock which are rated Aaa are judged to be of
the best quality. They carry the smallest degree of investment risk and are
generally referred to as "gilt edged." Interest payments are protected by a
large or by an exceptionally stable margin and principal is secure. While the
various protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position of such
issues.
--------
(1) The ratings indicated herein are believed to be the most recent ratings
available at the date of this prospectus for the securities listed. Ratings are
generally given to securities at the time of issuance. While the rating agencies
may from time to time revise such ratings, they undertake no obligation to do
so, and the ratings indicated do not necessarily represent ratings which will be
given to these securities on the date of the fund's fiscal year-end.
A-1
Aa: Bonds and preferred stock which are rated Aa are judged to be of
high quality by all standards. Together with the Aaa group they comprise what
are generally known as high-grade bonds.
They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present which make
the long-term risk appear somewhat larger than the Aaa securities.
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.
A-2
Market participants must determine whether any particular note is
rated, and if so, at what rating level.
Note: Moody's applies numerical modifiers 1, 2, and 3 in each generic
rating classification from Aa through Caa. The modifier 1 indicates that the
obligation ranks in the higher end of its generic rating category; the modifier
2 indicates a mid-range ranking; and the modifier 3 indicates a ranking in the
lower end of that generic rating category.
STANDARD & POOR'S SHORT-TERM ISSUE CREDIT RATINGS
A-1: A short-term obligation rated A-1 is rated in the highest category
by Standard & Poor's. The obligor's capacity to meet its financial commitment on
the obligation is strong. Within this category, certain obligations are
designated with a plus sign (+). This indicates that the obligor's capacity to
meet its financial commitment on these obligations is extremely strong.
A-2: A short-term obligation rated A-2 is somewhat more susceptible to
the adverse effects of changes in circumstances and economic conditions than
obligations in higher rating categories. However, the obligor's capacity to meet
its financial commitment on the obligation is satisfactory.
A-3: A short-term obligation rated A-3 exhibits adequate protection
parameters. However, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity of the obligor to meet its financial
commitment on the obligation.
B: A short-term obligation rated B is regarded as having significant
speculative characteristics. The obligor currently has the capacity to meet its
financial commitment on the obligation; however, it faces major ongoing
uncertainties which could lead to the obligor's inadequate capacity to meet its
financial commitment on the obligation.
C: A short-term obligation rated C is currently vulnerable to
nonpayment and is dependent upon favorable business, financial, and economic
conditions for the obligor to meet its financial commitment on the obligation.
D: A short-term obligation rated D is in payment default. The D rating
category is used when payments on an obligation are not made on the date due
even if the applicable grace period has not expired, unless Standard & Poor's
believes that such payments will be made during such grace period. The D rating
also will be used upon the filing of a bankruptcy petition or the taking of a
similar action if payments on an obligation are jeopardized.
STANDARD & POOR'S LONG-TERM ISSUE CREDIT RATINGS
Issue credit ratings are based, in varying degrees, on the following
considerations:
o 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;
o Nature of and provisions of the obligation;
o 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.
A-3
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 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
A-4
will be used upon the filing of a bankruptcy petition or the taking of a similar
action if payments on an obligation are jeopardized.
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.
A-5