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Calamos Advisors Trust Logo
CALAMOS(R) CONVERTIBLE PORTFOLIO
PROSPECTUS
MAY 1, 1999
An investment in the Portfolio is not a bank deposit, is not FDIC-insured, and
may lose value.
The Securities and Exchange Commission has not approved the Portfolio's shares
as an investment or determined whether this prospectus is accurate or complete.
If anyone tells you otherwise, they are committing a crime.
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TABLE OF CONTENTS
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Summary.......................... 3
Investment Objective........... 3
Principal Investment
Strategies.................. 3
Principal Risks of Investing in
the Portfolio............... 3
Investment Returns............. 4
Fees and Expenses.............. 4
How the Portfolio Invests........ 6
Management of the Portfolio...... 9
Shareholder Information.......... 11
Purchasing Shares.............. 11
Selling Shares................. 11
Valuing Shares................. 11
Other Information.............. 12
Distributions and Taxes.......... 12
For More Information............. 13
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PORTFOLIO INFORMATION
The Calamos(R) Convertible Portfolio is a portfolio of the Calamos Advisors
Trust (the "Trust"). The Trust offers the Portfolio's shares to certain life
insurance companies (Participating Insurance Companies) for allocation to
certain separate accounts established for the purpose of funding qualified and
non-qualified variable annuity contracts and variable life insurance contracts
(together, "Variable Contracts"). The Trust may also offer the Portfolio to
certain pension plans and retirement arrangements and accounts permitting
accumulation of funds on a tax-deferred basis ("Retirement Plans"). These
separate accounts of the Participating Insurance Companies are the shareholders
of the Portfolio. Individual variable annuity and variable life insurance
contract holders are not the "shareholders" of the Portfolio. In other words,
you cannot directly purchase shares of the Portfolio.
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SUMMARY
INVESTMENT OBJECTIVE
The Portfolio seeks current income as its primary objective with capital
appreciation as its secondary objective.
PRINCIPAL INVESTMENT STRATEGIES
The Portfolio invests primarily in a diversified portfolio of convertible
securities. These convertible securities may be either debt securities (bonds)
or preferred stock that are convertible into common stock, and may be issued by
both U.S. and foreign companies. Under normal market conditions, the Portfolio
invests at least 65% of its total assets in convertible securities.
The Portfolio may invest without limit in high yield or "junk" bonds, and
may invest up to 25% of its net assets in foreign securities. The Portfolio may
also invest a substantial portion of its assets 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).
PRINCIPAL RISKS OF INVESTING IN THE PORTFOLIO
As with any security, there are market and investment risks associated with
your investment in the Portfolio. The value of your investment in the Portfolio
will fluctuate over time and it is possible to lose money on your investment in
the Portfolio if any of the following occurs:
-- The stock market goes down.
-- There is an economic downturn, a substantial period of changing interest
rates or a period of political uncertainty that affects the Portfolio's
investments.
-- The value of the underlying common stock of the Portfolio's convertible
security investments fall below the price at which the Portfolio can
exchange the security for the common stock.
-- A corporate bond issuer does not make interest or principal payments
when due or its credit quality falls. The Portfolio's investment in junk
bonds entails a greater risk, including the risk of default, than an
investment in higher rated securities.
In addition, you could lose money on your investment in the Portfolio if
the Portfolio invests in foreign securities, because such securities tend to be
more volatile than U.S. securities and may subject the Portfolio to risks it may
not encounter with an investment in U.S. securities. These risks include:
-- Less available public information
-- Country risk, including economic and political instability
-- Higher transaction costs
-- Higher price volatility and less liquidity
-- Currency exchange rate fluctuation
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The Portfolio may be appropriate for long-term conservative investors who
seek a lower-risk alternative to equity investments or a way to diversify their
fixed-income investments.
Please refer to "How the Portfolio Invests" below for more information
regarding certain securities that the Portfolio may buy and a more detailed
discussion of risks.
INVESTMENT RETURNS
The Portfolio will provide you with performance information to assist you
in understanding that the Portfolio's return may vary and that there are risks
associated with investing in the Portfolio. As always, please note that the past
performance of the Portfolio will not indicate future performance.
FEES AND EXPENSES
THE TABLES BELOW DESCRIBE THE FEES AND EXPENSES THAT YOU MAY PAY IF YOU BUY
AND HOLD SHARES OF THE PORTFOLIO.
The Portfolio's shares can be purchased by Retirement Plans and by separate
accounts of Participating Insurance Companies offering Variable Contracts. The
Portfolio's shares are not offered directly to the public. The tables below do
not reflect the expenses charged at the separate account level. Please read the
Variable Contract prospectus to obtain that information.
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
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Maximum Sales Charge (Load) Imposed on Purchases............ NONE
Maximum Deferred Sales Charge (Load)........................ NONE
Maximum Sales Charge (Load) Imposed on Reinvested
Dividends................................................. NONE
Redemption Fee.............................................. NONE
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ANNUAL PORTFOLIO OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM PORTFOLIO
ASSETS)
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Management Fees............................................. .75%
Distribution (12b-1) Fees................................... NONE
Other Expenses(1)........................................... 1.25
Total Annual Portfolio Operating Expenses(2)................ 2.00%
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(1) "Other Expenses" are based on estimated amounts for the current fiscal year.
(2) The investment manager has voluntarily undertaken to waive fees and/or
reimburse Portfolio expenses so that the Total Annual Portfolio Operating
Expenses are limited to 1.00% of the Portfolio's average net assets. The
investment manager may terminate the expense limitation at any time.
Example: This example is intended to help you compare the cost of investing
in the Portfolio with the cost of investing in other mutual funds.
The Example assumes that you invest $10,000 in the Portfolio for the time
periods indicated and then redeem all of your shares at the end of those
periods. The Example
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also assumes that your investment has a 5% return each year and that the
Portfolio's operating expenses remain the same. Although your actual costs may
be higher or lower, based on these assumptions your costs would be:
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1 YEAR* 3 YEARS*
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$204 $637
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* The Example is based on Total Annual Portfolio Operating Expenses, as
described in the Annual Portfolio Operating Expense table above. If the
expenses had been computed based on the net expenses (Total Annual Portfolio
Operating Expenses less fee waivers and/or expense reimbursements), your costs
would have been $102 for 1 year and $318 for 3 years.
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HOW THE PORTFOLIO INVESTS
The Portfolio seeks current income as its primary objective with capital
appreciation as its secondary objective. The Trust's board of trustees may
change the Portfolio's investment objective without shareholder approval. The
Portfolio invests primarily in a diversified portfolio of convertible
securities. Under normal market conditions, the Portfolio invests at least 65%
of its total assets in convertible securities.
Calamos Asset Management, Inc., the Portfolio's investment manager,
believes that there are various advantages to buying convertible securities.
These advantages include the potential for capital appreciation if the value of
the underlying common stock increases, the relatively high yield received from
dividend or interest payments as compared to common stock dividends, and the
relatively lower price volatility as compared to common stock. The Portfolio
seeks to profit from this strategy by receiving interest on the convertible
security and through an increase in value of the convertible security if the
market value of the underlying common stock increases above the conversion price
on the convertible security.
In selecting securities for the Portfolio, the investment manager applies a
four-step approach:
- analysis of the default risk of the convertible security using
traditional credit analysis
- employment of fundamental equity analysis to determine the capital
appreciation potential of the common stock into which the security
converts
- consideration of the risk/return potential of the convertible security
- consideration of the diversification of the Portfolio and other portfolio
composition criteria
In its equity and credit analysis, the investment manager considers the
issuer's:
- financial soundness
- ability to make interest and dividend payments
- earnings and cash-flow forecast
- quality of management
TYPES OF INVESTMENTS
CONVERTIBLE SECURITIES. Convertible securities include debt obligations
and preferred stock of an issuer which may be exchanged for a predetermined
price (the conversion price) into the common stock of the issuer. Convertible
securities generally offer lower interest or dividend yields than
non-convertible securities of similar quality.
Many convertible securities are issued with a call feature that allows the
issuer of the security to choose when to redeem the security. If a convertible
security held by the Portfolio is called for redemption, the Portfolio will be
required to redeem the security, convert it into the underlying common stock, or
sell it to a third party at a time that may be unfavorable to the Portfolio.
Conversely, certain convertible debt securities may provide a "put option" to
the Portfolio which entitles the Portfolio to make the issuer redeem the
security at a premium over the stated principal amount of the debt security.
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The investment manager may also create a "synthetic" convertible security.
The investment manager may create a "synthetic" convertible security by
combining fixed income securities ("fixed income component") with 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. The Portfolio may also purchase
synthetic securities manufactured by other parties (typically investment banks),
including convertible structured notes. More flexibility is possible in the
assembly of a synthetic convertible security than in the purchase of a
convertible security. The fixed income component and the convertible component
may be represented by different issuers, and each component may be purchased
separately, at different times. Synthetic convertible securities are not
considered convertible securities for purposes of the Portfolio's policy to
invest at least 65% of its total assets in convertible securities. Additional
information regarding synthetic securities appears below.
EQUITY INVESTMENTS. Equity securities include exchange-traded and
over-the-counter common and preferred stocks, warrants, rights, and depository
receipts. An investment in the equity securities of a company represents a
proportionate ownership interest in the company. Therefore, the Portfolio
participates in the financial success or failure of any company in which it has
an equity interest. Compared with other asset classes, equity investments have a
greater potential for gain.
FOREIGN SECURITIES. The Portfolio may invest up to 25% of its net assets
in securities of foreign issuers. A foreign issuer is a company organized under
the laws of a foreign country that has its principal trading market for its
security in a foreign country. For purposes of the 25% limitation, foreign
securities do not include securities represented by American Depository Receipts
(ADRs) or securities guaranteed by a U.S. person. ADRs are traded on U.S.
exchanges and represent an ownership interest in a foreign security. They are
generally issued by a U.S. bank as a substitute for direct ownership of the
foreign security. International investing allows the Portfolio to achieve
greater diversification and to take advantage of changes in foreign economies
and market conditions.
RULE 144A SECURITIES. The Portfolio may invest a substantial portion of
its assets in securities that are not publicly traded, but that are eligible for
purchase and sale by certain qualified institutional buyers pursuant to Rule
144A under the Securities Act of 1933.
JUNK BONDS. The Portfolio may invest without limit in convertible and non-
convertible debt securities rated BB or lower by Standard & Poor's Corporation,
or Ba or lower by Moody's Investor Services, Inc., and securities that are not
rated but are considered by the investment manager to be of similar quality
(commonly called "junk" bonds). The Portfolio will not, however, acquire a
security rated below C. The Portfolio expects to maintain, over the long-term,
an average credit quality rating of investment grade.
DEFENSIVE INVESTING. The Portfolio may depart from its principal
investment strategies in response to adverse market, economic or political
conditions by taking temporary defensive positions without limitation in all
types of money market and short term debt securities, and repurchase agreements.
In a repurchase agreement, the Portfolio purchases a security and the seller (a
bank or securities dealer) simultaneously agrees to repurchase the security at
the same price plus an amount equal to an agreed-upon interest rate, on a
specified date. During periods when the Portfolio has assumed a temporary
defensive position, the Portfolio may not be able to achieve its investment
objective.
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INVESTMENT RISKS
All investments, including those in mutual funds, have risks. The Portfolio
is designed for long-term investors who can accept the fluctuations in portfolio
value and other risks associated with the Portfolio. There can be no guarantee
that the Portfolio will achieve its objective.
MARKET RISK. There are market risks with any security. Market risk is the
risk that the securities markets will increase or decrease in value. Your
investment may lose value in response to a general decline in the stock market
regardless of the individual results of the company in which the Portfolio
invests.
DEFAULT RISK. Default risk refers to the risk that an issuer of a debt
security will be unable to fulfill its obligation to repay principal and
interest. The lower a bond is rated, the greater its default risk.
