PROSPECTUS [Evergreen Investments Logo]
----------
$80,000,000
Evergreen UTILITIES AND
HIGH INCOME FUND
Auction Preferred Shares ("Preferred Shares")
3,200 Shares, Series M28
Liquidation Preference $25,000 Per Share
Evergreen Utilities and High Income Fund (the "Fund") is offering 3,200
Series M28 Auction Preferred Shares. The shares are referred to in this
prospectus as "Preferred Shares." The Fund is a recently organized,
non-diversified, closed-end management investment company. The Preferred Shares
are subject to mandatory redemption in certain circumstances. The Preferred
Shares may be redeemed, in whole or in part, at the option of the Fund at any
time, subject to certain conditions. Dividends on the Preferred Shares will be
cumulative from the date the shares are first issued.
Investment Objective. The Fund's investment objective is to seek a high
level of current income and moderate capital growth, with an emphasis on
providing tax-advantaged dividend income.
Portfolio Contents. Under normal market conditions, the Fund will invest at
least 80% of its net assets in securities of utilities companies (water, gas,
electric and telecommunications companies) and in U.S. dollar-denominated
non-investment grade debt securities. The Fund allocates its assets between two
separate investment strategies. Under normal market conditions, the Fund
allocates approximately 70% of its total assets to an investment strategy that
focuses on common, preferred and convertible preferred stocks and convertible
debentures of utility companies (water, gas, electric and telecommunications
companies), and approximately 30% of its total assets to an investment strategy
that focuses on U.S. dollar-denominated non-investment grade bonds, debentures,
and other income obligations.
The Fund's investment adviser reserves the discretion based upon market
conditions to reallocate the proportions of total assets invested in each
investment strategy. The U.S. high yield debt securities portion of the Fund's
portfolio is normally invested in high yield debt securities that are rated
between and including B3 and Ba1 by Moody's Investors Service, Inc. ("Moody's")
or B- and BB+ by Standard & Poor's Ratings Services, a division of The
McGraw-Hill Companies, Inc. ("S&P") or are unrated securities of comparable
quality as determined by the Fund's investment adviser. Up to 35% of the
utilities portion of the Fund's portfolio may be invested in convertible
debentures of any quality. Of this 35%, a maximum of 7% may be non-investment
grade. No more than 35% of the Fund's total assets is invested in non-investment
grade debt securities. Non-investment grade securities are commonly referred to
as "junk bonds" and are considered speculative with respect to the issuer's
capacity to pay interest and principal. They involve greater risk of loss, are
subject to greater price volatility and are less liquid, especially during
periods of economic uncertainty or change, than higher rated debt securities.
An investment in the Fund involves a high degree of risk and is not
appropriate for all investors. There can be no assurance that the Fund will
achieve its investment objective.
Investing in the Fund's Preferred Shares involves risks that are described in
the "Risk Factors" section beginning on page 40 of this prospectus. The minimum
purchase amount of the Preferred Shares is $25,000.
Per Share Total
Public offering price............... $25,000 $80,000,000
Sales load.......................... $250 $800,000
Proceeds to the Fund (1)............ $24,750 $79,200,000
(1) Not including offering expenses payable by the Fund estimated to be
$188,136, or $58.79 per share.
The public offering price per share will be increased by the amount of
dividends, if any, that have accumulated from the date the Preferred Shares are
first issued.
Neither the Securities and Exchange Commission (the "Commission") nor any
state securities commission has approved or disapproved of these securities or
determined if this prospectus is truthful or complete. Any representation to the
contrary is a criminal offense.
The underwriters are offering the Preferred Shares subject to various
conditions, including that the Preferred Shares be rated "AAA" by S&P and "AAA"
by Fitch Ratings ("Fitch") as of the time of delivery of the Preferred Shares to
the representatives of the underwriters. The Preferred Shares will be ready for
delivery, in book-entry form only, through the facilities of The Depository
Trust Company ("DTC") on or about June 25, 2004.
------------
Citigroup
Wachovia Securities
Merrill Lynch & Co.
UBS Investment Bank
------------
The date of this prospectus is June 22, 2004.
(continued from cover page.)
Investment Adviser. Evergreen Investment Management Company, LLC (the
"Advisor") is the Fund's investment adviser. See "Management of the Fund."
You should read the prospectus, which contains important information about
the Fund, before deciding whether to invest in the Preferred Shares and retain
it for future reference. A Statement of Additional Information, dated June 22,
2004, containing additional information about the Fund, has been filed with the
Commission and is incorporated by reference in its entirety into this
prospectus. You may request a free copy of the Statement of Additional
Information, the table of contents of which is on page 79 of this prospectus, by
calling 1-800-730-6001 or by writing to the Fund. You can review and copy
documents the Fund has filed at the Commission's Public Reference Room in
Washington, D.C. Call 1-202-942-8090 for information. The Commission charges a
fee for copies. You can get the same information free from the Commission's
EDGAR database on the Internet (http://www.sec.gov). You may also e-mail
requests for these documents to publicinfo@sec.gov or make a request in writing
to the Commission's Public Reference Section, Washington, D.C. 20549-0102.
The Preferred Shares do not represent a deposit or obligation of, and are
not guaranteed or endorsed by, any bank or other insured depository institution
and are not federally insured by the Federal Deposit Insurance Corporation, the
Federal Reserve Board or any other government agency.
The Fund is offering 3,200 shares of Series M28 Preferred Shares. The
Preferred Shares have a liquidation preference of $25,000 per share, plus any
accumulated, unpaid dividends. The Preferred Shares also have priority over the
Fund's common shares as to distribution of assets as described in this
prospectus. It is a condition of closing this offering that the Preferred Shares
be assigned a rating of "AAA" by S&P and "AAA" by Fitch.
The dividend rate for the initial dividend rate period will be 1.45%. The
initial rate period is from the date of issuance through July 19, 2004. For
subsequent rate periods, the Preferred Shares will pay dividends based on a rate
set at auction, usually held every 28 days. Prospective purchasers should
carefully review the auction procedures described in this prospectus and should
note: (1) a buy order (called a "bid order") or sell order is a commitment to
buy or sell Preferred Shares based on the results of an auction; (2) purchases
and sales will be settled on the next business day after the auction; and (3)
ownership of the Preferred Shares will be maintained in book-entry form by or
through DTC (or any successor securities depository).
The Preferred Shares are redeemable, in whole or in part, at the option of
the Fund on the business day after the last day prior to any date dividends are
paid on the Preferred Shares, and will be subject to mandatory redemption in
certain circumstances at a redemption price of $25,000 per share, plus
accumulated but unpaid dividends to the date of redemption, plus a premium in
certain circumstances. See "Description of Preferred Shares."
The Preferred Shares, which have no prior trading history, will not be
listed on an exchange. You may only buy or sell Preferred Shares through an
order placed at an auction with or through a broker-dealer that has entered into
an agreement with the auction agent or in a secondary market maintained by
certain broker-dealers. These broker-dealers are not required to maintain this
market, and there can be no assurance that a secondary market for the Preferred
Shares will develop or, if it does develop, that it will provide holders with a
liquid trading market (i.e., trading will depend on the presence of willing
buyers and sellers, and the trading price will be subject to variables to be
determined at the time of the trade by such broker-dealers). A general increase
in the level of interest rates may have an adverse effect on the secondary
market price of the Preferred Shares, and an investor that sells Preferred
Shares between auctions may receive a price per share of less than $25,000.
The Preferred Shares will be senior in liquidation and distribution rights
to the Fund's outstanding shares of common stock, which are traded on the
American Stock Exchange under the symbol "ERH." See "Description of Preferred
Shares."
You should rely only on the information contained in or incorporated by
reference in this prospectus. The Fund has not, and the underwriters have not,
authorized any other person to provide you with different or inconsistent
information. If anyone provides you with different or inconsistent information,
you should not rely on it. The Fund is not, and the underwriters are not, making
an offer to sell these securities in any jurisdiction where the offer or sale is
not permitted. You should assume that the information appearing in this
prospectus is accurate only as of the date of this prospectus, and the Fund's
business, financial condition, results of operations and prospects may have
changed since that date.
----------------------------------
TABLE OF CONTENTS
Page
Prospectus Summary ............................................................1
Financial Highlights (Unaudited) .............................................28
The Fund......................................................................29
Use of Proceeds...............................................................29
Capitalization (Unaudited) ...................................................30
Portfolio Composition ........................................................30
Investment Objective And Principal Investment Strategies .....................31
Risk Factors..................................................................40
Management Of The Fund .......................................................52
Description of Preferred Shares...............................................54
The Auction...................................................................63
U.S. Federal Income Tax Matters...............................................68
Net Asset Value...............................................................71
Description Of Shares ........................................................71
Anti-takeover Provisions Of The Agreement And Declaration Of Trust And
By-Laws.......................................................................74
Underwriting..................................................................76
Custodian, Transfer Agent, Dividend Disbursing Agent And Registrar ...........78
Validity Of Shares............................................................78
Table Of Contents For Statement Of Additional Information ....................79
PROSPECTUS SUMMARY
This is only a summary. This summary does not contain all of the information that you should consider
before investing in the Fund's Preferred Shares, especially the information set forth under the heading
"Risk Factors." You should read the more detailed information contained in this prospectus, the
Statement of Additional Information and the Fund's Statement of Preferences of Auction Preferred Shares
(the "Statement") attached as Appendix C to the Statement of Additional Information.
The Fund............................ Evergreen Utilities and High Income Fund (the "Fund") is a
recently organized, non-diversified, closed-end management
investment company. The Fund commenced operations on April 30,
2004 and closed an initial public offering of 11,500,000 common
shares of beneficial interest. As of May 31, 2004, the Fund
had 11,505,000 common shares outstanding and net assets of
$217,173,506. The Fund's principal offices are located at 200
Berkeley Street, Boston, Massachusetts 02116-5034, and its
telephone number is 1-800-343-2898.
The Offering ....................... The Fund is offering 3,200 shares of Series M28 Preferred
Shares, at a purchase price of $25,000 per share plus
dividends, if any, that have accumulated from the date the Fund
first issued the Preferred Shares. The Preferred Shares are
being offered through a group of underwriters (the
"Underwriters") led by Citigroup Global Markets Inc. See
"Underwriting" beginning on page 76. It is a condition to
their issuance that the Preferred Shares be issued with a
credit quality rating of "AAA" from S&P and "AAA" from Fitch.
The Preferred Shares entitle their holders to receive cash
dividends at an annual rate that may vary for the successive
dividend periods for the Preferred Shares. In general, except
as described under "Dividends and Rate Periods" below and
"Description of Preferred Shares --Dividends and Rate Periods,"
the dividend period for the Preferred Shares will be 28 days.
The auction agent will determine the dividend rate for a
particular period by an auction conducted on the business day
immediately prior to the start of that rate period. In an
auction, persons determine to hold or offer to sell or, based
on the dividend rates bid by them, offer to purchase or sell
Preferred Shares. If the number of Preferred Shares subject to
offers to purchase equals or exceeds those shares offered for
sale, then the dividend rate for the Preferred Shares for the
next succeeding dividend period will be the lowest rate
specified in the submitted bids which would result in existing
holders and potential holders owning all the Preferred Shares
available for purchase in the auction. See "The Auction"
beginning on page 63. The Preferred Shares are not listed on
an exchange. Instead, investors may buy or sell Preferred
Shares in an auction by submitting orders to broker-dealers
that have entered into an agreement with the auction agent.
Generally, investors in the Preferred Shares will not receive
certificates representing ownership of their shares. The
securities depository (DTC or any successor) or its nominee for
the account of the investor's broker-dealer will maintain
record ownership of Preferred Shares in book-entry form. An
investor's broker-dealer, in turn, will maintain records of
that investor's beneficial ownership of the Preferred Shares.
Investment Objective ............... The Fund's investment objective is to seek a high level of
current income and moderate capital growth, with an emphasis on
providing tax-advantaged dividend income. The Fund will invest
the net proceeds of the offering in accordance with the Fund's
investment objective and policies. There can be no assurance
that the Fund will achieve its investment objective. See
"Investment Objective and Principal Investment Strategies"
beginning on page 31.
Investment Policies ................ Under normal market conditions, the Fund will invest at least
80% of its net assets in securities of utilities companies
(water, gas, electric and telecommunications companies) and in
U.S. non-investment grade debt securities. The Fund allocates
its assets between two separate investment strategies. Under
normal market conditions, the Fund allocates approximately 70%
of its total assets to an investment strategy that focuses on
common, preferred and convertible preferred stocks and
convertible debentures of utility companies (water, gas,
electric and telecommunications companies), and approximately
30% of its total assets to an investment strategy that focuses
on U.S. dollar denominated non-investment grade bonds,
debentures, and other income obligations. The Advisor reserves
the discretion based upon market conditions to reallocate the
proportions of total assets invested in each investment
strategy. No more than 35% of the Fund's total assets will be
invested in non-investment grade debt securities. The Fund may
invest up to 25% of its total assets in foreign securities.
The two separate investment strategies are as follows:
o Utilities Securities. Under normal market conditions, the
Fund expects to invest approximately 70% of its total assets in
an investment strategy that focuses on common, preferred and
convertible preferred stocks and convertible debentures of
utility companies (water, gas, electric and telecommunications
companies). The Fund may invest this portion of its assets in
companies of all market capitalizations. The Fund may invest
up to 35% of this portion of the Fund's assets in convertible
debentures of utility companies of any quality. Of this 35%, a
maximum of 7% may be non-investment grade.
o U.S. High Yield Debt Securities. Under normal market
conditions, the Fund expects to invest approximately 30% of its
total assets in an investment strategy that focuses on U.S.
dollar denominated non-investment grade bonds, debentures and
other income obligations.
The high yield securities in which the Fund invests are
expected to be rated between and including B3 and Ba1 by
Moody's or B- and BB+ by S&P or will be unrated but determined
by the Advisor to be of comparable quality. This portion of
the Fund will not purchase high yield securities with a rating
of CCC or below, although the Fund may hold such securities as
a result of a downgrade in ratings subsequent to their
purchase. No more than 10% of this portion of the Fund's
assets may be invested in securities that are unrated or rated
CCC or below. Debt securities rated below investment grade are
commonly referred to as "junk bonds" and are considered
speculative with respect to the issuer's capacity to pay
interest and repay principal. Non-investment grade debt
securities involve greater risk of loss, are subject to greater
price volatility and are less liquid, especially during periods
of economic uncertainty or change, than higher rated debt
securities. For purposes of the Fund's credit quality
policies, if a security receives different ratings from
nationally recognized securities rating organizations, the Fund
will use the rating chosen by the portfolio managers as
most representative of the security's credit quality. The
Advisor anticipates that, assuming the Preferred Shares
represent approximately 27% of the Fund's total assets
immediately after their issuance, the weighted average duration
of the Fund's high yield U.S. debt securities will be 4.6 to
9.2 years (after leverage), although there is no guarantee that
this range will be obtained.
Tax-advantaged Dividend Income. Recent changes in the tax laws
have allowed qualifying dividends to be taxed at the same rate
as long-term capital gains (currently 15%). Through the Fund's
investments in the utilities sector, the Fund expects to invest
a significant portion of its assets in equity securities that
pay quarterly dividends qualifying for such rate. Therefore, a
significant portion of the Fund's yield may be considered to be
tax-advantaged relative to investments in securities that do
not qualify for the same rate as long-term capital gains.
However, because the Fund will also invest in debt obligations,
it will have less tax advantages than a fund fully invested in
securities qualifying for this rate.
Leverage. In addition to the issuance of Preferred Shares,
which will represent approximately 27% of the Fund's total
assets immediately after their issuance, the Fund may also
borrow through reverse repurchase agreements (up to 20% of
its total assets subject to the overall limitation on leverage
and borrowings). The Fund currently leverages its portfolio by
borrowing through reverse repurchase agreements. As of May 31,
2004, such leverage represented approximately 18% of the Fund's
total assets. The Fund may also borrow money from banks or
other financial institutions or issue debt securities. Such
borrowings would have seniority over the Preferred Shares,
including with respect to any distributions of assets that the
Fund might make and could limit the amount of funds available
for distributions of income. The Fund does not currently
intend to issue additional preferred shares. The Fund's total
leverage immediately following the issuance of the Preferred
Shares will not exceed 38% of the Fund's total assets. In
addition, the Fund will not leverage more of its portfolio if,
immediately after such leveraging, total leverage for the Fund
exceeds 38% of the Fund's total assets immediately after such
leveraging.
In addition to the investment strategies discussed above, the
Fund may also invest in the following:
Foreign Currency Transactions. Foreign currency transactions
are entered into for the purpose of hedging against foreign
exchange risk arising from the Fund's investment or anticipated
investment in securities denominated in foreign currencies.
The Fund also may enter into these contracts for purposes of
increasing exposure to a foreign currency or to shift exposure
to foreign currency fluctuations from one country to another.
Foreign currency transactions include the purchase of foreign
currency on a spot (or cash) basis, contracts to purchase or
sell foreign currencies at a future date (forward contracts),
the purchase and sale of foreign currency futures contracts,
and the purchase of exchange traded and over-the-counter call
and put options on foreign currency futures contracts and on
foreign currencies. The Fund may invest up to 5% of its total
assets in foreign currency transactions for non-hedging
purposes.
Corporate Loans. The Fund may invest a portion of its total
assets in loan participations and other claims against a
corporate borrower. The Fund may invest up to 10% of its total
assets in corporate loans. The corporate loans in which the
Fund invests primarily consist of direct obligations of a
borrower. The Fund may invest in a corporate loan at
origination as a co-lender or by acquiring in the secondary
market participations in, assignments of or novations of a
corporate loan. By purchasing a participation, the Fund
acquires some or all of the interest of a bank or other lending
institution in a loan to a corporate borrower.
Derivatives. The Fund may invest up to 10% of its total assets
in futures and options on securities and indices and in other
derivatives. The Fund may use derivatives for a variety of
purposes, including:
o As a hedge against adverse changes in securities market
prices or interest rates; and
o As a substitute for purchasing or selling securities.
In addition, the Fund may enter into interest rate swap
transactions with respect to the total amount the Fund is
leveraged in order to hedge against adverse changes in interest
rates affecting dividends payable on any preferred shares or
interest payable on borrowings constituting leverage. In
connection with any such swap transaction, the Fund will
segregate liquid securities in the amount of its obligations
under the transaction. A derivative is a security or
instrument whose value is determined by reference to the value
or the change in value of one or more securities, currencies,
indices or other financial instruments. The Fund does not use
derivatives as a primary investment technique and generally
does not anticipate using derivatives for non-hedging purposes.
In the event the Advisor uses derivatives for non-hedging
purposes, no more than 10% of the Fund's total assets will be
committed to initial margin for derivatives for such purposes.
Temporary Investments. Due to market conditions or otherwise,
investments that, in the judgment of the Advisor, are
appropriate for the Fund may not be immediately available.
Therefore, the Fund expects that there will be a period of up
to two months following the completion of its Preferred Shares
offering before the proceeds are fully invested in accordance
with its investment objective and policies. Pending such
investment, the Fund anticipates that all or a portion of the
proceeds will be invested in U.S. government securities or high
grade, short-term money market instruments.
See "Investment Objective and Principal Investment Strategies"
beginning on page 31.
Risks .............................. Before investing in the Preferred Shares you should consider
certain risks carefully.
Risks of Investing in the Preferred Shares.
The primary risks of investing in the Preferred Shares are:
o The Fund will not be permitted to declare dividends or
other distributions with respect to your Preferred Shares
unless the Fund meets certain asset coverage requirements;
o If an auction fails (there are more Preferred Shares
offered for sale than there are buyers for those shares)
you may not be able to sell some or all of your shares;
o Because of the nature of the market for Preferred Shares,
you may receive less than the price you paid for your
shares if you sell them outside of the auction,
especially when market interest rates are rising;
o A rating agency could downgrade the rating assigned to
the Preferred Shares, which could affect liquidity and
value;
o The Fund may be forced to redeem Preferred Shares to meet
regulatory or rating agency requirements or may
voluntarily redeem your shares in certain circumstances;
o In certain circumstances, the Fund may not earn
sufficient income from its investments to pay dividends
on the Preferred Shares; and
o If interest rates rise, the value of the Fund's
investment portfolio will decline, reducing the asset
coverage for the Preferred Shares.
o The Fund may have to repurchase common shares pursuant to
its Evergreen Enhanced Liquidity Plan (described below in
"Description of Shares" beginning on page 71), which
could prevent the Fund from taking advantage of
attractive investment opportunities; require it to sell
investments at disadvantageous times, and in amounts that
the Advisor would not otherwise contemplate; and, under
certain circumstances, require it to redeem Preferred
Shares in order to comply with leverage requirements of
the 1940 Act and requirements imposed by the rating
agencies.
Leverage Risk. The Fund uses financial leverage for investment
purposes. Leverage risk includes the risk associated with the
issuance of Preferred Shares to leverage the Fund's portfolio
and its investments in reverse repurchase agreements. It is
currently anticipated that, taking into account the Preferred
Shares being offered in this prospectus and the Fund's
investments in reverse repurchase agreements, the amount of
leverage will represent approximately 35% of the Fund's total
assets upon the issuance of the Preferred Shares. A portion of
the Fund's overall leverage may be comprised of borrowings from
banks or other financial institutions. The Fund's leveraged
capital structure creates special risks not associated with
unleveraged funds having similar investment objectives and
policies. These include the possibility that the value of the
assets acquired with such borrowing decreases although the
Fund's liability is fixed, the possibility of higher volatility
of the net asset value of the Fund and the Preferred Shares'
asset coverage, fluctuations in the dividend paid by the Fund
and higher expenses. Because the fee paid to the Advisor will
be calculated on the basis of the Fund's total assets (which
are the net assets of the Fund plus borrowings or other
leverage for investment purposes to the extent excluded in
calculating net assets), the fee will be higher when leverage
is utilized, giving the Advisor an incentive to utilize
leverage.
Interest Rate Risk. The Preferred Shares pay dividends based
on shorter-term interest rates. The Fund invests a portion of
the proceeds from the issuance of the Preferred Shares in
intermediate and longer-term, typically fixed rate bonds. The
interest rates on intermediate- and longer-term bonds are
typically, although not always, higher than shorter-term
interest rates. Both shorter-term and
intermediate-to-longer-term interest rates may fluctuate. If
shorter-term interest rates rise, dividend rates on the
Preferred Shares may rise so that the amount of dividends to be
paid to holders of Preferred Shares exceeds the income from the
intermediate- and longer-term bonds and other investments
purchased by the Fund with the proceeds from the sale of the
Preferred Shares. Under these circumstances, income from the
Fund's entire investment portfolio (not just the portion of the
portfolio purchased with the proceeds of this offering of
Preferred Shares) is available to pay dividends on the
Preferred Shares. However, the Fund's ability to pay dividends
on Preferred Shares could be jeopardized to the extent that the
income from the Fund's entire investment portfolio (not just
the portion of the portfolio purchased with the proceeds of
this offering of Preferred Shares) is not sufficient to pay
dividends at the Preferred Shares' dividend rate. If
intermediate- to longer-term interest rates rise, this could
negatively impact the value of the Fund's investment portfolio,
reducing the amount of assets serving as asset coverage for the
Preferred Shares.
Auction Risk. The dividend rate for the Preferred Shares
normally is set through an auction process. In the auction,
holders of Preferred Shares may indicate the dividend rate at
which they would be willing to hold or sell their Preferred
Shares or purchase additional Preferred Shares. The auction
also provides liquidity for the sale of Preferred Shares. An
auction fails if there are more Preferred Shares offered for
sale than there are buyers. You may not be able to sell your
Preferred Shares at an auction if the auction fails. Also, if
you place hold orders (orders to retain shares) at an auction
only at a specified dividend rate, and that rate exceeds the
rate set at the auction, you will not retain your shares.
Additionally, if you buy shares or elect to retain shares
without specifying a dividend rate below which you would not
wish to buy or continue to hold those shares, you could receive
a lower rate of return on your shares than the market rate.
Finally, the dividend period for the Preferred Shares may be
changed by the Fund, subject to certain conditions with notice
to the holders of Preferred Shares, which could also affect the
liquidity of your investment.
Secondary Market Risk. If you try to sell your Preferred Shares
between auctions you may not be able to sell any or all of your
shares or you may not be able to sell them for $25,000 per
share or $25,000 per share plus accumulated dividends. If the
Fund has designated a special rate period, changes in interest
rates could affect the price you would receive if you sold your
shares in the secondary market.
You may transfer shares outside of auctions only to or through
a broker-dealer that has entered into an agreement with the
auction agent and the Fund or other person as the Fund permits.
Ratings and Asset Coverage Risk. While it is expected that S&P
and Fitch each will assign ratings of "AAA" to the Preferred
Shares, such ratings do not eliminate or necessarily mitigate
the risks of investing in Preferred Shares.
Restrictions on Dividends and Other Distributions.
Restrictions imposed on the declaration and payment of
dividends or other distributions to the holders of the Fund's
common shares and Preferred Shares, both by the 1940 Act and by
requirements imposed by rating agencies, might impair the
Fund's ability to maintain its qualification as a regulated
investment company for federal income tax purposes.
General Risks of Investing in the Fund.
Limited Operating History Risk. The Fund is a recently
organized closed-end management investment company that
commenced operations in April 2004.
Investment Risk. An investment in the Fund is subject to
investment risk, including the possible loss of the entire
principal amount that you invest. Your investment in the Fund
represents an indirect investment in the securities owned by
the Fund. The value of these securities may increase or
decrease, at times rapidly and unexpectedly. Your investment
in the Fund may at any point in the future be worth less than
your original investment even after taking into account the
reinvestment of dividends and distributions.
Concentration Risk. The Fund will invest primarily in
securities of utilities companies. An investment in a fund
that concentrates its investments in a single sector or
industry entails greater risk than an investment in a fund that
invests its assets in numerous sectors or industries. The Fund
may be vulnerable to any financial, economic, political or
other development in its concentration sector or industry that
may weaken the sector or industry. As a result, the Fund's
shares may fluctuate more widely in value than those of a fund
investing in a number of different sectors or industries.
Non-Diversification Risk. An investment in a fund that is
non-diversified entails greater risk than an investment in a
diversified fund. When a fund is non-diversified, it may
invest a greater percentage of assets in a single issuer than
may be invested by a diversified fund. A higher percentage of
investments among fewer issuers may result in greater
fluctuation in the total market value of the Fund's portfolio
as compared to a fund which invests in numerous issuers
Utility Securities Risk. Investments in utility sectors
include the unique risks associated with decreases in the
demand for utility company (water, gas and electric) products
and services, increased competition resulting from
deregulation, and rising energy costs, among others. Such
developments also could cause utility companies to reduce the
dividends they pay on their stock, potentially decreasing the
dividends you receive from the Fund. Telecommunications,
similar to technology, is highly dependent on innovation and
expansion of existing technologies, such as internet
communications and the ability to access the internet through
cellular phones, as well as intense pricing competition and
industry consolidation. Water, gas and electric companies
typically borrow heavily to support continuing operations.
Increases in interest rates could increase these utility
companies' borrowing costs, which could adversely impact their
financial results and stock price, and ultimately the value of
and total return on your Fund shares.
Investment Style Risk. Securities with different
characteristics tend to shift in and out of favor depending
upon market and economic conditions as well as investor
sentiment. The Fund may outperform or underperform other funds
that employ a different style of investing. The Fund may also
employ a combination of styles that impact its risk
characteristics. Examples of different styles include growth
and value investing. Growth stocks may be more volatile than
other stocks because they are more sensitive to investor
perceptions of the issuing company's earnings growth
potential. Growth-oriented funds will typically underperform
when value investing is popular. Value stocks are those which
are undervalued in comparison to their peers due to adverse
business developments or other factors. Value-oriented funds
will typically underperform when growth investing is popular
Stock Market Risk. Your investment in the Fund will be
affected by general economic conditions such as prevailing
economic growth, inflation and interest rates. When economic
growth slows, or interest or inflation rates increase, equity
securities tend to decline in value. Such events could also
cause companies to decrease the dividends they pay. If these
events were to occur, the dividend yield, total return earned
on and the value of your investment would likely decline. Even
if general economic conditions do not change, the dividend
yield, total return earned on and the value of your investment
could decline if the particular industries, companies or
sectors in which a Fund invests do not perform well.
Market Capitalization Risk. The Fund may invest the portion of
its assets invested in utilities securities in securities of
companies of all market capitalizations. Stocks fall into
three broad market capitalization categories--large, medium and
small. Investing primarily in one category carries the risk
that due to current market conditions that category may be out
of favor with investors. If valuations of large capitalization
companies appear to be greatly out of proportion to the
valuations of small or medium capitalization companies,
investors may migrate to the stocks of small- and mid-sized
companies causing a fund that invests in these companies to
increase in value more rapidly than a fund that invests in
larger, fully-valued companies. Investing in medium and small
capitalization companies may be subject to special risks
associated with narrower product lines, more limited financial
resources, smaller management groups or greater dependence on a
few key employees, and a more limited trading market for their
stocks as compared to larger capitalization companies. As a
result, stocks of small and medium capitalization companies may
decline significantly in market downturns or their value may
fluctuate more sharply than other securities.
Preferred Stock Risk. The Fund may purchase preferred stock.
Preferred stock, unlike common stock, has a stated dividend
rate payable from the corporation's earnings. Preferred stock
dividends may be cumulative or non-cumulative, participating,
or auction rate. If interest rates rise, the fixed dividend on
preferred stocks may be less attractive, causing the price of
preferred stocks to decline. Also, the rights of preferred
stock on distribution of a corporation's assets in the event of
a liquidation are generally subordinate to the rights
associated with a corporation's debt securities. In addition
to the foregoing general risks associated with investments in
preferred stock, investments in certain types of preferred
stock carry additional risks. When dividends on a share of
non-cumulative preferred stock is not paid on the dividend
payment date, that dividend will ordinarily never be paid.
Preferred stock may have mandatory sinking fund provisions, as
well as call/redemption provisions, which can be a negative
feature when interest rate decline. Owners of auction rate
preferred stock may not be able to sell their shares when an
auction fails.
Credit Risk. Credit risk refers to an issuer's ability to make
payments of principal and interest when they are due. Because
the Fund will own securities with low credit quality, it will
be subject to a high level of credit risk. The credit quality
of such securities is considered speculative by rating agencies
with respect to the issuer's ability to pay interest or
principal. The prices of lower grade securities are more
sensitive to negative corporate developments, such as a decline
in profits, or adverse economic conditions, such as a
recession, than are the prices of higher grade securities.
Securities that have longer maturities or that do not make
regular interest payments also fluctuate more in price in
response to negative corporate or economic news. Therefore,
lower grade securities may experience high default rates, which
could mean that the Fund may lose some of its investments in
such securities. If this occurs, the Fund's net asset value
and ability to make distributions to you would be adversely
affected. The effects of this default risk are significantly
greater for the holders of lower grade securities because these
securities often are unsecured and subordinated to the payment
rights of other creditors of the issuer. The Fund may also be
subject to credit risk to the extent it engages in
transactions, such as repurchase agreements or dollar rolls,
which involve a promise by a third party to honor an obligation
to the Fund.
Interest Rate Risk. If interest rates go up, the value of debt
securities and certain dividend paying stocks tends to fall.
If a Fund invests a significant portion of its portfolio in
debt securities or stocks purchased primarily for dividend
income, and interest rates rise, then the value of your
investment may decline. If interest rates go down, interest
earned by a Fund on its debt investments may also decline,
which could cause the Fund to reduce the dividends it pays.
The longer the term of a debt security held by a Fund, the more
the Fund is subject to interest rate risk.
High Yield Debt Securities Risk. Investment in high yield
securities involves substantial risk of loss. Non-investment
grade debt securities or comparable unrated securities are
commonly referred to as "junk bonds" and are considered
predominantly speculative with respect to the issuer's ability
to pay interest and principal and are susceptible to default or
decline in market value due to adverse economic and business
developments. The market values for high yield securities tend
to be very volatile, and these securities are less liquid than
investment grade debt securities. For these reasons, your
investment in the Fund is subject to the following specific
risks:
o Increased price sensitivity to changing interest rates
and to a deteriorating economic environment.
o Greater risk of loss due to default or declining credit
quality.
o Adverse company specific events are more likely to
render the issuer unable to make interest and/or
principal payments.
o If a negative perception of the high yield market
develops, the price and liquidity of high yield
securities may be depressed. This negative perception
could last for a significant period of time.
o Adverse changes in economic conditions are more likely
to cause a high yield issuer to default on principal and
interest payments than an investment grade issuer. The
principal amount of high yield securities outstanding has
proliferated in the past decade as an increasing number
of issuers have used high yield securities for corporate
financing. An economic downturn could severely affect
the ability of highly leveraged issuers to service their
debt obligations or to repay their obligations upon
maturity.
o The secondary market for high yield securities may not
be as liquid as the secondary market for more highly
rated securities, a factor which may have an adverse
effect on the Fund's ability to dispose of a particular
security. There are fewer dealers in the market for high
yield securities than for investment grade obligations.
The prices quoted by different dealers may vary
significantly and the spread between the bid and ask
price is generally much larger than for higher rated
instruments. Under adverse market or economic
conditions, the secondary market for high yield
securities could contract further, independent of any
specific adverse changes in the condition of a particular
issuer, and these instruments may become illiquid. As a
result, the Fund could find it more difficult to sell
these securities or may be able to sell the securities
only at prices lower than if such securities were widely
traded. Prices realized upon the sale of such lower
rated or unrated securities, under these circumstances,
may be less than the prices used in calculating the
Fund's net asset value.
In addition to the risks discussed above, debt securities,
including high yield securities, are subject to certain risks,
including:
Issuer Risk. The value of corporate income-producing
securities may decline for a number of reasons which directly
relate to the issuer, such as management performance, financial
leverage and reduced demand for the issuer's goods and services.
Reinvestment Risk. Reinvestment risk is the risk that income
from the Fund's bond portfolio will decline if and when the
Fund invests the proceeds from matured, traded or called bonds
at market interest rates that are below the portfolio's current
earnings rate.
Prepayment Risk. During periods of declining interest rates,
the issuer of a security may exercise its option to prepay
principal earlier than scheduled, forcing the Fund to reinvest
in lower yielding securities. Debt securities frequently have
call features that allow the issuer to repurchase the security
prior to its stated maturity. An issuer may redeem an
obligation if the issuer can refinance the debt at a lower cost
due to declining interest rates or an improvement in the credit
standing of the issuer.
Extension Risk. During periods of rising interest rates, the
average life of certain types of securities may be extended
because of slower than expected principal payments. This may
lock in a below market interest rate, increase the security's
duration (the estimated period until the security is paid in
full) and reduce the value of the security
Management Risk. The Fund is subject to management risk
because it is an actively managed investment portfolio. The
Advisor's judgment about the attractiveness, relative value or
potential appreciation of a particular sector, security or
investment strategy may prove to be incorrect and there can be
no guarantee that it will produce the desired results.
Foreign (Non-U.S.) Investment Risk. Investing in the
securities of foreign issuers may involve unique risks compared
to investing in the securities of U.S. issuers. Some of these
risks do not apply to issuers located in larger, more developed
countries. These risks will be more pronounced if the Fund
invests significantly in emerging market countries or in one
country. For example, political turmoil and economic
instability in the countries in which a Fund invests could
adversely affect the dividend yield, total return earned on and
the value of your investment. Less information about non-U.S.
issuers or markets may be available due to less rigorous
disclosure and accounting standards or regulatory practices.
This may make it harder to get accurate information about a
security or company, and increase the likelihood that an
investment will not perform as well as expected. Many non-U.S.
markets are smaller, less liquid and more volatile than US.
markets. In a changing market, the Advisor may not be able to
sell the Fund's portfolio securities in amounts and prices the
Advisor considers reasonable. In addition, if the value of any
foreign currency in which a Fund's investments are denominated
declines relative to the U.S. dollar, the dividend yield, total
return earned on and the value of your investment in the Fund
may decline as well.
Currency Devaluation and Fluctuations Risk. The Fund may
invest in non-dollar-denominated investments. The Fund may be
limited in its ability to hedge the value of its
non-dollar-denominated investments against currency
fluctuations. As a result, a decline in the value of
currencies in which the Fund's investments are denominated
against the dollar will result in a corresponding decline in
the dollar value of the Fund's assets. These declines will in
turn affect the Fund's income and net asset value.
Convertible Securities Risk. Convertible securities generally
offer lower interest or dividend yields than non-convertible
securities of similar quality. As with all fixed income
securities, the market values of convertible securities tend to
decline as interest rates increase and, conversely, to increase
as interest rates decline. However, when the market price of
the common stock underlying a convertible security exceeds 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 convertible
security tends to trade increasingly on a yield basis and thus
may not decline in price to the same extent as the underlying
common stock. Convertible securities rank senior to common
stocks in an issuer's capital structure and consequently entail
less risk than the issuer's common stock.
Corporate Loans Risk. The Fund may acquire interests in loans
made by banks or other financial institutions to corporate
issuers or participation interests in such loans (up to 10% of
the Fund's total assets). By purchasing a participation
interest in a loan, the Fund acquires some or all of the
interest of a bank or other lending institution in a loan to a
corporate or government borrower. The participations typically
will result in the Fund having a contractual relationship only
with the lender, not the borrower. The Fund will have the
right to receive payments of principal, interest and any fees
to which it is entitled only from the lender selling the
participation and only upon receipt by the lender of the
payments from the borrower. If the Fund only acquires a
participation in the loan made by a third party, the Fund may
not be able to control the exercise of any remedies that the
lender would have under the corporate loan. Such third party
participation arrangements are designed to give corporate loan
investors preferential treatment over high yield investors in
the event of a deterioration in the credit quality of the
issuer. Even when these arrangements exist, however, there can
be no assurance that the principal and interest owed on the
corporate loan will be repaid in full. The secondary dealer
market for certain corporate loans may not be as well developed
as the secondary dealer market for bonds and, therefore,
presents increased market risk relating to liquidity and
pricing concerns. In addition, the markets in loans are not
regulated by federal securities laws or the Commission.
Foreign Currency Transactions Risk. In order to hedge against
foreign exchange risk, to increase exposure to a foreign
currency, or to shift exposure to foreign currency fluctuations
from one country to another, the Fund may engage in foreign
currency transactions, including the entering into of contracts
to purchase or sell foreign currencies at a future date and the
purchase and sale of foreign currency futures contracts.
Although the Fund primarily uses such contracts to hedge the
U.S. dollar value of a security it already owns or anticipates
purchasing, the Fund could lose money if it fails to predict
accurately the future exchange rate. Successful use of foreign
currency transactions depends on the Advisor's ability to
predict correctly movements in foreign exchange rates and
future exchange rate relationships. There is no assurance that
any foreign currency transaction undertaken by the Fund will be
successful.
Derivatives Risk. Even a small investment in derivatives can
have a significant impact on the Fund's exposure to interest
rates or currency exchange rates. If changes in a derivative's
value do not correspond to changes in the value of the Fund's
other investments, the Fund may not fully benefit from or could
lose money on the derivative position. In addition, some
derivatives involve risk of loss if the person who issued the
derivative defaults on its obligation. Certain derivatives may
be less liquid and more difficult to value.
Counterparty Risk. The Fund will be subject to credit risk
with respect to the counterparties to the derivatives contracts
purchased by the Fund. If a counterparty becomes bankrupt or
otherwise fails to perform its obligations under a derivative
contract due to financial difficulties, the Fund may experience
significant delays in obtaining any recovery under the
derivative contract in a bankruptcy or other reorganization
proceeding. The Fund may obtain only a limited recovery or may
obtain no recovery in such circumstances.
Market Disruption and Geopolitical Risk. The war with Iraq,
its aftermath and the continuing occupation of Iraq are likely
to have a substantial impact on the U.S. and the world
economies and securities markets. The nature, scope and
duration of the occupation cannot be predicted with any
certainty. Terrorist attacks on the World Trade Center and
Pentagon on September 11, 2001 closed some of the U.S.
securities markets for a four-day period and the occurrence of
similar events in the future cannot be ruled out. The war and
occupation, terrorism and related geopolitical risks have led,
and may in the future lead, to increased short-term market
volatility and may have adverse long-term effects on the U.S.
and world economies and markets generally. Those events could
also have an acute effect on individual issuers or related
groups of issuers, securities markets, interest rates,
auctions, secondary trading, ratings, credit risk, inflation
and other factors relating to the Preferred Shares.
Inflation Risk. Inflation risk is the risk that the value of
assets or income from the Fund's investments will be worth less
in the future as inflation decreases the value of money. As
inflation increases, the real, or inflation-adjusted, value of
the common shares and distributions can decline and the
dividend payments on the Fund's Preferred Shares or interest
payments on Fund borrowings, if any, may increase.
Tender Offers (Evergreen Enhanced Liquidity Plan) Risk. Under
certain circumstances, the Fund intends to make tender offers
for up to 5% of the Fund's outstanding common shares at net
asset value on a quarterly basis, subject to certain
conditions, and for a total of eight consecutive calendar
quarters. The Fund will make its first tender offer within the
first six to eight months of the Fund's operations if certain
conditions are met. The Fund's potential quarterly tender
offers for common shares may prevent the Fund from taking
advantage of attractive investment opportunities. Moreover, if
the Fund does not generate sufficient cash flow from
operations, it may be forced to sell investments at
disadvantageous times, and in amounts that the Advisor would
not otherwise contemplate, or to borrow money, in order to make
such tender offers. If the cost of borrowing to fund a tender
offer of common shares exceeds the income on retained
investments, it could impair the Fund's ability to pay
dividends on the Fund's Preferred Shares. The Fund's potential
quarterly tender offers for common shares will increase ratings
and asset coverage risk. See "Risk Factors--Risks of Investing
in Preferred Shares" beginning on page 40.
Liquidity Risk. The Fund does not intend to purchase illiquid
securities, which are securities that cannot be disposed of
within seven days in the ordinary course of business at
approximately the value at which the Fund has valued the
securities. However, the Fund is not required to sell or
dispose of any debt security that becomes illiquid subsequent
to its purchase. Illiquid securities may be subject to wide
fluctuations in market value. The Fund may be subject to
significant delays in disposing of illiquid securities.
Accordingly, the Fund may be forced to sell these securities at
less than fair market value or may not be able to sell them
when the Advisor believes that it is desirable to do so.
Illiquid securities also may entail registration expenses and
other transaction costs that are higher than those for liquid
securities
Anti-takeover Provisions Risk. The Fund's Agreement and
Declaration of Trust and By-laws include provisions that could
limit the ability of other entities or persons to acquire
control of the Fund or to change the composition of its Board
of Trustees. Such provisions could limit the ability of
shareholders to sell their shares at a premium over prevailing
market prices by discouraging a third party from seeking to
obtain control of the Fund. These provisions include staggered
terms of office for the Trustees, advance notice requirements
for shareholder proposals, and super-majority voting
requirements for open-ending the Fund or a merger, liquidation,
asset sale or similar transactions.
Other Regulatory Matters Risk. Governmental and self-regulatory
authorities have instituted numerous ongoing investigations of
various practices in the securities and mutual fund industries,
including those relating to market-timing and late trading. The
investigations cover advisory companies to mutual funds
(including the Advisor), broker-dealers, hedge funds and
others. Wachovia Corporation (the Advisor's parent) and/or
certain of its subsidiaries (including the Advisor) have
received subpoenas and/or other requests for documents and
testimony relating to the investigations, are attempting to
comply with those requests and are cooperating with the
investigations. Wachovia Corporation and its subsidiaries,
including the Advisor, are continuing their own internal review
of policies, practices, procedures and personnel, and are
taking remedial actions where appropriate. The Board of
Trustees of the Fund is actively monitoring the Advisor's
internal review of its policies, practices, procedures and
personnel as well as any remedial actions taken by the Advisor
as a result of such review. Wachovia Corporation also is
cooperating with governmental and self-regulatory authorities
in matters relating to the brokerage operations of Prudential
Financial, Inc. ("Prudential") that were included in Wachovia
Corporation's retail brokerage combination with Prudential.
Under the terms of the transaction, Wachovia Corporation is
indemnified by Prudential for liabilities relating to the
conduct of Prudential's businesses prior to July 1, 2003, the
closing date of the joint venture transaction between Wachovia
Corporation and Prudential.
Based on information currently available, advice of counsel,
available insurance coverage and established reserves, Wachovia
Corporation believes that the eventual outcome of the actions
against Wachovia Corporation and/or its subsidiaries, including
the matters described above, will not, individually or in the
aggregate, have a material adverse effect on Wachovia
Corporation's consolidated financial position or results of
operations or on its subsidiaries, including the Advisor.
However, in the event of unexpected future developments, it is
possible that the ultimate resolution of those matters, if
unfavorable, may be material to Wachovia Corporation's results
of operations for any particular period, including for that of
the Advisor.
For a further discussion of the risks described above, see
"Risk Factors" beginning on page 40.
Investment Adviser ................. Evergreen Investment Management Company, LLC (previously
defined as the "Advisor") is responsible on a day-to-day basis
for investment of the Fund's portfolio in accordance with its
investment objective and policies. Day-to-day management of
these portions of the Fund's portfolio is the responsibility of
a team of portfolio management professionals from the Advisor's
High Yield Bond and Value Equity teams, respectively.
The Advisor has been managing mutual funds and private accounts
since 1932 and, as of May 31, 2004, with its affiliates,
managed over $245 billion in assets, including more than $4.7
billion in high yield fixed income assets. The Advisor is a
wholly-owned subsidiary of Wachovia Corporation.
The Fund pays the Advisor an annual fee for its investment
advisory services equal to 0.60% of the Fund's average daily
Total Assets. This fee is payable monthly. "Total Assets" means
the net assets of the Fund (plus borrowings or other leverage
for investment purposes to the extent excluded in calculating
net assets). See "Management of the Fund" beginning on page 52.
Trading Market ..................... The Preferred Shares will not be listed on an exchange.
Instead, you may buy or sell Preferred Shares at an auction
that normally is held every 28 days, by submitting orders to a
broker-dealer that has entered into an agreement with the
auction agent (a "Broker-Dealer"), or to a broker-dealer that
has entered into a separate agreement with a Broker-Dealer. In
addition to the auctions, Broker-Dealers and other
broker-dealers may maintain a secondary trading market in
Preferred Shares outside of auctions, but may discontinue this
activity at any time. There is no assurance that a secondary
market will provide shareholders with liquidity. You may
transfer shares outside of auctions only to or through a
broker-dealer that has entered into an agreement with the
auction agent and the Fund or other person as the Fund
permits. See "The Auction" beginning on page 63.
Dividends and Rate The Preferred Shares will entitle their holders to receive cash
Periods ............................ dividends. The initial dividend rate is 1.45%, the dividend
payment date for the initial rate period is July 20, 2004 and
the initial rate period is 25 days. For subsequent rate
periods, the Preferred Shares will pay dividends based on a
rate set at auctions, normally held every 28 days. In most
instances, dividends are payable on the first business day
following the end of the rate period. The rate set at auction
will not exceed the applicable maximum rate. See "Description
of Preferred Shares--Dividends and Rate Periods" beginning on
page 54. Dividends on the Preferred Shares will be cumulative
from the date the shares are first issued and will be paid out
of legally available funds.
The Fund may, subject to certain conditions, designate special
rate periods of more than 28 days. A requested special rate
period will not be effective unless sufficient clearing bids
were made in the auction immediately preceding the special rate
period. In addition, full cumulative dividends, any amounts due
with respect to mandatory redemptions and any additional
dividends payable prior to such date must be paid in full. The
Fund must also have received confirmation from S&P and Fitch or
any substitute rating agency that the proposed special rate
period will not adversely affect such rating agency's
then-current rating on the Preferred Shares, and the lead
Broker-Dealer designated by the Fund must not have objected to
declaration of a special rate period. The dividend payment date
for special rate periods will be set out in the notice
designating a special rate period. See "Description of
Preferred Shares--Dividends and Rate Periods--Designation of
Special Rate Periods" and "The Auction" beginning on pages 58
and 63, respectively.
Ratings............................. It is expected that the Preferred Shares will receive a rating
of "AAA" from S&P and a rating of "AAA" from Fitch and the
receipt of such ratings are a condition to the issuance of the
Preferred Shares. These ratings are an assessment of the
capacity and willingness of an issuer to pay preferred stock
obligations. The ratings are not a recommendation to purchase,
hold or sell those shares inasmuch as the rating does not
comment as to market price or suitability for a particular
investor. The ratings also do not address the likelihood that
an owner of Preferred Shares will be able to sell such shares
in an auction or otherwise. The ratings are based on
information obtained from the Fund and other sources. The
ratings may be changed, suspended or withdrawn in the rating
agencies' discretion as a result of changes in, or the
unavailability of, such information. The rating agencies do not
impose any restrictions on the Fund's investment strategies.
However, certain types of securities in which the Fund may
otherwise invest consistent with its investment strategies are
not eligible for inclusion in the weekly calculation of the
discounted value of the Fund's portfolio that is required by
the rating agencies. Although the Fund reserves the right to
invest in such securities, they have not and it is anticipated
they will not constitute a significant portion of the Fund's
portfolio. See "Description of Preferred Shares--Rating Agency
Guidelines and Asset Coverage" beginning on page 60.
Redemption ......................... The Fund is required to redeem Preferred Shares if the Fund
does not meet an asset coverage ratio required by the
Investment Company Act of 1940 and the rules and regulations
thereunder, as amended (the "1940 Act"), or correct a failure
to meet a rating agency guideline in a timely manner. The Fund
may voluntarily redeem Preferred Shares, in whole or in part,
under certain conditions. See "Description of Preferred
Shares--Redemption" and "Description of Preferred Shares--Rating
Agency Guidelines and Asset Coverage" beginning on pages 58 and
60, respectively.
Asset Maintenance .................. Under the Statement, which establishes and fixes the rights and
preferences of the Preferred Shares, the Fund must maintain:
o asset coverage of the Preferred Shares as required by the
rating agency or agencies rating the Preferred Shares;
o asset coverage of at least 200% with respect to senior
securities that are stock, including the Preferred
Shares, as discussed in "Description of Preferred Shares
- Rating Agency Guidelines and Asset Coverage" beginning
on page 60.
In the event that the Fund does not maintain (or cure a failure
to maintain) these coverage tests, some or all of the Preferred
Shares will be subject to mandatory redemption. See
"Description of Preferred Shares -Redemption" beginning on page
58.
Based on the composition of the Fund's portfolio as of May 31,
2004, the asset coverage of the Preferred Shares as measured
pursuant to the 1940 Act would be approximately 370% if the
Fund were to issue Preferred Shares representing approximately
27% of the Fund's total assets as of May 31, 2004. The Fund
expects that the Preferred Shares issued will represent
approximately 27% of the Fund's total assets at the time of
issuance.
Liquidation Preference .............
The liquidation preference for the Preferred Shares will be
$25,000 per share plus accumulated but unpaid dividends, if
any, whether or not earned or declared. See "Description of
Preferred Shares--Liquidation" beginning on page 59.
Voting Rights.......................
The holders of preferred shares, including the Preferred
Shares, voting as a separate class, have the right to elect at
least two Trustees of the Fund at all times. Such holders also
have the right to elect a majority of the Trustees in the event
that two years' dividends on the preferred shares are unpaid.
In each case, the remaining Trustees will be elected by holders
of common shares and preferred shares, including the Preferred
Shares, voting together as a single class. The holders of
preferred shares, including the Preferred Shares, will vote as
a separate class or classes on certain other matters required
under the Statement, the 1940 Act and Delaware law. See
"Description of Preferred Shares--Voting Rights" and
"Anti-takeover Provisions in the Agreement and Declaration of
Trust and By-Laws" beginning on pages 61 and 74, respectively.
Federal Income The Fund intends to take the position that under present law
Taxation ........................... the Preferred Shares will constitute stock of the Fund.
Distributions with respect to the Preferred Shares (other than
distributions in redemption of the Preferred Shares that are
treated as exchanges of stock under Section 302(b) of the
Internal Revenue Code of 1986, as amended (the "Code")) will
constitute dividends to the extent of the Fund's current or
accumulated earnings and profits as calculated for U.S. federal
income tax purposes. For taxable years beginning on or before
December 31, 2008, however, dividends that are designated by
the Fund as qualified dividend income will be taxable to
individuals at a maximum federal income tax rate of 15%,
provided holding period and other requirements are satisfied.
Distributions of net capital gain that are designated by the
Fund as capital gain dividends will be treated as long-term
capital gains without regard to the length of time the
shareholder has held shares of the Fund. See "U.S. Federal
Income Tax Matters" beginning on page 68.
The Fund intends to seek an exemptive order from the Commission
that would allow it to distribute capital gains in any one
taxable year as often as necessary to comply with Internal
Revenue Service ("IRS") revenue rulings.
Custodian, Auction Agent, Transfer State Street Bank and Trust Company serves as the Fund's
Agent, Dividend Paying Agent and custodian. Deutsche Bank Trust Company Americas serves as
Registrar........................... auction agent, transfer agent, dividend paying agent,
redemption agent and registrar for the Preferred Shares.
FINANCIAL HIGHLIGHTS (Unaudited)
Information contained in the table below shows the unaudited operating performance of the Fund from the commencement of the
Fund's operations on April 30, 2004 through
May 31, 2004. Since the Fund was recently organized, the table covers approximately one month of operations.
Period Ended
May 31, 2004
(unaudited) (a)
---------------------
Net asset value, beginning of period $ 19.10 (b)
---------------------
Income from investment operations
Net investment income 0.17
Net realized and unrealized gains or losses on securities and foreign
currency related transactions (0.35)
---------------------
Total from investment operations (0.18)
Offering costs charged to capital (0.04)
---------------------
Net asset value, end of period $ 18.88
---------------------
Market value, end of period $ 20.01
---------------------
Total return (c)
Based on market value 0.05%
Based on net asset value -1.15%
Ratios and supplemental data
Net assets, end of period (in thousands) $ 217,174
Ratios to average net assets applicable to common shareholders
Expenses (d) 0.85%(e)
Interest expense 0.17%(e)
Net investment income 10.33%(e)
Portfolio turnover rate 14%
(a)For the period from April 30, 2004 (commencement of operations), to May 31, 2004.
(b)Initial public offering price of $20.00 per share less underwriting discount of $0.90 per
share.
(c)Total return is calculated assuming a purchase of common stock on the first day and a sale
on the last day of each period reported. Dividends and distributions are assumed for
purposes of these calculations to be reinvested at prices obtained under the Fund's
Automatic Dividend Reinvestment Plan. Total Return does not reflect brokerage commissions
or sales charges.
(d)Ratio of expenses to average net assets excludes interest expense.
(e)Annualized
The information above represents the unaudited operating performance for a
common share outstanding, total investment return, ratios to average net assets
and other supplemental data for the period indicated. This information has been
determined based upon financial information provided in the financial statements
and market value data for the Fund's common shares.
THE FUND
The Fund is a recently organized, non-diversified, closed-end management
investment company. The Fund was organized as a statutory trust under the laws
of the state of Delaware on February 4, 2004, and has registered under the 1940
Act. On April 30, 2004, the Fund issued an aggregate of 11,500,000 common shares
of beneficial interest, no par value, pursuant to an initial public offering.
The net proceeds of such offering were approximately $219,190,000 after payment
of sales load and offering expenses. The Fund's common shares are traded on the
American Stock Exchange under the symbol "ERH." The Fund's principal office is
located at 200 Berkeley Street, Boston, Massachusetts 02116-5034, and its
telephone number is 1-800-343-2898.
The following provides information about the Fund's outstanding shares as
of May 31, 2004.
Amount held by the
Amount Fund or for its
Title of Class Authorized Account Amount Outstanding
------------------------ ------------------ ------------------- -------------------
Common Shares Unlimited 0 11,505,000
Series M28 Preferred Unlimited 0 0
Shares
USE OF PROCEEDS
The net proceeds of this offering will be approximately $79,011,864 after
payment of the estimated offering costs and sales load. The Fund will invest the
net proceeds of the offering in accordance with its investment objective and
policies as stated below. However, investments that, in the judgment of the
Advisor, are appropriate for the Fund may not be immediately available.
Therefore, the Fund expects that there will be a period of up to two months
following the completion of its Preferred Shares offering before the proceeds
are fully invested in accordance with its investment objective and policies. In
addition, the Fund may use the net proceeds to satisfy any outstanding
borrowings, including those through bank loans and reverse repurchase
agreements. Pending such investment, the Fund anticipates that all or a portion
of the proceeds will be invested in U.S. government securities or high grade,
short-term money market instruments. See "Investment Objective and Principal
Investment Strategies."
CAPITALIZATION (Unaudited)
The following table sets forth the capitalization of the Fund as of May 31,
2004, and as adjusted to give effect to the issuance of the Preferred Shares
offered hereby assuming the Fund issues Preferred Shares representing
approximately 27% of the Fund's total assets as of May 31, 2004 (which includes
sales load and estimated offering costs of $988,136). The Fund expects that the
Preferred Shares issued will represent approximately 27% of the Fund's total
assets at the time of issuance.
Actual As Adjusted
Preferred Shares, $25,000 stated value per share, at liquidation
value; unlimited shares authorized (no shares issued; 3,200
shares issued, as adjusted) ........................................ $ -- $80,000,000
=============
Shareholder's Equity:
Paid in capital (Common shares, no par value per share;
unlimited shares authorized, 11,505,000 shares
outstanding (1))................................................ 219,290,000 218,301,864
Balance of undistributed net investment income ..................... 1,939,167 1,939,167
Accumulated net realized loss from investment transactions...(1,630,829) (1,630,829)
Net unrealized depreciation of investments... (2,424,832) (2,424,832)
--------- ---------
Net assets attributable to common shares ........................... $217,173,506 $216,185,370
============ =============
(1) None of these outstanding shares are held by or for the account of the Fund.
PORTFOLIO COMPOSITION
As of May 31, 2004, approximately 70% of the market value of the Fund's
portfolio was invested in equity securities and convertible debentures of
utilities companies and approximately 30% of the market value of the Fund's
portfolio was invested in high yield debt securities. The following table sets
forth certain information with respect to the composition of the Fund's
investment portfolio as of May 31, 2004. The Fund's high-yield debt securities
are categorized for the purposes of the following table by the highest rating
assigned each investment.
Credit Rating+ Value (000) Percent of Fund
----------- ---------------
Aaa/AAA ............................................................... $_____ ____%
Aa/AA.................................................................. _____ ____%
A/A.................................................................... _____ ____%
Baa/BBB ............................................................... 970 0.40%
Ba/BB ................................................................. 22,706 9.00%
B/B ................................................................... 52,305 20.60%
Caa/CCC ............................................................... _____ ____%
Ca/CC ................................................................. _____ ____%
Unrated++.............................................................. _____ ____%
Short-Term............................................................. 31,580 12.40%
Equities............................................................... 146,208 57.60%
------- ------
TOTAL.................................................................. $253,769 100.00%
-------- -------
+ Ratings assigned by Moody's and S&P. These ratings are an assessment of the capacity and willingness of an issuer to pay the
principal and interest on the securities being rated. The ratings are not a recommendation to purchase, hold or sell the
securities being rated inasmuch as the rating does not comment as to market price or suitability for a particular investor. The
meanings assigned by Moody's and S&P to their ratings are attached as an Appendix to the Statement of Additional Information.
++ Refers to securities that have not been rated by Moody's or S&P. See "Investment Objective and Principal Investment
Strategies--Principal Investment Strategies."
INVESTMENT OBJECTIVE AND PRINCIPAL INVESTMENT STRATEGIES
Investment Objective
The Fund's investment objective is to seek a high level of current income
and moderate capital growth, with an emphasis on providing tax-advantaged
dividend income. The Fund's investment objective is a fundamental policy and may
not be changed without the approval of a majority of the outstanding voting
securities (as defined in the 1940 Act) of the Fund. The Fund makes no assurance
that it will realize its objective.
Principal Investment Strategies
Under normal market conditions, the Fund will invest at least 80% of its
net assets in securities of utilities companies (water, gas, electric and
telecommunications companies) and in U.S non-investment grade debt securities.
Under normal market conditions, the Fund allocates approximately 70% of its
total assets to an investment strategy that focuses on common, preferred and
convertible preferred stocks and convertible debentures of utility (water, gas,
electric and telecommunications companies), and approximately 30% of its total
assets in an investment strategy that focuses on U.S. dollar denominated
non-investment grade bonds, debentures, and other income obligations. This is a
non-fundamental policy and may be changed by the Board of Trustees of the Fund
so long as shareholders are provided with at least 60 days prior written notice
of any change as required by the rules under the 1940 Act. The Advisor reserves
the discretion based upon market conditions to reallocate the proportions of
total assets invested in each investment strategy. No more than 35% of the
Fund's total assets will be invested in non-investment grade debt securities.
The Fund may invest up to 25% of its total assets in foreign securities.
An investment in the Fund may be speculative in that it involves a high
degree of risk and should not constitute a complete investment program. See
"Risk Factors."
The Fund principally allocates its assets between two separate investment
strategies:
o Utility Securities. Under normal market conditions, the Fund expects to
invest approximately 70% of its total assets in an investment strategy that
focuses on common, preferred and convertible preferred stocks and convertible
debentures of utility companies (water, gas, electric and telecommunications
companies). The Fund may invest this portion of its assets in companies of all
market capitalizations. This portion generally will be invested in approximately
60 to 70 different securities of utilities companies. In addition, the Fund may
invest up to 35% of this portion of the Fund's assets in convertible debentures
of utility companies of any quality. Of this 35%, a maximum of 7% may be
non-investment grade.
Recent changes in the tax laws have allowed qualifying dividends to be
taxed at the same rate as long-term capital gains (currently 15%). Through the
Fund's investments in the utilities sector, the Fund expects to invest a
significant portion of its assets in equity securities that pay quarterly
dividends qualifying for such rate. Therefore, a significant portion of the
Fund's yield may be considered to be tax-advantaged relative to investments in
securities that do not qualify for the same rate as long-term capital gains.
However, because the Fund will also invest in debt obligations, it will have
less tax advantages than a fund fully invested in securities qualifying for this
rate.
o U.S. High Yield Debt Securities. Under normal market conditions, the Fund
invests approximately 30% of its total assets in an investment strategy that
focuses on U.S. dollar denominated non-investment grade bonds, debentures and
other income obligations.
The high yield securities in which this portion of the Fund invests are
expected to be rated between and including B3 and Ba1 by Moody's or B- and BB+
by S&P or will be unrated but determined by the Advisor to be of comparable
quality. This portion of the Fund's portfolio targets securities with a minimum
rating of B to BB at the time of purchase and attempts to maintain a weighted
average credit quality with respect to the high yield securities of B to BB.
This portion of the Fund will not purchase high yield securities with a rating
of CCC or below, although the Fund may hold such securities as a result of a
downgrade in ratings subsequent to their purchase. No more than 10% of this
portion of the Fund's assets may be invested in securities that are rated CCC or
below or are unrated. Debt securities rated below investment grade are commonly
referred to as "junk bonds" and are considered speculative with respect to the
issuer's capacity to pay interest and repay principal. Non-investment grade debt
securities involve greater risk of loss, are subject to greater price volatility
and are less liquid, especially during periods of economic uncertainty or
change, than higher rated debt securities. For purposes of the Fund's credit
quality policies, if a security receives different ratings from nationally
recognized securities rating organizations, the Fund will use the rating chosen
by the portfolio managers as most representative of the security's credit
quality. The Fund's high yield securities may have fixed or variable principal
payments and all types of interest rate and dividend payment and reset terms,
including fixed rate, adjustable rate, contingent, deferred, payment in kind and
auction rate features. The Fund invests in high yield securities with a broad
range of maturities. The Advisor anticipates that, assuming the Preferred Shares
represent approximately 27% of the Fund's total assets immediately after their
issuance, the weighted average duration of the Fund's high yield U.S. debt
securities will be 4.6 to 9.2 years (after leverage), although there is no
guarantee that this range will be obtained. Maturity measures the average final
payable dates of debt instruments. Duration measures the average life of a bond,
defined as the weighted-average maturity of the periods until payment is made,
with weights proportional to the present value of payment. For example, a fund
with a duration of 5 years would likely drop 5% in value if interest rates rise
one percentage. Because the Fund will be leveraged, its net asset value may fall
more than 5% because changes in the value of the Fund are borne entirely by the
common shareholders.
In other than normal market conditions, when changing economic conditions
and other factors cause the yield difference between lower rated and higher
rated securities to narrow, the Fund may purchase higher rated U.S. debt
instruments if the Advisor believes that the risk of loss of income and
principal may be reduced substantially with only a relatively small reduction in
yield.
The Advisor will monitor the weighting of each investment strategy within
the Fund's portfolio on an ongoing basis and rebalance the Fund's assets when
the Advisor determines that such a rebalancing is necessary to align the
portfolio in accordance with the investment strategies described above in
"Investment Objective and Principal Investment Strategies--Principal Investment
Strategies." From time to time, the Fund's Advisor may make adjustments to the
weighting of each investment strategy. Such adjustments would be based on the
Advisor's review and consideration of the expected returns for each investment
strategy and would factor in the stock, bond and money markets, interest rate
and corporate earnings growth trends, and economic conditions which support
changing investment opportunities.
Other Investment Techniques and Strategies
In addition to the principal investment strategies discussed above, the
Fund may at times invest a portion of its assets in the investment strategies
and may use certain investment techniques as described below. The Statement of
Additional Information provides a more detailed discussion of certain of these
and other securities and techniques and indicates if the Fund is subject to any
limitations with respect to a particular investment strategy. (Please note that
some of these strategies may be a principal investment strategy for a portion of
the Fund and consequently are also described above under "Principal Investment
Strategies".)
Investments in Equity Securities. The Fund may invest in equity securities.
Equity securities, such as common stock, generally represent an ownership
interest in a company. While equity securities have historically generated
higher average returns than fixed income securities, equity securities have also
experienced significantly more volatility in those returns. An adverse event,
such as an unfavorable earnings report, may depress the value of a particular
equity security held by the Fund. Also, the price of equity securities,
particularly common stocks, are sensitive to general movements in the stock
market. A drop in the stock market may depress the price of equity securities
held by the Fund.
Convertible and Other Securities. The Fund's investment in fixed income
securities may include bonds and preferred stocks that are convertible into the
equity securities of the issuer or a related company. The Fund will not invest
more than 35% of the utilities portion of the Fund's assets in convertible
securities of any quality. Of this 35%, a maximum of 7% may be non-investment
grade. Depending upon the relationship of the conversion price to the market
value of the underlying securities, convertible securities may trade more like
equity securities than debt instruments.
Foreign Currency Transactions. Foreign currency transactions are entered
into for the purpose of hedging against foreign exchange risk arising from the
Fund's investment or anticipated investment in securities denominated in foreign
currencies. The Fund also may enter into these contracts for purposes of
increasing exposure to a foreign currency or to shift exposure to foreign
currency fluctuations from one country to another. Foreign currency transactions
include the purchase of foreign currency on a spot (or cash) basis, contracts to
purchase or sell foreign currencies at a future date (forward contracts), the
purchase and sale of foreign currency futures contracts, and the purchase of
exchange traded and over-the-counter call and put options on foreign currency
futures contracts and on foreign currencies.