INTEREST RATE RISK. Interest rate risk is the risk that the Portfolio's
investments will decrease in value as a result of an increase in interest rates.
Generally, there is an inverse relationship between the value of a debt security
and interest rates. Therefore, the value of bonds held by the Portfolio
generally decreases in periods of rising interest rates. In addition, the prices
of bonds with a longer term to maturity are normally more volatile in response
to interest rate changes than are shorter-term bonds.
INVESTMENT MANAGEMENT. The investment manager's ability to choose suitable
investments for the Portfolio has a significant impact on the Portfolio's
ability to achieve its investment objective.
CONVERTIBLE SECURITIES. As with all fixed-income securities, the market
value of convertible securities tends to decline as interest rates increase and,
conversely, to increase as interest rates decline. However, when the market
price of the common stock of the company issuing the convertible security is
more than the conversion price, the convertible security tends to reflect the
market price of the underlying common 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, and thus may not
decline in price to the same extent as the underlying common stock. Holders of
convertible securities would be paid before the company's common stock holders
in the event of a liquidation of the issuing company. Consequently, the issuer's
convertible securities entail less risk than the issuer's common stock.
EQUITY INVESTMENTS. Equity investments are subject to greater fluctuations
in market value than other asset classes as a result of such factors as the
company's business performance, investor perceptions, stock market trends and
general economic conditions. Smaller companies are especially sensitive to these
factors, and therefore may experience more price volatility than larger
companies.
FOREIGN MARKET RISK. There are special risks associated with investing in
foreign securities including fluctuations in exchange rates of foreign
currencies that will affect the U.S. dollar value of the security, and the
possibility of substantial price volatility as a result of political and
economic instability in the foreign country. Other risks of investing in foreign
securities include: less public information with respect to issuers of
securities, different accounting, auditing and financial reporting standards,
and less liquidity in foreign markets than in U.S. markets.
RULE 144A SECURITIES. As mentioned above, the Portfolio may purchase
securities that have been privately placed but that are eligible for purchase
and sale by certain
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qualified institutional buyers under Rule 144A. The investment manager, 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 Portfolio's restriction of investing no more than 10% of its
net 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.
JUNK BONDS. Although junk bonds typically pay higher interest rates than
investment grade bonds, there is a greater likelihood that the junk bond issuer
will default on interest and principal payments. In the event of an issuer's
bankruptcy, claims of other creditors may have priority over the claims of junk
bond holders, leaving few or no assets to repay junk bond holders. Junk bonds
are also more sensitive to adverse economic changes or individual corporate
developments than higher quality bonds. During a period of adverse economic
changes, including a period of rising interest rates, issuers of such bonds may
be unable to make principal and interest payments.
SYNTHETIC CONVERTIBLE SECURITIES. Because a synthetic convertible security
is composed of two or more separate securities, each with its own market value,
the value of a synthetic convertible security will respond differently to market
fluctuations than a convertible security. 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.
OTHER SECURITIES. While not the principal investments or strategies of the
Portfolio, the Portfolio may utilize other investments and investment techniques
which may impact Portfolio performance, including options, warrants, futures and
other strategic transactions. More information about Portfolio investments and
strategies is provided in the Statement of Additional Information.
The Portfolio is sold to the separate accounts of Participating Insurance
Companies offering Variable Contracts that are sold in a number of
jurisdictions. Certain states have regulations or guidelines concerning
concentration of investments and other investment techniques. If applied to the
Portfolio, the Portfolio may be limited in its ability to engage in certain
techniques and to manage its investments with the flexibility provided herein.
In order to permit the Portfolio to be available under Variable Contracts sold
in certain states, the Portfolio may make commitments that are more restrictive
than the investment policies and limitations described herein and in the
Statement of Additional Information. If the Portfolio determines that such a
commitment is no longer in the Portfolio's best interest, the commitment may be
revoked by terminating the availability of the Portfolio to Variable Contract
owners residing in such states.
MANAGEMENT OF THE PORTFOLIO
The Portfolio's investments are managed by its investment manager, Calamos
Asset Management, Inc. ("CAM"), 1111 E. Warrenville Road, Naperville, IL. At
February 1, 1999, CAM managed approximately $3.5 billion in assets of
individuals and institutions. CAM has been registered as an investment adviser
under the Investment Advisers Act of 1940 since 1987. John P. Calamos, president
of CAM, has been engaged in the investment advisory business since 1977.
Subject to the overall authority of the board of trustees, CAM furnishes
continuous investment supervision and management to the Portfolio under a
management agreement
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and also furnishes office space, equipment and management personnel. For these
services, the Portfolio pays CAM a fee based on average daily net assets that is
accrued daily and paid monthly. The fee paid by the Portfolio is at the annual
rate of .75% of average daily net assets. Additional expenses are incurred under
the Variable Contracts. These expenses are not described in this prospectus.
Variable Contract owners and Retirement Plan participants should consult with
the Variable Contract disclosure document or Retirement Plan information
regarding these expenses.
From time to time, CAM may pay Participating Insurance Companies or other
organizations that provide administrative services for the Portfolio or that
provide Variable Contract owners and/or Retirement Plan participants other
services relating to the Portfolio. The amount of any such payment will be
determined by the nature and extent of the services provided by the
Participating Insurance Companies or other organizations. Payment of such
expenses by CAM will not increase the fees paid by the Portfolio or its
shareholders.
CAM has voluntarily undertaken to limit the annual ordinary operating
expenses of shares of the Portfolio to 1.00% of average daily net assets. This
expense limitation is voluntary and may be terminated by CAM at any time.
John P. Calamos, President of the Trust, and Nick P. Calamos, Vice
President of the Trust, have managed the Portfolio since its inception in 1999.
During the past five years, John P. Calamos has been president of CAM and Nick
P. Calamos has been a managing director of CAM.
YEAR 2000 COMPLIANCE
Like other mutual funds, financial and business organizations and
individuals around the world, the Portfolio could be adversely affected if the
computer systems used by the investment manager and other service providers do
not properly process and calculate date-related information and data from and
after January 1, 2000. This is commonly known as the "Year 2000 Problem." CAM,
as investment manager, is taking steps that it believes are reasonably designed
to address the Year 2000 Problem with respect to computer systems that it uses
and to obtain reasonable assurances that comparable steps are being taken by the
Portfolio's other major service providers. At this time, there can be no
assurance that these steps will be sufficient to avoid any adverse impact to the
Portfolio. In addition, there can be no assurances that the Year 2000 Problem
will not have an adverse effect on global markets or economies, or on the
issuers whose securities are held by the Portfolio. Although CAM may consider
the Year 2000 Problem when evaluating investment opportunities, there can be no
assurance that improperly functioning computers will not affect specific issuers
or broad markets.
EURO CONVERSION
The introduction of the Economic and Monetary Union (EMU) in Europe
occurred on January 1, 1999, when eleven European countries adopted a single
currency -- the euro. The full conversion to the euro is being phased in over a
three year period. During this time, valuation systems and other operational
problems may occur in connection with the Portfolio's investments quoted in the
euro. The investment manager is actively working to address euro-related issues
and understands that other key service providers are taking similar steps. EMU
is driven by the expectation of a number of economic benefits, including lower
transaction costs, reduced exchange risk, greater competition, and a broadening
and deepening of European financial markets. However, there are a number of
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significant risks associated with EMU. Monetary and economic union on this scale
has never been attempted before. In addition, there is a significant degree of
uncertainty as to whether participating countries will remain committed to EMU
in the face of changing economic conditions. This uncertainty may increase the
volatility of the international markets in which the Portfolio invests.
SHAREHOLDER INFORMATION
PURCHASING SHARES
Shares of the Portfolio are purchased by the separate accounts of
Participating Insurance Companies or by Retirement Plans based on the
instructions they receive from the Variable Contract holders or Retirement Plan
participants. You cannot purchase Portfolio shares directly.
SELLING SHARES
Portfolio shares are sold by the separate accounts of Participating
Insurance Companies or by Retirement Plans. Shares may be sold to generate cash
to, among other things, pay a contract owner who requested a withdrawal or who
terminated a contract.
VALUING SHARES
The Portfolio's share price, or net asset value (NAV), is determined as of
the close of regular session trading on the New York Stock Exchange (NYSE)
(currently 4:00 p.m. Eastern time) each day that the NYSE is open. The NYSE is
regularly closed on New Year's Day, the third Monday in January and February,
Good Friday, the last Monday in May, Independence Day, Labor Day, Thanksgiving
and Christmas.
The NAV per share is calculated by dividing the value of all of the
securities and other assets of the Portfolio, less its liabilities, by the
number of Portfolio shares outstanding. Shares are purchased or sold at the NAV
next determined after receipt of a purchase or sale order in good form.
Portfolio securities are valued on the basis of market prices from the primary
market in which they are traded. As a general rule, equity securities listed on
a U.S. securities exchange or NASDAQ National Market are valued at the last
quoted sale price on the day the valuation is made. Bonds and other fixed-income
securities that are traded over the counter and on an exchange will be valued
according to the broadest and most representative market, and it is expected
this will ordinarily be the over-the-counter market.
The foreign securities held by the Portfolio 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 determined as of the
earlier of the time the exchange on which the securities are traded closes or as
of the close of trading on the NYSE. As a result, it is possible that events
affecting the value of such securities may occur that are not reflected in the
computation of the Portfolio's NAV, and the NAV may change on days when
shareholders will not be able to buy or sell the Portfolio's shares.
If market prices are not readily available, securities and other assets are
valued at a fair value as determined by the board of trustees. The effect of any
fair value pricing will be that the NAV will not be based on the last quoted
price of a security, but on a price which the board believes reflects the
current and true price of the security.
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OTHER INFORMATION
The Portfolio's shares can be purchased by Retirement Plans and by separate
accounts of certain life insurance companies (Participating Insurance Companies)
offering Variable Contracts. Individual variable annuity and variable life
insurance contract holders are not the "shareholders" of the Portfolio. Rather,
the separate accounts of the Participating Insurance Companies are the
shareholders of the Portfolio. You cannot directly purchase shares of the
Portfolio.
Please read the prospectus for the Variable Contract that you want to
purchase to learn about purchasing a contract. The Portfolio assumes no
responsibility for such prospectuses.
The Portfolio currently does not foresee any disadvantages to the holders
of variable life insurance contracts and variable annuity contracts arising from
the fact that the interests of the holders of such contracts may differ.
Nevertheless, the Trust's board of trustees intends to monitor events in order
to identify any material irreconcilable conflicts that may arise and to
determine what action, if any, should be taken.
DISTRIBUTIONS AND TAXES
DIVIDENDS AND CAPITAL GAINS
The Portfolio intends to distribute to its shareholders substantially all
of its net investment income and net realized capital gains. The Portfolio
declares and pays dividends from net investment income quarterly, and pays any
long-term capital gains annually.
TAXES
The Trust intends that the Portfolio will qualify as a regulated investment
company ("RIC") under the Internal Revenue Code of 1986 and will meet certain
diversification requirements applicable to mutual funds underlying variable
insurance products. For a discussion regarding what it means to qualify as a RIC
and a general discussion concerning some of the possible tax consequences
associated with the operation of the Trust, please refer to the section
entitled, "Taxation" in the Statement of Additional Information.
For a discussion of the taxation of the Participating Insurance Companies
and separate accounts, as well as the tax treatment of the Variable Contracts
and the owners thereof, see the disclosure documents for the Variable Contracts.
For information regarding the taxation of Retirement Plans, as well as the
participants thereunder, see the plan administrator and plan documents for the
Retirement Plan.
PLEASE CONSULT WITH YOUR TAX ADVISOR REGARDING YOUR PARTICULAR TAX SITUATION.