These hedging transactions do not eliminate fluctuations in the underlying
prices of the securities which the Fund owns or intends to purchase or sell.
They simply establish a rate of exchange which can be achieved at some future
point in time. The Fund may invest up to 5% of its total assets in foreign
currency transactions for non-hedging purposes.
Preferred Shares. The Fund may invest in preferred shares. Preferred shares
are equity securities, but they have many characteristics of fixed income
securities, such as a fixed dividend payment rate and/or a liquidity preference
over the issuer's common shares. However, because preferred shares are equity
securities, they may be more susceptible to risks traditionally associated with
equity investments than the Fund's fixed income securities.
Corporate Loans. The Fund may invest a portion of its assets in loan
participations and other claims against corporate borrowers. The Fund may invest
up to 10% of its total assets in corporate loans. The Fund considers corporate
loans to be high yield debt instruments if the issuer has outstanding debt
securities rated below investment grade or has no rated securities, and includes
corporate loans in determining the percentage of its total assets that are
invested in high yield debt instruments. The corporate loans in which the Fund
invests primarily consist of direct obligations of a borrower. The Fund may
invest in a corporate loan at origination as a co-lender or by acquiring in the
secondary market participations in, assignments of or novations of a corporate
loan. By purchasing a participation, the Fund acquires some or all of the
interest of a bank or other lending institution in a loan to a corporate
borrower. The participations typically will result in the Fund having a
contractual relationship only with the lender, not the borrower. The Fund will
have the right to receive payments of principal, interest and any fees to which
it is entitled only from the lender selling the participation and only upon
receipt by the lender of the payments from the borrower. Many such loans are
secured, although some may be unsecured. Loans that are fully secured offer the
Fund more protection than an unsecured loan in the event of non-payment of
scheduled interest or principal. However, there is no assurance that the
liquidation of collateral from a secured loan would satisfy the corporate
borrower's obligation, or that the collateral can be liquidated. Direct debt
instruments may involve a risk of loss in case of default or insolvency of the
borrower and may offer less legal protection to the Fund in the event of fraud
or misrepresentation. In addition, loan participations involve a risk of
insolvency of the lending bank or other financial intermediary. The markets in
loans are not regulated by federal securities laws or the Commission.
As in the case of other high yield investments, such corporate loans may be
rated in the lower rating categories of the established rating services (B3 or
higher by Moody's or B- or higher by S&P), or may be unrated investments
considered by the Advisor to be of comparable quality. As in the case of other
high yield investments, such corporate loans can be expected to provide higher
yields than lower yielding, higher rated fixed income securities, but may be
subject to greater risk of loss of principal and income. There are, however,
some significant differences between corporate loans and high yield bonds.
Corporate loan obligations are frequently secured by pledges of liens and
security interests in the assets of the borrower, and the holders of corporate
loans are frequently the beneficiaries of debt service subordination provisions
imposed on the borrower's bondholders. These arrangements are designed to give
corporate loan investors preferential treatment over high yield investors in the
event of a deterioration in the credit quality of the issuer. Even when these
arrangements exist, however, there can be no assurance that the borrowers of the
corporate loans will repay principal and/or pay interest in full. Corporate
loans generally bear interest at rates set at a margin above a generally
recognized base lending rate that may fluctuate on a day-to-day basis, in the
case of the prime rate of a U.S. bank. Consequently, the value of corporate
loans held by the Fund may be expected to fluctuate significantly less than the
value of other fixed rate high yield instruments as a result of changes in the
interest rate environment. On the other hand, the secondary dealer market for
certain corporate loans may not be as well developed as the secondary dealer
market for high yield bonds and, therefore, presents increased market risk
relating to liquidity and pricing concerns.
Structured Securities. The Fund may invest in structured securities. The
value of the principal and/or interest on such securities is determined by
reference to changes in the value of specific currencies, interest rates,
commodities, indices or other financial indicators ("Reference") or the relative
change in two or more References. The interest rate or the principal amount
payable upon maturity or redemption may be increased or decreased depending upon
changes in the Reference. The terms of the structured securities may provide in
certain circumstances that no principal is due at maturity and, therefore, may
result in a loss of the Fund's investment. Changes in the interest rate or
principal payable at maturity may be a multiple of the changes in the value of
the Reference. Consequently, structured securities may entail a greater degree
of market risk than other types of fixed income securities.
U.S. Government Securities. U.S. government securities in which the Fund
may invest include debt obligations of varying maturities issued by the U.S.
Treasury or issued or guaranteed by an agency or instrumentality of the U.S.
government, including the Federal Housing Administration, Federal Financing
Bank, Farmers Home Administration, Export-Import Bank of the United States,
Small Business Administration, Government National Mortgage Association (GNMA),
General Services Administration, Central Bank for Cooperatives, Federal Farm
Credit Banks, Federal Home Loan Banks, Federal Home Loan Mortgage Corporation
(FHLMC), Federal National Mortgage Association (FNMA), Maritime Administration,
Tennessee Valley Authority, District of Columbia Armory Board, Student Loan
Marketing Association, Resolution Trust Corporation and various institutions
that previously were or currently are part of the Farm Credit System (which has
been undergoing reorganization since 1987). Some U.S. government securities,
such as U.S. Treasury bills, Treasury notes and Treasury bonds, which differ
only in their interest rates, maturities and times of issuance, are supported by
the full faith and credit of the United States. Securities issued by GNMA, but
not those issued by FNMA or FHLMC, are also backed by the full faith and credit
of the U.S. government. Others are supported by: (1) the right of the issuer to
borrow from the U.S. Treasury, such as securities of the Federal Home Loan
Banks; (2) the discretionary authority of the U.S. government to purchase the
agency's obligations, such as securities of the FNMA or FHLMC; or (3) only the
credit of the issuer. In general, securities issued by U.S. government-sponsored
entities are neither insured nor guaranteed by the U.S. Treasury. No assurance
can be given that the U.S. government will provide financial support in the
future to U.S. government agencies, authorities or instrumentalities that are
not supported by the full faith and credit of the United States. Securities
guaranteed as to principal and interest by the U.S. government, its agencies,
authorities or instrumentalities include: (i) securities for which the payment
of principal and interest is backed by an irrevocable letter of credit issued by
the U.S. government or any of its agencies, authorities or instrumentalities;
and (ii) participations in loans made to non-U.S. governments or other entities
that are so guaranteed. The secondary market for certain of these participations
is limited and, therefore, they may be regarded as illiquid (i.e., the Fund
cannot easily resell them within seven days at current value).
Other Investment Companies. The Fund may invest in the securities of other
investment companies to the extent that such investments are consistent with the
Fund's investment objective and policies and permissible under the 1940 Act.
Under the 1940 Act, the Fund may not acquire the securities of other domestic or
non-U.S. investment companies if, as a result, (i) more than 10% of the Fund's
total assets would be invested in securities of other investment companies, (ii)
such purchase would result in more than 3% of the total outstanding voting
securities of any one investment company being held by the Fund, or (iii) more
than 5% of the Fund's total assets would be invested in any one investment
company. These limitations do not apply to the purchase of shares of any
investment company in connection with a merger, consolidation, reorganization or
acquisition of substantially all the assets of another investment company.
The Fund, as a holder of the securities of other investment companies, will
bear its pro rata portion of the other investment companies' expenses, including
advisory fees. These expenses are in addition to the direct expenses of the
Fund's own operations.
Defensive and Temporary Investments. Under unusual market or economic
conditions or for temporary defensive purposes, the Fund may invest up to 100%
of its total assets in securities issued or guaranteed by the U.S. government or
its instrumentalities or agencies, certificates of deposit, bankers' acceptances
and other bank obligations, commercial paper rated in the highest category by a
nationally recognized statistical rating organization or other fixed income
securities deemed by the Advisor to be consistent with a defensive posture, or
may hold cash. To the extent the Fund implements defensive strategies, it may be
unable to achieve its investment objective.
Derivatives. The Fund may, but is not required to, use various derivatives
described below to earn income, facilitate portfolio management and mitigate
risks. Such derivatives are generally accepted under modern portfolio management
and are regularly used by many mutual funds and other institutional investors.
Although the Advisor seeks to use the practices to further the Fund's investment
objective, no assurance can be given that these practices will achieve this
result.
The Fund may purchase and sell derivative instruments such as
exchange-listed and over-the-counter put and call options on securities,
financial futures, equity, fixed-income and interest rate indices, and other
financial instruments, purchase and sell financial futures contracts and options
thereon, and enter into various interest rate transactions such as swaps, caps,
floors or collars. The Fund also may purchase derivative instruments that
combine features of these instruments. Collectively, all of the above are
referred to as "derivatives." The Fund generally seeks to use derivatives as a
portfolio management or hedging technique to seek to protect against possible
adverse changes in the market value of securities held in or to be purchased for
the Fund's portfolio, protect the value of the Fund's portfolio, facilitate the
sale of certain securities for investment purposes, manage the effective
interest rate exposure of the Fund, manage the effective maturity or duration of
the Fund's portfolio, or establish positions in the derivatives markets as a
temporary substitute for purchasing or selling particular securities. The Fund
may invest up to 10% of its total assets in futures and options on securities
and indices and in other derivatives. In addition, the Fund may enter into
interest rate swap transactions with respect to the total amount the Fund is
leveraged in order to hedge against adverse changes in interest rates affecting
dividends payable on any preferred shares or interest payable on borrowings
constituting leverage. In connection with any such swap transaction, the Fund
will segregate liquid securities in the amount of its obligations under the
transaction. The Fund generally does not anticipate using derivatives for
non-hedging purposes, but in the event the Advisor uses derivatives for
non-hedging purposes, no more than 10% of the Fund's total assets will be
committed to initial margin for derivatives for such purposes.
Derivatives have risks, including the imperfect correlation between the
value of such instruments and the underlying assets, the possible default of the
other party to the transaction or illiquidity of the derivative instruments.
Furthermore, the ability to successfully use derivatives depends on the
Advisor's ability to predict pertinent market movements, which cannot be
assured. Thus, the use of derivatives may result in losses greater than if they
had not been used, may require the Fund to sell or purchase portfolio securities
at inopportune times or for prices other than current market values, may limit
the amount of appreciation the Fund can realize on an investment, or may cause
the Fund to hold a security that it might otherwise sell. Additionally, amounts
paid by the Fund as premiums and cash or other assets held in margin accounts
with respect to derivatives are not otherwise available to the Fund for
investment purposes.
A more complete discussion of derivatives and their risks is contained in
the Statement of Additional Information.
Repurchase Agreements. The Fund may enter into repurchase agreements with
broker-dealers, member banks of the Federal Reserve System and other financial
institutions. Repurchase agreements are arrangements under which the Fund
purchases securities and the seller agrees to repurchase the securities within a
specific time and at a specific price. The repurchase price is generally higher
than the Fund's purchase price, with the difference being income to the Fund.
Under the direction of the Board of Trustees, the Advisor reviews and monitors
the creditworthiness of any institution which enters into a repurchase agreement
with the Fund. The counterparty's obligations under the repurchase agreement are
collateralized with U.S. Treasury and/or agency obligations with a market value
of not less than 100% of the obligations, valued daily. Collateral is held by
the Fund's custodian in a segregated, safekeeping account for the benefit of the
Fund. Repurchase agreements afford the Fund an opportunity to earn income on
temporarily available cash at low risk. In the event of commencement of
bankruptcy or insolvency proceedings with respect to the seller of the security
before repurchase of the security under a repurchase agreement, the Fund may
encounter delay and incur costs before being able to sell the security. Such a
delay may involve loss of interest or a decline in price of the security. If a
court characterizes the transaction as a loan and the Fund has not perfected a
security interest in the security, the Fund may be required to return the
security to the seller's estate and be treated as an unsecured creditor of the
seller. As an unsecured creditor, the Fund would be at risk of losing some or
all of the principal and interest involved in the transaction.
Lending of Portfolio Securities. The Fund may lend portfolio securities to
registered broker-dealers, or other institutional investors, deemed by the
Advisor to be creditworthy (and approved by the Board of Trustees of the Fund)
under agreements which require that the loans be secured continuously by
collateral in cash, cash equivalents or U.S. Treasury bills maintained on a
current basis at an amount at least equal to the market value of the securities
loaned. The Fund continues to receive the equivalent of the interest or
dividends paid by the issuer on the securities loaned as well as the benefit of
any increase and the detriment of any decrease in the market value of the
securities loaned and would also receive compensation based on investment of the
collateral. The Fund would not have the right to vote any securities having
voting rights during the existence of the loan, but would call the loan in
anticipation of an important vote to be taken among holders of the securities or
of the giving or withholding of consent on a material matter affecting the
investment.
As with other extensions of credit, there are risks of delay in recovery or
even loss of rights in the collateral should the borrower of the securities fail
financially. The Fund will lend portfolio securities only to firms that have
been approved in advance by the Board of Trustees, which will monitor the
creditworthiness of any such firms. At no time would the value of the securities
loaned exceed 35% of the value of the Fund's total assets.
Portfolio Turnover. It is the policy of the Fund not to engage in trading
for short-term profits although portfolio turnover is not considered a limiting
factor in the execution of investment decisions for the Fund.
Due to market conditions or otherwise, investments that, in the judgment of
the Advisor, are appropriate investments for the Fund may not be immediately
available. Therefore, the Fund expects that there will be an initial investment
period of up to two months following the completion of the Preferred Shares
offering before the proceeds are fully invested in accordance with its
investment objective and policies. Pending such investment, the Fund anticipates
that all or a portion of the proceeds will be invested in U.S. government
securities or high grade, short-term money market instruments.
Leverage
In addition to the issuance of Preferred Shares, which will represent
approximately 27% of the Fund's total assets immediately after their issuance,
the Fund may also borrow through reverse repurchase agreements (up to 20% of its
total assets subject to the overall limitation on leverage and borrowings). The
Fund currently leverages its portfolio by borrowing through reverse repurchase
agreements. As of May 31, 2004, such leverage represented approximately 18% of
the Fund's total assets. The Fund may also borrow money from banks or other
financial institutions or issue debt securities. Such borrowings would have
seniority over the Preferred Shares, including with respect to any distributions
of assets that the Fund might make and could limit the amount of funds available
for distributions of income. The Fund does not currently intend to issue
additional preferred shares. The Fund's total leverage immediately following the
issuance of the Preferred Shares will not exceed 38% of the Fund's total assets.
In addition, the Fund will not leverage more of its portfolio if, immediately
after such leveraging, total leverage for the Fund exceeds 38% of the Fund's
total assets immediately after such leveraging.
The Advisor's Investment Approach
The Fund combines investments in high yield debt securities with equity
securities and convertible debentures of utilities companies. Each of these
sectors has its own distinct attributes that the Advisor believes could
contribute to the potential for the Fund to achieve its investment objective.
There is no guarantee that the Fund will obtain its investment objective. The
Fund is managed following a rigorous investment process that emphasizes both
quality and value. The research-driven approach includes both a top-down review
of macroeconomic factors and intensive, bottom-up scrutiny of individual
securities. The Advisor considers both broad economic and issuer specific
factors in selecting a portfolio which it believes will achieve the Fund's
investment objective. In assessing the appropriate maturity and duration for the
Fund's portfolio and the credit quality parameters and weighting objectives for
sector and industry of each portion of the Fund's portfolio, the Advisor
considers a variety of factors that are expected to influence the economic
environment and the dynamics of the equity and debt securities markets. These
factors include fundamental economic indicators, such as interest rate trends,
the rates of economic growth and inflation, the performance of equity markets,
commodities prices, monetary policies in the U.S. and overseas and the relative
value of the U.S. dollar compared to other currencies. Once the Advisor
determines the preferable portfolio characteristics, the Advisor conducts
further evaluation to determine capacity and inventory levels in the utility
industry. The Advisor considers a number of factors when selecting individual
utility company stocks: a history of high dividends and profits; the size of the
company's market and market share; competitive or technological advantages that
may help it in the future; potential merger activity; and the projected
volatility of the company or industry. The stock selection is based on a blended
style of equity management that allows it to invest in both value- and
growth-oriented equity securities. The Advisor also selects individual
securities based upon the terms of the securities (such as yields compared to
U.S. Treasuries or comparable issues), liquidity and rating. In addition, the
Advisor employs due diligence and fundamental research to assess an issuer's
credit quality, taking into account financial condition and profitability,
future capital needs, potential for change in rating, industry outlook, the
competitive environment and management ability. The Advisor uses extensive,
proprietary research and broad sector diversification to help manage risk. The
Advisor considers both macro- and microeconomic factors -- such as inflation,
consumer spending and wages -- that affect the conditions of firms in the Fund's
portfolio.
The Advisor's analysis of issuers may include, among other things, historic
and current financial conditions, current and anticipated cash flow and
borrowing requirements, value of assets in relation to historical costs,
strength of management, responsiveness to business conditions, credit standing,
the company's leverage versus industry norms and current and anticipated results
of operations. While the Advisor considers as one factor in its credit analysis
the ratings assigned by the rating services, the Advisor performs its own
independent credit analysis of issuers and, consequently, the Fund may invest,
without limit, in unrated securities. As a result, the Fund's ability to achieve
its investment objective may depend to a greater extent on the Advisor's own
credit analysis than investment companies which invest in higher rated
securities. The Advisor's analysis also includes quantitative and qualitative
research and modeling designed to evaluate the effects of changing interest rate
and prepayment scenarios and their effect on the performance of the security and
portfolio.
In making portfolio decisions, the Advisor relies on the knowledge,
experience and judgment of its staff who has access to a wide variety of
research. Each portfolio management team applies a strict sell discipline to its
portion of the Fund's portfolio, which is as important as purchase criteria in
determining a portfolio holding's performance. The Fund may continue to hold
securities that are downgraded after the Fund purchases them and will sell such
securities only if, in the Advisor's judgment, it is advantageous to sell such
securities.
RISK FACTORS
Investing in the Fund involves risk, including the risk that you may
receive little or no return on your investment or that you may lose part or all
of your investment. Therefore, before investing you should consider carefully
the following risks that you assume when you invest in Preferred Shares.
Risks of Investing in Preferred Shares
Leverage Risk. The Fund uses financial leverage for investment purposes.
Leverage risk includes the risk associated with the issuance of Preferred Shares
to leverage the Fund's portfolio and its investments in reverse repurchase
agreements. It is currently anticipated that, taking into account the Preferred
Shares being offered in this prospectus and the Fund's investments in reverse
repurchase agreements, the amount of leverage will represent approximately 35%
of the Fund's total assets upon the issuance of the Preferred Shares. A portion
of the Fund's overall leverage may be comprised of borrowings from banks or
other financial institutions.
The Fund's leveraged capital structure creates special risks not associated
with unleveraged funds having similar investment objectives and policies. These
include the possibility that the value of the assets acquired with such
borrowing decreases although the Fund's liability is fixed, the possibility of
higher volatility of the net asset value of the Fund and the Preferred Shares'
asset coverage, fluctuations in the dividend paid by the Fund and higher
expenses. If the dividend rate on the Preferred Shares exceeds the net rate of
return on the Fund's portfolio, the leverage will result in a lower net asset
value than if the Fund were not leveraged, and the Fund's ability to pay
dividends to meet asset coverage requirement on the Preferred Shares will be
reduced. In addition, to the extent that any forms of leverage utilized by the
Fund are senior to the Preferred Shares, payments to holders of Preferred Shares
in liquidation or otherwise will be subject to prior payment of obligations
relating to such other forms of leverage. The Fund's total leverage immediately
following the issuance of the Preferred Shares will not exceed 38% of the Fund's
total assets. In addition, the Fund will not leverage more of its portfolio if,
immediately after such leveraging, total leverage for the Fund exceeds 38% of
the Fund's total assets immediately after such leveraging.
Because the fee paid to the Advisor will be calculated on the basis of the
Fund's Total Assets (which are the net assets of the Fund plus borrowings or
other leverage for investment purposes to the extent excluded in calculating net
assets), the fee will be higher when leverage is utilized, giving the Advisor an
incentive to utilize leverage.
Interest Rate Risk. The Preferred Shares pay dividends based on
shorter-term interest rates. The Fund invests a portion of the proceeds from the
issuance of the Preferred Shares in intermediate- and longer-term, typically
fixed rate bonds. The interest rates on intermediate- and longer-term bonds are
typically, although not always, higher than shorter-term interest rates. Both
shorter-term and intermediate- to longer-term interest rates may fluctuate. If
shorter-term interest rates rise, dividend rates on the Preferred Shares may
rise so that the amount of dividends to be paid to holders of Preferred Shares
exceeds the income from the intermediate- and longer-term bonds and other
investments purchased by the Fund with the proceeds from the sale of Preferred
Shares. Under these circumstances, income from the Fund's entire investment
portfolio (not just the portion of the portfolio purchased with the proceeds of
the Preferred Shares offering) is available to pay dividends on the Preferred
Shares. However, the Fund's ability to pay dividends on the Preferred Shares
could be jeopardized to the extent that the income from the Fund's entire
investment portfolio (not just the portion of the portfolio purchased with the
proceeds of the Preferred Shares offering) is not sufficient to pay dividends at
the Preferred Shares' dividend rate. Assuming the Fund issues Preferred Shares
with a liquidation preference equal to approximately 27% of the Fund's total
assets and an annual dividend rate of 2.37% of such liquidation preference
(which rate is approximately the rate the Advisor expects the Fund to pay after
hedging, based on market rates as of the date of this prospectus), the Fund
would need to achieve an annual total return on its total assets (net of
expenses) of 0.593% in order to cover dividend payments on the Preferred Shares.
Of course, these numbers are merely estimates used for illustration. Actual
dividend rates on the Preferred Shares will vary frequently, and may be
significantly higher or lower than the rate identified above. If intermediate-
to longer-term interest rates rise, this could negatively impact the value of
the Fund's investment portfolio, reducing the amount of assets serving as asset
coverage for the Preferred Shares. The Fund's decision to issue Preferred Shares
is based on many factors, the most important of which are investment outlook,
market conditions and interest rates. Successful use of a leveraging strategy
depends on the Advisor's ability to predict correctly interest rate and market
movements. The Advisor generally expects to utilize leverage when the Fund can
borrow at a lower rate than the securities it invests in are likely to return or
yield. There is no assurance that a leveraging strategy will be successful
during any period in which it is employed.
Auction Risk. The dividend rate for the Preferred Shares normally is set
through an auction process. In the auction, holders of Preferred Shares may
indicate the dividend rate at which they would be willing to hold or sell their
Preferred Shares or purchase additional Preferred Shares. The auction also
provides liquidity for the sale of Preferred Shares. An auction fails if there
are more Preferred Shares offered for sale than there are buyers. You may not be
able to sell your Preferred Shares at an auction if the auction fails. As a
result, your investment in Preferred Shares may be illiquid. Neither any
Broker-Dealer nor the Fund is obligated to purchase Preferred Shares in an
auction or otherwise in the event an auction fails. Also, if you place hold
orders (orders to retain Preferred Shares) at an auction only at a specified
dividend rate, and that rate exceeds the rate set at the auction, you will not
retain your Preferred Shares. Additionally, if you buy shares or elect to retain
shares without specifying a dividend rate below which you would not wish to buy
or continue to hold those shares, you could receive a lower rate of return on
your shares than the market rate. Finally, the dividend period for the Preferred
Shares may be changed by the Fund, subject to certain conditions with notice to
the holders of Preferred Shares, which could also effect the liquidation of your
investment. See "Description of Preferred Shares" and "The Auction--Auction
Procedures."
Secondary Market Risk. If you try to sell your Preferred Shares between
auctions you may not be able to sell any or all of your shares or you may not be
able to sell them for $25,000 per share or $25,000 per share plus accumulated
dividends. If the Fund has designated a special rate period (a rate period of
more than 28 days), changes in interest rates could affect the price you would
receive if you sold your shares in the secondary market. You may transfer shares
outside of auctions only to or through a broker-dealer that has entered into an
agreement with the Fund's auction agent, Deutsche Bank Trust Company Americas,
and the Fund or such other person as the Fund permits. The Fund does not
anticipate imposing significant restrictions on transfers to other persons.
However, unless any such other person has entered into a relationship with a
broker-dealer that has entered into a broker-dealer agreement with the auction
agent, that person will not be able to submit bids at auctions with respect to
the Preferred Shares. Broker-dealers that maintain a secondary trading market
for Preferred Shares are not required to maintain this market, and the Fund is
not required to redeem shares either if an auction or an attempted secondary
market sale fails because of a lack of buyers. No secondary market may develop
or exist at any time for Preferred Shares. The Preferred Shares will not be
listed on a stock exchange or the Nasdaq stock market. If you sell your
Preferred Shares to a broker-dealer between auctions, you may receive less than
the price you paid for them, especially if market interest rates have risen
since the last auction.
Ratings and Asset Coverage Risk. While it is expected that S&P and Fitch
each will assign a rating of "AAA" to the Preferred Shares, such ratings do not
eliminate or necessarily mitigate the risks of investing in Preferred Shares.
S&P or Fitch could downgrade its rating of the Preferred Shares or withdraw its
rating of the Preferred Shares at any time, which may make your shares less
liquid at an auction or in the secondary market and which may reduce the value
of your shares. If S&P or Fitch downgrades the Preferred Shares, the Fund may
alter its portfolio or redeem Preferred Shares in an effort to improve the
rating, although there is no assurance that it will be able to do so to the
extent necessary to restore the prior rating. If the Fund fails to satisfy the
asset coverage ratios discussed under "Description of Preferred Shares -Rating
Agency Guidelines and Asset Coverage," the Fund will be required to redeem a
sufficient number of Preferred Shares in order to return to compliance with the
asset coverage ratios. The Fund may be required to redeem Preferred Shares at a
time when it is not advantageous for the Fund to make such redemption or to
liquidate portfolio securities in order to have available cash for such
redemption. The Fund may voluntarily redeem Preferred Shares under certain
circumstances in order to meet asset maintenance tests. While a sale of
substantially all the assets of the Fund or the merger of the Fund into another
entity would require the approval of the holders of the Preferred Shares voting
as a separate class as discussed under "Description of the Preferred
Shares--Voting Rights," a sale of substantially all the assets of the Fund or
the merger of the Fund with or into another entity would not be treated as a
liquidation of the Fund nor require that the Fund redeem the Preferred Shares,
in whole or in part, provided that the Fund continued to comply with the asset
coverage ratios discussed under "Description of Preferred Shares--Rating Agency
Guidelines and Asset Coverage." See "Description of Preferred Shares--Rating
Agency Guidelines and Asset Coverage" for a description of the asset maintenance
tests the Fund must meet.
Restrictions on Dividends and Other Distributions. Restrictions imposed on
the declaration and payment of dividends or other distributions to the holders
of the Fund's common shares and Preferred Shares, both by the 1940 Act and by
requirements imposed by rating agencies, might impair the Fund's ability to
maintain its qualification as a regulated investment company for federal income
tax purposes. While the Fund may redeem Preferred Shares to enable the Fund to
distribute its income as required to maintain its qualification as a regulated
investment company under the Code, there can be no assurance that such
redemptions can be effected in time to meet the requirements of the Code. See
"U.S. Federal Income Tax Matters."
General Risks of Investing in the Fund
Limited Operating History Risk. The Fund is a recently organized closed-end
management investment company that commenced operations in April 2004.
Investment Risk. An investment in the Fund is subject to investment risk,
including the possible loss of the entire principal amount that you invest. Your
investment in the Fund represents an indirect investment in the securities owned
by the Fund. The value of these securities may increase or decrease, at times
rapidly and unexpectedly. Your investment in the Fund may at any point in the
future be worth less than your original investment even after taking into
account the reinvestment of dividends and distributions.
Concentration Risk. An investment in a fund that concentrates its
investments in a single sector or industry entails greater risk than an
investment in a fund that invests its assets in numerous sectors or industries.
A Fund may be vulnerable to any financial, economic, political or other
development in its concentration sector or industry that may weaken the sector
or industry. As a result, the Fund's shares may fluctuate more widely in value
than those of a fund investing in a number of different sectors or industries.
Non-Diversification Risk. The Fund will invest primarily in securities of
utilities (including telecommunications) companies. An investment in a fund that
is non-diversified entails greater risk than an investment in a diversified
fund. When a fund is non-diversified, it may invest a greater percentage of
assets in a single issuer than may be invested by a diversified fund. A higher
percentage of investments among fewer issuers may result in greater fluctuation
in the total market value of the Fund's portfolio as compared to a fund which
invests in numerous issuers.
Utility Securities Risk. Investments in utility sectors include the unique
risks associated with decreases in the demand for utility company products and
services, increased competition resulting from deregulation, and rising energy
costs, among others. Such developments also could cause utility companies such
as water, gas and electric companies, to reduce the dividends they pay on their
stock, potentially decreasing the dividends you receive from the Fund.
Telecommunications, similar to technology, is highly dependent on innovation and
expansion of existing technologies, such as internet communications and the
ability to access the internet through cellular phones, as well as intense
pricing competition and industry consolidation. Water, gas and electric
companies typically borrow heavily to support continuing operations. Increases
in interest rates could increase these companies' borrowing costs, which could
adversely impact their financial results and stock price, and ultimately the
value of and total return on your Fund shares.
Investment Style Risk. Securities with different characteristics tend to
shift in and out of favor depending upon market and economic conditions as well
as investor sentiment. The Fund may outperform or underperform other funds that
employ a different style of investing. The Fund may also employ a combination of
styles that impact its risk characteristics. Examples of different styles
include growth and value investing. Growth stocks may be more volatile than
other stocks because they are more sensitive to investor perceptions of the
issuing company's earnings growth potential. Growth-oriented funds will
typically underperform when value investing is popular. Value stocks are those
which are undervalued in comparison to their peers due to adverse business
developments or other factors. Value-oriented funds will typically underperform
when growth investing is popular.
Stock Market Risk. Your investment in the Fund will be affected by general
economic conditions such as prevailing economic growth, inflation and interest
rates. When economic growth slows, or interest or inflation rates increase,
equity securities tend to decline in value. Such events could also cause
companies to decrease the dividends they pay. If these events were to occur, the
dividend yield, total return earned on and the value of your investment would
likely decline. Even if general economic conditions do not change, the dividend
yield, total return earned on and the value of your investment could decline if
the particular industries, companies or sectors in which a Fund invests do not
perform well.
Market Capitalization Risk. The Fund may invest the portion of its assets
invested in utilities securities in securities of companies of all market
capitalizations. Stocks fall into three broad market capitalization
categories--large, medium and small. Investing primarily in one category carries
the risk that due to current market conditions that category may be out of favor
with investors. If valuations of large capitalization companies appear to be
greatly out of proportion to the valuations of small or medium capitalization
companies, investors may migrate to the stocks of small- and mid-sized companies
causing a fund that invests in these companies to increase in value more rapidly
than a fund that invests in larger, fully-valued companies. Investing in medium
and small capitalization companies may be subject to special risks associated
with narrower product lines, more limited financial resources, smaller
management groups or greater dependence on a few key employees, and a more
limited trading market for their stocks as compared to larger capitalization
companies. As a result, stocks of small and medium capitalization companies may
decline significantly in market downturns or their value may fluctuate more
sharply than other securities.
Preferred Stock Risk. The Fund may purchase preferred stock. Preferred
stock, unlike common stock, has a stated dividend rate payable from the
corporation's earnings. Preferred stock dividends may be cumulative or
non-cumulative, participating, or auction rate. If interest rates rise, the
fixed dividend on preferred stocks may be less attractive, causing the price of
preferred stocks to decline. Also, the rights of preferred stock on distribution
of a corporation's assets in the event of a liquidation are generally
subordinate to the rights associated with a corporation's debt securities. In
addition to the foregoing general risks associated with investments in preferred
stock, investments in certain types of preferred stock carry additional risks.
"Cumulative" dividend provisions require all or a portion of prior unpaid
dividends to be paid. Unlike cumulative preferred securities, dividends on
non-cumulative securities do not accrue. Therefore, if a dividend on a share of
non-cumulative preferred stock is not paid on the dividend payment date, that
dividend ordinarily will never be paid. Preferred stock may have mandatory
sinking fund provisions, as well as call/redemption provisions prior to
maturity, which can be a negative feature when interest rates decline. Owners of
auction rate preferred stock may not be able to sell their shares when an
auction fails.
Credit Risk. Credit risk refers to an issuer's ability to make payments of
principal and interest when they are due. Because the Fund will own securities
with low credit quality, it will be subject to a high level of credit risk. The
credit quality of such securities is considered speculative by rating agencies
with respect to the issuer's ability to pay interest or principal. The prices of
lower grade securities are more sensitive to negative corporate developments,
such as a decline in profits, or adverse economic conditions, such as a
recession, than are the prices of higher grade securities. Securities that have
longer maturities or that do not make regular interest payments also fluctuate
more in price in response to negative corporate or economic news. Therefore,
lower grade securities may experience high default rates, which could mean that
the Fund may lose some of its investments in such securities. If this occurs,
the Fund's net asset value and ability to make distributions to you would be
adversely affected. The effects of this default risk are significantly greater
for the holders of lower grade securities because these securities often are
unsecured and subordinated to the payment rights of other creditors of the
issuer.
Interest Rate and Other Risks. Fixed income securities, including high
yield securities, are subject to certain common risks, including:
* If interest rates go up, the value of debt securities in the Fund's
portfolio generally will decline. This is known as interest rate risk.
Although the Fund's investment objective includes limiting the Fund's
exposure to interest rate risk, there is no guarantee that the Fund will
meet its investment objective;
* During periods of declining interest rates, the issuer of a security may
exercise its option to prepay principal earlier than scheduled, forcing the
Fund to reinvest in lower yielding securities. This is known as call or
prepayment risk. Debt securities frequently have call features that allow
the issuer to repurchase the security prior to its stated maturity. An
issuer may redeem an obligation if the issuer can refinance the debt at a
lower cost due to declining interest rates or an improvement in the credit
standing of the issuer;
* During periods of rising interest rates, the average life of certain types
of securities may be extended because of slower than expected principal
payments. This may lock in a below market interest rate, increase the
security's duration (the estimated period until the security is paid in
full) and reduce the value of the security. This is known as extension
risk;
* The Advisor's judgment about the attractiveness, relative value or
potential appreciation of a particular sector, security or investment
strategy may prove to be incorrect. This is known as management risk; and
* The Fund will be subject to credit risk with respect to the counterparties
to the derivatives contracts purchased by the Fund. If a counterparty
becomes bankrupt or otherwise fails to perform its obligations under a
derivative contract due to financial difficulties, the Fund may experience
significant delays in obtaining any recovery under the derivative contract
in a bankruptcy or other reorganization proceeding. The Fund may obtain
only a limited recovery or may obtain no recovery in such circumstances.
This is known as counterparty risk.
The Fund's use of leverage will increase interest rate risk. See "Risk
Factors--Risks of Investment in Preferred Shares."
High Yield Debt Securities Risk. Investment in high yield securities
involves substantial risk of loss. Non-investment grade debt securities or
comparable unrated securities are commonly referred to as "junk bonds" and are
considered predominantly speculative with respect to the issuer's ability to pay
interest and principal and are susceptible to default or decline in market value
due to adverse economic and business developments. The market values for high
yield securities tend to be very volatile, and these securities are less liquid
than investment grade debt securities. For these reasons, your investment in the
Fund is subject to the following specific risks:
* Increased price sensitivity to changing interest rates and to a
deteriorating economic environment.
* Greater risk of loss due to default or declining credit quality.
* Adverse company specific events are more likely to render the issuer unable
to make interest and/or principal payments.
* If a negative perception of the high yield market develops, the price and
liquidity of high yield securities may be depressed. This negative
perception could last for a significant period of time.
Debt securities rated below investment grade are speculative with respect
to the capacity to repay principal in accordance with the terms of such
securities. See the Statement of Additional Information for a description of
Moody's and S&P's ratings.
Adverse changes in economic conditions are more likely to cause a high
yield issuer to default on principal and interest payments than an investment
grade issuer. The principal amount of high yield securities outstanding has
proliferated in the past decade as an increasing number of issuers have used
high yield securities for corporate financing. An economic downturn could
severely affect the ability of highly leveraged issuers to service their debt
obligations or to repay their obligations upon maturity. If the national economy
enters into a deeper recessionary phase during 2004 or interest rates rise
sharply, the number of defaults by high yield issuers is likely to increase.
Similarly, down-turns in profitability in specific industries could adversely
affect the ability of high yield issuers in those industries to meet their
obligations. The market values of lower rated debt securities tend to reflect
individual developments of the issuer to a greater extent than do higher rated
securities, which react primarily to fluctuations in the general level of
interest rates. Factors having an adverse impact on the market value of lower
quality securities may have an adverse effect on the Fund's net asset value and
the market value of its common shares. In addition, the Fund may incur
additional expenses to the extent it is required to seek recovery upon a default
in payment of principal or interest on its portfolio holdings. In certain
circumstances, the Fund may be required to foreclose on an issuer's assets and
take possession of its property or operations. In such circumstances, the Fund
would incur additional costs in disposing of such assets and potential
liabilities from operating any business acquired.
The secondary market for high yield securities may not be as liquid as the
secondary market for more highly rated securities, a factor which may have an
adverse effect on the Fund's ability to dispose of a particular security when
necessary to meet its liquidity needs. There are fewer dealers in the market for
high yield securities than for investment grade obligations. The prices quoted
by different dealers may vary significantly and the spread between the bid and
ask price is generally much larger than for higher rated instruments. Under
adverse market or economic conditions, the secondary market for high yield
securities could contract further, independent of any specific adverse changes
in the condition of a particular issuer, and these instruments may become
illiquid.
As a result, the Fund could find it more difficult to sell these securities
or may be able to sell the securities only at prices lower than if such
securities were widely traded. Prices realized upon the sale of such lower rated
or unrated securities, under these circumstances, may be less than the prices
used in calculating the Fund's net asset value.
Since investors generally perceive that there are greater risks associated
with lower rated debt securities of the type in which the Fund may invest a
portion of its assets, the yields and prices of such securities may tend to
fluctuate more than those for higher rated securities. In the lower rated
segments of the debt securities market, changes in perceptions of issuers'
creditworthiness tend to occur more frequently and in a more pronounced manner
than do changes in higher rated segments of the debt securities market,
resulting in greater yield and price volatility.
If the Fund owns high yield securities that are rated CCC or below or if
unrated, the equivalent thereof, the Fund will incur significant risk in
addition to the risks associated with investments in high yield securities and
corporate loans. However, the Fund would limit these types of securities to 10%
of the portion of the Fund that invests in high yield securities. Distressed
securities frequently do not produce income while they are outstanding. The Fund
may purchase distressed securities that are in default or the issuers of which
are in bankruptcy. The Fund may be required to bear certain extraordinary
expenses in order to protect and recover its investment in these securities.
Issuer Risk. The value of corporate income-producing securities may decline
for a number of reasons which directly relate to the issuer, such as management
performance, financial leverage and reduced demand for the issuer's goods and
services.
Reinvestment Risk. Reinvestment risk is the risk that income from the
Fund's bond portfolio will decline if and when the Fund invests the proceeds
from matured, traded or called bonds at market interest rates that are below the
portfolio's current earnings rate.
Foreign (Non-U.S.) Investment Risk. Investing in foreign issuers, including
emerging market issuers, may involve unique risks compared to investing in the
securities of U.S. issuers. Some of these risks do not apply to issuers located
in larger, more developed countries. These risks are more pronounced if the Fund
invests significantly in emerging market countries or in one country. For
example, political turmoil and economic instability in the countries in which a
Fund invests could adversely affect the dividend yield, total return earned on
and the value of your investment. Less information about non-U.S. issuers or
markets may be available due to less rigorous disclosure and accounting
standards or regulatory practices. This may make it harder to get accurate
information about a security or company, and increase the likelihood that an
investment will not perform as well as expected. Many non-U.S. markets are
smaller, less liquid and more volatile than U.S. markets. In a changing market,
the Advisor may not be able to sell the Fund's portfolio securities in amounts
and at prices the Advisor considers reasonable. Economic, political and social
developments may significantly disrupt the financial markets or interfere with
the Fund's ability to enforce its rights against foreign government issuers. The
value of securities denominated in foreign currencies may fluctuate based on
changes in the value of those currencies relative to the U.S. dollar, and a
decline in applicable foreign exchange rates could reduce the value of such
securities held by the Fund. Foreign settlement procedures also may involve
additional risks.
The ability of a foreign sovereign issuer to make timely and ultimate
payments on its debt obligations will also be strongly influenced by the
sovereign issuer's balance of payments, including export performance, its access
to international credits and investments, fluctuations of interest rates and the
extent of its foreign reserves. A country whose exports are concentrated in a
few commodities or whose economy depends on certain strategic imports could be
vulnerable to fluctuations in international prices of these commodities or
imports. To the extent that a country receives payment for its exports in
currencies other than dollars, its ability to make debt payments denominated in
dollars could be adversely affected. If a sovereign issuer cannot generate
sufficient earnings from foreign trade to service its external debt, it may need
to depend on continuing loans and aid from foreign governments, commercial banks
and multinational organizations.
Additional factors that may influence the ability or willingness to service
debt include, but are not limited to, a country's cash flow situation, the
availability of sufficient foreign exchange on the date a payment is due, the
relative size of its debt service burden to the economy as a whole, and its
government's policy towards the International Monetary Fund ("IMF"), the World
Bank and other international agencies to which a government debtor may be
subject. The cost of servicing external debt will also generally be adversely
affected by rising international interest rates because many external debt
obligations bear interest at rates which are adjusted based upon international
interest rates.
There may be less publicly available information about a foreign company
than about a U.S. company, and foreign countries may not be subject to
accounting, auditing, and financial reporting standards and requirements
comparable to or as uniform as those of U.S. companies. In addition, if a
deterioration occurs in the country's balance of payments, if could impose
temporary restrictions on foreign capital remittances. Investing in local
markets in foreign countries may require the Fund to adopt special procedures,
seek local governmental approvals or take other actions, each of which may
involve additional costs to the Fund. Moreover, brokerage commissions and other
transaction costs on foreign securities exchanges are generally higher than in
the United States.
Currency Devaluations and Fluctuations Risk. The Fund may invest in
non-dollar-denominated investments. The Fund may be limited in its ability to
hedge the value of its non-dollar-denominated investments against currency
fluctuations. As a result, a decline in the value of currencies in which the
Fund's investments are denominated against the dollar will result in a
corresponding decline in the dollar value of the Fund's assets. These declines
will in turn affect the Fund's income and net asset value. The Fund will compute
its income on the date of its receipt by the Fund at the exchange rate in effect
with respect to the relevant currency on that date. If the value of the currency
declines relative to the dollar between the date income is accrued and the date
the Fund makes a distribution, the amount available for distribution to the
Fund's shareholders would be reduced. If the exchange rate against the dollar of
a currency in which a portfolio security of the Fund is denominated declines
between the time the Fund accrues expenses in dollars and the time expenses are
paid, the amount of the currency required to be converted into dollars in order
to pay expenses in dollars will be greater than the equivalent amount in the
currency of the expenses at the time they are incurred. A decline in the value
of non-U.S. currencies relative to the dollar may also result in foreign
currency losses that will reduce distributable net investment income.
Foreign currency exchange rates may fluctuate significantly over short
periods of time. A forward foreign currency exchange contract reduces the Fund's
exposure to changes in the value of the currency it will deliver and increases
its exposure to changes in the value of the currency it will exchange into.
Contracts to sell foreign currency will limit any potential gain which might be
realized by the Fund if the value of the hedged currency increases. In the case
of forward contracts entered into for the purpose of increasing return, the Fund
may sustain losses which will reduce its gross income. Forward foreign currency
exchange contracts also involve the risk that the party with which the Fund
enters the contract may fail to perform its obligations to the Fund. The
purchase and sale of foreign currency futures contracts and the purchase of call
and put options on foreign currency futures contracts and on foreign currencies
involve certain risks associated with derivatives.
Convertible Securities Risk. The Fund may invest up to 35% of its total
assets in convertible securities. Convertible fixed income securities generally
offer lower interest or dividend yields than non-convertible securities of
similar quality. As with all fixed income securities, the market values of
convertible securities tend to decline as interest rates increase and,
conversely, to increase as interest rates decline. However, when the market
price of the common stock underlying a convertible security exceeds 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 convertible security tends to trade increasingly on a yield basis
and thus may not decline in price to the same extent as the underlying common
stock.
Corporate Loans Risk. The Fund may acquire interests in loans made by banks
or other financial institutions to corporate issuers or participation interests
in such loans (up to 10% of the Fund's total assets). By purchasing a
participation interest in a loan, the Fund acquires some or all of the interest
of a bank or other lending institution in a loan to a corporate or government
borrower. The participations typically will result in the Fund having a
contractual relationship only with the lender, not the borrower. The Fund will
have the right to receive payments of principal, interest and any fees to which
it is entitled only from the lender selling the participation and only upon
receipt by the lender of the payments from the borrower.
Corporate loan obligations are frequently secured by security interests in
the assets of the borrower and the holders of corporate loans are frequently the
beneficiaries of debt service subordination provisions imposed on the borrower's
bondholders. If the Fund only acquires a participation in the loan made by a
third party, the Fund may not be able to control the exercise of any remedies
that the lender would have under the corporate loan. Such third party
participations are designed to give corporate loan investors preferential
treatment over high yield investors in the event of a deterioration in the
credit quality of the issuer. Even when these arrangements exist, however, there
can be no assurance that the principal and interest owed on the corporate loan
will be repaid in full. The secondary dealer market for certain corporate loans
may not be as well developed as the secondary dealer market for bonds and,
therefore, presents increased market risk relating to liquidity and pricing
concerns.
Foreign Currency Transactions Risk. In order to hedge against foreign
exchange risk, to increase exposure to a foreign currency, or to shift exposure
to foreign currency fluctuations from one country to another, the Fund may
engage in foreign currency transactions, including the entering into of
contracts to purchase or sell foreign currencies at a future date and the
purchase and sale of foreign currency futures contracts. Although the Fund
primarily uses such contracts to hedge the U.S. dollar value of a security it
already owns or anticipates purchasing, the Fund could lose money if it fails to
predict accurately the future exchange rate. Successful use of foreign currency
transactions depends on the Advisor's ability to predict correctly movements in
foreign exchange rates and future exchange rate relationships. For example, the
Fund may engage in hedging and cross hedging with respect to foreign currencies
to protect itself against a possible decline in the value of another foreign
currency in which certain of the Fund's investments are denominated. If the Fund
is incorrect in its judgment of future exchange rate relationships, the Fund
could be in a less advantageous position than if such hedge had not been
established. There is no assurance that any foreign currency transaction
undertaken by the Fund will be successful.
Derivatives Risk. Even a small investment in derivatives can have a
significant impact on the Fund's exposure to interest rates. If changes in a
derivative's value do not correspond to changes in the value of the Fund's other
investments, the Fund may not fully benefit from or could lose money on the
derivative position. In addition, some derivatives involve risk of loss if the
person who issued the derivative defaults on its obligation. Certain derivatives
may be less liquid and more difficult to value.
Market Disruption and Geopolitical Risk. The war with Iraq, its aftermath
and the continuing occupation of Iraq are likely to have a substantial impact on
the U.S. and the world economies and securities markets. The nature, scope and
duration of the occupation cannot be predicted with any certainty. Terrorist
attacks on the World Trade Center and Pentagon on September 11, 2001 closed some
of the U.S. securities markets for a four-day period and the occurrence of
similar events in the future cannot be ruled out. The war and occupation,
terrorism and related geopolitical risks have led, and may in the future lead,
to increased short-term market volatility and may have adverse long-term effects
on the U.S. and world economies and markets generally. Those events could also
have an acute effect on individual issuers or related groups of issuers,
securities markets, interest rates, auctions, secondary trading, ratings, credit
risk, inflation and other factors relating to the Preferred Shares.
Inflation Risk. Inflation risk is the risk that the value of assets or
income from the Fund's investments will be worth less in the future as inflation
decreases the value of money. As inflation increases, the real, or
inflation-adjusted, value of the common shares and distributions can decline and
the dividend payments on the Fund's Preferred Shares or interest payments on
Fund borrowings, if any, may increase.
Tender Offers (Evergreen Enhanced Liquidity Plan) Risk. Under certain
circumstances, the Fund intends to make tender offers for up to 5% of the Fund's
outstanding common shares at net asset value on a quarterly basis, subject to
certain conditions, and for a total of eight consecutive calendar quarters. The
Fund will make its first tender offer within the first six to eight months of
the Fund's operations if certain conditions are met. The Fund's potential
quarterly tender offers for common shares may prevent the Fund from taking
advantage of attractive investment opportunities. Moreover, if the Fund does not
generate sufficient cash flow from operations, it may be forced to sell
investments at disadvantageous times, and in amounts that the Advisor would not
otherwise contemplate, or to borrow money, in order to make such tender offers.
If the cost of borrowing to fund a tender offer of common shares exceeds the
income on retained investments, it could impair the Fund's ability to pay
dividends on the Preferred Shares. The Fund's potential quarterly tender offers
for common shares will increase ratings and asset coverage risk. See "Risk
Factors--Risks of Investment in Preferred Shares."
Liquidity Risk. The Fund does not intend to purchase illiquid securities,
which are securities that cannot be disposed of within seven days in the
ordinary course of business at approximately the value at which the Fund has
valued the securities. However, the Fund is not required to sell or dispose of
any debt security that becomes illiquid subsequent to its purchase. Illiquid
securities may be subject to wide fluctuations in market value. The Fund may be
subject to significant delays in disposing of illiquid securities. Accordingly,
the Fund may be forced to sell these securities at less than fair market value
or may not be able to sell them when the Advisor believes that it is desirable
to do so. Illiquid securities also may entail registration expenses and other
transaction costs that are higher than those for liquid securities.
Anti-takeover Provisions Risk. The Fund's Agreement and Declaration of
Trust and By-laws include provisions that could limit the ability of other
entities or persons to acquire control of the Fund or to change the composition
of its Board of Trustees. Such provisions could limit the ability of
shareholders to sell their shares at a premium over prevailing market prices by
discouraging a third party from seeking to obtain control of the Fund. These
provisions include staggered terms of office for the Trustees, advance notice
requirements for shareholder proposals, and super-majority voting requirements
for certain transactions with affiliates, open-ending the Fund or a merger,
liquidation, asset sales and similar transactions. See "Anti-takeover Provisions
of the Agreement and Declaration of Trust and By-Laws."
Other Regulatory Matters Risk. Governmental and self-regulatory authorities
have instituted numerous ongoing investigations of various practices in the
securities and mutual fund industries, including those relating to market-timing
and late trading. The investigations cover advisory companies to mutual funds
(including the Advisor), broker-dealers, hedge funds and others. Wachovia
Corporation (the Advisor's parent) and/or certain of its subsidiaries (including
the Advisor) have received subpoenas and/or other requests for documents and
testimony relating to the investigations, are attempting to comply with those
requests, and are cooperating with the investigations. Wachovia Corporation and
its subsidiaries, including the Advisor, are continuing their own internal
review of policies, practices, procedures and personnel, and are taking remedial
actions where appropriate. The Board of Trustees of the Fund is actively
monitoring the Advisor's internal review of its policies, practices, procedures
and personnel as well as any remedial actions taken by the Advisor as a result
of such review. Wachovia Corporation also is cooperating with governmental and
self-regulatory authorities in matters relating to the brokerage operations of
Prudential that were included in Wachovia Corporation's retail brokerage
combination with Prudential. Under the terms of the transaction, Wachovia
Corporation is indemnified by Prudential for liabilities relating to the conduct
of Prudential's businesses prior to July 1, 2003, the closing date of the joint
venture transaction between Wachovia Corporation and Prudential.
Based on information currently available, advice of counsel, available
insurance coverage and established reserves, Wachovia Corporation believes that
the eventual outcome of the actions against Wachovia Corporation and/or its
subsidiaries, including the matters described above, will not, individually or
in the aggregate, have a material adverse effect on Wachovia Corporation's
consolidated financial position or results of operations or on its subsidiaries,
including the Advisor. However, in the event of unexpected future developments,
it is possible that the ultimate resolution of those matters, if unfavorable,
may be material to Wachovia Corporation's results of operations for any
particular period, including for that of the Advisor.
MANAGEMENT OF THE FUND
Trustees and Officers
The Fund's Board of Trustees provides broad supervision over the affairs of
the Fund. The officers of the Fund are responsible for the Fund's operations.
The Trustees and officers of the Fund, together with their principal occupations
during the past five years, are listed in the Statement of Additional
Information. Each of the Trustees serves as a Trustee of each of the 94 U.S.
registered investment portfolios for which the Advisor serves as investment
adviser.
Investment Adviser
Evergreen Investment Management Company, LLC (previously defined as the
"Advisor") will act as the Fund's investment adviser. The Advisor has been
managing mutual funds and private accounts since 1932 and, with its affiliates,
managed over $245 billion in assets as of May 31, 2004. The Advisor is located
at 200 Berkeley Street, Boston, Massachusetts 02116-5034. The Advisor is a
wholly owned subsidiary of Wachovia Bank, N.A. Wachovia Bank, N.A., located at
201 South College Street, Charlotte, North Carolina 28288-0630, is a subsidiary
of Wachovia Corporation, formerly First Union Corporation.
As the Fund's investment adviser, the Advisor provides the Fund with
investment research, advice and supervision and furnishes the Fund with an
investment program consistent with the Fund's investment objective and policies,
subject to the supervision of the Fund's Trustees. The Advisor determines what
portfolio securities will be purchased or sold, arranges for the placing of
orders for the purchase or sale of portfolio securities, selects brokers or
dealers to place those orders, maintains books and records with respect to the
Fund's securities transactions, and reports to the Trustees on the Fund's
investments and performance.
Compensation and Expenses
Under the management contract, the Fund will pay to the Advisor monthly, as
compensation for the services rendered and expenses paid by it, an annual fee
equal to 0.60% of the Fund's average daily Total Assets. Because the fee paid to
the Advisor is determined on the basis of the Fund's Total Assets, the Advisor's
interest in determining whether to leverage the Fund may differ from the
interests of the Fund.
The Fund's average daily Total Assets are determined for the purpose of
calculating the management fee by taking the average of all the daily
determinations of Total Assets during a given calendar month. The fees are
payable for each calendar month as soon as practicable after the end of that
month.
Under the terms of its management contract with the Fund, the Advisor pays
all the operating expenses, including executive salaries and the rental of
office space, relating to its services for the Fund, with the exception of the
following, which are to be paid by the Fund: (a) charges and expenses for
bookkeeping; (b) the charges and expenses of auditors; (c) the charges and
expenses of any custodian, transfer agent, and registrar appointed by the Fund;
(d) issue and transfer taxes chargeable to the Fund in connection with
securities transactions to which the Fund is a party; (e) trust fees payable by
the Fund to federal, state or other governmental agencies; (f) fees and expenses
involved in registering and maintaining registrations of the Fund and/or its
shares with federal regulatory agencies, state or blue sky securities agencies
and foreign jurisdictions, including the preparation of prospectuses and
statements of additional information for filing with such regulatory
authorities; (g) all expenses of shareholders' and Trustees' meetings and of
preparing, printing and distributing prospectuses, notices, proxy statements and
all reports to shareholders and to governmental agencies; (h) charges and
expenses of legal counsel to the Fund and the Trustees; (i) compensation of
those Trustees of the Fund who are not affiliated with the Advisor or the Fund
(as defined under the 1940 Act) other than as Trustees; (j) the cost of
preparing and printing share certificates; and (k) the fees and other expenses
of listing the Fund's shares on any national stock exchange. In addition, the
Fund will pay all brokers' and underwriting commissions chargeable to the Fund
in connection with securities transactions to which the Fund is a party.
The Fund has also entered into an administration agreement with Evergreen
Investment Services, Inc. ("EIS"), pursuant to which EIS provides certain
administrative and accounting services. The Fund will pay EIS a monthly fee
computed at an annual rate of 0.05% of the Fund's average daily Total Assets.
Portfolio Manager
Day-to-day management of the portion of the Fund's portfolio that is
described as the utility and telecommunications portion under "Investment
Objective and Principal Investment Strategies - Principal Investment Strategies
- Utility Securities" above is the responsibility of a team of portfolio
management professionals from the Advisor's Value Equity team. Together the team
managed more than $6.4 billion in assets under management as of May 31, 2004.
The team is led by Timothy O'Brien, who has more than 19 years of investment
experience. Mr. O'Brien has been with the Advisor since April 2002 and currently
serves as a managing director and senior portfolio manager.
Day-to-day management of the portion of the Fund's portfolio that is
described as the U.S. high yield debt securities portion under "Investment
Objective and Principal Investment Strategies - Principal Investment Strategies
- U.S. High Yield Debt Securities" is the responsibility of a team of portfolio
management professionals from the Advisor's Select High Yield Bond team, which
includes specialized industry analysts responsible for various sectors. Among
the portfolios the team manages is the open-end Evergreen Select High Yield Bond
Fund. The Select High Yield team is led by Richard Cryan, who has more than 25
years of fixed income investment experience. Mr. Cryan has been a senior
portfolio manager with the Advisor since 1992. Mr. Cryan is part of the team
that manages the closed-end Evergreen Income Advantage Fund and a portion of the
closed-end Evergreen Managed Income Fund. Together the team managed more than
$4.7 billion in high yield securities as of May 31, 2004.
DESCRIPTION OF PREFERRED SHARES
The following is a brief description of the material terms of the Preferred
Shares. For the complete terms of the Preferred Shares, please refer to the
detailed description of the Preferred Shares in the Statement (Appendix C to the
Statement of Additional Information). This description does not purport to be
complete and is subject to and qualified in its entirety by reference to the
Fund's Statement.
General
The Fund's Agreement and Declaration of Trust authorizes the issuance of an
unlimited number of preferred shares in one or more classes or series with
rights as determined by the Board of Trustees without the approval of common
shareholders. The Statement currently authorizes the issuance of an unlimited
number of Series M28 Preferred Shares. All Preferred Shares will have a
liquidation preference of $25,000 per share, plus an amount equal to accumulated
but unpaid dividends (whether or not earned or declared).
The Preferred Shares will rank on parity with each other and any other
series of preferred shares of the Fund as to the payment of dividends and the
distribution of assets upon liquidation. Each Preferred Share carries one vote
on matters on which Preferred Shares can be voted. The Preferred Shares, when
issued, will be fully paid and non-assessable and have no preemptive, conversion
or cumulative voting rights.
Dividends and Rate Periods
The following is a general description of dividends and rate periods for
the Preferred Shares.
Rate Periods. The initial rate period for the Preferred Shares is 25 days.
Any subsequent rate periods for the Preferred Shares will generally be 28
days. The Fund, subject to certain conditions, may change the length of
subsequent rate periods by designating them as special rate periods. See
"Designation of Special Rate Periods" below.
Dividend Payment Dates. Dividends on the Preferred Shares will be payable,
when, as and if declared by the Board of Trustees, out of legally available
funds in accordance with the Agreement and Declaration of Trust, the Statement
and applicable law. The Initial Dividend Payment Date (the date on which
dividends will be paid for the initial rate period, which starts on the day the
Preferred Shares are issued through July 19, 2004) for the Preferred Shares is
July 20, 2004. Subsequently, the Dividend Payment Date (the date on which
dividends are payable) for the Preferred Shares is every 28 days.
If dividends are payable on a day that is not a business day, then
dividends will generally be payable on the next day if such day is a business
day or as otherwise specified in the Statement. In addition, the Fund may
specify a different Dividend Payment Date for any special rate period of more
than 28 days, provided that such date shall be set forth in the notice of
special rate period communicated to the auction agent and each Broker-Dealer
relating to such special rate period.
If a Dividend Payment Date is not a business day because the New York Stock
Exchange is closed for business for more than three consecutive business days
due to an act of God, natural disaster, act of war, civil or military
disturbance, act of terrorism, sabotage, riots or a loss or malfunction of
utilities or communications services, or the dividend payable on such date can
not be paid for any such reason, then:
* the Dividend Payment Date for the affected dividend period will be the next
business day on which the Fund and its paying agent, if any, can pay the
dividend using their best reasonable efforts;
* the affected dividend period will end on the day it otherwise would have
ended; and
* the next dividend period will begin and end on the dates on which it
otherwise would have begun and ended.
Dividends will be paid through the Securities Depository (DTC or any other
securities depository selected by the Fund as securities depository that agrees
to follow the procedures required to be followed by such securities depository
in connection with the Preferred Shares) on each Dividend Payment Date. The
Securities Depository, in accordance with its current procedures, is expected to
distribute dividends received from the Fund in next-day funds on each Dividend
Payment Date to Agent Members (members or participants in the Securities
Depository that will act on behalf of a bidder). These Agent Members are in turn
expected to distribute such dividends to the persons for whom they are acting as
agents. However, each of the current Broker-Dealers has indicated to the Fund
that dividend payments will be available in same-day funds on each Dividend
Payment Date to customers that use such Broker-Dealer or that Broker-Dealer's
designee as Agent Member.
Calculation of Dividend Payment. The Fund computes the dividends per share
payable on the Preferred Shares by multiplying the applicable rate for such
shares in effect by a fraction. The numerator of this fraction will normally be
the number of days in the rate period and the denominator will normally be 360.
This rate is then multiplied by $25,000 to arrive at dividends per share.
Dividends on the Preferred Shares will accumulate from the date of their
original issue, which is June 25, 2004. The initial dividend rate for the
Preferred Shares is 1.45%.
For each dividend payment period after the initial dividend period, the
dividend rate will be the dividend rate determined at auction, except that the
dividend rate that results from an auction will not be greater than the maximum
applicable rate described below.
The maximum applicable rate for any regular rate period will be (as set
forth in the table below) the greater of (A) the applicable percentage of the
Reference Rate or (B) the applicable spread plus the Reference Rate. The
"Reference Rate" is the applicable LIBOR Rate for a dividend period or a special
dividend period of fewer than 365 days), or the applicable Treasury Index Rate
(for a special dividend period of 365 days or more.) In the case of a special
rate period, the maximum applicable rate will be specified by the Fund in the
notice of the special rate period for such dividend payment period. The
applicable percentage and applicable spread will be determined based on the
lower of the credit rating or ratings assigned to the Preferred Shares by Fitch
and S&P. If Fitch and S&P or both do not make such rating available, the rate
will be determined by reference to equivalent ratings issued by a substitute
rating agency. The LIBOR Rate is the applicable London Inter-Bank Offered Rate
for deposits in U.S. dollars for the period most closely approximating the
applicable dividend period for the Preferred Shares. The "Treasury Index Rate"
is the average yield to maturity for certain U.S. Treasury fixed interest rate
securities having substantially the same length to maturity as the applicable
dividend period for the Preferred Shares. For a more detailed description,
please see the Statement.
Applicable
Percentage
of Reference
Rate Applicable
Credit Ratings Spread
S&P Fitch
AAA AAA 125% 125bps
AA- to AA+ AA- to AA+ 150% 150bps
A- to A+ A- to A+ 200% 200bps
BBB- to BBB+ BBB- to BBB+ 250% 250bps
BB+ and below BB+ and 300% 300bps
below
Assuming the Fund maintains an AAA rating on the Preferred Shares, the
practical effect of the different methods used to calculate the Maximum
Applicable Rate is shown in the table below:
Maximum Maximum Method Used to
Applicable Rate Applicable Rate Using Determine the
Using the the Applicable Spread Maximum Applicable
Applicable Rate
Reference Rate Percentage
1% 1.25% 2.25% Spread
2% 2.50% 3.25% Spread
3% 3.75% 4.25% Spread
4% 5.00% 5.25% Spread
5% 6.25% 6.25% Either
6% 7.50% 7.25% Percentage
Prior to each dividend payment date, the Fund is required to deposit with
the auction agent sufficient funds for the payment of declared dividends. The
failure to make such deposit will not result in the cancellation of any auction
but will result in a late charge being paid by the Fund to the auction agent for
the benefit of holders of the Preferred Shares. The Fund does not intend to
establish any reserves for the payment of dividends.
Restrictions on Dividends and Other Distributions. While any of the
Preferred Shares are outstanding, the Fund, except as provided below, may not
declare, pay or set apart for payment, any dividend or other distribution in
respect of its common shares. In addition, the Fund may not call for redemption
or redeem any of its common shares unless the following conditions are met:
* immediately after such transaction, the discounted value of the Fund's
portfolio would be equal to or greater than the Preferred Shares Basic
Maintenance Amount and the value of the Fund's portfolio would be equal to
or greater than the 1940 Act Preferred Shares Asset Coverage (see "Rating
Agency Guidelines and Asset Coverage" below);
* full cumulative dividends on the Preferred Shares due on or prior to the
date of the transaction have been declared and paid or shall have been
declared and sufficient funds for the payment thereof deposited with the
auction agent; and
* the Fund has redeemed the full number of Preferred Shares required to be
redeemed by any provision for mandatory redemption contained in the
Statement.
The Fund generally will not declare, pay or set apart for payment any
dividend on any class or series of shares of the Fund ranking, as to the payment
of dividends, on a parity with Preferred Shares unless the Fund has declared and
paid or contemporaneously declares and pays full cumulative dividends on the
Preferred Shares through its most recent dividend payment date. However, when
the Fund has not paid dividends in full upon the Preferred Shares through the
most recent dividend payment date or upon any other class or series of shares of
the Fund ranking, as to the payment of dividends, on a parity with Preferred
Shares through their most recent respective dividend payment dates, the amount
of dividends declared per share on Preferred Shares and such other class or
series of shares will in all cases bear to each other the same ratio that
accumulated dividends per share on the Preferred Shares and such other class or
series of shares bear to each other.
Designation of Special Rate Periods. The Fund may, in certain situations,
declare a special rate period. Prior to declaring a special rate period, the
Fund will give notice (request for special dividend period) to the auction agent
and to each Broker-Dealer. The notice will request that the next succeeding rate
period for the Preferred Shares be a number of days specified in such notice.
The requested special rate period will not be effective unless sufficient
clearing bids for shares of such series were made in the auction immediately
preceding such special rate period. In addition, full cumulative dividends, any
amounts due with respect to mandatory redemptions and any additional dividends
payable prior to such date must be paid in full or deposited with the auction
agent. The Fund must also have received written confirmation from S&P and Fitch
or any substitute rating agency that the proposed special rate period will not
adversely affect such rating agency's then-current rating on the Preferred
Shares, and the lead Broker-Dealer designated by the Fund, initially Citigroup
Global Markets Inc., must not have objected to declaration of a special rate
period. The Fund also must have portfolio securities with a discounted value at
least equal to the Preferred Share Maintenance Amount. A notice for special rate
period also will specify whether the Preferred Shares will be subject to
optional redemption during such special rate period and, if so, the redemption
premium, if any, required to be paid by the Fund in connection with such
optional redemption.