You do not own the Portfolio's shares directly; therefore, the Portfolio's
distributions are not likely to affect your tax situation. However, the separate
accounts, in which you own a Variable Contract, may be affected by Portfolio
distributions. Tax consequences to Variable Contract holders are described in
the separate prospectuses issued by the Participating Insurance Companies.
Portfolio distributions may be taxed as ordinary income or capital gains.
Capital gains may be taxed at different rates depending on the length of time
that the assets are held by the Portfolio. The Portfolio's distributions,
whether received in cash or reinvested in additional Portfolio shares, may be
subject to federal income tax.
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FOR MORE INFORMATION
If you would like more information about the Calamos Convertible Portfolio,
the following resources are available upon request, free of charge.
This prospectus is intended for use in connection with Variable Contacts or
Retirement Plans.
ANNUAL AND SEMIANNUAL REPORTS
Additional information about the Portfolio's investments will be available
in the Portfolio's annual and semiannual reports to shareholders. The reports
will contain a discussion of the market conditions and investment strategies
that significantly affected the Portfolio's performance for the past six-month
and twelve-month periods.
STATEMENT OF ADDITIONAL INFORMATION
The Statement of Additional Information (SAI) provides more detailed
information about the Portfolio and is incorporated herein by reference.
You can get free copies of reports and the SAI, request other information
and discuss your questions about the Portfolio by contacting Calamos Asset
Management, Inc. at:
CALAMOS(R) ASSET MANAGEMENT, INC.
1111 E Warrenville Road
Naperville, Illinois 60563-1493
Telephone: 1-800-823-7386
Internet: http://www.calamos.com
You can review the Portfolio's reports and SAI at the Public Reference Room
of the Securities and Exchange Commission. You can get text-only copies for free
from the Commission's Internet website at: http://www.sec.gov, or for a fee by
calling or writing to:
Public Reference Section of the Commission
Washington, D.C. 20549-6009
Telephone: 1-800-SEC-0330
Investment Company Act file no. 811-09237
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STATEMENT OF ADDITIONAL INFORMATION MAY 1, 1999
CALAMOS ADVISORS TRUST LOGO
CALAMOS(R) ADVISORS TRUST
CALAMOS(R) CONVERTIBLE PORTFOLIO
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1111 East Warrenville Road
Naperville, Illinois 60563-1493
(630) 245-7200
Toll Free: (800) 823-7386
This Statement of Additional Information relates to CALAMOS(R) Convertible
Portfolio (the "Portfolio"), which is a series of Calamos Advisors Trust (the
"Trust"). It is not a prospectus, but provides information that should be read
in conjunction with the Portfolio's prospectus dated the same date as this
Statement of Additional Information and any supplements thereto. The prospectus
may be obtained without charge by writing or telephoning the Portfolio at the
address or telephone numbers set forth above.
The Portfolio is currently available for sale to the separate accounts of
certain life insurance companies (Participating Insurance Companies) offering
variable annuity contracts and variable life insurance contracts (together,
"Variable Contracts") and may be offered to certain types of pension plans and
retirement arrangements and accounts permitting accumulation of funds on a
tax-deferred basis ("Retirement Plans") as described in the prospectus.
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TABLE OF CONTENTS
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The Trust and the Portfolio..... B-1
Investment Strategies and
Risks......................... B-1
Investment Restrictions......... B-17
Management...................... B-20
Investment Advisory Services.... B-21
Purchasing and Redeeming
Shares........................ B-22
Performance Information......... B-23
Distributor..................... B-26
Portfolio Transactions.......... B-26
</TABLE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Taxation........................ B-27
Certain Shareholders............ B-29
Custodian....................... B-29
Independent Auditors............ B-29
Shareholder Information......... B-29
Appendix -- Description of Bond
Ratings....................... B-31
Report of Independent
Auditors...................... B-33
Statement of Net Assets......... B-34
</TABLE>
<PAGE> 16
THE TRUST AND THE PORTFOLIO
The Portfolio is a series of Calamos Advisors Trust (the "Trust") which was
organized as a Massachusetts business trust on February 17, 1999. The Portfolio
is an open-end, diversified management investment company that seeks current
income as its primary objective with capital appreciation as its secondary
objective.
The prospectus contains information concerning the Portfolio's investment
objective and principal investment strategies and risks. This SAI provides
additional information concerning certain securities and strategies used by the
Portfolio and their associated risks.
INVESTMENT STRATEGIES AND RISKS
The following information supplements, and should be read in conjunction
with the discussion of the Portfolio's investment objectives, strategies and
risks that are described in the prospectus.
CONVERTIBLE SECURITIES
As described in the prospectus, the Portfolio invests primarily in a
diversified portfolio of convertible securities. Under normal market conditions,
the Portfolio invests at least 65% of its total assets in convertible
securities.
Convertible securities include any corporate debt security or preferred
stock that may be converted into underlying shares of common stock. The common
stock underlying convertible securities may be issued by a different entity than
the issuer of the convertible securities. Convertible securities entitle the
holder to receive interest payments paid on corporate debt securities or the
dividend preference on a preferred stock until such time as the convertible
security matures or is redeemed or until the holder elects to exercise the
conversion privilege. As a result of the conversion feature, however, the
interest rate or dividend preference on a convertible security is generally less
than would be the case if the securities were issued in non-convertible form.
The value of convertible securities is influenced by both the yield of
non-convertible securities of comparable issuers and by the value of the
underlying common stock. The value of a convertible security viewed without
regard to its conversion feature (i.e., strictly on the basis of its yield) is
sometimes referred to as its "investment value." The investment value of the
convertible security will typically 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.
B-1
<PAGE> 17
SYNTHETIC CONVERTIBLE SECURITIES
The investment manager may create a "synthetic" convertible security by
combining fixed income securities with the right to acquire equity securities.
More flexibility is possible in the assembly of a synthetic convertible security
than in the purchase of a convertible security. Although synthetic convertible
securities may be selected where the two components are issued by a single
issuer, thus making the synthetic convertible security similar to the true
convertible security, the character of a synthetic convertible security allows
the combination of components representing distinct issuers, when management
believes that such a combination would better promote the Portfolio's investment
objective. A synthetic convertible security also is a more flexible investment
in that its two components may be purchased separately. For example, the
Portfolio may purchase a warrant for inclusion in a synthetic convertible
security but temporarily hold short-term investments while postponing the
purchase of a corresponding bond pending development of more favorable market
conditions. The Portfolio's holdings of synthetic convertible securities are not
considered convertible securities for purposes of the Portfolio's policy to
invest at least 65% of its assets in convertible securities.
A holder of a synthetic convertible security faces the risk of a decline in
the price of the security or the level of the index involved in the convertible
component, causing a decline in the value of the call option or warrant
purchased to create the synthetic convertible security. Should the price of the
stock fall below the exercise price and remain there throughout the exercise
period, the entire amount paid for the call option or warrant would be lost.
Since a synthetic convertible security includes the fixed-income component as
well, the holder of a synthetic convertible security also faces the risk that
interest rates will rise, causing a decline in the value of the fixed-income
instrument.
The Portfolio may also purchase synthetic convertible securities
manufactured by other parties, including convertible structured notes.
Convertible structured notes are fixed income debentures linked to equity, and
are typically issued by investment banks. Convertible structured notes have the
attributes of a convertible security, however, the investment bank that issued
the convertible note assumes the credit risk associated with the investment,
rather than the issuer of the underlying common stock into which the note is
convertible.
DEBT SECURITIES
In pursuing its investment objective, the Portfolio may invest in
convertible and non-convertible debt securities, including lower-rated
securities (i.e., securities rated BB or lower by Standard & Poor's Corporation
or Ba or lower by Moody's Investor Services, Inc.) and securities that are not
rated but are considered by the investment manager to be of similar quality.
There are no restrictions as to the ratings of debt securities acquired by the
Portfolio or the portion of the Portfolio's assets that may be invested in debt
securities in a particular ratings category, except that the Portfolio will not
acquire a security rated below C.
Securities rated BBB or Baa are considered to be medium grade and to have
speculative characteristics. Lower-rated debt securities are predominantly
speculative with respect to the issuer's capacity to pay interest and repay
principal. Investment in medium-or lower-quality debt securities involves
greater investment risk, including the possibility of issuer default or
bankruptcy. An economic downturn could severely disrupt the market for such
securities and adversely affect the value of such securities. In addition,
lower-quality bonds are less sensitive to interest rate changes than
higher-quality instruments and
B-2
<PAGE> 18
generally are more sensitive to adverse economic changes or individual corporate
developments. During a period of adverse economic changes, including a period of
rising interest rates, issuers of such bonds may experience difficulty in
servicing their principal and interest payment obligations.
Achievement by the Portfolio of its investment objectives will be more
dependent on the investment manager's credit analysis than would be the case if
the Portfolio were investing in higher-quality debt securities. Since the
ratings of rating services (which evaluate the safety of principal and interest
payments, not market risks) are used only as preliminary indicators of
investment quality, the investment manager employs its own credit research and
analysis. These analyses may take into consideration such quantitative factors
as an issuer's present and potential liquidity, profitability, internal
capability to generate funds, debt/equity ratio and debt servicing capabilities,
and such qualitative factors as an assessment of management, industry
characteristics, accounting methodology, and foreign business exposure.
Medium- and lower-quality debt securities may be less marketable than
higher-quality debt securities because the market for them is less broad. The
market for unrated debt securities is even narrower. During periods of thin
trading in these markets, the spread between bid and asked prices is likely to
increase significantly, and the Portfolio may have greater difficulty selling
its portfolio securities. The market value of these securities and their
liquidity may be affected by adverse publicity and investor perceptions.
RULE 144A SECURITIES
The Portfolio may invest a substantial portion of its assets in securities
that have been privately placed but that are eligible for purchase and sale by
certain qualified institutional buyers, such as the Portfolio, under Rule 144A
under the Securities Act of 1933. The investment manager, under the supervision
of the Trust's board of trustees, will consider whether securities purchased
under Rule 144A are illiquid and thus subject to the Portfolio's restriction of
investing no more than 10% of its net 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, the investment manger will consider the
trading markets for the specific security, taking into account the unregistered
nature of a Rule 144A security. In addition, the investment manger 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 Portfolio's holdings of illiquid securities would be reviewed to
determine what, if any, steps are required to assure that the Portfolio does not
invest more than 10% 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.
FOREIGN SECURITIES
The Portfolio may invest up to 25% of its net assets in securities of
foreign issuers. A foreign issuer is a company organized under the laws of a
foreign country that has its principal trading market for its securities in a
foreign country. For this purpose, foreign securities do not include American
Depositary Receipts (ADRs) or securities guaranteed
B-3
<PAGE> 19
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. 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 Portfolio may invest in sponsored or unsponsored ADRs.
In the case of an unsponsored ADR, the Portfolio 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 Portfolio'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 Portfolio intends to invest in companies and governments 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 Portfolio expects that substantially all of its investments will be in
developed nations. However, the Portfolio may invest in the securities of
emerging countries. The securities markets of emerging countries are
substantially smaller, less developed, less liquid and more volatile than the
securities markets of the U.S. and other more developed countries. Disclosure
and regulatory standards in many respects are less stringent than in the U.S.
and other major markets. There also may be a lower level of monitoring and
regulation of emerging markets and the activities of investors in such markets,
and enforcement of existing regulations has been extremely limited. Economies in
individual emerging markets may differ favorably or unfavorably from the U.S.
economy in such respects as growth of gross domestic product, rates of
inflation, currency depreciation,
B-4
<PAGE> 20
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. The Portfolio may enter into 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 Portfolio 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 Portfolio 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 Portfolio 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 Portfolio 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 Portfolio 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 Portfolio 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 Portfolio. The Portfolio may not engage in "speculative" currency
exchange transactions.