Redemption
Mandatory Redemption. The Fund is required to maintain (a) a discounted
value of eligible portfolio securities greater than or equal to the Preferred
Shares Basic Maintenance Amount and (b) asset coverage of at least 200% with
respect to senior securities which are equity shares, including the Preferred
Shares (1940 Act Preferred Shares Asset Coverage). Eligible portfolio securities
for purposes of the Preferred Shares Basic Maintenance Amount will be determined
from time to time by the rating agencies then rating the Preferred Shares. If
the Fund fails to maintain such asset coverage amounts and does not timely cure
such failure in accordance with the requirements of the rating agency that rates
the Preferred Shares, the Fund must redeem all or a portion of the Preferred
Shares. This mandatory redemption will take place on a date that the Board of
Trustees specifies out of legally available funds, in accordance with the
Agreement and Declaration of Trust, the Statement and applicable law, at the
redemption price of $25,000 per share plus accumulated but unpaid dividends
(whether or not earned or declared) to the date fixed for redemption. The number
of Preferred Shares that must be redeemed in order to cure such failure will be
allocated pro rata among the outstanding Preferred Shares. The mandatory
redemption or retirement will be limited to the number of Preferred Shares
necessary, after giving effect to such redemption, in order that the discounted
value of the Fund's portfolio equals or exceeds the Preferred Shares Basic
Maintenance Amount, as applicable, and the value of the Fund's portfolio equals
or exceeds the 1940 Act Preferred Shares Asset Coverage. In determining the
number of Preferred Shares required to be redeemed in accordance with the
foregoing, the Fund will allocate the number of shares required to be redeemed
to satisfy the Preferred Shares Basic Maintenance Amount or the 1940 Act
Preferred Shares Asset Coverage, as the case may be, pro rata among the
Preferred Shares and any other preferred shares of the Fund subject to
redemption or retirement. If fewer than all outstanding shares of any series
are, as a result, to be redeemed, the Fund may redeem such shares by lot or
other method that it deems fair and equitable. The mandatory redemption will be
limited to the number of Preferred Shares and any other preferred shares
necessary to restore the required discounted value or the 1940 Act Preferred
Shares Asset Coverage, as the case may be.
Optional Redemption. To the extent permitted under the 1940 Act and
Delaware law, the Fund at its option may, without the consent of the holders of
Preferred Shares, redeem Preferred Shares having a dividend period of one year
or less, in whole or in part, on the business day after the last day of such
dividend period upon not less than 15 calendar days' and not more than 40
calendar days' prior notice. The optional redemption price per share will be
$25,000 per share, plus an amount equal to accumulated but unpaid dividends
thereon (whether or not earned or declared) to the date fixed for redemption.
Preferred Shares having a dividend period of more than one year are redeemable
at the option of the Fund, in whole or in part, prior to the end of the relevant
dividend period, subject to any specific redemption provisions, which may
include the payment of redemption premiums to the extent required under any
applicable specific redemption provisions. The Fund will not make any optional
redemption unless, after giving effect thereto, (i) the Fund has available
certain deposit securities with maturities or tender dates not later than the
day preceding the applicable redemption date and having a value not less than
the amount (including any applicable premium) due to holders of the Preferred
Shares by reason of the redemption of the Preferred Shares on such date fixed
for the redemption and (ii) the Fund has eligible assets with an aggregate
discounted value equal to or greater than the Preferred Shares Basic Maintenance
Amount. Notwithstanding the foregoing, Preferred Shares may not be redeemed at
the option of the Fund unless all dividends in arrears on outstanding preferred
shares, including all outstanding Preferred Shares, have been or are being
contemporaneously paid or set aside for payment. This would not prevent the
lawful purchase or exchange offer for Preferred Shares made on the same terms to
holders of all outstanding preferred shares.
Liquidation
If the Fund is liquidated, the holders of any outstanding Preferred Shares
will receive the liquidation preference on such Preferred Shares, plus all
accumulated but unpaid dividends, before any payment is made to the holders of
common shares. The holders of Preferred Shares will be entitled to receive these
amounts from the assets of the Fund available for distribution to its
shareholders. In addition, the rights of holders of Preferred Shares to receive
these amounts are subject to the rights of holders of any series or class of
shares, including other series of preferred shares, ranking on a parity with the
Preferred Shares with respect to the distribution of assets upon liquidation of
the Fund. After the payment to the holders of Preferred Shares of the full
preferential amounts as described, the holders of Preferred Shares will have no
right or claim to any of the remaining assets of the Fund.
For purpose of the foregoing paragraph, a voluntary or involuntary
liquidation of the Fund does not include:
- the sale of all or substantially all the property or business of the
Fund;
- the merger or consolidation of the Fund into or with any other
business trust or corporation; or
- the merger or consolidation of any other business trust or corporation
into or with the Fund.
In addition, none of the foregoing would result in the Fund being required
to redeem any Preferred Shares if after such transaction the Fund continued to
comply with the rating agency guidelines and asset coverage ratios.
Rating Agency Guidelines and Asset Coverage
The Fund is required under guidelines of S&P and Fitch to maintain assets
having in the aggregate a discounted value at least equal to the Preferred
Shares Basic Maintenance Amount. S&P and Fitch have each established separate
guidelines for calculating discounted value. To the extent any particular
portfolio holding does not satisfy a rating agency's guidelines, all or a
portion of the holding's value will not be included in the rating agency's
calculation of discounted value. The S&P and Fitch guidelines also impose
certain diversification requirements on the Fund's portfolio. The S&P and Fitch
guidelines do not impose any limitations on the percentage of the Fund's assets
that may be invested in holdings not eligible for inclusion in the calculation
of the discounted value of the Fund's portfolio. The amount of ineligible assets
included in the Fund's portfolio at any time may vary depending upon the rating,
diversification and other characteristics of the eligible assets included in the
portfolio. The Preferred Shares Basic Maintenance Amount is the sum of (a) the
aggregate liquidation preference of the Preferred Shares then outstanding,
together with the aggregate liquidation preference on any other series of
preferred shares, and (b) certain accrued and projected dividend and other
payment obligations of the Fund.
The Fund is also required under the 1940 Act to maintain the 1940 Act
Preferred Shares Asset Coverage. The Fund's 1940 Act Preferred Shares Asset
Coverage is tested as of the last business day of each month in which any senior
equity securities are outstanding. The minimum required 1940 Act Preferred
Shares Asset Coverage amount of 200% may be increased or decreased if the 1940
Act is amended. Based on the composition of the portfolio of the Fund and market
conditions as of May 31, 2004, the 1940 Act Preferred Shares Asset Coverage with
respect to all of the Fund's preferred shares, assuming the issuance on that
date of all Preferred Shares offered hereby and giving effect to the deduction
of related sales load and related offering costs estimated at $988,136 would
have been computed as follows:
Value of Fund assets less liabilities
not constituting senior securities
__________________________ = $296,185,370
Senior securities representing _____________= 370%
indebtedness plus liquidation value $80,000,000
of the preferred shares
In the event the Fund does not timely cure a failure to maintain (a) a
discounted value of its portfolio at least equal to the Preferred Shares Basic
Maintenance Amount or (b) the 1940 Act Preferred Shares Asset Coverage, in each
case in accordance with the requirements of the rating agency or agencies then
rating the Preferred Shares, the Fund will be required to redeem Preferred
Shares as described under "Redemption-Mandatory Redemption" above.
The Fund may, but is not required to, adopt any modifications to the
guidelines that may be established by S&P or Fitch. Failure to adopt any such
modifications, however, may result in a change in the ratings assigned to the
Preferred Shares or a withdrawal of ratings altogether. In addition, any rating
agency providing a rating for the Preferred Shares may, at any time, change or
withdraw any such rating. The Board of Trustees may, without shareholder
approval, amend, alter or repeal any or all of the definitions and related
provisions which have been adopted by the Fund pursuant to the rating agency
guidelines in the event such rating agency is no longer rating the Preferred
Shares or the Fund receives written confirmation from S&P or Fitch, as the case
may be, that any such amendment, alteration or repeal would not impair the
rating then assigned to the Preferred Shares.
As described by S&P and Fitch, a preferred stock rating is an assessment of
the capacity and willingness of an issuer to pay preferred stock obligations.
The rating on the Preferred Shares is not a recommendation to purchase, hold or
sell those shares, inasmuch as the rating does not comment as to market price or
suitability for a particular investor. The rating agency guidelines described
above also do not address the likelihood that an owner of Preferred Shares will
be able to sell such shares in an auction or otherwise. The rating is based on
current information furnished to S&P and Fitch by the Fund and the Advisor and
information obtained from other sources. The rating may be changed, suspended or
withdrawn as a result of changes in, or the unavailability of, such information.
The common shares have not been rated by a nationally recognized statistical
rating organization.
The rating agencies do not impose any restrictions on the Fund's investment
strategies. However, certain types of securities in which the Fund may otherwise
invest consistent with its investment strategies are not eligible for inclusion
in the weekly calculation of the discounted value of the Fund's portfolio
required by the rating agencies. Although the Fund reserves the right to invest
in such securities, they have not and it is anticipated they will not constitute
a significant portion of the Fund's portfolio.
The rating agency's guidelines will apply to the Preferred Shares only so
long as the rating agency is rating the shares. The Fund will pay certain fees
to S&P and Fitch for rating the Preferred Shares.
Voting Rights
Except as otherwise described in this prospectus or as otherwise required
by law, holders of Preferred Shares will have equal voting rights with holders
of common shares and any other preferred shares (one vote per share) and will
vote together with holders of common shares and any preferred shares as a single
class.
Holders of outstanding preferred shares, including Preferred Shares, voting
as a separate class, are entitled to elect two of the Fund's Trustees. The
remaining Trustees are elected by holders of common shares and preferred shares,
including Preferred Shares, voting together as a single class. In addition, if
at any time dividends (whether or not earned or declared) on outstanding
preferred shares, including the Preferred Shares, are due and unpaid in an
amount equal to two full years of dividends, and sufficient cash or specified
securities have not been deposited for the payment of such dividends, then, the
sole remedy of holders of outstanding preferred shares, including the Preferred
Shares, is that the number of Trustees constituting the Board will be
automatically increased by the smallest number that, when added to the two
Trustees elected exclusively by the holders of preferred shares, including the
Preferred Shares, as described above, would constitute a majority of the Board.
The holders of preferred shares, including the Preferred Shares, will be
entitled to elect that smallest number of additional Trustees at a special
meeting of shareholders held as soon as possible thereafter and at all
subsequent meetings at which Trustees are to be elected. The terms of office of
the persons who are Trustees at the time of that election will continue. If the
Fund thereafter shall pay, or declare and set apart for payment, in full, all
dividends payable on all outstanding preferred shares, including the Preferred
Shares, the special voting rights stated above will cease, and the terms of
office of the additional Trustees elected by the holders of preferred shares,
including the Preferred Shares, will automatically terminate.
As long as any Preferred Shares are outstanding, the Fund will not, without
the affirmative vote or consent of the holders of at least a majority of the
Preferred Shares outstanding at the time (voting together as a separate class):
(a) authorize, create or issue, or increase the authorized or issued
amount of, any class or series of shares ranking prior to or on a
parity with the Preferred Shares with respect to payment of
dividends or the distribution of assets on dissolution,
liquidation or winding up the affairs of the Fund, or authorize,
create or issue additional shares of Preferred Shares or any
other preferred shares, unless, in the case of preferred shares
on a parity with the Preferred Shares, the Fund obtains written
confirmation from S&P (if S&P is then rating preferred shares),
Fitch (if Fitch is then rating preferred shares) or any
substitute rating agency (if any such substitute rating agency is
then rating preferred shares) that the issuance of such a class
or series would not impair the rating then assigned by such
rating agency to Preferred Shares and the Fund continues to
comply with Section 13 of the 1940 Act, the 1940 Act Preferred
Shares Asset Coverage requirements and the Preferred Shares Basic
Maintenance Amount requirements, in which case the vote or
consent of the holders of the Preferred Shares is not required;
(b) amend, alter or repeal the provisions of the Agreement and
Declaration of Trust, or the Statement, by merger, consolidation
or otherwise, so as to adversely affect any preference, right or
power of the Preferred Shares or holders of Preferred Shares;
provided, however, that (i) none of the actions permitted by the
exception to (a) above will be deemed to affect such preferences,
rights or powers, (ii) a division of Preferred Shares will be
deemed to affect such preferences, rights or powers only if the
terms of such division adversely affect the holders of Preferred
Shares and (iii) the authorization, creation and issuance of
classes or series of shares ranking junior to the Preferred
Shares with respect to the payment of dividends and the
distribution of assets upon dissolution, liquidation or winding
up of the affairs of the Fund will be deemed to affect such
preferences, rights or powers only if S&P or Fitch is then rating
the Preferred Shares and such issuance would, at the time
thereof, cause the Fund not to satisfy the 1940 Act Preferred
Shares Asset Coverage or the Preferred Shares Basic Maintenance
Amount requirement;
(c) authorize the Fund's conversion from a closed-end to an open-end
investment company; or
(d) amend the provisions of the Agreement and Declaration of Trust,
which provide for the classification of the Board of Trustees of
the Fund into three classes, each with a term of office of three
years with only one class of Trustees standing for election in
any year.
So long as any shares of the Preferred Shares are outstanding, the Fund
shall not, without the affirmative vote or consent of the holders of at least 66
2/3% of the Preferred Shares outstanding at the time, in person or by proxy,
either in writing or at a meeting, voting as a separate class, file a voluntary
application for relief under federal bankruptcy law or any similar application
under state law for so long as the Fund is solvent and does not foresee becoming
insolvent.
To the extent permitted under the 1940 Act, the Fund will not approve any
of the actions set forth in (a) or (b) above which adversely affects the rights
expressly set forth in the Agreement and Declaration of Trust, or the Statement,
of a holder of shares of a series of preferred shares differently than those of
a holder of shares of any other series of preferred shares without the
affirmative vote or consent of the holders of at least a majority of the shares
of each series adversely affected. Unless a higher percentage is provided for
under the Agreement and Declaration of Trust, or the Statement, the affirmative
vote of the holders of "a majority of the outstanding Preferred Shares" (as
defined in the Statement), voting together as a single class, will be required
to approve any plan of reorganization (as such term is used in the 1940 Act)
adversely affecting such shares or any other action (other than (c) and (d)
above) requiring a vote of security holders under Section 13(a) of the 1940 Act.
However, to the extent permitted by the Agreement and Declaration of Trust, or
the Statement, no vote of holders of common shares, either separately or
together with holders of preferred shares as a single class, is necessary to
take the actions contemplated by (a) and (b) above. The holders of common shares
will not be entitled to vote in respect of such matters unless, in the case of
the actions contemplated by (b) above, the action would adversely affect the
contract rights of the holders of common shares expressly set forth in the
Agreement and Declaration of Trust.
The foregoing voting provisions will not apply with respect to Preferred
Shares if, at or prior to the time when a vote is required, such shares have
been (i) redeemed or (ii) called for redemption and sufficient funds have been
deposited in trust to effect such redemption.
THE AUCTION
General
Except as otherwise described in this prospectus, the Statement provides
that the applicable rate for the Preferred Shares for each rate period after the
initial rate period will be the rate that results from an auction conducted as
set forth in the Statement, the material terms of which are summarized below. In
such an auction, persons determine to hold or offer to sell or, based on
dividend rates bid by them, offer to purchase or sell Preferred Shares. See the
Statement included in the Statement of Additional Information for a more
complete description of the auction process.
Auction Agency Agreement. The Fund will enter into an auction agency
agreement with the auction agent (currently, Deutsche Bank Trust Company
Americas) which provides, among other things, that the auction agent will follow
the auction procedures to determine the applicable rate for the Preferred
Shares, so long as the applicable rate for such Preferred Shares is to be based
on the results of an auction.
The auction agent may terminate the auction agency agreement upon notice to
the Fund no earlier than 60 days after delivery of said notice. If the auction
agent should resign, the Fund will use its best efforts to enter into an
agreement with a successor auction agent containing substantially the same terms
and conditions as the auction agency agreement. The Fund may remove the auction
agent provided that, prior to removal, the Fund has entered into a replacement
agreement with a successor auction agent.
Broker-Dealer Agreements. Each auction requires the participation of one or
more Broker-Dealers. The auction agent will enter into agreements with several
Broker-Dealers selected by the Fund, which provide for the participation of
those Broker-Dealers in auctions for Preferred Shares.
The auction agent will pay to each Broker-Dealer after each auction, from
funds provided by the Fund, a service charge at the annual rate of 1/4 of 1% of
the liquidation preference ($25,000 per share) of the Preferred Shares held by a
Broker-Dealer's customer upon settlement in an auction.
The Fund may request that the auction agent terminate one or more
Broker-Dealer agreements at any time upon five days' notice, provided that at
least one Broker-Dealer agreement is in effect after termination of the
agreement. Notwithstanding the foregoing, either the auction agent or Citigroup
Global Markets Inc. may terminate the broker-dealer agreement to which they are
both parties only upon 60 days' written notice to the other party and to the
Fund.
Auction Procedures
Prior to the submission deadline on each auction date for the Preferred
Shares, each customer of a Broker-Dealer who is listed on the records of that
Broker-Dealer (or, if applicable, the auction agent) as a beneficial owner of
the Preferred Shares may submit the following types of orders with respect to
shares of the Preferred Shares to that Broker-Dealer:
1. Hold Order-indicating its desire to hold the Preferred Shares
without regard to the applicable rate for the next dividend
period.
2. Bid-indicating its desire to sell the Preferred Shares at $25,000
per share if the applicable rate for the next dividend period is
less than the rate or spread specified in the bid.
3. Sell Order-indicating its desire to sell the Preferred Shares at
$25,000 per share without regard to the applicable rate for the
next dividend period.
A beneficial owner may submit different types of orders to its
Broker-Dealer with respect to different shares of Preferred Shares then held by
the beneficial owner. A beneficial owner that submits its bid with respect to
the Preferred Shares to its Broker-Dealer having a rate higher than the maximum
applicable rate for the Preferred Shares on the auction date will be treated as
having submitted a sell order to its Broker-Dealer. A beneficial owner that
fails to submit an order to its Broker-Dealer with respect to the Preferred
Shares will ordinarily be deemed to have submitted a hold order with respect to
the Preferred Shares to its Broker-Dealer. However, if a beneficial owner fails
to submit an order with respect to the Preferred Shares to its Broker-Dealer for
an auction relating to a dividend period of more than 91 days, such beneficial
owner will be deemed to have submitted a sell order to its Broker-Dealer. A sell
order constitutes an irrevocable offer to sell the Preferred Shares subject to
the sell order. A beneficial owner that offers to become the beneficial owner of
additional Preferred Shares is, for purposes of such offer, a potential holder
as discussed below.
A potential holder is either a customer of a Broker-Dealer that is not a
beneficial owner of Preferred Shares but that wishes to purchase the Preferred
Shares or that is a beneficial owner of the Preferred Shares that wishes to
purchase additional Preferred Shares. A potential holder may submit bids to its
Broker-Dealer in which it offers to purchase the Preferred Shares at $25,000 per
share if the applicable rate for the Preferred Shares for the next dividend
period is not less than the specified rate in such bid. A bid placed by a
potential holder of the Preferred Shares specifying a rate higher than the
maximum rate for the Preferred Shares on the auction date will not be accepted.
The Broker-Dealers in turn will submit the orders of their respective
customers who are beneficial owners and potential holders to the auction agent.
They will designate themselves (unless otherwise permitted by the Fund) as
existing holders of the Preferred Shares subject to orders submitted or deemed
submitted to them by beneficial owners. They will designate themselves as
potential holders of the Preferred Shares subject to orders submitted to them by
potential holders. However, neither the Fund, the Advisor nor the auction agent
will be responsible for or have any liability with respect to a Broker-Dealer's
failure to comply with these procedures. Any order placed with the auction agent
by a Broker-Dealer as or on behalf of an existing holder or a potential holder
will be treated the same way as an order placed with a Broker-Dealer by a
beneficial owner or potential holder. Similarly, any failure by a Broker-Dealer
to submit to the auction agent an order for any Preferred Shares held by it or
customers who are beneficial owners will be treated as a beneficial owner's
failure to submit to its Broker-Dealer an order in respect of Preferred Shares
held by it. A Broker-Dealer may also submit orders to the auction agent for its
own account as an existing holder or potential holder, provided it is not an
affiliate of the Fund.
There are sufficient clearing bids for the Preferred Shares in an auction
if the number of Preferred Shares subject to bids submitted or deemed submitted
to the auction agent by Broker-Dealers for potential holders with rates or
spreads equal to or lower than the maximum applicable rate is at least equal to
or exceeds the sum of the number of Preferred Shares subject to sell orders and
the number of Preferred Shares subject to bids specifying rates or spreads
higher than the maximum applicable rate submitted or deemed submitted to the
auction agent by Broker-Dealers for existing holders of the Preferred Shares. If
there are sufficient clearing bids for the Preferred Shares, the applicable rate
for the Preferred Shares for the next succeeding dividend period thereof will be
the lowest rate specified in the submitted bids which, taking into account such
rate and all lower rates bid by Broker-Dealers as or on behalf of existing
holders and potential holders, would result in existing holders and potential
holders owning the Preferred Shares available for purchase in the auction.
If there are not sufficient clearing bids for the Preferred Shares, the
applicable rate for the next dividend period will be the maximum rate on the
auction date. However, if the Fund has declared a special rate period and there
are not sufficient clearing bids, the election of a special rate period will not
be effective and the applicable rate for the next rate period will be the
maximum rate. If there are not sufficient clearing bids, beneficial owners of
Preferred Shares that have submitted or are deemed to have submitted sell orders
may not be able to sell in the auction all the Preferred Shares subject to such
sell orders. If all of the applicable outstanding Preferred Shares are the
subject of submitted hold orders, then the rate period following the auction
will automatically be the same length as the preceding rate period and the
applicable rate for the next rate period will be 90% of the Reference Rate.
The auction procedures include a pro rata allocation of the Preferred
Shares for purchase and sale which may result in an existing holder continuing
to hold or selling, or a potential holder purchasing, a number of Preferred
Shares that is different than the number of Preferred Shares specified in its
order. To the extent the allocation procedures have that result, Broker-Dealers
that have designated themselves as existing holders or potential holders in
respect of customer orders will be required to make appropriate pro rata
allocations among their respective customers.
Settlement of purchases and sales will be made on the next business day
(which is also a dividend payment date) after the auction date through the DTC.
Purchasers will make payment through their Agent Members in same day funds to
DTC against delivery to their respective Agent Members. DTC will make payment to
the sellers' Agent Members in accordance with DTC's normal procedures, which now
provide for payment against delivery by their Agent Members in same day funds.
The auctions for the Preferred Shares will normally be held every 28 days
(normally every Monday), and each subsequent dividend period will normally begin
on the following business day (normally the following Tuesday).
If an Auction Date (the business day next preceding the first day of a
dividend period) is not a business day because the New York Stock Exchange is
closed for business for more than three consecutive business days due to an act
of God, natural disaster, act of war, civil or military disturbance, act of
terrorism, sabotage, riots or a loss or malfunction of utilities or
communications services, or the auction agent is not able to conduct an auction
in accordance with the Auction Procedures (the procedures for conducting
auctions set forth in the Statement) for any such reason, then the Applicable
Rate (the rate per annum at which cash dividends are payable on the Preferred
Shares for any dividend period) for the next dividend period will be the
Applicable Rate determined on the previous Auction Date. However, if the New
York Stock Exchange is closed for such reason for three or less than three
consecutive business days, then the Applicable Rate for the next Dividend Period
shall be the Applicable Rate determined by auction on the first business day
following such Auction Date.
The following is a simplified example of how a typical auction works.
Assume that the Fund has 1,000 outstanding Preferred Shares and three current
holders. The three current holders and three potential holders submit orders
through broker-dealers at the auction:
Current Holder A ........................ Owns 500 shares, wants to sell all Bid order of 4.1% rate for
500 shares if auction rate is less all 500 shares
than 4.1%
Current Holder B......................... Owns 300 shares, wants to hold Hold order-will take the
auction rate
Current Holder C......................... Owns 200 shares, wants to sell all Bid order of 3.9% rate for
200 shares if auction rate is less all 200 shares
than 3.9%
Potential Holder D....................... Wants to buy 200 shares Places order to buy at or
above 4.0%
Potential Holder E....................... Wants to buy 300 shares Places order to buy at or
above 3.9%
Potential Holder F....................... Wants to buy 200 shares Places order to buy at or
above 4.1%
The lowest dividend rate that will result in all 1,000 Preferred Shares
continuing to be held is 4.0% (the offer by D). Therefore, the dividend rate
will be 4.0%. Current holders B and C will continue to own their shares. Current
holder A will sell its shares because A's dividend rate bid was higher than the
dividend rate. Potential holder D will buy 200 shares and potential holder E
will buy 300 shares because their bid rates were at or below the dividend rate.
Potential holder F will not buy any shares because its bid rate was above the
dividend rate.
Secondary Market Trading and Transfers of Preferred Shares
The Broker-Dealers are expected to maintain a secondary trading market in
Preferred Shares outside of auctions, but are not obligated to do so, and may
discontinue such activity at any time. There can be no assurance that any
secondary trading market in Preferred Shares will provide owners with liquidity
of investment. The Preferred Shares will not be registered on any stock exchange
or on the Nasdaq stock market.
Investors who purchase Preferred Shares in an auction (particularly if the
Fund has declared a special rate period) should note that because the dividend
rate on such shares will be fixed for the length of that dividend period, the
value of such shares may fluctuate in response to the changes in interest rates,
and may be more or less than their original cost if sold on the open market in
advance of the next auction thereof, depending on market conditions.
A beneficial owner or an existing holder may sell, transfer or otherwise
dispose of Preferred Shares only in whole shares and only:
* pursuant to a bid or sell order placed with the auction agent in accordance
with the auction procedures;
* to a Broker-Dealer; or
* to such other persons as may be permitted by the Fund; provided, however,
that a sale, transfer or other disposition of Preferred Shares from a
customer of a Broker-Dealer who is listed on the records of that
Broker-Dealer as the holder of such shares to that Broker-Dealer or another
customer of that Broker-Dealer shall not be deemed to be a sale, transfer
or other disposition if such Broker-Dealer remains the existing holder of
the shares; and in the case of all transfers other than pursuant to
auctions, the Broker-Dealer (or other person, if permitted by the Fund) to
whom such transfer is made will advise the auction agent of such transfer.
U.S. FEDERAL INCOME TAX MATTERS
The following is a summary discussion of certain U.S. federal income tax
consequences that may be relevant to a shareholder of acquiring, holding and
disposing of Preferred Shares of the Fund. This discussion only addresses U.S.
federal income tax consequences to U.S. shareholders who hold their shares as
capital assets and does not address all of the U.S. federal income tax
consequences that may be relevant to particular shareholders in light of their
individual circumstances. This discussion also does not address the tax
consequences to shareholders who are subject to special rules, including,
without limitation, financial institutions, insurance companies, dealers in
securities or foreign currencies, foreign holders, persons who hold their shares
as or in a hedge against currency risk, a constructive sale, or conversion
transaction, holders who are subject to the alternative minimum tax, or
tax-exempt or tax-deferred plans, accounts, or entities. In addition, the
discussion does not address any state, local, or foreign tax consequences, and
it does not address any federal tax consequences other than U.S. federal income
tax consequences. The discussion reflects applicable tax laws of the United
States as of the date of this prospectus, which tax laws may be changed or
subject to new interpretations by the courts or the Internal Revenue Service
("IRS") retroactively or prospectively. No attempt is made to present a detailed
explanation of all U.S. federal income tax concerns affecting the Fund and its
shareholders, and the discussion set forth herein does not constitute tax
advice. Investors are urged to consult their own tax advisers to determine the
specific tax consequences to them of investing in the Fund, including the
applicable federal, state, local and foreign tax consequences to them and the
effect of possible changes in tax laws.
The Fund intends to elect to be treated and to qualify each year as a
"regulated investment company" under Subchapter M of the Code and to comply with
applicable distribution requirements so that it generally will not pay U.S.
federal income tax on income and capital gains distributed to shareholders. In
order to qualify as a regulated investment company, which the following
discussion assumes, the Fund must satisfy certain tests regarding the nature of
its income and the diversification of its assets. If the Fund qualifies as a
regulated investment company and, for each taxable year, it distributes to its
shareholders an amount equal to or exceeding the sum of (i) 90% of its
"investment company taxable income" as that term is defined in the Code (which
includes, among other things, dividends, taxable interest, and the excess of any
net short-term capital gains over net long-term capital losses, as reduced by
certain deductible expenses) without regard to the deduction for dividends paid
and (ii) 90% of the excess of its gross tax-exempt interest, if any, over
certain disallowed deductions, the Fund generally will be relieved of U.S.
federal income tax on any income of the Fund, including long-term capital gains,
distributed to shareholders. However, if the Fund retains any investment company
taxable income or "net capital gain" (the excess of net long-term capital gain
over net short-term capital loss), it generally will be subject to U.S. federal
income tax at regular corporate rates on the amount retained. The Fund intends
to distribute at least annually all or substantially all of its investment
company taxable income and net tax-exempt interest. If for any taxable year the
Fund did not qualify as a regulated investment company, it would be treated as a
corporation subject to U.S. federal income tax, and all distributions out of its
current or accumulated earnings and profits (including distributions of net
capital gain) would be taxed to shareholders as ordinary dividend income.
Based in part on the lack of any present intention on the part of the Fund
to redeem or purchase the Preferred Shares at any time in the future, the Fund
believes that under present law the Preferred Shares will constitute stock of
the Fund and distributions with respect to the Preferred Shares (other than
distributions in redemption of the Preferred Shares that are treated as
exchanges of stock under Section 302(b) of the Code) will constitute dividends
to the extent of the Fund's current or accumulated earnings and profits as
calculated for U.S. federal income tax purposes. Such dividends generally will
be taxable as ordinary income to holders (other than capital gain dividends or
dividends attributable to qualified dividend income of the Fund, as described
below) and if a portion of the Fund's income consists of qualifying dividends
paid by U.S. corporations, a portion of the dividends paid by the Fund may
qualify for the corporate dividends received deduction. The Fund's belief relies
in part on a published ruling of the IRS stating that certain preferred stock
similar in many material respects to the Preferred Shares represents equity (and
following a discussion assumes such treatment will apply). It is possible,
however, that the IRS might take a contrary position asserting, for example that
the Preferred Shares constitute debt of the Fund. If this position were upheld,
the discussion of the treatment of distributions above would not apply. Instead,
distributions by the Fund to holders of Preferred Shares would constitute
interest, whether or not such distributions exceeded the earnings and profits of
the Fund, would be included in full in the income of the recipient and would be
taxed as ordinary income.
In general, dividends from investment company taxable income are taxable as
ordinary income, and designated dividends from net capital gain, if any, are
taxable as long-term capital gains for U.S. federal income tax purposes without
regard to the length of time the shareholder has held shares of the Fund. For
taxable years beginning on or before December 31, 2008, however, dividends that
are designated by the Fund as derived from qualified dividend income will be
taxable to individuals at a maximum federal income tax rate of 15%, provided
holding period and other requirements are satisfied. A distribution of an amount
in excess of the Fund's current or accumulated earnings and profits will be
treated by a shareholder as a return of capital to the extent of (and in
reduction of) the shareholder's tax basis in its shares, and any such amount in
excess of that basis will be treated as gain from the sale of the shares as
discussed below. The U.S. federal income tax status of all distributions will be
reported to shareholders annually.
The IRS has taken the position that if a regulated investment company has
two classes of shares, it must designate distributions made to each class in any
year as consisting of no more than such class's proportionate share of
particular types of income (including ordinary income and capital gains). A
class's proportionate share of a particular type of income is determined
according to the percentage of total dividends paid by the regulated investment
company during the year to such class. Consequently, the Fund intends to
designate distributions made to the common shareholders and the preferred
shareholders of particular types of income in accordance with each such class's
proportionate shares of such income.
If the Fund retains any net capital gain, the Fund may designate the
retained amount as undistributed capital gains in a notice to shareholders who,
if subject to U.S. federal income tax on long-term capital gains, (i) will be
required to include in income for U.S. federal income tax purposes, as long-term
capital gain, their proportionate shares of such undistributed amount, (ii) will
be entitled to credit their proportionate shares of the tax paid by the Fund on
the undistributed amount against their U.S. federal income tax liabilities, if
any, and to claim refunds to the extent the credit exceeds such liabilities, and
(iii) will be entitled to increase the tax basis of their shares by the
difference between their proportionate shares of such includible gains and their
proportionate shares of the tax deemed paid. The Fund intends to seek an
exemptive order from the Commission that would allow it to distribute capital
gains in any one taxable year as often as necessary to comply with IRS revenue
rulings.
Sales and other dispositions of Preferred Shares generally are taxable
events for shareholders that are subject to tax. Shareholders should consult
their own tax advisers with reference to their individual circumstances to
determine whether any particular transaction in the Fund's shares (including a
redemption of Preferred Shares) is properly treated as a sale for tax purposes,
as the following discussion assumes, and the tax treatment of any gains or
losses recognized in such transactions. In general, if Preferred Shares are
sold, the shareholder will recognize gain or loss equal to the difference
between the amount realized on the sale and the shareholder's adjusted basis in
the shares. Such gain or loss generally will be treated as long-term gain or
loss if the shares were held for more than one year and otherwise generally will
be treated as short-term gain or loss. Any loss recognized by a shareholder upon
the sale or other disposition of shares with a tax holding period of six months
or less generally will be treated as a long-term capital loss to the extent of
any amounts treated as distributions of long-term capital gain with respect to
such shares. Losses on sales or other dispositions of shares may be disallowed
under "wash sale" rules in the event a shareholder acquires other shares in the
Fund within a period of 61 days beginning 30 days before and ending 30 days
after a sale or other disposition of the original shares.
Federal law requires that the Fund withhold (as "backup withholding") tax
at a current rate of 28% on reportable payments, including dividends and capital
gain distributions paid to certain shareholders who have not complied with IRS
regulations. Corporations are generally exempt from backup withholding. In order
to avoid this withholding requirement, shareholders must certify on their
account applications, or on separate IRS Forms W-9, that the Social Security
Number or other Taxpayer Identification Number they provide is their correct
number and that they are not currently subject to backup withholding, or that
they are exempt from backup withholding. The Fund may nevertheless be required
to withhold if it receives notice from the IRS that the number provided is
incorrect or backup withholding is applicable as a result of previous
underreporting of income. Similar backup withholding rules may apply to a
shareholder's broker with respect to the proceeds of sales or other dispositions
of the Fund's shares by such shareholder. Backup withholding is not an
additional tax. Any amounts withheld from payments made to a shareholder may be
refunded or credited against such shareholder's U.S. federal income tax
liability, if any, provided that the required information is provided to the
IRS.
The foregoing is a general and abbreviated summary of the provisions of the
Code and the Treasury regulations in effect as they generally affect the
taxation of the Fund and its shareholders. As noted above, these provisions are
subject to change by legislative, judicial or administrative action, and any
such change may be retroactive. A further discussion of the U.S. federal income
tax rules applicable to the Fund can be found in the Statement of Additional
Information which is incorporated by reference into this prospectus.
Shareholders are urged to consult their tax advisers regarding specific
questions as to U.S. federal, foreign, state, and local income or other taxes.
NET ASSET VALUE
The Fund calculates a net asset value for its common shares every day the
New York Stock Exchange is open when regular trading closes (normally 4:00 p.m.
Eastern time). For purposes of determining the net asset value of a common
share, the value of the securities held by the Fund plus any cash or other
assets (including interest accrued but not yet received) minus all liabilities
(including accrued expenses and indebtedness) and the aggregate liquidation
value of any outstanding preferred shares is divided by the total number of
common shares outstanding at such time. Expenses, including the fees payable to
the Advisor, are accrued daily. Currently, the net asset values of shares of
publicly traded closed-end investment companies investing in equity and debt
securities are published in Barron's, the Monday edition of The Wall Street
Journal and the Monday and Saturday editions of The New York Times.
The Fund generally values its portfolio securities using closing market
prices or readily available market quotations. The Fund may use a pricing
service or a pricing matrix to value some of its assets. When closing market
prices or market quotations are not available or are considered by the Advisor
to be unreliable, the Fund may use a security's fair value. Fair value is the
valuation of a security determined on the basis of factors other than market
value in accordance with procedures approved by the Fund's Trustees. The Fund
also may use the fair value of a security, including a non-U.S. security, when
the Advisor determines that the closing market price on the primary exchange
where the security is traded no longer accurately reflects the value of the
security due to factors affecting one or more relevant securities markets or the
specific issuer. The use of fair value pricing by the Fund may cause the net
asset value of its shares to differ from the net asset value that would be
calculated using closing market prices. International securities markets may be
open on days when the U.S. markets are closed. For this reason, the value of any
international securities owned by the Fund could change on a day you cannot buy
or sell shares of the Fund.
Debt securities with remaining maturities of 60 days or less are valued at
amortized cost, which is a method of estimating market value. The value of
interest rate swaps, caps and floors is determined in accordance with a formula
and then confirmed periodically by obtaining a bank quotation. Positions in
options are valued at the last sale price on the market where any such option is
principally traded. Positions in futures contracts are valued at closing prices
for such contracts established by the exchange on which they are traded.
Repurchase agreements are valued at cost plus accrued interest.
DESCRIPTION OF SHARES
The Fund is authorized to issue an unlimited number of common shares,
without par value. The Fund is also authorized to issue preferred shares,
including the Preferred Shares being offered by this prospectus. The Board of
Trustees is authorized to classify and reclassify any unissued shares into one
or more additional classes or series of shares. The Board of Trustees may
establish such series or class, including preferred shares, from time to time by
setting or changing in any one or more respects the designations, preferences,
conversion or other rights, voting powers, restrictions, limitations as to
dividends, qualifications or terms or conditions of redemption of such shares
and pursuant to such classification or reclassification to increase or decrease
the number of authorized shares of any existing class or series. The Board of
Trustees, without shareholder approval, is authorized to amend the Agreement of
Declaration of Trust and by-laws to reflect the terms of any such class or
series, including any class of preferred shares. The Fund is also authorized to
issue other securities, including debt securities.
Common Shares
Common shares are fully paid and non-assessable. Shareholders are entitled
to share pro rata in the net assets of the Fund available for distribution to
common shareholders upon liquidation of the Fund. Common shareholders are
entitled to one vote for each share held.
So long as any shares of the Fund's preferred shares, including the
Preferred Shares, are outstanding, holders of common shares will not be entitled
to receive any net income of or other distributions from the Fund unless all
accumulated dividends on preferred shares have been paid and unless asset
coverage (as defined in the 1940 Act) with respect to preferred shares would be
at least 200% after giving effect to such distributions.
The Fund will send unaudited reports at least semiannually and audited
annual financial statements to all of its shareholders.
Tender Offers (Evergreen Enhanced Liquidity Plan)
The market price per common share may be greater or less than net asset
value per common share. Common shares of closed-end investment companies, in
some cases trade at a premium, but frequently trade at a discount from net asset
value. This characteristic of common shares of closed-end funds is a risk
separate and distinct from the risk that the Fund's net asset value may
decrease. The Board of Trustees has determined that it would be in the best
interests of shareholders of the Fund to take action to attempt to reduce or
eliminate a market value discount from net asset value. To that end, the Board
of Trustees has determined that quarterly tender offers may help reduce any
market discount that may develop.
Accordingly, the Board of Trustees has committed to make tender offers for
the Fund's common shares under certain circumstances and subject to certain
conditions. Beginning six to eight months after the Fund's commencement of
operations (for a total of eight consecutive calendar quarters), in the event
that the common shares trade at a discount to net asset value of greater than 5%
for fifteen of twenty days during a specific measurement period (initially the
twenty-first through fortieth trading days of a quarter) (the "measurement
period"), the Fund, under normal circumstances, will make offers to purchase up
to 5% of its outstanding common shares at their net asset value from all
beneficial shareholders. The Fund will not undertake a tender offer if the
Fund's common shares are not trading at a discount. The Fund will make its first
tender offer within the first six to eight months of the commencement of the
Fund's operations and for the following seven quarters after such initial tender
offer if the discount exists during the measurement period for the number of
days specified above. The Board of Trustees reserves the right to modify the
conditions described in this paragraph in light of experience. In addition, the
Board of Trustees may consider from time to time open market repurchases of the
Fund's outstanding common shares.
Under certain circumstances described below, the Board of Trustees may
determine not to undertake a tender offer even if the conditions described in
the preceding paragraph are met. Moreover, there can be no assurance that any
such tender offers would cause the common shares to trade at a price equal to
their net asset value or reduce the spread between the market price and the net
asset value per common share. Although the Board of Trustees generally believes
that tender offers are in the best interests of shareholders, the acquisition of
common shares by the Fund will decrease the total assets of the Fund and,
therefore, will have the effect of increasing the Fund's expense ratio.
The Fund will purchase all outstanding common shares tendered in accordance
with the terms of the offer unless the Board of Trustees determined to accept
none of them (based upon the circumstances set forth below). If more common
shares are tendered for repurchase than the Fund has offered to repurchase,
common shares will be repurchased on a pro-rata basis. If authorized by the
Commission, the Fund may make as a condition of each tender offer that no one
shareholder may receive more than 10% of the amount purchased by the Fund in the
tender offer. There can be no assurance that the Commission will approve this
condition. Thus, shareholders may be unable to liquidate all or a given
percentage of their common shares and some shareholders may tender more shares
than they wish to have repurchased in order to ensure repurchase of at least a
specific number of common shares. Shareholders may withdraw tendered common
shares at any time prior to the tender offer deadline.
Tender offers and the need to fund repurchase obligations may affect the
ability of the Fund to be fully invested, which may reduce returns. Moreover,
diminution in the size of the Fund through repurchases without offsetting new
sales of common shares may result in untimely sales of portfolio securities and
a higher expense ratio, and may limit the ability of the Fund to participate in
new investment opportunities. Repurchases resulting in portfolio turnover will
result in additional expenses being borne by the Fund. The Fund may borrow to
meet repurchase obligations, which entails certain risks and costs. See "Risk
Factors--Tender Offers (Evergreen Enhanced Liquidity Plan)."
If the Fund's common shares are purchased pursuant to a tender offer, such
purchases could reduce significantly the asset coverage of any borrowing or
outstanding senior securities, including the Preferred Shares. The Fund may not
purchase common shares to the extent such purchases would result in the asset
coverage with respect to such borrowing or senior securities (including the
Preferred Shares) being reduced below the asset coverage requirement set forth
in the 1940 Act. Accordingly, in order to purchase all common shares tendered,
the Fund may have to repay all or part of any then outstanding borrowing or
redeem all or part of any then outstanding senior securities (including the
Preferred Shares) to maintain the required asset coverage. In addition, the
amount of common shares for which the Fund makes any particular tender offer may
be limited for the reasons set forth above or in respect of other concerns
related to liquidity of the Fund's portfolio.
Although the Board of Trustees has committed to conduct quarterly tender
offers beginning in the Fund's first six to eight months of operations if the
conditions described above are met, it is the policy of the Board of Trustees
(which may be changed by the Board), not to cause the Fund to purchase shares
pursuant to a tender offer if (1) such purchases would impair the Fund's status
as a regulated investment company under the Federal tax laws; (2) the Fund would
not be able to liquidate portfolio securities in a manner that is orderly and
consistent with the Fund's investment objective and policies in order to
purchase tendered common shares; (3) such action would result in the Fund
failing to satisfy the American Stock Exchange's minimum listing requirements;
or (4) there is, in the judgment of the Board of Trustees, any (a) legal action
or proceeding instituted or threatened challenging the tender offer or otherwise
materially adversely affecting the Fund, (b) declaration of a banking moratorium
by Federal or state authorities or any suspension of payment by banks in the
United States, which is material to the Fund, (c) limitation imposed by Federal
or state authorities on the extension of credit by lending institutions, (d)
commencement of war, armed hostilities or other international or national
calamity directly or indirectly involving the United States which is material to
the Fund, or (e) other event or condition that would have a material adverse
effect on the Fund or its shareholders if tendered common shares were purchased.
Thus, there can be no assurance that the Board of Trustees will proceed with any
tender offer. The Board of Trustees may modify these conditions in light of
circumstances existing at the time.
Any tender offer will be made and shareholders will be notified in
accordance with the requirements of the Securities Exchange Act of 1934 and the
1940 Act, either by publication or mailing or both. The offering documents will
contain information prescribed by such laws and the rules thereunder. The Fund
will pay all costs and expenses associated with the making of any tender offer.
ANTI-TAKEOVER PROVISIONS OF THE AGREEMENT AND DECLARATION OF TRUST AND BY-LAWS
The Fund's Agreement and Declaration of Trust includes provisions that
could have the effect of limiting the ability of other entities or persons to
acquire control of the Fund or to change the composition of its Board of
Trustees and could have the effect of depriving shareholders of an opportunity
to sell their shares at a premium over prevailing market prices by discouraging
a third party from seeking to obtain control of the Fund.
The Board of Trustees is divided into three classes of approximately equal
size. The terms of the Trustees of the different classes are staggered so that
approximately one-third of the Board of Trustees is elected by shareholders each
year.
A Trustee may be removed from office with or without cause by a majority of
Trustees if such removal is approved by a vote of the holders of at least 75% of
the shares entitled to be voted on the matter.
In addition, the Agreement and Declaration of Trust requires the favorable
vote of the holders of at least 75% of the Fund's shares to approve, adopt or
authorize the following:
* a merger or consolidation or statutory share exchange of the Fund with any
other corporation;
* a sale of all or substantially all of the Fund's assets (other than in the
regular course of the Fund's investment activities); or
* a liquidation or dissolution of the Fund
unless such action has been approved, adopted or authorized by the affirmative
vote of at least 75% of the total number of Trustees fixed in accordance with
the by-laws, in which case the affirmative vote of a majority of the Fund's
shares is required. Following any issuance of preferred shares by the Fund, it
is anticipated that the approval, adoption or authorization of the foregoing
also would require the favorable vote of a majority of the Fund's shares of
preferred shares then entitled to be voted, voting as a separate class.
In addition, conversion of the Fund to an open-end investment company would
require an amendment to the Fund's Agreement and Declaration of Trust. The
amendment would have to be declared advisable by the Board of Trustees prior to
its submission to shareholders. Such an amendment would require the favorable
vote of the holders of at least 75% of the Fund's outstanding shares (including
any preferred shares) entitled to be voted on the matter, voting as a single
class (or a majority of such shares if the amendment was previously approved,
adopted or authorized by 75% of the total number of Trustees fixed in accordance
with the By-laws). Such a vote also would satisfy a separate requirement in the
1940 Act that the change be approved by the shareholders. Shareholders of an
open-end investment company may require the company to redeem their shares of
common stock at any time (except in certain circumstances as authorized by or
under the 1940 Act) at their net asset value, less such redemption charge, if
any, as might be in effect at the time of a redemption. All redemptions will be
made in cash. If the Fund is converted to an open-end investment company, it
could be required to liquidate portfolio securities to meet requests for
redemption, and the common shares would no longer be listed on the American
Stock Exchange.
Conversion to an open-end investment company would also require changes in
certain of the Fund's investment policies and restrictions, such as those
relating to the borrowing of money.
In addition, the Agreement and Declaration of Trust requires the favorable
vote of a majority of the Trustees followed by the favorable vote of the holders
of at least 75% of the outstanding shares of each affected class or series of
the Fund, voting separately as a class or series, to approve, adopt or authorize
certain transactions with 5% or greater holders of a class or series of shares
and their associates, unless the transaction has been approved by at least 75%
of the Trustees, in which case "a majority of the outstanding voting securities"
(as defined in the 1940 Act) of the Fund shall be required. For purposes of
these provisions, a 5% or greater holder of a class or series of shares (a
"Principal Shareholder") refers to any person who, whether directly or
indirectly and whether alone or together with its affiliates and associates,
beneficially owns 5% or more of the outstanding shares of any class or series of
shares of beneficial interest of the Fund. The 5% holder transactions subject to
these special approval requirements are:
* the merger or consolidation of the Fund or any subsidiary of the Fund with
or into any Principal Shareholder;
* the issuance of any securities of the Fund to any Principal Shareholder for
cash;
* the sale, lease or exchange of all or any substantial part of the assets of
the Fund to any Principal Shareholder, except assets having an aggregate
fair market value of less than $1,000,000, aggregating for the purpose of
such computation all assets sold, leased or exchanged in any series of
similar transactions within a 12-month period; or
* the sale, lease or exchange to the Fund or any subsidiary of the Fund, in
exchange for securities of the Fund, of any assets of any Principal
Shareholder, except assets having an aggregate fair market value of less
than $1,000,000, aggregating for purposes of such computation all assets
sold, leased or exchanged in any series of similar transactions within a
12-month period.
The Agreement and Declaration of Trust and By-laws provide that the Board
of Trustees has the power, to the extent the By-laws do not reserve the right to
the shareholders, to make, alter or repeal any of the By-laws, subject to the
requirements of applicable law. Neither this provision of the Agreement and
Declaration of Trust, nor any of the foregoing provisions thereof requiring the
affirmative vote of 75% of outstanding shares of the Fund, can be amended or
repealed except by the vote of such required number of shares.
The Fund's By-laws generally require that advance notice be given to the
Fund in the event a shareholder desires to nominate a person for election to the
Board of Trustees or to transact any other business at an annual meeting of
shareholders. With respect to an annual meeting following the first annual
meeting of shareholders, notice of any such nomination or business must be
delivered to or received at the principal executive offices of the Fund not less
than 90 calendar days nor more than 120 calendar days prior to the anniversary
date of the prior year's annual meeting (subject to certain exceptions). In the
case of the first annual meeting of shareholders, the notice must be given no
later than the tenth calendar day following public disclosure as specified in
the by-laws of the date of the meeting. Any notice by a shareholder must be
accompanied by certain information as provided in the By-laws.
UNDERWRITING
Citigroup Global Markets Inc. is acting as representative of the
Underwriters named below. Subject to the terms and conditions stated in the
underwriting agreement dated the date hereof, each Underwriter named below has
severally agreed to purchase, and the Fund has agreed to sell to such
Underwriter, the number of Preferred Shares set forth opposite the name of such
Underwriter.
Number of Preferred
Shares,
Underwriter Series M28
----------- ----------
Citigroup Global Markets Inc.............................. 1,248
Wachovia Capital Markets, LLC............................. 1,248
Merrill Lynch, Pierce, Fenner & Smith Incorporated........ 544
UBS Securities LLC........................................ 160
----------------------
Total................................... 3,200
----------------------
The underwriting agreement provides that the obligations of the
Underwriters to purchase the Preferred Shares included in this offering are
subject to approval of certain legal matters by counsel and to certain other
conditions. The Underwriters are obligated to purchase all the Preferred Shares
if they purchase any of the Preferred Shares.
The Underwriters propose to offer some of the Preferred Shares directly to
the public at the public offering price set forth on the cover page of this
prospectus and some of the Preferred Shares to certain dealers at the public
offering price less a concession not to exceed $137.50 per Preferred Share. The
sales load the Fund will pay of $250 per Preferred Share is equal to 1.00% of
the initial offering price. The Underwriters may allow, and such dealers may
reallow, a concession not in excess of $37.50 per Preferred Share on sales to
certain other dealers. If all of the Preferred Shares are not sold at the
initial offering price, the representatives may change the public offering price
and other selling terms. Investors must pay for any Preferred Shares purchased
on or before June 25, 2004.
The Fund has agreed that, for a period of 180 days from the date of this
prospectus, it will not, without the prior written consent of Citigroup Global
Markets Inc., offer, sell, contract to sell, pledge, or otherwise dispose of,
any senior securities (as defined in the 1940 Act) of the Fund other than the
Preferred Shares, or any securities convertible into, or exercisable, or
exchangeable for senior securities other than the Preferred Shares, provided
however, that the Fund may issue and sell common shares pursuant to any dividend
reinvestment plan of the Fund and the Fund may issue common shares issuable upon
the conversion of securities or the exercise of warrants outstanding on June 22,
2004 or engage in reverse repurchase agreements or borrow from banks or other
financial institutions in connection with its portfolio strategies as described
in this prospectus.
The Fund has agreed to reimburse the Underwriters for certain expenses
incurred by the Underwriters in this offering.
The Fund anticipates that from time to time the underwriters may act as
brokers or dealers in connection with the execution of the Fund's portfolio
transactions after they have ceased to be Underwriters and, subject to certain
restrictions, may act as brokers while they are Underwriters. The Underwriters
are active underwriters of, and dealers in, securities and act as market makers
in a number of such securities, and therefore can be expected to engage in
portfolio transactions with, and perform services for the Fund, subject to
applicable law.
A prospectus in electronic format may be available on the website
maintained by one or more of the Underwriters.
The Fund anticipates that the Underwriters or one of their respective
affiliates may, from time to time, act in auctions as Broker-Dealers and receive
fees as set forth under "The Auction" and in the Statement of Additional
Information.
Certain underwriters have performed investment banking and advisory
services for the Advisor and its affiliates from time to time, for which they
have received customary fees and expenses. Certain underwriters may, from time
to time, engage in transactions with or perform services for Advisor in the
ordinary course of business.
In conjunction with the Fund's common shares offering, the Advisor (and not
the Fund) has agreed to pay certain underwriters a fee for, among other items,
the provision of services related to the sale and distribution of the common
shares and after-market support services. Additionally, the Advisor will pay to
Citigroup Global Markets Inc. from its own resources a structuring fee for
advice relating to the structure and design of the Fund and organization of the
Fund as well as services related to the sale and distribution of the Fund's
common shares. In addition, the Fund has agreed to reimburse certain of the
underwriter expenses in connection with the common shares offering. The sum of
the structuring fee paid to Citigroup Global Markets Inc., the fees paid to
certain other underwriters, the amounts paid by the Fund to reimburse certain
underwriter and other expenses and the sales load to be paid by the Fund will
not exceed 9.00% of the total price to the public of the common shares offered
by the Fund.
The underwriting agreement provides that it may be terminated in the
absolute discretion of the representatives, without liability on the part of any
Underwriter to the Fund or the Advisor, by notice to the Fund or the Advisor if,
prior to the delivery of and payment for the Preferred Shares, (i) trading in
the common shares shall have been suspended by the Commission or the American
Stock Exchange or trading in securities generally on the New York Stock Exchange
or the American Stock Exchange shall have been suspended or limited or minimum
prices for trading in securities generally shall have been established on such
exchange, (ii) a banking moratorium shall have been declared by either federal
or New York state authorities, or (iii) there shall have occurred any outbreak
or escalation of hostilities, declaration by the United States of a national
emergency or war, or other calamity or crisis the effect of which on financial
markets in the United States is such as to make it, in the representatives' sole
judgment, impracticable or inadvisable to proceed with the offering or delivery
of the Preferred Shares as contemplated by this prospectus.
The Fund and the Advisor have agreed to indemnify the underwriters against
certain liabilities, including liabilities under the Securities Act of 1933, or
to contribute to payments the underwriters may be required to make because of
any of those liabilities.
The principal business address of Citigroup is 388 Greenwich Street, New
York, New York 10013.
CUSTODIAN, TRANSFER AGENT, DIVIDEND DISBURSING AGENT AND REGISTRAR
The Fund's securities and cash are held under a custodian agreement with
State Street Bank and Trust Company, 2 Avenue de Lafayette, Boston,
Massachusetts 02111. Deutsche Bank Trust Company Americas is the auction agent,
transfer agent, dividend paying agent, redemption agent and registrar for the
Preferred Shares. Deutsche Bank Trust Company Americas' address is 60 Wall
Street, New York, New York 10005. EquiServe Trust Company, N.A. is the transfer
agent, registrar, shareholder servicing agent and dividend disbursing agent for
the Fund's common shares. EquiServe Trust Company, N.A.'s address is P .O. Box
43010, Providence, Rhode Island 02940-3010.
VALIDITY OF SHARES
Certain legal matters in connection with the shares offered hereby are
passed on for the Fund by Sullivan & Worcester LLP, Washington, D.C. Certain
matters have been passed upon for the underwriters by Simpson Thacher & Bartlett
LLP. Sullivan & Worcester LLP and Simpson Thacher & Bartlett LLP may rely as to
certain matters of Delaware law on the opinion of Richards, Layton & Finger,
P.A.
TABLE OF CONTENTS FOR STATEMENT OF ADDITIONAL INFORMATION
Fund History..............................................................3
Use of Proceeds...........................................................3
Investment Objective and Policies.........................................3
Investment Restrictions..................................................20
Management of the Fund...................................................23
The Advisor, Administrator and Transfer Agent............................31
Portfolio Transactions...................................................34
Tender Offers for Common Shares..........................................36
Additional Information Concerning the Auctions for Preferred Shares......38
Rating Agency Guidelines.................................................40
U.S. Federal Income Tax Matters..........................................61
Performance-Related and Other Information................................68
Experts..................................................................72
Additional Information...................................................72
Financial Statements.....................................................73
Appendix A--Description of Ratings......................................A-1
Appendix B--Proxy Voting Policies and Procedures........................B-1
Appendix C--Statement of Preferences of Auction Preferred Shares........C-1
Appendix D--Settlement Procedures.......................................D-1
=====================================================================
$80,000,000
[Evergreen Investments LOGO]
Evergreen Utilities and High Income Fund
Auction Preferred Shares ("Preferred Shares")
3,200 Shares, Series M28
Liquidation Preference $25,000 Per Share
-----------
PROSPECTUS
June 22, 2004
-------------
Citigroup
Wachovia Securities
Merrill Lynch & Co.
UBS Investment Bank
=====================================================================
EVERGREEN UTILITIES AND HIGH INCOME FUND
STATEMENT OF ADDITIONAL INFORMATION
Evergreen Utilities and High Income Fund (the "Fund") is a recently
organized, non-diversified, closed-end management investment company. The
auction preferred shares ("Preferred Shares") are a series of preferred shares
of the Fund. This Statement of Additional Information relating to the Fund's
Series M28 Preferred Shares does not constitute a prospectus, but should be read
in conjunction with the prospectus relating thereto dated June 22, 2004. This
Statement of Additional Information does not include all information that a
prospective investor should consider before purchasing Preferred Shares, and
investors should obtain and read the prospectus prior to purchasing such shares.
A copy of the prospectus may be obtained without charge by calling
1-800-730-6001.
The prospectus and this Statement of Additional Information are part of the
registration statement filed with the Securities and Exchange Commission (the
"Commission"), Washington, D.C., which includes additional information regarding
the Fund. The registration statement may be obtained from the Commission upon
payment of the fee prescribed, inspected at the Commission's office at no charge
or inspected on the Commission's website at http://www.sec.gov.
Capitalized terms used but not defined in this Statement of Additional
Information shall have the meanings given to such terms in the prospectus.
TABLE OF CONTENTS
Fund History.........................................................3
Use of Proceeds......................................................3
Investment Objective and Policies....................................3
Investment Restrictions.............................................20
Management of the Fund..............................................23
The Advisor, Administrator and Transfer Agent.......................31
Portfolio Transactions..............................................34
Tender Offers for Common Shares.....................................36
Additional Information Concerning the Auctions for Preferred
Shares.......................................................38
Rating Agency Guidelines............................................40
U.S. Federal Income Tax Matters.....................................61
Performance-Related and Other Information...........................68
Experts.............................................................72
Additional Information..............................................72
Financial Statements................................................73
Appendix A--Description of Ratings..................................A-1
Appendix B--Proxy Voting Policy and Procedures......................B-1
Appendix C--Statement of Preferences of Auction Preferred Shares....C-1
Appendix D--Settlement Procedures...................................D-1
This Statement of Additional Information is dated June 22, 2004.
FUND HISTORY
The Fund is a non-diversified, closed-end management investment company
organized as a statutory trust under the laws of Delaware on February 4, 2004
and registered under the Investment Company Act of 1940, as amended (the "1940
Act"). Much of the information contained in this Statement of Additional
Information expands on subjects discussed in the prospectus.
USE OF PROCEEDS
The Fund will invest the net proceeds of the offering in accordance with
the Fund's investment objective and policies as stated in the prospectus as soon
as practicable after the closing of this offering. However, investments that, in
the judgment of the Advisor, are appropriate investments for the Fund may not be
immediately available. Therefore, the Fund expects that there will be an initial
investment period of up to two months following the completion of the Preferred
Shares offering before it is invested in accordance with its investment
objective and policies. Pending such investment, the Fund anticipates that all
or a portion of the proceeds will be invested in U.S. government securities or
high grade, short-term money market instruments.
INVESTMENT OBJECTIVE AND POLICIES
The prospectus presents the investment objective and the principal
investment strategies and risks of the Fund. This section supplements the
disclosure in the Fund's prospectus and provides additional information on the
Fund's investment policies or restrictions. Capitalized terms have the meaning
defined in the prospectus unless otherwise defined herein.
Restrictions or policies stated as a maximum percentage of the Fund's
assets are only applied immediately after a portfolio investment to which the
policy or restriction is applicable (other than the limitations on borrowing or
the asset coverage requirements of the 1940 Act for senior securities).
Accordingly, any later increase or decrease resulting from a change in values,
net assets or other circumstances will not be considered in determining whether
the investment complies with the Fund's restrictions and policies.
Primary Investments
Under normal market conditions, the Fund will invest at least 80% of its
net assets (defined as net assets plus the amount of any borrowing for
investment purposes) in securities of utilities companies (water, gas, electric
and telecommunications companies) and in U.S. dollar-denominated non-investment
grade debt securities. The Fund allocates its assets between two separate
investment strategies. Under normal market conditions, the Fund allocates
approximately 70% of its total assets to an investment strategy that focuses on
common, preferred and convertible preferred stocks and convertible debentures of
utility companies (water, gas, electric and telecommunications companies), and
approximately 30% of its total assets to an investment strategy that focuses on
U.S. dollar-denominated non-investment grade bonds, debentures, and other income
obligations. The Fund's investment adviser reserves the discretion based upon
market conditions to reallocate the proportions of total assets invested in each
investment strategy. Shareholders will be provided with at least 60-days prior
written notice of any changes in the 80% investment policy. The utilities
portion of the Fund may invest up to 5% of its assets in the securities of oil
companies such as oil pipeline companies.
Securities
EURODOLLAR INSTRUMENTS AND YANKEE BONDS. The Fund may invest in Eurodollar
instruments and Yankee bonds. Eurodollar instruments are bonds of corporate and
government issuers that pay interest and principal in U.S. dollars but are
issued in markets outside the United States, primarily in Europe. Yankee bonds
are U.S. dollar-denominated bonds typically issued in the U.S. by non-U.S.
governments and their agencies and non-U.S. banks and corporations. The Fund may
also invest in Eurodollar Certificates of Deposit ("ECDs"), Eurodollar Time
Deposits ("ETDs") and Yankee Certificates of Deposit ("Yankee CDs"). ECDs are
U.S. dollar-denominated certificates of deposit issued by non-U.S. branches of
domestic banks; ETDs are U.S. dollar-denominated deposits in a non-U.S. branch
of a U.S. bank or in a non-U.S. bank; and Yankee CDs are U.S. dollar-denominated
certificates of deposit issued by a U.S. branch of a non-U.S. bank and held in
the U.S. These investments involve risks that are different from investments in
securities issued by U.S. issuers, including potential unfavorable political and
economic developments, non-U.S. withholding or other taxes, seizure of non-U.S.
deposits, currency controls, interest limitations or other governmental
restrictions which might affect payment of principal or interest.
INVESTMENTS IN DEPOSITARY RECEIPTS. The Fund may hold securities of
non-U.S. issuers in the form of American Depositary Receipts ("ADRs"), European
Depositary Receipts ("EDRs"), Global Depositary Receipts ("GDRs") and other
similar instruments. Generally, ADRs in registered form are designed for use in
U.S. securities markets, and EDRs and GDRs and other similar global instruments
in bearer form are designed for use in non-U.S. securities markets.
ADRs are denominated in U.S. dollars and represent an interest in the right
to receive securities of non-U.S. issuers deposited in a U.S. bank or
correspondent bank. ADRs do not eliminate all the risk inherent in investing in
the securities of non-U.S. issuers. However, by investing in ADRs rather than
directly in equity securities of non-U.S. issuers, the Fund will avoid currency
risks during the settlement period for either purchases or sales. The Fund does
not count investments in ADRs towards the Fund's 25% limit in foreign
securities. However, it does limit its overall investment in ADRs to 10%. EDRs
and GDRs are not necessarily denominated in the same currency as the underlying
securities which they represent. Investments in EDRs and GDRs will be subject to
the Fund's 25% limit in foreign securities.
For purposes of the Fund's investment policies, investments in ADRs, GDRs
and similar instruments will be deemed to be investments in the underlying
equity securities of non-U.S. issuers. The Fund may acquire depositary receipts
from banks that do not have a contractual relationship with the issuer of the
security underlying the depositary receipt to issue and secure such depositary
receipt. To the extent the Fund invests in such unsponsored depositary receipts
there may be an increased possibility that the Fund may not become aware of
events affecting the underlying security and thus the value of the related
depositary receipt. In addition, certain benefits (i.e., rights offerings) which
may be associated with the security underlying the depositary receipt may not
inure to the benefit of the holder of such depositary receipt.
CORPORATE LOANS AND PARTICIPATIONS. The Fund may invest directly or through
a private investment fund in corporate loans or participations in corporate
loans (collectively, "corporate loans"). The Fund may invest up to 10% of its
total assets in corporate loans. Corporate loans are generally subject to
liquidity risks because they are traded in an over-the-counter market.
Corporate loans, like most other debt obligations, are subject to the risk
of default. While all investments involve some amount of risk, corporate loans
generally involve less risk than equity instruments of the same issuer because
the payment of principal of and interest on debt instruments is a contractual
obligation of the issuer that, in most instances, takes precedence over the
payment of dividends, or the return of capital, to the issuer's shareholders.
Although the Fund may invest in corporate loans that will be fully
collateralized with assets with a market value that, at the time of acquisition,
equals or exceeds the principal amount of the corporate loan, the value of the
collateral may decline below the principal amount of the corporate loan
subsequent to the Fund's investment in such bank loan. In addition, to the
extent that collateral consists of stock of the borrower or its subsidiaries or
affiliates, the Fund will be subject to the risk that this stock may decline in
value, be relatively illiquid, or may lose all or substantially all of its
value, causing the bank loan to be undercollateralized. There is no assurance
that the sale of collateral would raise enough cash to satisfy the borrower's
payment obligation or that the collateral can or will be liquidated. Some or all
of the bank loans held by the Fund may not be secured by any collateral, and
such bank loans entail greater risk than secured bank loans.
Corporate loans are also subject to the risk of default of scheduled
interest or principal payments. In the event of a failure to pay scheduled
interest or principal payments on corporate loans held by the Fund, the Fund
could experience a reduction in its income, would experience a decline in the
market value of the particular corporate loan so affected, and may experience a
decline in the net asset value of its shares or the amount of its dividends. The
risk of default will increase in the event of an economic downturn or a
substantial increase in interest rates. To the extent that the Fund's investment
is in a corporate loan acquired from another lender, the Fund may be subject to
certain credit risks with respect to that lender.