If the Portfolio enters into a forward contract, the Portfolio's custodian
will segregate liquid assets of the Portfolio having a value equal to the
Portfolio's commitment under such forward contract. At the maturity of the
forward contract to deliver a particular currency, the Portfolio may either sell
the portfolio security related to the contract and make delivery of the
currency, or it may retain the security and either acquire the currency on the
spot market or terminate its contractual obligation to deliver the currency by
purchasing an offsetting contract with the same currency trader obligating it to
purchase on the same maturity date the same amount of the currency.
It is impossible to forecast with absolute precision the market value of
portfolio securities at the expiration of a forward contract. Accordingly, it
may be necessary for the
B-5
<PAGE> 21
Portfolio 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 Portfolio is obligated to deliver and if a decision is
made to sell the security and make delivery of the currency. Conversely, it may
be necessary to sell on the spot market some of the currency received upon the
sale of the portfolio security if its market value exceeds the amount of
currency the Portfolio is obligated to deliver.
If the Portfolio retains the portfolio security and engages in an
offsetting transaction, the Portfolio will incur a gain or a loss to the extent
that there has been movement in forward contract prices. If the Portfolio
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 Portfolio'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 Portfolio 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 Portfolio 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 Portfolio of unrealized profits or force the Portfolio to cover its
commitments for purchase or sale of currency, if any, at the current market
price.
Hedging against a decline in the value of a currency does not eliminate
fluctuations in the value of a portfolio security traded in that currency or
prevent a loss if the value of the security declines. Hedging transactions also
preclude the opportunity for gain if the value of the hedged currency should
rise. Moreover, it may not be possible for the Portfolio to hedge against a
devaluation that is so generally anticipated that the Portfolio is not able to
contract to sell the currency at a price above the devaluation level it
anticipates. The cost to the Portfolio of engaging in currency exchange
transactions varies with such factors as the currency involved, the length of
the contract period, and prevailing market conditions. Since currency exchange
transactions are usually conducted on a principal basis, no fees or commissions
are involved.
SYNTHETIC FOREIGN MONEY MARKET POSITIONS. The Portfolio may invest in
money market instruments denominated in foreign currencies. In addition to, or
in lieu of, such direct investment, the Portfolio 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.
B-6
<PAGE> 22
LENDING OF PORTFOLIO SECURITIES
The Portfolio may lend its portfolio securities, up to 33 1/3% of its total
assets, including collateral received, 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 Portfolio. The Portfolio 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 Portfolio may pay reasonable
fees to persons unaffiliated with the Portfolio for services in arranging the
loans. The Portfolio 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
Portfolio 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
the investment manager's judgment, a material event requiring a shareholder vote
would otherwise occur before the loan was repaid. In the event of bankruptcy or
other default of the borrower, the Portfolio 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 Portfolio seeks to enforce its
rights thereto, (b) possible subnormal levels of income and lack of access to
income during this period, and (c) expenses of enforcing its rights. In an
effort to reduce these risks, the investment manager will monitor the
creditworthiness of the firms to which the Portfolio lends securities.
REPURCHASE AGREEMENTS
The Portfolio may invest in repurchase agreements, provided that the
Portfolio may not invest more than 10% of its net assets in repurchase
agreements maturing in more than seven days and any other illiquid securities. A
repurchase agreement is a sale of securities to the Portfolio in which the
seller agrees to repurchase the securities at a higher price, which includes an
amount representing interest on the purchase price, within a specified time.
Such agreements generally have maturities of no more than seven days and could
be used to permit the Portfolio to earn interest on assets awaiting long term
investment. The Portfolio requires continuous maintenance by the custodian for
the Portfolio'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. Although repurchase
agreements carry certain risks not associated with direct investments in
securities, the Portfolio will enter in repurchase agreements only with sellers
the investment manager believes present minimum credit risk in accordance with
guidelines approved by the board of trustees. The investment manager will review
and monitor the creditworthiness of such institutions, and will consider the
capitalization of the institution, the investment manager's prior dealing with
the institution, and rating of the institution's senior long-term debt by
independent rating agencies and other relevant factors. In the event of a
bankruptcy or other default of a seller of a repurchase agreement, the Portfolio
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 Portfolio 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.
B-7
<PAGE> 23
OPTIONS ON SECURITIES, INDEXES AND CURRENCIES
The Portfolio may purchase and sell put options and call options on
securities, indexes or foreign currencies in standardized contracts traded on
recognized securities exchanges, boards of trade, or similar entities, or quoted
on NASDAQ. The Portfolio may purchase agreements, sometimes called cash puts,
that may accompany the purchase of a new issue of bonds from a dealer.
An option on a security (or index) is a contract that gives the purchaser
(holder) of the option, in return for a premium, the right to buy from (call) or
sell to (put) the seller (writer) of the option the security underlying the
option (or the cash value of the index) at a specified exercise price at any
time during the term of the option (normally not exceeding nine months). The
writer of an option on an individual security or on a foreign currency has the
obligation upon exercise of the option to deliver the underlying security or
foreign currency upon payment of the exercise price or to pay the exercise price
upon delivery of the underlying security or foreign currency. Upon exercise, the
writer of an option on an index is obligated to pay the difference between the
cash value of the index and the exercise price multiplied by the specified
multiplier for the index option. (An index is designed to reflect specified
facets of a particular financial or securities market, a specific group of
financial instruments or securities, or certain economic indicators.)
The Portfolio will write call options and put options only if they are
"covered." For example, in the case of a call option on a security, the option
is "covered" if the Portfolio owns the security underlying the call or has an
absolute and immediate right to acquire that security without additional cash
consideration (or, if additional cash consideration is required, cash or cash
equivalents in such amount are held in a segregated account by its custodian)
upon conversion or exchange of other securities held in its portfolio.
If an option written by the Portfolio expires, the Portfolio realizes a
capital gain equal to the premium received at the time the option was written.
If an option purchased by the Portfolio expires, the Portfolio realizes a
capital loss equal to the premium paid.
Prior to the earlier of exercise or expiration, an option may be closed out
by an offsetting purchase or sale of an option of the same series (type,
exchange, underlying security or index, exercise price and expiration). There
can be no assurance, however, that a closing purchase or sale transaction can be
effected when the Portfolio desires.
The Portfolio 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 Portfolio 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 Portfolio will realize a capital gain
or, if it is less, the Portfolio 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 Portfolio is an asset of the
Portfolio, valued initially at the premium paid for the option. The premium
received for an option written by the Portfolio 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.
B-8
<PAGE> 24
RISKS ASSOCIATED WITH OPTIONS. There are several risks associated with
transactions in options. For example, there are significant differences between
the securities markets, the currency markets and the options markets that could
result in an imperfect correlation among these markets, causing a given
transaction not to achieve its objectives. A decision as to whether, when and
how to use options involves the exercise of skill and judgment, and even a
well-conceived transaction may be unsuccessful to some degree because of market
behavior or unexpected events.
There can be no assurance that a liquid market will exist when the
Portfolio seeks to close out an option position. If the Portfolio 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 Portfolio 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 Portfolio 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
Portfolio foregoes, during the option's life, the opportunity to profit from
currency appreciation.
If trading were suspended in an option purchased or written by the
Portfolio, the Portfolio would not be able to close out the option. If
restrictions on exercise were imposed, the Portfolio might not be able to
exercise an option it has purchased.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
The Portfolio 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 Portfolio may purchase and write call and put futures options. Options
on futures 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
- ---------------
(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.
B-9
<PAGE> 25
true. The Portfolio 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 Portfolio's securities or the price of
the securities that the Portfolio intends to purchase. Although other techniques
could be used to reduce or increase the Portfolio's exposure to stock price,
interest rate and currency fluctuations, the Portfolio may be able to achieve
its desired exposure more effectively and perhaps at a lower cost by using
futures contracts and futures options.
The Portfolio 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 Portfolio'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 Portfolio, the
Portfolio 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 Portfolio'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 Portfolio upon termination of
the contract, assuming all contractual obligations have been satisfied. The
Portfolio expects to earn interest income on its initial margin deposits. A
futures contract held by the Portfolio is valued daily at the official
settlement price of the exchange on which it is traded. Each day the Portfolio
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 Portfolio does not represent a
borrowing or loan by the Portfolio but is instead settlement between the
Portfolio 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 Portfolio will mark-to-market its open futures positions.
The Portfolio 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 Portfolio.
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 Portfolio engaging in
the transaction realizes a capital gain, or if it is more, the Portfolio
realizes a capital loss. Conversely, if an offsetting sale price is more than
the original purchase price, the Portfolio engaging in the transaction realizes
a capital gain, or if it less,
B-10
<PAGE> 26
the Portfolio 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 Portfolio's holdings, 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 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 a
Portfolio seeks to close out a futures or futures option position. The Portfolio
would be exposed to possible loss on the position during the interval of
inability to close, and would continue to be required to meet margin
requirements until the position is closed. In addition, many of the contracts
discussed above are relatively new instruments without a significant trading
history. As a result, there can be no assurance that an active secondary market
will develop or continue to exist.
LIMITATIONS ON OPTIONS AND FUTURES
If other options, futures contracts or futures options of types other than
those described herein are traded in the future, the Portfolio may also use
those investment vehicles, provided the board of trustees determines that their
use is consistent with the Portfolio's investment objective.
The Portfolio will not enter into a futures contract or purchase an option
thereon if, immediately thereafter, the initial margin deposits for futures
contracts held by the
B-11
<PAGE> 27
Portfolio plus premiums paid by it for open futures option positions, less the
amount by which any such positions are "in-the-money,"(2) would exceed 5% of the
Portfolio's total assets.
When purchasing a futures contract or writing a put option on a futures
contract, the Portfolio 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
Portfolio 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 Portfolio.
The Portfolio 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 Portfolio has written call options on specific
securities in its portfolio, the value of those securities will be deducted from
the current market value of the securities portfolio.
In order to comply with Commodity Futures Trading Commission Regulation 4.5
and thereby avoid being deemed a "commodity pool operator," the Portfolio will
use commodity futures or commodity options contracts solely for bona fide
hedging purposes within the meaning and intent of Regulation 1.3(z), or, with
respect to positions in commodity futures and commodity options contracts that
do not come within the meaning and intent of 1.3(z), the aggregate initial
margin and premiums required to establish such positions will not exceed 5% of
the fair market value of the assets of the Portfolio, after taking into account
unrealized profits and unrealized losses on any such contracts it has entered
into (in the case of an option that is in-the-money at the time of purchase, the
in-the-money amount, as defined in Section 190.01(x) of the Commission
Regulations,, may be excluded in computing such 5%).
TAXATION OF OPTIONS AND FUTURES
If the Portfolio exercises a call or put option that it holds, the premium
paid for the option is added to the cost basis of the security purchased (call)
or deducted from the proceeds of the security sold (put). For cash settlement
options and futures options exercised by the Portfolio, the difference between
the cash received at exercise and the premium paid is a capital gain or loss.
If a call or put option written by the Portfolio is exercised, the premium
is included in the proceeds of the sale of the underlying security (call) or
reduces the cost basis of the security purchased (put). For cash settlement
options and futures options written by the Portfolio, the difference between the
cash paid at exercise and the premium received is a capital gain or loss.
Entry into a closing purchase transaction will result in capital gain or
loss. If an option written by the Portfolio was in-the-money at the time it was
written and the security
- ---------------
(2) A call option is "in-the-money" if the value of the futures contract that is
the subject of the option exceeds the exercise price. A put option is
"in-the-money" if the exercise price exceeds the value of the futures
contract that is the subject of the option.
B-12
<PAGE> 28
covering the option was held for more than the long-term holding period prior to
the writing of the option, any loss realized as a result of a closing purchase
transaction will be long-term. The holding period of the securities covering an
in-the-money option will not include the period of time the option is
outstanding.