The Fund may acquire corporate loans of borrowers that are experiencing, or
are more likely to experience, financial difficulty, including corporate loans
issued in highly leveraged transactions. The Fund may even acquire and retain in
its portfolio corporate loans of borrowers that have filed for bankruptcy
protection or that have had involuntary bankruptcy petitions filed against them
by creditors.
In the event of the bankruptcy, receivership, or other insolvency
proceeding of a borrower, the Fund could experience delays or limitations with
respect to its ability to collect the principal of and interest on the corporate
loan and with respect to its ability to realize the benefits of the collateral
securing the corporate loan, if any. Among the credit risks involved in such a
proceeding are the avoidance of the corporate loan as a fraudulent conveyance,
the restructuring of the payment obligations under the corporate loan
(including, without limitation, the reduction of the principal amount, the
extension of the maturity, and the reduction of the interest rate thereof), the
avoidance of the pledge of collateral securing the corporate loan as a
fraudulent conveyance or preferential transfer, the discharge of the obligation
to repay that portion of the corporate loan that exceeds the value of the
collateral, and the subordination of the Fund's rights to the rights of other
creditors of the borrower under applicable law. Similar delays or limitations of
the Fund's ability to collect the principal of and interest on the corporate
loan and with respect to its ability to realize the benefits of the collateral
securing the corporate loan may arise in the event of the bankruptcy,
receivership, or other insolvency proceeding of an original lender or an agent.
The Advisor anticipates that investment decisions on corporate loans will
be based largely on the credit analysis performed by the Advisor's investment
personnel and not on analysis prepared by rating agencies or other independent
parties, and such analysis may be difficult to perform for many borrowers and
issuers. The Advisor may also utilize information prepared and supplied by the
agent or other lenders. Information about interests in corporate loans generally
will not be in the public domain, and interests are often not currently rated by
any nationally recognized rating service. Many borrowers have not issued
securities to the public and are not subject to reporting requirements under
federal securities laws. Generally, borrowers are required to provide financial
information to lenders, including the Fund, and information may be available
from other corporate loan participants or agents that originate or administer
corporate loans. There can be no assurance that the Advisor's analysis will
disclose factors that may impair the value of a corporate loan. A serious
deterioration in the credit quality of a borrower could cause a permanent
decrease in the Fund's net asset value.
There is no minimum rating or other independent evaluation of a borrower or
its securities limiting the Fund's investments, except that, with respect to the
portion of the Fund's assets that are invested in high yield securities, the
Fund may not purchase securities with a rating of CCC or below. However, the
Fund may hold such securities as a result of a downgrade in ratings subsequent
to their purchase, although no more than 10% of that portion of the Fund's
assets may be invested in securities that are unrated or rated CCC. Although a
corporate loan often is not rated by any rating agency at the time the Fund
purchases the corporate loan, rating agencies have become more active in rating
an increasing number of corporate loans and at any given time a substantial
portion of the corporate loans in the Fund's portfolio may be rated. Although
the Advisor may consider such ratings when evaluating a corporate loan, it does
not view such ratings as a determinative factor in its investment decisions. The
lack of a rating may not necessarily imply that a corporate loan is of lesser
investment quality. The Fund may invest its assets in corporate loans rated
below investment grade or that are unrated but of comparable quality.
While debt instruments generally are subject to the risk of changes in
interest rates, the interest rates of corporate loans in which the Fund may
invest would adjust with a specified interest rate. Thus the risk that changes
in interest rates would affect the market value of such corporate loans is
significantly decreased, but is not eliminated.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. The Fund may purchase
securities, including U.S. government securities, on a when-issued basis or may
purchase or sell securities for delayed delivery. In such transactions, delivery
of the securities occurs beyond the normal settlement period, but no payment or
delivery is made by the Fund prior to the actual delivery or payment by the
other party to the transaction. The Fund will not earn income on these
securities until delivered. The purchase of securities on a when-issued or
delayed delivery basis involves the risk that the value of the securities
purchased will decline prior to the settlement date. The sale of securities for
delayed delivery involves the risk that the prices available in the market on
the delivery date may be greater than those obtained in the sale transaction.
The Fund's obligations with respect to when-issued and delayed delivery
transactions will be fully collateralized by segregating liquid assets with a
value equal to the Fund's obligations. See "Asset Segregation."
PREFERRED SHARES. Preferred shares are equity securities, but they have
many characteristics of fixed income securities, such as a fixed dividend
payment rate and/or a liquidity preference over the issuer's common shares.
However, because preferred shares are equity securities, they may be more
susceptible to risks traditionally associated with equity investments than the
Fund's fixed income investments.
OTHER INVESTMENT COMPANIES. The Fund may invest in the securities of other
investment companies to the extent that such investments are consistent with the
Fund's investment objective and policies and permissible under the Investment
Company Act of 1940, as amended (the "1940 Act"). Under the 1940 Act, the Fund
may not acquire the securities of other domestic or non-U.S. investment
companies if, as a result, (i) more than 10% of the Fund's total assets would be
invested in securities of other investment companies, (ii) such purchase would
result in more than 3% of the total outstanding voting securities of any one
investment company being held by the Fund, or (iii) more than 5% of the Fund's
total assets would be invested in any one investment company. These limitations
do not apply to the purchase of shares of any investment company in connection
with a merger, consolidation, reorganization or acquisition of substantially all
the assets of another investment company. Notwithstanding the foregoing, subject
to receiving no-action assurance from the Commission, the Fund may invest cash
balances in shares of other money market funds advised by the Fund's Advisor or
its affiliates in amounts up to 25% of the Fund's total assets.
The Fund, as a holder of the securities of other investment companies, will
bear its pro rata portion of the other investment companies' expenses, including
advisory fees. These expenses are in addition to the direct expenses of the
Fund's own operations.
MONEY MARKET INSTRUMENTS. Money market instruments are high-quality
instruments that present minimal credit risk. They may include U.S. government
obligations, commercial paper and other short-term corporate obligations, and
certificates of deposit, bankers' acceptances, bank deposits, and other
financial institution obligations. These instruments may carry fixed or variable
interest rates.
Payment-in-kind Securities. The Fund may invest in payment-in-kind (PIK)
securities. PIK securities are debt obligations which provide that the issuer
may, at its option, pay interest on such bonds in cash or in the form of
additional debt obligations, for a specified period of time. Such investments
benefit the issuer by mitigating its need for cash to meet debt service, but
also require a higher rate of return to attract investors who are willing to
defer receipt of such cash.
The issuer's option to pay in additional securities typically ranges from
one to six years, compared to an average maturity for all PIK securities of
eleven years. Call protection and sinking fund features are comparable to those
offered on traditional debt issues.
PIKs, like zero coupon bonds, are designed to give an issuer flexibility in
managing cash flow. Some PIKs are senior debt. In other cases, where PIKs are
subordinated, most senior lenders view them as equity equivalents.
An advantage of PIKs for the issuer -- as with zero coupon securities -- is
that interest payments are automatically compounded (reinvested) at the stated
coupon rate, which is not the case with cash-paying securities. However, PIKs
are gaining popularity over zero coupon bonds since interest payments in
additional securities can be monetized and are more tangible than accretion of a
discount.
Generally, PIK bonds trade without accrued interest. Their price is
expected to reflect an amount representing accreted interest since the last
payment. PIKs generally trade at higher yields than comparable cash-paying
securities of the same issuer. Their premium yield is usually the result of the
lesser desirability of non-cash interest, the more limited audience for non-cash
paying securities and the fact that many PIKs have been issued to equity
investors who do not normally own or hold such securities.
Calculating the true yield on a PIK security requires a discounted cash
flow analysis if the security is trading at a premium or a discount because the
realizable value of additional payments is equal to the current market value of
the underlying security, not par.
Regardless of whether PIK securities are senior or deeply subordinated,
issuers are generally highly motivated to retire them because they are usually
their most costly form of capital.
Derivatives
INTEREST RATE TRANSACTIONS
Interest Rate Swaps, Collars, Caps and Floors. In order to hedge the value
of the Fund's portfolio against interest rate fluctuations or to enhance the
Fund's income, the Fund may, but is not required to, enter into various interest
rate transactions such as interest rate swaps and the purchase or sale of
interest rate caps and floors. To the extent that the Fund enters into these
transactions, the Fund expects to do so primarily to preserve a return or spread
on a particular investment or portion of its portfolio or to protect against any
increase in the price of securities the Fund anticipates purchasing at a later
date. The Fund intends to use these transactions primarily as a hedge and not as
a speculative investment. However, the Fund also may invest in interest rate
swaps to enhance income or to increase the Fund's yield, for example, during
periods of steep interest rate yield curves (i.e., wide differences between
short-term and long-term interest rates). The Fund is not required to hedge its
portfolio and may choose not to do so. The Fund cannot guarantee that any
hedging strategies it uses will work.
In an interest rate swap, the Fund exchanges with another party their
respective commitments to pay or receive interest (e.g., an exchange of fixed
rate payments for floating rate payments). For example, if the Fund holds a debt
instrument with an interest rate that is reset only once each year, it may swap
the right to receive interest at this fixed rate for the right to receive
interest at a rate that is reset every week. This would enable the Fund to
offset a decline in the value of the debt instrument due to rising interest
rates but would also limit its ability to benefit from falling interest rates.
Conversely, if the Fund holds a debt instrument with an interest rate that is
reset every week and it would like to lock in what it believes to be a high
interest rate for one year, it may swap the right to receive interest at this
variable weekly rate for the right to receive interest at a rate that is fixed
for one year. Such a swap would protect the Fund from a reduction in yield due
to falling interest rates and may permit the Fund to enhance its income through
the positive differential between one week and one year interest rates, but
would preclude it from taking full advantage of rising interest rates.
The Fund usually will enter into interest rate swaps on a net basis (i.e.,
the two payment streams are netted out with the Fund receiving or paying, as the
case may be, only the net amount of the two payments). The net amount of the
excess, if any, of the Fund's obligations over its entitlements with respect to
each interest rate swap will be accrued on a daily basis, and an amount of cash
or liquid instruments having an aggregate net asset value at least equal to the
accrued excess will be maintained in a segregated account by the Fund's
custodian. If the interest rate swap transaction is entered into on other than a
net basis, the full amount of the Fund's obligations will be accrued on a daily
basis, and the full amount of the Fund's obligations will be maintained in a
segregated account by the Fund's custodian.
The Fund also may engage in interest rate transactions in the form of
purchasing or selling interest rate caps or floors. The Fund will not sell
interest rate caps or floors that it does not own. The purchase of an interest
rate cap entitles the purchaser, to the extent that a specified index exceeds a
predetermined interest rate, to receive payments of interest equal to the
difference of the index and the predetermined rate on a notional principal
amount (i.e., the reference amount with respect to which interest obligations
are determined although no actual exchange of principal occurs) from the party
selling such interest rate cap. The purchase of an interest rate floor entitles
the purchaser, to the extent that a specified index falls below a predetermined
interest rate, to receive payments of interest at the difference of the index
and the predetermined rate on a notional principal amount from the party selling
such interest rate floor. The Fund will not enter into caps or floors if, on a
net basis, the aggregate notional principal amount with respect to such
agreements exceeds the net assets of the Fund.
Typically, the parties with which the Fund will enter into interest rate
transactions will be broker-dealers and other financial institutions. The Fund
will not enter into any interest rate swap, cap or floor transaction unless the
unsecured senior debt or the claims-paying ability of the other party thereto is
rated investment grade quality by at least one nationally recognized statistical
rating organization at the time of entering into such transaction or whose
creditworthiness is believed by the Advisor to be equivalent to such rating. If
there is a default by the other party to such a transaction, the Fund will have
contractual remedies pursuant to the agreements related to the transaction. The
swap market has grown substantially in recent years with a large number of banks
and investment banking firms acting both as principals and as agents utilizing
standardized swap documentation. As a result, the swap market has become
relatively liquid in comparison with other similar instruments traded in the
interbank market. Caps and floors, however, are less liquid than swaps. Certain
federal income tax requirements may limit the Fund's ability to engage in
interest rate swaps.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS. To hedge against
changes in securities prices or currency exchange rates or to seek to increase
total return, the Fund may purchase and sell various kinds of futures contracts,
and purchase and write (sell) call and put options on any of such futures
contracts. The Fund may also enter into closing purchase and sale transactions
with respect to any of such contracts and options. The futures contracts may be
based on various securities (such as U.S. government securities), securities
indices, non-U.S. currencies and other financial instruments and indices. The
Fund will engage in futures and related options transactions for bona fide
hedging and non-hedging purposes as described below. All futures contracts
entered into by the Fund are traded on U.S. exchanges or boards of trade that
are licensed and regulated by the Commodity Futures Trading Commission (the
CFTC) or on non-U.S. exchanges.
Futures Contracts. A futures contract may generally be described as an
agreement between two parties to buy and sell particular financial instruments
for an agreed price during a designated month (or to deliver the final cash
settlement price, in the case of a contract relating to an index or otherwise
not calling for physical delivery at the end of trading in the contract).
When interest rates are rising or securities prices are falling, the Fund
can seek to offset a decline in the value of its current portfolio securities
through the sale of futures contracts. When interest rates are falling or
securities prices are rising, the Fund, through the purchase of futures
contracts, can attempt to secure better rates or prices than might later be
available in the market when it effects anticipated purchases. Similarly, the
Fund can sell futures contracts on a specified currency to protect against a
decline in the value of such currency and a decline in the value of its
portfolio securities which are denominated in such currency. The Fund can
purchase futures contracts on a non-U.S. currency to establish the price in U.S.
dollars of a security denominated in such currency that the Fund has acquired or
expects to acquire.
Positions taken in the futures markets are not normally held to maturity
but are instead liquidated through offsetting transactions which may result in a
profit or a loss. While futures contracts on securities or currency will usually
be liquidated in this manner, the Fund may instead make, or take, delivery of
the underlying securities or currency whenever it appears economically
advantageous to do so. A clearing corporation associated with the exchange on
which futures on securities or currency are traded guarantees that, if still
open, the sale or purchase will be performed on the settlement date.
Hedging Strategies. Hedging, by use of futures contracts, seeks to
establish with more certainty the effective price, rate of return and currency
exchange rate on portfolio securities and securities that the Fund owns or
proposes to acquire. The Fund may, for example, take a "short" position in the
futures market by selling futures contracts in order to hedge against an
anticipated rise in interest rates or a decline in market prices or non-U.S.
currency rates that would adversely affect the value of the Fund's portfolio
securities. Such futures contracts may include contracts for the future delivery
of securities held by the Fund or securities with characteristics similar to
those of the Fund's portfolio securities. Similarly, the Fund may sell futures
contracts in a non-U.S. currency in which its portfolio securities are
denominated or in one currency to hedge against fluctuations in the value of
securities denominated in a different currency if there is an established
historical pattern of correlation between the two currencies. If, in the opinion
of the Advisor, there is a sufficient degree of correlation between price trends
for the Fund's portfolio securities and futures contracts based on other
financial instruments, securities indices or other indices, the Fund may also
enter into such futures contracts as part of its hedging strategies. Although
under some circumstances prices of securities in the Fund's portfolio may be
more or less volatile than prices of such futures contracts, the Advisor will
attempt to estimate the extent of this volatility difference based on historical
patterns and compensate for any such differential by having the Fund enter into
a greater or lesser number of futures contracts or by attempting to achieve only
a partial hedge against price changes affecting the Fund's portfolio securities.
When hedging of this character is successful, any depreciation in the value of
portfolio securities will be substantially offset by appreciation in the value
of the futures position. On the other hand, any unanticipated appreciation in
the value of the Fund's portfolio securities would be substantially offset by a
decline in the value of the futures position.
On other occasions, the Fund may take a "long" position by purchasing
futures contracts. This may be done, for example, when the Fund anticipates the
subsequent purchase of particular securities when it has the necessary cash, but
expects the prices or currency exchange rates then available in the applicable
market to be less favorable than prices or rates that are currently available.
Options on Futures Contracts. The acquisition of put and call options on
futures contracts will give the Fund the right (but not the obligation) for a
specified price to sell or to purchase, respectively, the underlying futures
contract at any time during the option period. As the purchaser of an option on
a futures contract, the Fund obtains the benefit of the futures position if
prices move in a favorable direction but limits its risk of loss in the event of
an unfavorable price movement to the loss of the premium and transaction costs.
The writing of a call option on a futures contract generates a premium
which may partially offset a decline in the value of the Fund's assets. By
writing a call option, the Fund becomes obligated, in exchange for the premium,
to sell a futures contract (if the option is exercised), which may have a value
higher than the exercise price. Conversely, the writing of a put option on a
futures contract generates a premium which may partially offset an increase in
the price of securities that the Fund intends to purchase. However, the Fund
becomes obligated to purchase a futures contract (if the option is exercised)
which may have a value lower than the exercise price. Thus, the loss incurred by
the Fund in writing options on futures is potentially unlimited and may exceed
the amount of the premium received. The Fund will incur transaction costs in
connection with the writing of options on futures.
The holder or writer of an option on a futures contract may terminate its
position by selling or purchasing an offsetting option on the same series. There
is no guarantee that such closing transactions can be effected. The Fund's
ability to establish and close out positions on such options will be subject to
the development and maintenance of a liquid market.
Other Considerations. The Fund will engage in futures and related options
transactions only for bona fide hedging or non-hedging purposes in accordance
with CFTC regulations which permit principals of an investment company
registered under the 1940 Act to engage in such transactions without registering
as commodity pool operators. The Fund will determine that the price fluctuations
in the futures contracts and options on futures used for hedging purposes are
substantially related to price fluctuations in securities held by the Fund or
which the Fund expects to purchase. Except as stated below, the Fund's futures
transactions will be entered into for traditional hedging purposes--i.e.,
futures contracts will be sold to protect against a decline in the price of
securities (or the currency in which they are denominated) that the Fund owns,
or futures contracts will be purchased to protect the Fund against an increase
in the price of securities (or the currency in which they are denominated) it
intends to purchase. As evidence of this hedging intent, the Fund expects that
on 75% or more of the occasions on which it takes a long futures or option
position (involving the purchase of futures contracts), the Fund will have
purchased, or will be in the process of purchasing, equivalent amounts of
related securities or assets denominated in the related currency in the cash
market at the time when the futures or option position is closed out. However,
in particular cases, when it is economically advantageous for the Fund to do so,
a long futures position may be terminated or an option may expire without the
corresponding purchase of securities or other assets.
As an alternative to literal compliance with the bona fide hedging
definition, a CFTC regulation permits the Fund to elect to comply with a
different test, under which the sum of the amounts of initial margin deposits on
the Fund's existing non-hedging futures contracts and premiums paid for options
on futures entered into for non-hedging purposes (net of the amount the
positions are "in the money") would not exceed 5% of the market value of the
Fund's total assets. The Fund does not use derivatives as a primary investment
technique and generally does not anticipate using derivatives for non-hedging
purposes. In the event the Fund uses derivatives for non-hedging purposes, no
more than 3% of the Fund's total assets will be committed to initial margin for
derivatives for such purposes. The Fund will engage in transactions in futures
contracts and related options only to the extent such transactions are
consistent with the requirements of the Internal Revenue Code of 1986, as
amended (the "Code") for maintaining its qualification as a regulated investment
company for federal income tax purposes.
Futures contracts and related options involve brokerage costs, require
margin deposits and, in the case of contracts and options obligating the Fund to
purchase securities or currencies, require the Fund to segregate assets to cover
such contracts and options.
While transactions in futures contracts and options on futures may reduce
certain risks, such transactions themselves entail certain other risks. Thus,
while the Fund may benefit from the use of futures and options on futures,
unanticipated changes in interest rates, securities prices or currency exchange
rates may result in a poorer overall performance for the Fund than if it had not
entered into any futures contracts or options transactions. In the event of an
imperfect correlation between a futures position and a portfolio position which
is intended to be protected, the desired protection may not be obtained and the
Fund may be exposed to risk of loss.
Options on Securities and Securities Indices. The Fund may purchase put and
call options on any security in which it may invest or options on any securities
index based on securities in which it may invest. The Fund would also be able to
enter into closing sale transactions in order to realize gains or minimize
losses on options it has purchased.
Writing Call and Put Options on Securities. A call option written by the
Fund obligates the Fund to sell specified securities to the holder of the option
at a specified price if the option is exercised at any time before the
expiration date. All call options written by the Fund are covered, which means
that the Fund will own the securities subject to the options as long as the
options are outstanding, or the Fund will use the other methods described below.
The Fund's purpose in writing covered call options is to realize greater income
than would be realized on portfolio securities transactions alone. However, the
Fund may forgo the opportunity to profit from an increase in the market price of
the underlying security.
A put option written by the Fund would obligate the Fund to purchase
specified securities from the option holder at a specified price if the
option is exercised at any time before the expiration date. All put options
written by the Fund would be covered, which means that the Fund would have
segregated assets with a value at least equal to the exercise price of the
put option. The purpose of writing such options is to generate additional
income for the Fund. However, in return for the option premium, the Fund
accepts the risk that it may be required to purchase the underlying
security at a price in excess of its market value at the time of purchase.
Call and put options written by the Fund will also be considered to be
covered to the extent that the Fund's liabilities under such options are wholly
or partially offset by its rights under call and put options purchased by the
Fund. In addition, a written call option or put may be covered by entering into
an offsetting forward contract and/or by purchasing an offsetting option or any
other option which, by virtue of its exercise price or otherwise, reduces the
Fund's net exposure on its written option position.
Writing Call and Put Options on Securities Indices. The Fund may also write
(sell) covered call and put options on any securities index composed of
securities in which it may invest. Options on securities indices are similar to
options on securities, except that the exercise of securities index options
requires cash payments and does not involve the actual purchase or sale of
securities. In addition, securities index options are designed to reflect price
fluctuations in a group of securities or segments of the securities market
rather than price fluctuations in a single security.
The Fund may cover call options on a securities index by owning securities
whose price changes are expected to be similar to those of the underlying index,
or by having an absolute and immediate right to acquire such securities without
additional cash consideration (or for additional consideration if cash in such
amount is segregated) upon conversion or exchange of other securities in its
portfolio. The Fund may cover call and put options on a securities index by
segregating assets with a value equal to the exercise price.
Purchasing Call and Put Options. The Fund would normally purchase call
options in anticipation of an increase in the market value of securities of the
type in which it may invest. The purchase of a call option would entitle the
Fund, in return for the premium paid, to purchase specified securities at a
specified price during the option period. The Fund would ordinarily realize a
gain if, during the option period, the value of such securities exceeded the sum
of the exercise price, the premium paid and transaction costs; otherwise the
Fund would realize either no gain or a loss on the purchase of the call option.
The Fund would normally purchase put options in anticipation of a decline
in the market value of securities in its portfolio ("protective puts") or in
securities in which it may invest. The purchase of a put option would entitle
the Fund, in exchange for the premium paid, to sell specified securities at a
specified price during the option period. The purchase of protective puts is
designed to offset or hedge against a decline in the market value of the Fund's
holdings. Put options may also be purchased by the Fund for the purpose of
affirmatively benefiting from a decline in the price of securities which it does
not own. The Fund would ordinarily realize a gain if, during the option period,
the value of the underlying securities decreased below the exercise price
sufficiently to more than cover the premium and transaction costs; otherwise the
Fund would realize either no gain or a loss on the purchase of the put option.
Gains and losses on the purchase of protective put options would tend to be
offset by countervailing changes in the value of the underlying portfolio
securities.
The Fund may terminate its obligations under an exchange-traded call or put
option by purchasing an option identical to the one it has written. Obligations
under over-the-counter options may be terminated only by entering into an
offsetting transaction with the counterparty to such option. Such purchases are
referred to as "closing purchase transactions."
Risks of Trading Options. There is no assurance that a liquid secondary
market on an options exchange will exist for any particular exchange-traded
option, or at any particular time. If the Fund is unable to effect a closing
purchase transaction with respect to covered options it has written, the Fund
will not be able to sell the underlying securities or dispose of its segregated
assets until the options expire or are exercised. Similarly, if the Fund is
unable to effect a closing sale transaction with respect to options it has
purchased, it will have to exercise the options in order to realize any profit
and will incur transaction costs upon the purchase or sale of underlying
securities.
Reasons for the absence of a liquid secondary market on an exchange include
the following: (i) there may be insufficient trading interest in certain
options; (ii) restrictions may be imposed by an exchange on opening or closing
transactions or both; (iii) trading halts, suspensions or other restrictions may
be imposed with respect to particular classes or series of options; (iv) unusual
or unforeseen circumstances may interrupt normal operations on an exchange; (v)
the facilities of an exchange or the Options Clearing Corporation (OCC) may not
at all times be adequate to handle current trading volume; or (vi) one or more
exchanges could, for economic or other reasons, decide or be compelled at some
future date to discontinue the trading of options (or a particular class or
series of options), in which event the secondary market on that exchange (or in
that class or series of options) would cease to exist, although outstanding
options on that exchange, if any, that had been issued by the OCC as a result of
trades on that exchange would continue to be exercisable in accordance with
their terms.
The Fund may purchase and sell both options that are traded on U.S. and
options traded over the counter with broker-dealers who make markets in these
options. The ability to terminate over-the-counter options is more limited than
with exchange-traded options and may involve the risk that broker-dealers
participating in such transactions will not fulfill their obligations.
Transactions by the Fund in options on securities and indices will be
subject to limitations established by each of the exchanges, boards of trade or
other trading facilities governing the maximum number of options in each class
which may be written or purchased by a single investor or group of investors
acting in concert. Thus, the number of options which the Fund may write or
purchase may be affected by options written or purchased by other investment
advisory clients of the Advisor. An exchange, board of trade or other trading
facility may order the liquidations of positions found to be in excess of these
limits, and it may impose certain other sanctions.
The writing and purchase of options is a highly specialized activity which
involves investment techniques and risks different from those associated with
ordinary portfolio securities transactions. The successful use of protective
puts for hedging purposes depends in part on the Advisor's ability to predict
future price fluctuations and the degree of correlation between the options and
securities markets.
The hours of trading for options may not conform to the hours during which
the underlying securities are traded. To the extent that the options markets
close before the markets for the underlying securities, significant price
movements can take place in the underlying markets that cannot be reflected in
the options markets.
In addition to the risks of imperfect correlation between the Fund's
portfolio and the index underlying the option, the purchase of securities index
options involves the risk that the premium and transaction costs paid by the
Fund in purchasing an option will be lost. This could occur as a result of
unanticipated movements in the price of the securities comprising the securities
index on which the option is based.
FOREIGN CURRENCY TRANSACTIONS.
Foreign Currency Exchange Transactions. The Fund may engage in foreign
currency exchange transactions to protect against uncertainty in the level of
future exchange rates. The Advisor may engage in foreign currency exchange
transactions in connection with the purchase and sale of portfolio securities
("transaction hedging"), and to protect the value of specific portfolio
positions ("position hedging").
The Fund may engage in "transaction hedging" to protect against a change in
the foreign currency exchange rate between the date on which the Fund contracts
to purchase or sell the security and the settlement date, or to "lock in" the
U.S. dollar equivalent of a dividend or interest payment in a foreign currency.
For that purpose, the Fund may purchase or sell a foreign currency on a spot (or
cash) basis at the prevailing spot rate in connection with the settlement of
transactions in portfolio securities denominated in or exposed to that foreign
currency.
If conditions warrant, the Fund may also enter into contracts to purchase
or sell foreign currencies at a future date ("forward contracts") and purchase
and sell foreign currency futures contracts as a hedge against changes in
foreign currency exchange rates between the trade and settlement dates on
particular transactions and not for speculation. A foreign currency forward
contract is a negotiated agreement to exchange currency at a future time at a
rate or rates that may be higher or lower than the spot rate. Foreign currency
futures contracts are standardized exchange-traded contracts and have margin
requirements.
For transaction hedging purposes, the Fund may also purchase
exchange-listed and over-the-counter call and put options on foreign currency
futures contracts and on foreign currencies. A put option on a futures contract
gives the Fund the right to assume a short position in the futures contract
until expiration of the option. A put option on currency gives the Fund the
right to sell a currency at an exercise price until the expiration of the
option. A call option on a futures contract gives the Fund the right to assume a
long position in the futures contract until the expiration of the option. A call
option on currency gives the Fund the right to purchase a currency at the
exercise price until the expiration of the option.
The Fund may engage in "position hedging" to protect against a decline in
the value relative to the U.S. dollar of the currencies in which its portfolio
securities are denominated, or quoted or exposed (or an increase in the value of
currency for securities which the Fund intends to buy, when it holds cash
reserves and short-term investments). For position hedging purposes, the Fund
may purchase or sell foreign currency futures contracts and foreign currency
forward contracts, and may purchase put or call options on foreign currency
futures contracts and on foreign currencies on exchanges or in over-the-counter
markets. In connection with position hedging, the Fund may also purchase or sell
foreign currency on a spot basis.
The precise matching of the amounts of foreign currency exchange
transactions and the value of the portfolio securities involved will not
generally be possible since the future value of such securities in foreign
currencies will change as a consequence of market movements in the value of
those securities between the dates the currency exchange transactions are
entered into and the dates they mature.
It is impossible to forecast with precision the market value of portfolio
securities at the expiration or maturity of a forward or futures contract.
Accordingly, it may be necessary for the Fund to purchase additional foreign
currency on the spot market (and bear the expense of such purchase) if the
market value of the security or securities being hedged is less than the amount
of foreign currency the Fund is obligated to deliver and if a decision is made
to sell the security or securities and make delivery of the foreign currency.
Conversely, it may be necessary to sell on the spot market some of the foreign
currency received upon the sale of the portfolio security or securities if the
market value of such security or securities exceeds the amount of foreign
currency the Fund is obligated to deliver.
Hedging transactions involve costs and may result in losses. The Fund may
write covered call options on foreign currencies to offset some of the costs of
hedging those currencies. The Fund's ability to engage in hedging and related
option transactions may be limited by tax considerations.
Transaction and position hedging do not eliminate fluctuations in the
underlying prices of the securities which the Fund owns or intends to purchase
or sell. They simply establish a rate of exchange which one can achieve at some
future point in time. Additionally, although these techniques seek to minimize
the risk of loss due to a decline in the value of the hedged currency, they seek
to limit any potential gain which might result from the increase in the value of
such currency.
Currency Forward and Futures Contracts. A forward foreign currency exchange
contract involves an obligation to purchase or sell a specific currency at a
future date, which may be any fixed number of days from the date of the contract
as agreed by the parties, at a price set at the time of the contract. In the
case of a cancelable forward contract, the holder has the unilateral right to
cancel the contract at maturity by paying a specified fee. The contracts are
traded in the interbank market conducted directly between currency traders
(usually large commercial banks) and their customers. A forward contract
generally has no deposit requirement, and no commissions are charged at any
stage for trades. A foreign currency futures contract is a standardized contract
for the future delivery of a specified amount of a foreign currency at a future
date at a price set at the time of the contract. Foreign currency futures
contracts traded in the U.S. are designed by and traded on exchanges regulated
by the CFTC, such as the New York Mercantile Exchange.
The Advisor anticipates that forward contracts will be used primarily by
the Advisor to adjust the foreign exchange exposure of the Fund to protect
against uncertainty in the level of future foreign exchange rates, and the Fund
might be expected to enter into such contracts under the following
circumstances:
Lock In. When the Advisor desires to lock in the U.S. dollar price on the
purchase or sale of a security denominated in a foreign currency.
Cross Hedge. If a particular currency is expected to decrease against
another currency, the Fund may sell the currency expected to decrease and
purchase a currency which is expected to increase against the currency sold in
an amount approximately equal to some or all of the Fund's holdings denominated
in the currency sold.
Direct Hedge. If the Advisor wants to eliminate substantially all of the
risk of owning a particular currency, and/or if the Advisor thinks that the Fund
can benefit from price appreciation in a given country's bonds but does not want
to hold the currency, it may employ a direct hedge back into the U.S. dollar. In
either case, the Fund would enter into a forward contract to sell the currency
in which a portfolio security is denominated and purchase U.S. dollars at an
exchange rate established at the time it initiated the contract. The cost of the
direct hedge transaction may offset most, if not all, of the yield advantage
offered by the foreign security, but the Fund would hope to benefit from an
increase (if any) in value of the bond.
Proxy Hedge. The Advisor might choose to use a proxy hedge, which may be
less costly than a direct hedge. In this case, the Fund, having purchased a
security, will sell a currency whose value is believed to be closely linked to
the currency in which the security is denominated. Interest rates prevailing in
the country whose currency was sold would be expected to be closer to those in
the U.S. and lower than those of securities denominated in the currency of the
original holding. This type of hedging entails greater risk than a direct hedge
because it is dependent on a stable relationship between the two currencies
paired as proxies and the relationships can be very unstable at times.
Forward foreign currency exchange contracts differ from foreign currency
futures contracts in certain respects. For example, the maturity date of a
forward contract may be any fixed number of days from the date of the contract
agreed upon by the parties, rather than a predetermined date in any given month.
Forward contracts may be in any amounts agreed upon by the parties rather than
predetermined amounts. Also, forward foreign exchange contracts are traded
directly between currency traders so that no intermediary is required. A forward
contract generally requires no margin or other deposit.