If the Portfolio writes an equity call option(3) other than a "qualified
covered call option," as defined in the Internal Revenue Code, any loss on such
option transaction, to the extent it does not exceed the unrealized gains on the
securities covering the option, may be subject to deferral until the securities
covering the option have been sold.
A futures contract held until delivery results in capital gain or loss
equal to the difference between the price at which the futures contract was
entered into and the settlement price on the earlier of delivery notice date or
expiration date. If the Portfolio delivers securities under a futures contract,
the Portfolio also realizes a capital gain or loss on those securities.
For federal income tax purposes, the Portfolio generally is required to
recognize as income for each taxable year its net unrealized gains and losses as
of the end of the year on futures, futures options and non-equity options
positions ("year-end mark-to-market"). Generally, any gain or loss recognized
with respect to such positions (either by year-end mark-to-market or by actual
closing of the positions) is considered to be 60% long-term and 40% short-term,
without regard to the holding periods of the contracts. However, in the case of
positions classified as part of a "mixed straddle," the recognition of losses on
certain positions (including options, futures and futures options positions, the
related securities and certain successor positions thereto) may be deferred to a
later taxable year. Sale of futures contracts or writing of call options (or
futures call options) or buying put options (or futures put options) that are
intended to hedge against a change in the value of securities held by the
Portfolio: (1) will affect the holding period of the hedged securities; and (2)
may cause unrealized gain or loss on such securities to be recognized upon entry
into the hedge.
If the Portfolio were to enter into a short index future, short index
futures option or short index option position and the Portfolio's portfolio were
deemed to "mimic" the performance of the index underlying such contract, the
option or futures contract position and the Portfolio's stock positions would be
deemed to be positions in a mixed straddle, subject to the above-mentioned loss
deferral rules.
In order for the Portfolio to continue to qualify for federal income tax
treatment as a regulated investment company, at least 90% of its gross income
for a taxable year must be derived from qualifying income; i.e., dividends,
interest, income derived from loans of securities and gains from the sale of
securities or foreign currencies, or other income (including but not limited to
gains from options, futures or forward contracts). Any net gain realized from
futures (or futures options) contracts will be considered gain from the sale of
securities and therefore be qualifying income for purposes of the 90%
requirement.
- ---------------
(3) An equity option is defined to mean any option to buy or sell stock, and any
other option the value of which is determined by reference to an index of
stocks of the type that is ineligible to be traded on a commodity futures
exchange (e.g., an option contract on a sub-index based on the price of nine
hotel-casino stocks). The definition of equity option excludes options on
broad-based stock indexes (such as the Standard & Poor's 500 index).
B-13
<PAGE> 29
The Taxpayer Relief Act of 1997 (the "Act") imposed constructive sale
treatment for federal income tax purposes on certain hedging strategies with
respect to appreciated securities. Under these rules taxpayers will recognize
gain, but not loss, with respect to securities if they enter into short sales or
"offsetting notional principal contracts" (as defined by the Act) with respect
to, or futures or "forward contracts" (as defined by the Act) with respect to,
the same or substantially identical property, or if they enter into such
transactions and then acquire the same or substantially identical property. The
Secretary of the Treasury is authorized to promulgate regulations that will
treat as constructive sales certain transactions that have substantially the
same effect as short sales, offsetting notional principal contracts, and futures
or forward contracts to deliver the same or substantially similar property.
The Portfolio distributes to shareholders annually any net capital gains
that have been recognized for federal income tax purposes (including year-end
mark-to-market gains) on options and futures transactions. Such distributions
are combined with distributions of capital gains realized on the Portfolio's
other investments, and shareholders are advised of the nature of the payments.
WARRANTS
The Portfolio 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 tend to be greater
than the percentage increase or decrease in the value of the underlying common
stock.
SHORT SALES
The Portfolio may attempt to hedge against market risk and to enhance
income by selling short "against the box," that is: (1) entering into short
sales of securities that it currently has the right to acquire through the
conversion or exchange of other securities that it owns, or to a lesser extent,
entering into short sales of securities that it currently owns; and (2) entering
into arrangements with the broker-dealers through which such securities are sold
short to receive income with respect to the proceeds of short sales during the
period the Portfolio's short positions remain open. The Portfolio may make short
sales of securities only if at all times when a short position is open the
Portfolio owns an equal amount of such securities or securities convertible into
or exchangeable for, without payment of any further consideration, securities of
the same issue as, and equal in amount to, the securities sold short.
In a short sale against the box, the Portfolio does not deliver from its
portfolio the securities sold and does not receive immediately the proceeds from
the short sale. Instead, the Portfolio borrows the securities sold short from a
broker-dealer through which the short sale is executed, and the broker-dealer
delivers such securities, on behalf of the Portfolio, to the purchaser of such
securities. Such broker-dealer is entitled to retain the proceeds from the short
sale until the Portfolio delivers to such broker-dealer the securities sold
short. In addition, the Portfolio is required to pay to the broker-dealer the
amount of any
B-14
<PAGE> 30
dividends paid on shares sold short. Finally, to secure its obligation to
deliver to such broker-dealer the securities sold short, the Portfolio must
deposit and continuously maintain in a separate account with the Portfolio's
custodian an equivalent amount of the securities sold short or securities
convertible into or exchangeable for such securities without the payment of
additional consideration. The Portfolio 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 Portfolio receives the proceeds of the sale. Because the
Portfolio ordinarily will want to continue to hold securities in its portfolio
that are sold short, the Portfolio will normally close out a short position by
purchasing on the open market and delivering to the broker-dealer an equal
amount of the securities sold short, rather than by delivering portfolio
securities.
A short sale works the same way, except that the Portfolio places in the
segregated account cash or U.S. government securities equal in value to the
difference between (i) the market value of the securities sold short at the time
they were sold short and (ii) any cash or U.S. government securities required to
be deposited with the broker as collateral. In addition, so long as the short
position is open, the Portfolio must daily adjust the value of the segregated
account so that the amount deposited in it, plus any amount deposited with the
broker as collateral, will equal the current market value of the security sold
short. However, the value of the segregated account may not be reduced below the
point at which the segregated account, plus any amount deposited with the
broker, is equal to the market value of the securities sold short at the time
they were sold short.
Short sales may protect the Portfolio against the risk of losses in the
value of its portfolio securities because any unrealized losses with respect to
such portfolio securities should be wholly or partially offset by a
corresponding gain in the short position. However, any potential gains in such
portfolio securities should be wholly or partially offset by a corresponding
loss in the short position. The extent to which such gains or losses are offset
will depend upon the amount of securities sold short relative to the amount the
Portfolio owns, either directly or indirectly, and, in the case where the
Portfolio owns convertible securities, changes in the conversion premium.
Short sale transactions of the Portfolio involve certain risks. In
particular, the imperfect correlation between the price movements of the
convertible securities and the price movements of the underlying common stock
being sold short creates the possibility that losses on the short sale hedge
position may be greater than gains in the value of the portfolio securities
being hedged. In addition, to the extent that a Portfolio pays a conversion
premium for a convertible security, the Portfolio is generally unable to protect
against a loss of such premium pursuant to a short sale hedge. In determining
the number of shares to be sold short against the Portfolio's position in the
convertible securities, the anticipated fluctuation in the conversion premiums
is considered. The Portfolio will also incur transaction costs in connection
with short sales. Certain provisions of the Internal Revenue Code may limit the
degree to which the Portfolio is able to enter into short sales, which
limitations might impair the Portfolio's ability to achieve its investment
objective. See "Taxation."
In addition to enabling the Portfolio to hedge against market risk, short
sales may afford the Portfolio an opportunity to earn additional current income
to the extent the Portfolio 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 Portfolio's
short positions remain open.
B-15
<PAGE> 31
The Taxpayer Relief Act of 1997 imposed constructive sale treatment for
federal income tax purposes on certain hedging strategies with respect to
appreciated securities. Under these rules taxpayers will recognize gain, but not
loss, with respect to securities if they enter into short sales or "offsetting
notional principal contracts" (as defined by the Act) with respect to, or
futures or "forward contracts" (as defined by the Act) with respect to the same
or substantially identical property, or if they enter into such transactions and
then acquire the same or substantially identical property. The Secretary of the
Treasury is authorized to promulgate regulations that will treat as constructive
sales certain transactions that have substantially the same effect as short
sales.
"WHEN-ISSUED" AND DELAYED DELIVERY SECURITIES AND REVERSE REPURCHASE AGREEMENTS
The Portfolio 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 Portfolio 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 Portfolio makes such commitments only with the
intention of actually acquiring the securities, but may sell the securities
before settlement date if the investment manager deems it advisable for
investment reasons. The Portfolio 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 Portfolio may enter into reverse repurchase agreements with banks and
securities dealers. A reverse repurchase agreement is a repurchase agreement in
which the Portfolio 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 Portfolio 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 Portfolio 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
Portfolio and held by the custodian throughout the period of the obligation. The
use of these investment strategies, as well as borrowing under a line of credit
as described below, may increase net asset value fluctuation.
ILLIQUID SECURITIES
The Portfolio may invest up to 10% of its total assets, taken at market
value, in illiquid securities, including any securities that are not readily
marketable either because they are restricted securities or for other reasons.
Restricted securities are securities that are subject to restrictions on resale
because they have not been registered for sale under the Securities Act of 1933.
A position in restricted securities might adversely affect the liquidity and
marketability of a portion of the Portfolio's holdings, and the Portfolio might
not be able to dispose of its holdings in such securities promptly or at
reasonable prices. In those instances where a Portfolio is required to have
restricted securities held by it registered prior to sale by the Portfolio and
the Portfolio does not have a contractual commitment from the issuer or seller
to pay the costs of such registration, the gross proceeds from the sale of
securities would be reduced by the registration costs and
B-16
<PAGE> 32
underwriting discounts. Any such registration costs are not included in the
percentage limitation on a Portfolio's investment in restricted securities. The
Portfolio does not intend to invest in illiquid securities during the next
fiscal year, except that the Portfolio may invest in options traded on the
NASDAQ National Market System.
TEMPORARY INVESTMENTS
The Portfolio may make temporary investments without limitation when the
investment manager determines that a defensive position is warranted. Such
investments may be in money market instruments, consisting of obligations of, or
guaranteed as to principal and interest by, the U.S. Government or its agencies
or instrumentalities; certificates of deposit, bankers' acceptances and other
obligations of domestic banks having total assets of at least $500 million and
which 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.
PORTFOLIO TURNOVER
Although the Portfolio 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 Portfolio would result in increased transaction
expense, which must be borne by the Portfolio. High portfolio turnover may also
result in the realization of capital gains or losses and, to the extent net
short-term capital gains are realized, any distributions resulting from such
gains will be considered ordinary income for federal income tax purposes.
INVESTMENT RESTRICTIONS
The Portfolio operates under the following investment restrictions. The
Portfolio may not (except as indicated):
(i) as to 75% of its assets, invest more than 5% of its total assets,
taken at market value at the time of a particular purchase, in the
securities of any one issuer, except that this restriction does not
apply to securities issued or guaranteed by the United States
Government or its agencies or instrumentalities;
(ii) acquire more than 10%, taken at the time of a particular purchase, of
the outstanding voting securities of any one issuer;
(iii) act as an underwriter of securities, except insofar as it may be
deemed an underwriter for purposes of the Securities Act of 1933 on
disposition of securities acquired subject to legal or contractual
restrictions on resale;
(iv) purchase or sell real estate (although it may purchase securities
secured by real estate or interests therein, or securities issued by
companies which invest in real estate or interests therein),
commodities or commodity contracts;
(v) make loans, but this restriction shall not prevent the Portfolio from
(a) investing in debt obligations, (b) investing in repurchase
agreements or (c) lending portfolio securities;
B-17
<PAGE> 33
(vi) invest more than 10% of the Portfolio's net assets (taken at market
value at the time of each purchase) in illiquid securities, including
repurchase agreements maturing in more than seven days;
(vii) borrow, except that the Portfolio may (a) borrow from banks for
temporary or emergency purposes in amounts not exceeding 33% of the
value of the Portfolio's total assets at the time of the borrowing,
and (b) enter into transactions in options, futures and options on
futures(4);
(viii) invest in a security if more than 25% of its total assets (taken at
market value at the time of a particular purchase) would be invested
in the securities of issuers in any particular industry, except that
this restriction does not apply to securities issued or guaranteed
by the U.S. Government or its agencies or instrumentalities; or
(ix) issue any senior security, except to the extent permitted under the
Investment Company Act of 1940 (the "1940 Act").
The above restrictions are fundamental policies and may not be changed
without the approval of a "majority" of the outstanding shares of the Portfolio,
which for this purpose means the approval of the lesser of (a) more than 50% of
the outstanding voting securities of the Portfolio or (b) 67% or more of the
outstanding shares if the holders of more than 50% of the outstanding shares of
the Portfolio are present or represented at the meeting by proxy.
In addition to the fundamental restrictions listed above, the Portfolio may
not:
(a) invest in shares of other open-end investment companies (except in
connection with a plan of merger or reorganization);
(b) invest in companies for the purpose of exercising control or
management;
(c) purchase securities on margin (except for use of such short-term
credits as are necessary for the clearance of transactions, including
transactions in options, futures and options on futures), or
participate on a joint or a joint and several basis in any trading
account in securities, except in connection with transactions in
options, futures and options on futures;
(d) make short sales of securities, except that the Portfolio may make
short sales of securities if the Portfolio owns an equal amount of
such securities, or owns securities that are convertible or
exchangeable, without payment of further consideration, into an equal
amount of such securities;
(e) invest more than 25% of its net assets (valued at time of purchase) in
securities of foreign issuers (other than securities represented by
American Depositary Receipts and securities guaranteed by a U.S.
person).
Restrictions (a) through (e) may be changed by the board of trustees
without shareholder approval.
Notwithstanding the foregoing investment restrictions, the Portfolio may
purchase securities pursuant to the exercise of subscription rights, subject to
the condition that such purchase will not result in the Portfolio's ceasing to
be a diversified investment company.
- ---------------
(4) State insurance laws currently restrict the Portfolio's borrowing to
facilitate redemptions to no more than 25% of the Portfolio's net assets.
B-18
<PAGE> 34
Far Eastern and European corporations frequently issue additional capital stock
by means of subscription rights offerings to existing shareholders at a price
substantially below the market price of the shares. The failure to exercise such
rights would result in the Portfolio's interest in the issuing company being
diluted. The market for such rights is not well developed in all cases and,
accordingly, the Portfolio may not always realize full value on the sale of
rights. The exception applies in cases where the limits set forth in the
investment restrictions would otherwise be exceeded by exercising rights or
would have already been exceeded as a result of fluctuations in the market value
of the Portfolio's portfolio securities with the result that the Portfolio would
be forced either to sell securities at a time when it might not otherwise have
done so, to forego exercising the rights.
In addition, pursuant to state insurance laws, the Portfolio is subject to
the following guidelines, which may also be changed by the board of trustees:
(a) The Portfolio will be invested in a minimum of five different foreign
countries at all times, except that this minimum is reduced to four
when foreign country investments comprise less than 80% of the value
of the Portfolio's net assets; to three when less than 60% of such
value; to two when less than 40%; and to one when less than 20%.
(b) The Portfolio will have no more than 20% of its net assets invested in
securities of issuers located in any one country; except that the
Portfolio may have an additional 15% of its net assets invested in
securities of issuers located in any one of the following countries:
Australia; Canada; France; Japan; the United Kingdom; or Germany.
(c) The Portfolio may not acquire the securities of any issuer if, as a
result of such investment, more than 10% of the Portfolio's total
assets would be invested in the securities of any one issuer, except
that this restriction shall not apply to U.S. Government securities or
foreign government securities; and the Portfolio will not invest in a
security if, as a result of such investment, it would hold more than
10% of the outstanding voting securities of any one issuer.
(d) The Portfolio may borrow no more than 10% of the value of its net
assets when borrowing for any general purpose and 25% of net assets
when borrowing as a temporary measure to facilitate redemptions.
B-19
<PAGE> 35
MANAGEMENT
TRUSTEES AND OFFICERS
The management of the Trust, including general supervision of the duties
performed for the Portfolio under the Investment Management Agreement, is the
responsibility of its board of trustees. Set forth below is information about
the trustees and officers of the Trust.
<TABLE>
<CAPTION>
NAME, POSITION(S) WITH TRUST
AND AGE AT MARCH 31, 1999 PRINCIPAL OCCUPATION(S) DURING PAST FIVE YEARS
- ---------------------------- ----------------------------------------------
<S> <C>
John P. Calamos(1)........................... President, Calamos Asset Management, Inc.
Trustee and President, 58 ("CAM"); President, Calamos Financial
Services, Inc. ("CFS"), a broker-dealer and
the Portfolio's distributor.
Nick P. Calamos(1)........................... Managing Director, CAM and CFS.
Trustee and Vice President, 38
Richard J. Dowen(2).......................... Professor of Finance, Northern Illinois
Trustee, 54 University.
Robert Frost(2).............................. Management Consultant, ECOM Consultants, Inc.
Trustee, 59
William A. Kaun(2)........................... Principal, W.A. Kaun Co. (investment adviser
Trustee, 71 and publisher).
John P. Salmon............................... Vice President -- Mutual Fund Operations, CAM,
Treasurer and Assistant Secretary, 53 since 1997; Manager and Assistant Vice
President, Collective Investment Fund
Accounting Group, First National Bank of
Chicago, prior thereto.
James S. Hamman, Jr.......................... Vice President and General Counsel, CAM, since
Secretary, 29 1998; Vice President and Associate Counsel,
Scudder Kemper Investments, Inc. (investment
manager), 1996 -- 1998; attorney, Vedder,
Price, Kaufman & Kammholz, prior thereto.
</TABLE>
- -------------------------
(1) John P. Calamos and Nick P. Calamos are trustees who are "interested
persons" of the Trust as defined in the Investment Company Act of 1940 (the
"1940 Act") and are members of the executive committee of the board of
trustees, which has authority during intervals between meetings of the board
of trustees to exercise the powers of the board.
(2) Messrs. Dowen, Frost and Kaun are members of the audit committee of the
board of trustees, which makes recommendations regarding the selection of
the Trust's independent auditors and meets with representatives of the
independent auditors to determine the scope and review the results of each
audit.
The trustees of the Trust are also trustees of Calamos Investment Trust, an
open-end investment company advised by CAM.
B-20
<PAGE> 36
The address of Mr. Dowen is Department of Finance, Northern Illinois
University, DeKalb, Illinois 60115; that of Mr. Frost is 53 Ward Drive, New
Rochelle, New York 10804; and that of Mr. Kaun is 1750 Grandstand Place, Elgin,
Illinois 60123. The address of the officers of the Trust is 1111 East
Warrenville Road, Naperville, Illinois 60563-1493. Nick Calamos is a nephew of
John Calamos.
The following table shows the compensation paid to each trustee who was not
an "interested person" of the Trust. The information in the last column is for
the 1998 calendar year.
<TABLE>
<CAPTION>
ESTIMATED TOTAL
AGGREGATE COMPENSATION
COMPENSATION FROM CALAMOS FUNDS
NAME OF TRUSTEE FROM THE TRUST(*) COMPLEX
- --------------- -------------------- ---------------------
<S> <C> <C>
Richard J. Dowen............................. $4,500 $6,000
Robert Frost................................. $4,500 $6,000
William A. Kaun.............................. $4,500 $6,000
</TABLE>
- -------------------------
(*) Estimated payments for the period May 1, 1999 through December 31, 1999.
Trustees who are "interested" persons of the Trust, as well as officers of
the Trust, are compensated by CAM and not by the Trust. The Trust does not
provide any pension or retirement benefits to its trustees.
INVESTMENT ADVISORY SERVICES
Investment management and administrative services are provided to the
Portfolio by CAM pursuant to an Investment Management Agreement (the
"Agreement") dated May 1, 1999. The Trust pays CAM a fee accrued daily and paid
monthly at the annual rate of .75% of average daily net assets.
The Agreement will remain in effect with respect to the Portfolio until
August 1, 2000, and from year to year thereafter so long as such continuation is
approved at least annually by (1) the board of trustees or the vote of a
majority of the outstanding voting securities of the Portfolio, and (2) a
majority of the trustees who are not interested persons of any party to the
Agreement, cast in person at a meeting called for the purpose of voting on such
approval. The Agreement may be terminated at any time, without penalty, by
either the Trust or the Adviser upon 60 days' written notice, and is
automatically terminated in the event of its assignment as defined in the 1940
Act.
The use of the name "Calamos" in the name of the Trust and in the name of
the Portfolio is pursuant to licenses granted by the Adviser, and the Trust has
agreed to change the names to remove those references if CAM ceases to act as
investment adviser to the Portfolio. The Adviser is controlled by John P.
Calamos.
EXPENSES
Subject to the expense limitation described below, the Portfolio pays all
its own operating expenses that are not specifically assumed by CAM, including
(i) fees of the investment adviser; (ii) interest, taxes and any governmental
filing fees; (iii) compensation and expenses of the trustees, other than those
who are interested persons of the Trust, the investment adviser or the
distributor; (iv) legal, audit, custodial and transfer agency fees
B-21
<PAGE> 37
and expenses; (v) registration and qualification of the Portfolio and its shares
under federal and state securities laws; (vi) expenses of printing and mailing
reports, notices and proxy material to shareholders, and expenses incidental to
meetings of shareholders; (vii) expenses of preparing prospectuses and of
printing and distributing them to existing shareholders; (viii) insurance
premiums; (ix) litigation and indemnification expenses and other extraordinary
expenses not incurred in the normal course of the business of the Trust; and (x)
brokerage commissions and other transaction-related costs.
The investment manager has voluntarily undertaken to reimburse the
Portfolio for any annual operating expenses in excess of 1.00% of average daily
net assets. This reimbursement is voluntary and may be terminated by CAM at any
time.
PURCHASING AND REDEEMING SHARES
Shares of the Portfolio may not be purchased or redeemed directly by
individual Variable Contract owners. Purchases and redemptions are discussed in
the prospectus. The Portfolio may suspend the right of redemption during any
period when (a) trading on the NYSE is restricted, as determined by the
Commission, or that exchange is closed for other than customary weekend and
holiday closings, (b) the Commission has by order permitted such suspension, or
(c) an emergency, as determined by the Commission, exists making disposal of the
Portfolio's securities or valuation of the net assets of the Portfolio not
reasonably practicable.
Because shares of the Portfolio are offered to separate accounts supporting
variable annuity contracts and separate accounts supporting variable life
insurance contracts, a potential for certain conflicts may exist between the
interests of owners of variable annuity contracts and owners of variable life
insurance contracts. Likewise, in the event that shares of the Portfolio are
offered to qualified pension and retirement plans, a potential for certain
conflicts may exist between the interest of variable annuity contract owners,
variable life insurance contract owners and plan participants. The Trust does
not currently foresee any disadvantage to owners of either variable annuity
contracts or variable life insurance contracts arising from the fact that shares
of the Portfolio might be held by such entities. The Trust's board of trustees,
however, will monitor the Portfolio in order to identify any material
irreconcilable conflicts of interest which may possibly arise, and to determine
what action, if any, should be taken in response to such conflicts.
NET ASSET VALUE
In computing the net asset value of the Portfolio, portfolio securities,
including options, that are traded on a national securities exchange and
securities reported on the NASDAQ National Market System are valued at the last
reported sales price. Securities traded in the over-the-counter market and
listed securities for which no sales were reported are valued at the mean of the
most recently quoted bid and asked prices. Each outstanding futures contract is
valued at the official settlement price for the contract on the exchange on
which the contract is traded, except that if the market price of the contract
has increased or decreased by the maximum amount permitted on the valuation date
("up or down the limit"), the contract is valued at a fair value as described
below. Short-term obligations with maturities of 60 days or less are valued at
amortized cost.
When market quotations are not readily available for the Portfolio's
securities, such securities are valued at a fair value following procedures
approved by the board of trustees. These procedures include determining fair
value on the basis of valuations furnished by
B-22
<PAGE> 38
pricing services approved by the board of trustees, which include market
transactions for comparable securities and various relationships between
securities which are generally recognized by institutional traders, as well as
on the basis of appraisals received from a pricing service using a computerized
matrix system, or appraisals derived from information concerning the securities
or similar securities received from recognized dealers in those securities.
The Portfolio's net asset value is determined only on days on which the New
York Stock Exchange (the "NYSE") is open for trading. The NYSE is regularly
closed on Saturdays and Sundays and on New Year's Day, the third Mondays in
January and February, Good Friday, the last Monday in May, Independence Day,
Labor Day, Thanksgiving and Christmas. If one of these holidays falls on a
Saturday or Sunday, the NYSE will be closed on the preceding Friday or the
following Monday, respectively.
Securities that are principally traded in a foreign market are valued as of
the close of the appropriate exchange or other designated time. Trading in
securities on European and Far Eastern securities exchanges and over-the-counter
markets is normally completed at various times before the close of business on
each day on which the 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 Portfolio's net asset value is not calculated. Therefore, such
calculation does not take place contemporaneously with the determination of the
prices of many of the portfolio securities used in such calculation and the
value of the Portfolio's portfolio may be significantly affected on days when
shares of the Portfolio may not be purchased or redeemed.
REDEMPTION IN KIND
The Portfolio has elected to be governed by Rule 18f-1 under the Investment
Company Act of 1940 pursuant to which it is obligated to redeem shares solely in
cash up to the lesser of $250,000 or 1% of the net asset value of the Portfolio
during any 90-day period for any one shareholder. Redemptions in excess of these
amounts will normally be paid in cash, but may be paid wholly or partly by a
distribution in kind of securities. If a redemption is made in-kind, the
redeeming shareholder would bear any transaction costs incurred in selling the
securities received.
PERFORMANCE INFORMATION
TOTAL RETURN
From time to time the Portfolio may quote total return figures. "Total
Return" for a period is the percentage change in value during a period of an
investment in Portfolio shares, including the value of shares acquired through
reinvestment of all dividends and capital gains distributions. "Average Annual
Total Return" is the average annual compounded rate of change in value
represented by the Total Return for the period.
B-23
<PAGE> 39
Average Annual Total Return will be computed as follows:
<TABLE>
<S> <C> <C> <C>
ERV = P(1+T)(N)
Where: P = a hypothetical initial investment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000
investment made at the beginning of the period, at the
end of the period (or fractional portion thereof)
</TABLE>
YIELD
The Portfolio may also quote yield figures. The yield of the Portfolio is
calculated by dividing its net investment income per share (a hypothetical
figure as defined in SEC rules) during a 30-day period by the net asset value
per share on the last day of the period. The yield formula provides for
semiannual compounding, which assumes that net investment income is earned and
reinvested at a constant rate and annualized at the end of a six-month period.
The yield is not based on actual dividends paid.
Yield will be computed as follows:
<TABLE>
<S> <C> <C>
YIELD = 2[((a-b/cd)+1)(6)-1]
Where: a = dividends and interest earned during the period
b = expenses accrued for the period (net of reimbursements)
c = the average daily number of shares outstanding during
the period that were entitled to receive dividends
d = the maximum offering price per share on the last day of
the period
</TABLE>
Figures quoted will assume reinvestment of all dividends and distributions.
Income taxes are not taken into account. The figures will not necessarily be
indicative of future performance. The performance of the Portfolio is a result
of conditions in the securities markets, portfolio management, and operating
expenses. Although information such as yield and total return is useful in
reviewing the Portfolio's performance and in providing some basis for comparison
with other investment alternatives, it should not be used for comparison with
other investments using different reinvestment assumptions or time periods.
Performance figures do not reflect expenses of the separate accounts of the
Participating Insurance Companies or expenses imposed under the Variable
Contracts or expenses imposed by Retirement Plans.
In advertising and sales literature, the performance of the Portfolio may
be compared with that of other mutual funds, indexes or averages of other mutual
funds, indexes of related financial assets or data, other accounts or
partnerships managed by Calamos Asset Management, Inc., and other competing
investment and deposit products available from or through other financial
institutions. The composition of these indexes, averages or accounts differs
from that of the Portfolio. Comparison of the Portfolio to an alternative
investment should consider differences in features and expected performance.
B-24
<PAGE> 40
All of the indexes and averages noted below will be obtained from the
indicated sources or reporting services, which the Portfolio generally believes
to be accurate. The Portfolio may also note its mention (including performance
or other comparative rankings) in newspapers, magazines, or other media from
time to time. However, the Portfolio assumes no responsibility for the accuracy
of such data.
Newspapers and magazines which might mention the Portfolio include, but are
not limited to, the following:
<TABLE>
<S> <C>
Barron's Money
Business Week Mutual Fund Letter
Changing Times Mutual Fund Values
Chicago Tribune (Morningstar)
Chicago Sun-Times Newsweek
Crain's Chicago Business The New York Times
Consumer Reports Pensions and Investments
Consumer Digest Personal Investor
Financial World Stanger Reports
Forbes Time
Fortune USA Today
Investor's Daily U.S. News and World Report
Los Angeles Times The Wall Street Journal
</TABLE>
The Portfolio may compare its performance to the Consumer Price Index (All
Urban), a widely recognized measure of inflation.
The performance of the Portfolio may be compared to the following indexes
or averages: Standard & Poor's 400 MidCap Index, Value Line Index, Lipper
Balanced Index, Lipper Convertible Fund Index, Lipper Growth and Income Index,
Lehman Brothers Government/Corporate Index and mutual fund performance indices
published by Variable Annuity Research & Data Service. The performance of the
Portfolio may also be compared to the Russell 2000 Index, the Wilshire Small
Growth Index, and the Fisher Small-Cap Growth Index, all supplied by the Carmack
Group. All three of these indexes represent equity investments in
smaller-capitalization stocks.
The Lipper averages are unweighted averages of total return performance of
mutual funds as classified, calculated and published by Lipper, Inc. ("Lipper"),
an independent service that monitors the performance of more than 1,000 funds.
The Portfolio may also use comparative performance as computed in a ranking by
Lipper or category averages and rankings provided by another independent
service. Should Lipper or another service reclassify the Portfolio to a
different category or develop (and place the Portfolio into) a new category, the
Portfolio may compare its performance or ranking against other funds in the
newly assigned category, as published by the service. Moreover, the Portfolio
may compare its performance or ranking against all funds tracked by Lipper or
another independent service.
To illustrate the historical returns on various types of financial assets,
the Portfolio may use historical data provided by Ibbotson Associates, Inc.
("Ibbotson"), a Chicago-based investment firm. Ibbotson constructs (or obtains)
very long-term (since 1926) total return data (including, for example, total
return indexes, total return percentages, average
B-25
<PAGE> 41
annual total returns and standard deviations of such returns) for common stocks,
small company stocks, long-term corporate bonds, long-term government bonds,
intermediate-term government bonds, U.S. Treasury bills and Consumer Price
Index.
DISTRIBUTOR
Calamos Financial Services, Inc. ("CFS"), a broker-dealer whose sole
shareholder and principal officer is John P. Calamos, serves as distributor for
the Portfolio, subject to change by a majority of the "non-interested" trustees
at any time. CFS is located at 1111 East Warrenville Road, Naperville, Illinois
60563-1493. CFS is responsible for all purchases, sales, redemptions and other
transfers of shares of the Portfolio without any charge to the Portfolio or
Participating Insurance Companies or Retirement Plans purchasing the Portfolio's
shares. However, each Variable Contract imposes its own charges and fees on
owners of the Variable Contract and may impose such charges on participants in a
Retirement Plan. CFS is also responsible for all expenses incurred in connection
with its performance of services for the Portfolio, including, but not limited
to, personnel, office space and equipment, telephone, postage and stationery
expenses. CFS receives brokerage commissions for executing portfolio
transactions for the Portfolio. See "Portfolio Transactions."
CFS has the exclusive right to distribute shares of the Portfolio. The
obligation of CFS is an agency or "best efforts" arrangement, which does not
obligate CFS to sell any stated number of shares.
PORTFOLIO TRANSACTIONS
Portfolio transactions on behalf of the Portfolio 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 Portfolio usually includes
an undisclosed dealer commission or mark-up. In underwritten offerings, the
price paid by the Portfolio includes a disclosed, fixed commission or discount
retained by the underwriter or dealer.
In executing portfolio transactions, the investment manager uses its best
efforts to obtain for the Portfolio the most favorable price and execution
available. In seeking the most favorable price and execution, the investment
manager considers all factors it deems relevant, including price, the size of
the transaction, the nature of the market for the security, the amount of
commission, the timing of the transaction taking into account market prices and
trends, the execution capability of the broker-dealer and the quality of service
rendered by the broker-dealer in other transactions.
The trustees have determined that portfolio transactions for the Portfolio
may be executed through CFS if, in the judgment of the investment manager, the
use of CFS is likely to result in prices and execution at least as favorable to
the Portfolio as those available from other qualified brokers and if, in such
transactions, CFS charges the Portfolio commission rates consistent with those
charged by CFS to comparable unaffiliated customers in similar transactions. The
board of trustees, including a majority of the trustees who are not "interested"
trustees, has adopted procedures that are reasonably designed to provide that
any commissions, fees or other remuneration paid to CFS are consistent with the
foregoing standard. The Portfolio will not effect principal transactions with
CFS.
B-26
<PAGE> 42
In allocating the portfolio brokerage transactions to unaffiliated
broker-dealers, the investment manager 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 the investment manager believes these services have
substantial value, they are considered supplemental to the investment manager's
own efforts in the performance of its duties under the management agreement. As
permitted by Section 28(e) of the Securities Exchange Act of 1934 ("1934 Act"),
the investment manager may pay a broker-dealer that provides brokerage and
research services an amount of commission for effecting a securities transaction
for the Portfolio in excess of the commission that another broker-dealer would
have charged for effecting that transaction if the amount is believed by the
investment manager to be reasonable in relation to the value of the overall
quality of the brokerage and research services provided. Other clients of the
investment manager may indirectly benefit from the availability of these
services to the investment manager, and the Portfolio may indirectly benefit
from services available to the investment manager as a result of transactions
for other clients.
TAXATION
The following is only a summary of certain tax considerations. The summary
is not intended to present a detailed explanation or as a substitute for careful
tax planning. Investors are urged to consult their tax advisors with specific
reference to their own tax situations.
SHARES OF THE PORTFOLIO ARE OFFERED TO SEPARATE ACCOUNTS OF PARTICIPATING
INSURANCE COMPANIES THAT FUND VARIABLE CONTRACTS AND MAY BE OFFERED TO CERTAIN
RETIREMENT PLANS. SEE THE DISCLOSURE DOCUMENTS FOR THE VARIABLE CONTRACTS OR THE
PLAN DOCUMENTS (INCLUDING THE SUMMARY PLAN DESCRIPTION) FOR THE RETIREMENT PLANS
FOR A DISCUSSION OF THE SPECIAL TAXATION OF INSURANCE COMPANIES WITH RESPECT TO
THE SEPARATE ACCOUNTS AND THE VARIABLE CONTRACTS, AND THE HOLDERS THEREOF, OR
THE SPECIAL TAXATION OF RETIREMENT PLANS AND THE PARTICIPANTS THEREIN. The
Portfolio intends to qualify and elect to be treated as a regulated investment
company under Subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code") so as to be relieved of federal income tax on its net investment income
and capital gains that it distributes to shareholders.
The Portfolio must meet several requirements to maintain its status as a
regulated investment company. These requirements include the following: (1) at
least 90% of the Portfolio's gross income must be derived from dividends,
interest, payments with respect to securities loaned, and gains from the sale or
disposition of securities; and (2) at the close of each quarter of the
Portfolio's taxable year, (a) at least 50% of the value of the Portfolio's total
assets must consist of cash, U.S. Government securities and other securities (no
more than 5% of the value of the Portfolio may consist of such other securities
of any one issuer, and the Portfolio must not hold more than 10% of the
outstanding voting stock of any issuer), and (b) the Portfolio must not invest
more than 25% of the value of its total assets in the securities of any one
issuer (other than U.S. Government securities).
In order to maintain the qualification of the Portfolio's status as a
regulated investment company, the Trust may, in its business judgment, restrict
the Portfolio's ability to enter into stock index futures contracts or options
on such futures contracts or engage in short-term trading and transactions in
securities (including stock index futures contracts
B-27
<PAGE> 43
and options on such futures contracts). For the same reason, the Trust may, in
its business judgement, require the Portfolio to defer the closing out of a
contract beyond the time when it might otherwise be advantageous to do so.
Pursuant to the requirements of Section 817(h) of the Code, the only
shareholders of the Portfolio will be insurance companies and their separate
accounts that fund variable insurance contracts. The prospectus that describes a
particular variable insurance contract discusses the taxation of separate
accounts and the owner of the particular variable insurance contract.
The Portfolio intends to comply with the requirements of Section 817(h) and
related regulations. Section 817(h) of the code and the regulations issued by
the Treasury Department impose certain diversification requirements affecting
the securities in which the Portfolio may invest. These diversification
requirements are in addition to the diversification requirements under
subchapter M and the Investment Company Act of 1940.
In order to comply with the current or future requirements of section
817(h) (or related provisions of the Code), the Trust may be required, e.g., to
alter the investment objectives of the Portfolio. No such change of investment
objectives will take place without notice to the shareholders of the Portfolio,
the approval of a majority of the outstanding voting shares, and the approval of
the Securities and Exchange commission, to the extent legally required.
The Portfolio's investment in foreign securities or currencies may require
it to pay withholding or other taxes to foreign governments. Foreign tax
withholding from dividends and interest, if any, is generally at a rate between
10% and 35%. The investment yield of the Portfolio will be reduced by these
foreign taxes. Shareholders will bear the cost of any foreign tax withholding,
but may not be able to claim a foreign tax credit or deduction for these foreign
taxes. Investing in securities of passive foreign investment companies may be
subject to U.S. Federal income taxes and interest charges, and the investment
yield of the Portfolio will be reduced by these taxes and interest charges.
Shareholders will bear the cost of these taxes and interest charges, but will
not be able to claim a deduction for these amounts.
If the Portfolio failed to qualify as a regulated investment company,
owners of Variable Contracts based on the Portfolio (1) might be taxed currently
on the investment earnings under their contracts and thereby lose the benefit of
tax deferral, and (2) the Portfolio might incur additional taxes. In addition,
if the Portfolio failed to comply with the diversification requirements of
Section 817(h) of the regulations thereunder, owners of Variable Contracts based
on the Portfolio would be taxed on the investment earnings under their contracts
and thereby lose the benefit of tax deferral. Accordingly, compliance with the
above rules is carefully monitored by the investment manager and it is intended
that the Portfolio will comply with these rules as they exist or as they may be
modified from time to time. Compliance with the tax requirements described above
may result in a reduction in the return achieved by the Portfolio, since, to
comply with the above rules, the investments utilized (and the time at which
such investments are entered into and closed out) may be different from what the
investment manager might otherwise believe to be desirable.
B-28
<PAGE> 44
CERTAIN SHAREHOLDERS
As of March 26,1999, Calamos Asset Management, Inc. was the initial seed
money shareholder of 100% of the shares of the Portfolio. As of March 26, 1999,
trustees and officers of the Trust, as a group, owned less than 1% of the shares
of the Portfolio.
CUSTODIAN
The Bank of New York, 48 Wall Street, New York, New York 10286, is the
custodian for the assets of the Portfolio. The custodian is responsible for
holding all cash and securities of the Portfolio, directly or through a book
entry system, delivering and receiving payment for securities sold by the
Portfolio, receiving and paying for securities purchased by the Portfolio,
collecting income from investments of the Portfolio and performing other duties,
all as directed by authorized persons of the Trust. The custodian does not
exercise any supervisory functions in such matters as the purchase and sale of
securities by the Portfolio, payment of dividends or payment of expenses of the
Portfolio.
INDEPENDENT AUDITORS
Ernst & Young LLP, Sears Tower, 233 South Wacker Drive, Chicago, Illinois
60606, audits and reports on the Portfolio's annual financial statements,
reviews certain regulatory reports and the Portfolios' federal income tax
returns, and performs other professional accounting, tax and advisory services
when engaged to do so by the Portfolio.
SHAREHOLDER INFORMATION
Under the terms of the Agreement and Declaration of Trust, the trustees may
issue an unlimited number of shares of beneficial interest without par value for
each series of shares authorized by the trustees and the trustees may divide the
shares of any series into two or more classes of shares of that series.
Currently the Trust has one series in operation. All Shares issued will be fully
paid and non-assessable and will have no preemptive or conversion rights. In the
future, the board of trustees may authorize the issuance of shares of additional
series and additional classes of shares of any series.
The Portfolio's shares are entitled to participate pro rata in any
dividends and other distributions declared by the Trust's board of trustees with
respect to shares of the Portfolio. All shares of the Portfolio have equal
rights in the event of liquidation of the Portfolio.
Under Massachusetts law, the shareholders of the Trust may, under certain
circumstances, be held personally liable for the Trust's obligations. However,
the Trust's Declaration of Trust disclaims liability of the shareholders,
trustees, and officers of the Trust for acts or obligations of the Portfolio,
which are binding only on the assets and property of the Portfolio. The
Declaration of Trust requires that notice of such disclaimer be given in each
agreement, obligation, or contract entered into or executed by the Trust or the
board of trustees. The Declaration of Trust provides for indemnification out of
a Portfolio's assets of all losses and expenses of any Portfolio shareholder
held personally liable for the Portfolio's obligations. Thus, the risk of a
shareholder incurring financial loss on account of shareholder liability is
remote, since it is limited to circumstances in which the disclaimer is
inoperative and the Portfolio itself is unable to meet its obligations.
B-29
<PAGE> 45
VOTING RIGHTS
Each share has one vote and fractional shares have fractional votes. As a
business trust, the Trust is not required to hold annual shareholder meetings.
However, special meetings may be called for purposes such as electing or
removing trustees, changing fundamental policies or approving an investment
advisory agreement.
Under current interpretations of the 1940 Act, the Portfolio expects that
Participating Insurance Company shareholders will offer variable contract
holders the opportunity to instruct them as to how Portfolio shares attributable
to such contracts will be voted with respect to matters to be voted upon. The
separate prospectuses describing the Variable Contracts include additional
disclosure of how contract holder voting rights are computed.
B-30
<PAGE> 46
APPENDIX -- DESCRIPTION OF BOND RATINGS
A rating of a rating service represents the service's opinion as to the
credit quality of the security being rated. However, the ratings are general and
are not absolute standards of quality or guarantees as to the creditworthiness
of an issuer. Consequently, the Portfolio's investment manager believes that the
quality of debt securities in which the Portfolio invests should be continuously
reviewed. A rating is not a recommendation to purchase, sell or hold a security,
because it does not take into account market value or suitability for a
particular investor. When a security has received a rating from more than one
service, each rating should be evaluated independently. Ratings are based on
current information furnished by the issuer or obtained by the ratings services
from other sources which they consider reliable. Ratings may be changed,
suspended or withdrawn as a result of changes in or unavailability of such
information, or for other reasons.
The following is a description of the characteristics of ratings used by
Moody's Investors Service, Inc. ("Moody's") and Standard & Poor's Corporation
("S&P").
MOODY'S RATINGS
AAA -- Bonds rated Aaa are judged to be the best quality. They carry the
smallest degree of investment risk and are generally referred to as "gilt-edge."
Interest payments are protected by a large or by an exceptionally stable margin
and principal is secure. Although 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 bonds.
AA -- Bonds rated Aa are judged to be 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 bonds 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 in Aaa bonds.
A -- Bonds 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 sometime in the future.
BAA -- Bonds 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 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 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 rated Caa are of poor standing. Such bonds may be in default
or there may be present elements of danger with respect to principal or
interest.
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<PAGE> 47
CA -- Bonds rated Ca represent obligations which are speculative in a high
degree. Such bonds are often in default or have other marked shortcomings.
S&P RATINGS
AAA -- Bonds rated AAA have the highest rating. Capacity to pay principal
and interest is extremely strong.
AA -- Bonds rated AA have a very strong capacity to pay principal and
interest and differ from AAA bonds only in small degree.
A -- Bonds rated A have a strong capacity to pay principal and interest,
although they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than bonds in higher rated categories.
BBB -- Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit protection parameters,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity to pay principal and interest for bonds in this capacity
than for bonds in higher rated categories.
BB -- B -- CCC -- CC -- Bonds rated BB, B, CCC and CC are regarded, on
balance, as predominantly speculative with respect to the issuer's capacity to
pay interest and repay principal in accordance with the terms of the obligation.
BB indicates the lowest degree of speculation among such bonds and CC the
highest degree of speculation. Although such bonds will likely have some quality
and protective characteristics, these are outweighed by large uncertainties or
major risk exposures to adverse conditions.
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<PAGE> 48
REPORT OF INDEPENDENT AUDITORS
The Board of Trustees and Shareholder
Calamos Insurance Trust -- Calamos Convertible Portfolio
We have audited the accompanying statement of net assets of Calamos
Insurance Trust -- Calamos Convertible Portfolio of Calamos Insurance Trust as
of March 26, 1999. This statement of net assets is the responsibility of the
Portfolio's management. Our responsibility is to express an opinion on this
statement of net assets based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the statement of net assets is free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the statement of net assets. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall statement of net assets
presentation. We believe that our audit of the statement of net assets provides
a reasonable basis for our opinion.
In our opinion the statement of net assets referred to above presents
fairly, in all material respects, the financial position of Calamos Insurance
Trust -- Calamos Convertible Portfolio at March 26, 1999 in conformity with
generally accepted accounting principles.
ERNST & YOUNG LLP
Chicago, Illinois
March 26, 1999
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<PAGE> 49
CALAMOS INSURANCE TRUST
CALAMOS CONVERTIBLE PORTFOLIO
STATEMENT OF NET ASSETS
MARCH 26, 1999
<TABLE>
<S> <C>
ASSETS
Cash........................................................ $100,000
--------
NET ASSETS
Net assets, applicable to shares of beneficial interest
(unlimited number of shares authorized, no par value)
outstanding............................................... $100,000
========
THE PRICING OF SHARES
Net asset value and redemption price per share
($100,000/10,000 shares outstanding)...................... $ 10.00
</TABLE>
- -------------------------
NOTES:
Calamos Convertible Portfolio ("Portfolio") is a series of Calamos Insurance
Trust ("Trust") an open-end management investment company, organized as a
business trust under the laws of the Commonwealth of Massachusetts on February
17, 1999. All shares of beneficial interest of the Portfolio were issued to
Calamos Asset Management, Inc., the investment manager for the Portfolio of the
Trust, on March 26, 1999. The costs of organization of the Trust will be paid by
Calamos Asset Management, Inc.
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