At the maturity of a forward or futures contract, the Fund may either
accept or make delivery of the currency specified in the contract, or at or
prior to maturity enter into a closing transaction involving the purchase or
sale of an offsetting contract. Closing transactions with respect to forward
contracts are usually effected with the currency trader who is a party to the
original forward contract. Closing transactions with respect to futures
contracts are effected on a commodities exchange; a clearing corporation
associated with the exchange assumes responsibility for closing out such
contracts.
Positions in foreign currency futures contracts may be closed out only on
an exchange or board of trade which provides a secondary market in such
contracts. Although the Fund intends to purchase or sell foreign currency
futures contracts only on exchanges or boards of trade where there appears to be
an active secondary market, there can be no assurance that a secondary market on
an exchange or board of trade will exist for any particular contract or at any
particular time. In such event, it may not be possible to close a futures
position and, in the event of adverse price movements, the Fund would continue
to be required to make daily cash payments of variation margin.
Foreign Currency Options. Options on foreign currencies operate similarly
to options on securities, and are traded primarily in the over-the-counter
market, although options on foreign currencies have recently been listed on
several exchanges. The Advisor anticipates that foreign currency options will be
purchased or written only when it believes that a liquid secondary market exists
for such options. There can be no assurance that a liquid secondary market will
exist for a particular option at any specific time. Options on foreign
currencies are affected by all of those factors which influence foreign exchange
rates and investments generally.
The value of a foreign currency option is dependent upon the value of the
foreign currency and the U.S. dollar and may have no relationship to the
investment merits of a foreign security. Because foreign currency transactions
occurring in the interbank market involve substantially larger amounts than
those that may be involved in the use of foreign currency options, investors may
be disadvantaged by having to deal in an odd lot market (generally consisting of
transactions of less than $1 million) for the underlying foreign currencies at
prices that are less favorable than for round lots.
There is no systematic reporting of last sale information for foreign
currencies and there is no regulatory requirement that quotations available
through dealers or other market sources be firm or revised on a timely basis.
Available quotation information is generally representative of very large
transactions in the interbank market and thus may not reflect relatively smaller
transactions (less than $1 million) where rates may be less favorable. The
interbank market in foreign currencies is a global, around-the-clock market. To
the extent that the U.S. options markets are closed while the markets for the
underlying currencies remain open, significant price and rate movements may take
place in the underlying markets that cannot be reflected in the options markets.
Foreign Currency Conversion. Although foreign exchange dealers do not
charge a fee for currency conversion, they do realize a profit based on the
difference (the "spread") between prices at which they are buying and selling
various currencies. Thus, a dealer may offer to sell a foreign currency to the
Fund at one rate, while offering a lesser rate of exchange should the Fund
desire to resell that currency to the dealer.
Asset Segregation
The 1940 Act requires that the Fund segregate assets in connection with
certain types of transactions that may have the effect of leveraging the Fund's
portfolio. If the Fund enters into a transaction requiring segregation, such as
a forward commitment, the custodian or the Advisor will segregate liquid assets
in an amount required to comply with the 1940 Act. Such segregated assets will
be valued at market daily. If the aggregate value of such segregated assets
declines below the aggregate value necessary to satisfy requirements under the
1940 Act, additional liquid assets will be segregated.
Downgrades in Fixed Income Debt Securities
The Advisor does not intend to purchase illiquid or restricted securities
(securities that the Fund cannot easily resell within seven days at current
value or that have contractual or legal restrictions on resale) or distressed
securities (securities which are the subject of bankruptcy proceedings or
otherwise in default as to the repayment of principal and/or payment of
interest). However, the Fund is not required to sell or dispose of any debt
security that falls into either category subsequent to its purchase.
If a security held by the Fund subsequently is categorized as illiquid or
restricted, the Fund may be unable to quickly resell the security quickly or may
be able to sell it only at a price below current market value or could have
difficulty valuing this holding precisely. Distressed securities frequently do
not produce income while they are outstanding and may require the Fund to bear
certain extraordinary expenses in order to protect and recover its investment.
Therefore, the Fund's ability to achieve current income may be diminished. Such
securities are also subject to uncertainty as to when, in what manner and for
what value the obligations evidenced by the distressed securities will be
satisfied.
The Advisor's Investment Process
The Fund combines investments in high yield debt securities with common,
preferred and convertible preferred stocks and convertible debentures of
utilities companies. Each of these sectors has its own distinct attributes that
the Advisor believes could contribute to the potential for the Fund to achieve
its investment objective. There is no guarantee that the Fund will obtain its
investment objective.
As discussed in the prospectus, the Fund is managed following a rigorous
investment process that emphasizes both quality and value. Each portion of the
Fund's assets is managed by its respective portfolio management team, whose
investment strategies are summarized as follows.
U.S. High Yield Debt Securities. The high yield team emphasizes quality
companies with stable or improving financial situations. Extensive, proprietary
research helps manage risk, as does broad sector diversification. The team
considers both macro- and microeconomic factors - such as inflation, consumer
spending and wages - that affect the conditions of firms in the portfolio.
Utilities Securities. The value equity team considers a number of factors
when selecting utility company stocks, which include among others: a history of
high dividends and profits; the size of the company's market and market share;
competitive or technological advantages that may help it in the future;
potential merger activity; and the projected volatility of the company or
industry. The team's stock selection is based on a blended style of equity
management that allows it to invest in both value- and growth-oriented equity
securities.
Proxy Voting Policy and Procedures
The Fund has adopted Proxy Voting Policies and Procedures which the Advisor
uses to determine how to vote proxies relating to the Fund's portfolio
securities. A copy of the Fund's Proxy Voting Policy and Procedures are attached
as Appendix B to this Statement of Additional Information.
INVESTMENT RESTRICTIONS
The Fund has adopted the fundamental investment restrictions set forth
below which may not be changed without the vote of "a majority of the Fund's
outstanding shares", as defined in the 1940 Act. After the Fund has issued a
class of preferred shares, including the Preferred Shares, the investment
restrictions cannot be changed without the approval of a majority of the
outstanding common and preferred shares, voting together as a class, and the
approval of a majority of the outstanding preferred shares, voting separately by
class. Where necessary, an explanation beneath a fundamental policy describes
the Fund's practices with respect to that policy, as allowed by current law. If
the law governing a policy changes, the Fund's practices may change accordingly
without a shareholder vote. Unless otherwise stated, all references to the
assets of the Fund are in terms of current market value.
1. Non-Diversification
The Fund is a non-diversified investment company under the 1940 Act.
Further Explanation of Non-Diversification Policy:
A non-diversified investment company is not limited by the 1940 Act as to
the amount of assets that may be invested in any one issuer. However, in order
to qualify as a regulated investment company for tax purposes, the Fund may have
no more that 25% of its total assets invested in the securities (other than
securities of the U.S. government, its agencies or instrumentalities, or the
shares of other regulated investment companies) of any one issuer. In addition,
with respect to 50% of its total assets, the Fund may not invest more than 5% of
its total assets, determined at market or other fair value at the time of
purchase, in the securities (other than securities issued by the U.S.
government, its agencies or instrumentalities) of any one issuer, or invest in
more than 10% of the voting securities (other than securities issued by the U.S.
government, its agencies or instrumentalities) of any one issuer, determined at
the time of purchase.
2. Concentration
The Fund will concentrate its investments (invests 25% or more of its
assets) in the securities of issuers engaged in the utility (water, gas,
electric and telecommunications) sector. The Fund will not concentrate in any
other industries.
3. Issuing Senior Securities
Except as permitted under the 1940 Act, the Fund may not issue senior
securities.
Further Explanation of Senior Securities Policy:
The Fund may not issue any class of senior security, or sell any such
security of which it is the issuer, unless (i) if such class of senior security
represents an indebtedness, immediately after such issuance or sale, it will
have an asset coverage of at least 300% or (ii) if such class of senior security
is a stock, immediately after such issuance or sale it will have an asset
coverage of at least 200%.
4. Borrowing
The Fund may not borrow money, except to the extent permitted by
applicable law.
Further Explanation of Borrowing Policy:
The Fund may borrow from banks and enter into reverse repurchase agreements
in an amount up to 33 1/3% of its total assets, taken at market value. The Fund
intends to limit its borrowing through reverse repurchase agreements to up to
20% of its total assets. The Fund may also borrow up to an additional 5% of its
total assets from banks or others. The Fund may purchase securities on margin
and engage in short sales to the extent permitted by applicable law.
5. Underwriting
The Fund may not underwrite securities of other issuers, except insofar as
the Fund may be deemed to be an underwriter in connection with the disposition
of its portfolio securities.
6. Real Estate
The Fund may not purchase or sell real estate, except that, to the extent
permitted by applicable law, the Fund may invest in (a) securities that are
directly or indirectly secured by real estate, or (b) securities issued by
issuers that invest in real estate.
7. Commodities
The Fund may not purchase or sell commodities or contracts on commodities,
except to the extent that the Fund may engage in financial futures contracts and
related options and currency contracts and related options and may otherwise do
so in accordance with applicable law and without registering as a commodity pool
operator under the Commodity Exchange Act.
8. Lending
The Fund may not make loans to other persons, except that the Fund may lend
its portfolio securities in accordance with applicable law. The acquisition of
investment securities or other investment instruments shall not be deemed to be
the making of a loan.
Further Explanation of Lending Policy:
To generate income and offset expenses, the Fund may lend portfolio
securities to broker-dealers and other financial institutions in an amount up to
33 1/3% of its total assets, taken at market value. While securities are on
loan, the borrower will pay the Fund any income accruing on the security. The
Fund may invest any collateral it receives in additional portfolio securities,
such as U.S. Treasury notes, certificates of deposit, other high-grade,
short-term obligations or interest bearing cash equivalents. Increases or
decreases in the market value of a security lent will affect the Fund and its
shareholders.
When the Fund lends its securities, it will require the borrower to give
the Fund collateral in cash or government securities. The Fund will require
collateral in an amount equal to at least 100% of the current market value of
the securities lent, including accrued interest. The Fund has the right to call
a loan and obtain the securities lent any time on notice of not more than five
business days. The Fund may pay reasonable fees in connection with such loans.
The risk in lending portfolio securities, as with other extensions of secured
credit, consist of possible delay in receiving additional collateral, or in the
recovery of the securities or possible loss of rights in their collateral should
the borrower fail financially.
All other investment policies of the Fund in the prospectus under the
heading "Investment Objective and Principal Investment Strategies" and in this
Statement of Additional Information under the heading "Investment Objective and
Policies" are considered non-fundamental and may be changed by the Board of
Trustees without prior approval of the Fund's outstanding voting shares provided
they are given at least 60 days prior written notice.
Under the 1940 Act, the Fund may invest up to 10% of its total assets in
the aggregate in shares of other investment companies and up to 5% of its total
assets in any one investment company, provided the investment does not represent
more than 3% of the voting stock of the acquired investment company at the time
such shares are purchased. As a shareholder in any investment company, the Fund
will bear its ratable share of that investment company's expenses, and would
remain subject to payment of the Fund's advisory fees and other expenses with
respect to assets so invested. Holders of common shares would therefore be
subject to duplicative expenses to the extent the Fund invests in other
investment companies. In addition, the securities of other investment companies
may also be leveraged and will therefore be subject to the same leverage risks
described herein and in the prospectus. As described in the prospectus in the
section entitled "Risks," the net asset value and market value of leveraged
shares will be more volatile and the yield to shareholders will tend to
fluctuate more than the yield generated by unleveraged shares.
In addition, to comply with federal tax requirements for qualification as a
"regulated investment company," the Fund's investments will be limited in a
manner such that at the close of each quarter of each tax year, (a) no more than
25% of the value of the Fund's total assets are invested in the securities
(other than United States government securities or securities of other regulated
investment companies) of a single issuer or two or more issuers controlled by
the Fund and engaged in the same, similar or related trades or businesses and
(b) with regard to at least 50% of the Fund's total assets, no more than 5% of
its total assets are invested in the securities (other than United States
government securities or securities of other regulated investment companies) of
a single issuer. These tax-related limitations may be changed by the Trustees to
the extent appropriate in light of changes to applicable tax requirements.
MANAGEMENT OF THE FUND
Trustees of the Fund
The Fund's Board of Trustees provides broad supervision over the Fund's
affairs. The Trustees meet periodically throughout the year to oversee the
Fund's activities, reviewing, among other things, the Fund's performance and its
contractual arrangements with various service providers. Each Trustee is paid a
fee for his or her services. The officers of the Fund are responsible for the
Fund's operations. The Fund's Trustees and officers are listed below, together
with their principal occupations during the past five years.
The Trustees are not required to contribute to the capital of the Fund or
to hold shares in the Fund. A majority of the Trustees are persons who are not
"interested persons" (as defined in the 1940 Act) of the Fund (collectively, the
"Disinterested Trustees").
The Fund has an Executive Committee which consists of Michael S. Scofield,
K. Dun Gifford and Russell A. Salton III, M.D., each of whom is a Disinterested
Trustee. The Executive Committee recommends Trustees to fill vacancies, prepares
the agenda for Board of Trustees meetings and acts on routine matters between
scheduled Board of Trustees. The Executive Committee may solicit suggestions for
persons to fill vacancies on the Board of Trustees from such sources as they
deem appropriate, including the Advisor. Nominations by shareholders will not be
considered. The Trustees will consider such nominations at the next regularly
scheduled Board of Trustees meeting.
The Fund has an Audit Committee which consists of Charles A. Austin III
(Chairperson), Shirley L. Fulton, K. Dun Gifford, Gerald M. McDonnell, William
W. Pettit and Russell A. Salton III, M.D. The purpose of the Audit Committee is
to evaluate financial management, meet with the auditors and deal with other
matters of a financial nature that they deem appropriate. The Audit Committee is
comprised entirely of Disinterested Trustees.
The Fund has a Performance Committee which consists of Richard J. Shima
(Chairperson), Leroy Keith, Jr., Richard K. Wagoner and David M. Richardson. The
Performance Committee reviews all activities involving investment-related issues
and activities of the Advisor to the Fund, reviews the performance of the other
service providers to the Fund, and assesses the performance of the Fund.
Set forth below are the Trustees of the Fund. Unless otherwise indicated,
the address for each Trustee is 200 Berkeley Street, Boston, Massachusetts
02116.
Disinterested Trustees:
-------------------------- ------------ -------------- ----------------------------------------- --------------- ------------------
Number of Other
Name and Portfolios Trusteeships
Position Beginning Overseen in held outside
Date of Birth with Year of Term Principal Occupations for Last Five Evergreen of Evergreen
Fund of Office* Years Funds complex Funds complex
-------------------------- ------------ -------------- ----------------------------------------- --------------- ------------------
-------------------------- ------------ -------------- ----------------------------------------- --------------- ------------------
Charles A. Austin III Trustee 2004 Investment Counselor, Anchor Capital 94 None
Advisors, Inc. (investment advice);
Director, The Andover Companies
(insurance); Trustee, Arthritis
Foundation of New England; Director,
The Francis Ouimet Society; Former
Director, Health Development Corp.
(fitness-wellness centers); Former
DOB: 10/23/34 Director, Mentor Income Fund, Inc.;
Former Trustee, Mentor Funds and Cash
Resource Trust; Former Investment
Counselor, Appleton Partners, Inc.
(investment advice); Former Director,
Executive Vice President and Treasurer,
State Street Research & Management
Company (investment advice).
-------------------------- ------------ -------------- ----------------------------------------- --------------- ------------------
-------------------------- ------------ -------------- ----------------------------------------- --------------- ------------------
Shirley L. Fulton Trustee 2004 Partner, Helms, Henderson & Fulton, 94 None
P.A. (law firm); Former Senior Resident
DOB: 1/10/52 Superior Court Judge, 26th Judicial
District, Charlotte, North Carolina.
-------------------------- ------------ -------------- ----------------------------------------- --------------- ------------------
-------------------------- ------------ -------------- ----------------------------------------- --------------- ------------------
Chairman and President, Oldways
Preservation and Exchange Trust
(education); Trustee, Treasurer and
Chairman of the Finance Committee,
Cambridge College; Former Chairman of
K. Dun Gifford Trustee 2004 the Board, Director, and Executive Vice 94 None
DOB: 10/23/38 President, The London Harness Company
(leather goods purveyor); Former
Director, Mentor Income Fund, Inc.;
Former Trustee, Mentor Funds and Cash
Resource Trust.
-------------------------- ------------ -------------- ----------------------------------------- --------------- ------------------
-------------------------- ------------ -------------- ----------------------------------------- --------------- ------------------
Partner, Stonington Partners, Inc.
(private investment firm); Trustee of
Phoenix Series Fund, Phoenix
Multi-Portfolio Fund, and The Phoenix
Big Edge Series Fund; Former Chairman Trustee, Phoenix
of the Board and Chief Executive Series Fund,
Officer, Carson Products Company Phoenix
Leroy Keith, Jr. Trustee 2004 (manufacturing); Director, Obagi 94 Multi-Portfolio
DOB: 2/14/39 Medical Product Co.; Director, Lincoln Fund, and The
Educational Services; Director Phoenix Big Edge
Diversapack Co.; Former President, Series Fund
Morehouse College; Former Director,
Mentor Income Fund, Inc.; Former
Trustee, Mentor Funds and Cash Resource
Trust.
-------------------------- ------------ -------------- ----------------------------------------- --------------- ------------------
-------------------------- ------------ -------------- ----------------------------------------- --------------- ------------------
Manager of Commercial Operations, SMI
STEEL - South Carolina (steel
producer); Former Sales and Marketing
Gerald M. McDonnell Trustee 2004 Management, Nucor Steel Company; Former 94 None
DOB: 7/14/39 Director, Mentor Income Fund, Inc.;
Former Trustee, Mentor Funds and Cash
Resource Trust.
-------------------------- ------------ -------------- ----------------------------------------- --------------- ------------------
-------------------------- ------------ -------------- ----------------------------------------- --------------- ------------------
Partner and Vice President, Kellam &
Pettit, P.A. (law firm); Former
William Walt Pettit Trustee 2004 Director, Mentor Income Fund, Inc.; 94 None
DOB: 8/26/55 Former Trustee, Mentor Funds and Cash
Resource Trust.
-------------------------- ------------ -------------- ----------------------------------------- --------------- ------------------
-------------------------- ------------ -------------- ----------------------------------------- --------------- ------------------
President, Richardson, Runden & Company
(executive recruitment business
development/consulting company);
Consultant, Kennedy Information, Inc.
(executive recruitment information and
research company); Consultant, AESC
(The Association of Retained Executive
David M. Richardson Trustee 2004 Search Consultants); Trustee, NDI 94 None
DOB: 9/19/41 Technologies, LLP (communications);
Director, J&M Cumming Paper Co. (paper
merchandising); Former Vice Chairman,
DHR International, Inc. (executive
recruitment); Former Director, Mentor
Income Fund, Inc.; Former Trustee,
Mentor Funds and Cash Resource Trust.
-------------------------- ------------ -------------- ----------------------------------------- --------------- ------------------
-------------------------- ------------ -------------- ----------------------------------------- --------------- ------------------
President/CEO, Access One MedCard;
Former Medical Director, Healthcare
Resource Associates, Inc.; Former
Russell A. Salton, III MD Medical Director, U.S. Health
DOB: 6/2/47 Trustee 2004 Care/Aetna Health Services; Former 94 None
Director, Mentor Income Fund, Inc.;
Former Trustee, Mentor Funds and Cash
Resource Trust.
-------------------------- ------------ -------------- ----------------------------------------- --------------- ------------------
-------------------------- ------------ -------------- ----------------------------------------- --------------- ------------------
Attorney, Law Offices of Michael S.
Michael S. Scofield Scofield; Former Director, Mentor
DOB: 2/20/43 Trustee 2004 Income Fund, Inc.; Former Trustee, 94 None
Mentor Funds and Cash Resource Trust.
-------------------------- ------------ -------------- ----------------------------------------- --------------- ------------------
-------------------------- ------------ -------------- ----------------------------------------- --------------- ------------------
Richard J. Shima Trustee 2004 Independent Consultant; Director, Trust 94 None
Company of CT; Trustee, Saint Joseph
College (CT); Director, Hartford
Hospital; Trustee, Greater Hartford
YMCA; Former Director, Enhance
Financial Services, Inc.; Former
DOB: 8/11/39 Director, Old State House Association;
Former Director of CTG Resources, Inc.
(natural gas); Former Director, Mentor
Income Fund, Inc.; Former Trustee,
Mentor Funds and Cash Resource Trust.
-------------------------- ------------ -------------- ----------------------------------------- --------------- ------------------
Interested Trustee:
------------------------ -------------- ----------- -------------------------------------------- --------------- ------------------
Richard K. Wagoner, Trustee 2004 Member and Former President, North 94 None
Carolina Securities Traders Association;
Member, Financial Analysts Society; Former
CFA** Consultant to the Boards of Trustees of
DOB: 12/12/37 the Evergreen funds; Former Trustee,
Mentor Funds and Cash Resource Trust.
------------------------ -------------- ----------- -------------------------------------------- --------------- ------------------
* Each Trustee serves until a successor is duly elected or qualified or until
his death, resignation, retirement or removal from office.
** Mr. Wagoner is an "interested person" of the funds because of his ownership
of shares in Wachovia Corporation, the parent to the Advisor.
Trustee Ownership of Evergreen Funds Shares
Set forth below is the dollar range of the Trustees' investment in the Fund
and the aggregate dollar range of their investment in the Evergreen fund
complex, as of December 31, 2003. As of December 31, 2003, the Fund had not been
formed and therefore had not issued any shares.
------------------------------ -------------------- ------------------------
Aggregate Dollar Range
Trustees Dollar Range of of Investment in Fund
Investment in Fund Complex
------------------------------ -------------------- ------------------------
============================== ==================== ========================
Charles A. Austin, III* $0 Over $100,000
============================== ==================== ========================
============================== ==================== ========================
Shirley L. Fulton $0 $0**
============================== ==================== ========================
============================== ==================== ========================
K. Dun Gifford $0 $10,001-$50,000
============================== ==================== ========================
============================== ==================== ========================
Dr. Leroy Keith, Jr. $0 $1-$10,000
============================== ==================== ========================
============================== ==================== ========================
Gerald M. McDonnell* $0 $10,001-$50,000
============================== ==================== ========================
============================== ==================== ========================
William Walt Pettit* $0 $10,001-$50,000
============================== ==================== ========================
============================== ==================== ========================
David M. Richardson $0 $50,001-$100,000
============================== ==================== ========================
============================== ==================== ========================
Dr. Russell A. Salton, III* $0 $0
============================== ==================== ========================
============================== ==================== ========================
Michael S. Scofield* $0 Over $100,000
============================== ==================== ========================
============================== ==================== ========================
Richard J. Shima* $0 Over $100,000
============================== ==================== ========================
============================== ==================== ========================
Richard K. Wagoner $0 Over $100,000
============================== ==================== ========================
* In addition to the above investment amounts, the Trustee has over $100,000
indirectly invested in certain of the Evergreen funds through Deferred
Compensation Plans, with the exception of Mr. Shima who has over $50,000
indirectly invested.
** Ms. Fulton became a Trustee in 2004.
Officers of the Fund
Set forth below are the officers of the Fund.
-------------------------------- ------------------------ -------------------------------------------------------------
Position with Fund Principal Occupation for Last Five Years
Name, Address
and Date of Birth
-------------------------------- ------------------------ -------------------------------------------------------------
-------------------------------- ------------------------ -------------------------------------------------------------
President President and Chief Investment Officer, Evergreen
Dennis H. Ferro Investment Management Company, LLC and Executive Vice
401 S. Tryon, President, Wachovia Bank, N.A.
12th Floor
Charlotte, NC 28288
DOB: 6/20/45
-------------------------------- ------------------------ -------------------------------------------------------------
-------------------------------- ------------------------ -------------------------------------------------------------
Carol Kosel Treasurer Senior Vice President, Evergreen Investment Services, Inc.
200 Berkeley Street and Treasurer, Vestaur Securities, Inc.
Boston, MA 02116
DOB: 12/25/63
-------------------------------- ------------------------ -------------------------------------------------------------
-------------------------------- ------------------------ -------------------------------------------------------------
Senior Vice President and General Counsel, Evergreen
Michael H. Koonce Secretary Investment Services, Inc.; Senior Vice President and
200 Berkeley Street Assistant General Counsel, Wachovia Corporation; former
Boston, MA 02116 Senior Vice President and General Counsel, Colonial
DOB: 4/20/60 Management Associates, Inc.; former Vice President and
Counsel, Colonial Management Associates, Inc.
-------------------------------- ------------------------ -------------------------------------------------------------
Trustees Compensation
Listed below is the Trustee compensation estimated to be paid by the Fund
individually for the period beginning April 27, 2004 and ending on December 31,
2004 and by the Fund and the ten trusts and one other limited liability company
in the Evergreen fund complex for the twelve months ended December 31, 2003. As
of December 31, 2003, the Fund had not been formed and therefore did not pay
compensation to the Trustees. The Trustees do not receive pension or retirement
benefits from the Fund.
================================================================================
Trustee Aggregate Compensation Total Compensation from the
from Fund** Evergreen Fund Complex *
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Charles A. Austin, III $5,000 $153,000
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Shirley L. Fulton $3,500 $0**
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
K. Dun Gifford $5,500 $178,500
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Leroy Keith, Jr. $5,000 $153,000
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Gerald M. McDonnell $5,000 $153,000
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
William Walt Pettit $5,000 $153,000
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
David M. Richardson $5,000 $153,000
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Russell A. Salton, III $5,500 $163,500
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Michael S. Scofield $5,500 $193,500
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Richard J. Shima $5,000 $168,000
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Richard K. Wagoner $5,000 $153,000
================================================================================
* Certain Trustees have elected to defer all or part of their total
compensation for the twelve months ended December 31, 2003. The amounts
listed below will be payable in later years to the respective Trustees:
Austin $91,800
Pettit $153,000
Shima $58,800
** Ms. Fulton became a Trustee in 2004.
Election of Trustees is non-cumulative. The term of one class of Trustees
expires each year commencing with the first shareholder meeting following the
public offering of the Fund's common shares and no term shall continue for more
than three years after the applicable election. The terms of Messrs. Scofield,
Gifford, Keith and Ms. Fulton expire at the first annual meeting, the terms of
Messrs. Austin, McDonnell and Shima expire at the second annual meeting, and the
terms of Messrs. Pettit, Richardson, Salton and Wagoner expire at the third
annual meeting. Subsequently, each class of Trustees will stand for election at
the conclusion of its respective term. Such classification may prevent
replacement of a majority of the Trustees for up to a two-year period. Mr.
Pettit and Mr. Richardson represent the holders of the Fund's preferred shares.
Limitation of Trustees' Liability
The Agreement and Declaration of Trust provides that a Trustee will not be
liable for errors of judgment or mistakes of fact or law, but nothing in the
Agreement and Declaration of Trust protects a Trustee against any liability to
which he would otherwise be subject by reason of willful misfeasance, bad faith,
gross negligence or reckless disregard of his duties involved in the conduct of
his office or the discharge of his functions.
In addition, the Fund's Agreement and Declaration of Trust provides that
the Fund will indemnify its Trustees and officers against liabilities and
expenses in connection with the performance of their duties on behalf of the
Fund to the fullest extent permitted by law, including the advancing of expenses
incurred in connection therewith. Under Delaware law, the Fund is entitled to
indemnify and hold harmless any Trustee or other person from and against any and
all claims and demands whatsoever. Indemnification may be against judgments,
penalties, fines, compromises and reasonable accountants' and counsel fees
actually incurred by the Trustee or officer in connection with the proceeding.
In the view of the staff of the Commission, an indemnification provision is
consistent with the 1940 Act if it (1) precludes indemnification for any
liability, whether or not there is an adjudication of liability, arising by
reason of willful misfeasance, bad faith, gross negligence or reckless disregard
of the duties described in Section 17(h) and (i) of the 1940 Act ("disabling
conduct") and (2) sets forth reasonable and fair means for determining whether
indemnification shall be made; in the case of the Fund, "reasonable and fair
means" would include (1) a final decision on the merits by a court or other body
before whom the proceeding was brought that the person to be indemnified
("indemnitee") was not liable by reason of disabling conduct (including a
dismissal because of insufficiency of evidence) and (2) a reasonable
determination, based upon a review of the facts, that the indemnitee was not
liable by reason of disabling conduct by (a) the vote of a majority of a quorum
of Trustees who are neither "interested persons" of the Fund as defined in
Section 2(a)(19) of the 1940 Act nor parties to the proceeding, or (b) a written
opinion of independent legal counsel.
The indemnification rights provided or authorized by the Agreement and
Declaration of Trust or applicable law are not exclusive of any other rights to
which a person seeking indemnification may be entitled. The Fund intends to
obtain liability insurance at its expense for the benefit of its Trustees and
officers which includes coverage for liability arising from the performance of
their duties on behalf of the Fund which is not inconsistent with the
indemnification provisions of the Agreement and Declaration of Trust and
applicable law.
THE ADVISOR, ADMINISTRATOR AND TRANSFER AGENT
Advisor
Evergreen Investment Management Company, LLC (previously defined as the
"Advisor"), a wholly owned subsidiary of Wachovia Bank, N.A., is the investment
adviser to the Fund. Wachovia Bank, N.A., located at 201 South College Street,
Charlotte, North Carolina 28288-0630, is a subsidiary of Wachovia Corporation,
formerly First Union Corporation. As of May 31, 2004, the Advisor, with its
affiliates, had more than $245 billion in assets under management. The Advisor
has a 70-year history of money management and is the 15th largest mutual fund
company in the United States, according to FRC Financial Research Corp (open end
funds only). The Advisor employs over 350 investment professionals and has more
than 5 million individual and institutional clients.
The Advisor is a Delaware limited liability company. The Advisor is
registered with the Commission as an investment adviser under the Investment
Advisers Act of 1940, as amended. The business address of the Advisor and its
officers and Trustees is 200 Berkeley Street, Boston, Massachusetts 02116-5034.
Subject to the authority of the Board of Trustees, the Advisor is responsible
for overall management of the Fund's business affairs.
Day-to-day management of the portion of the Fund's portfolio that is
described as the utility and telecommunications portion under "Investment
Objectives and Principal Investment Strategies - Principal Investment Strategies
- Utility Securities" in the Prospectus is the responsibility of a team of
portfolio management professionals from the Advisor's Value Equity team.
Together the team managed more than $6.4 billion in assets under management as
of May 31, 2004. The team is led by Timothy O'Brien, who has more than 19 years
of investment experience. Mr. O'Brien has been with the Advisor since April 2002
and currently serves as a managing director and senior portfolio manager.
Day-to-day management of the portion of the Fund's portfolio that is
described as the U.S. high yield debt securities portion under "Investment
Objective and Principal Investment Strategies - Principal Investment Strategies-
U.S. High Yield Debt Securities" in the Prospectus is the responsibility of a
team of portfolio management professionals from the Advisor's Select High Yield
Bond team, which includes specialized industry analysts responsible for various
sectors. Also, the open-end Evergreen Select High Yield Bond is among the
portfolios the team manages. The Select High Yield team is led by Richard Cryan,
who has more than 25 years of fixed income investment experience. Mr. Cryan has
been a senior portfolio manager with the Advisor since 1992. Mr. Cryan is part
of the team that manages the closed-end Evergreen Income Advantage Fund and a
portion of the closed-end Evergreen Managed Income Fund. Together the team
managed more than $4.7 billion in high yield securities as of May 31, 2004.
Investment Management Contract
The Board of Trustees, including a majority of the Disinterested Trustees,
has the responsibility under the 1940 Act to approve the Fund's management
contract for its initial term and annually thereafter at a meeting called for
the purpose of voting on such matters. The Fund's Board of Trustees, including
the Disinterested Trustees, approved the management contract for an initial
two-year term on March 18, 2004. In approving the management contract, the
Trustees reviewed materials provided by the Advisor and considered the
following: (1) the level of the management fees and estimated expense ratio of
the Fund as compared to competitive funds of a comparable size; (2) the nature
and quality of the services rendered by the Advisor to the Fund, (3) the costs
of providing services to the Fund, and (4) the anticipated profitability of the
Fund to the Advisor. In particular, the Trustees considered the risk-adjusted
historical performance records of the Advisor's portfolio management teams
responsible for managing high-yield bond portfolios and for managing the
Advisor's open-end utilities fund. In view of the historical performance of the
Advisor's portfolio management teams responsible for managing portfolios of
utilities securities and high-yield debt securities, the Trustees concluded that
Advisor could be expected to provide superior investment advisory services to
the Fund. The Trustees concluded that the proposed management fee was below that
paid by comparable closed-end funds with investment strategies similar to the
Fund. They also concluded that the proposed management fee was below the average
fee paid by closed-end equity sector funds and closed-end high yield funds. The
Trustees concluded that the Advisor's costs of providing services to the Fund
and its anticipated profitability from managing the Fund were reasonable. The
Fund's initial sole shareholder, Evergreen Financing Company, LLC, approved the
management contract on April 19, 2004.
The management contract will continue in effect for two years from its
effective date and, thereafter, from year to year only if approved at least
annually by the Board of Trustees or by a vote of a majority of the Fund's
outstanding voting securities (as provided in the 1940 Act). In either case, the
terms of the management contract and continuance thereof must be approved by the
vote of a majority of the Disinterested Trustees cast in person at a meeting
called for the purpose of voting on such approval. The management contract may
be terminated, without penalty, on 60 days' written notice by the Fund's Board
of Trustees or by a vote of a majority of outstanding voting securities of the
Fund or by the Advisor by either party to the other. The management contract
will terminate automatically upon its "assignment" as that term is defined in
the 1940 Act.
Under the management contract, and subject to the supervision of the Fund's
Board of Trustees, the Advisor furnishes to the Fund investment advisory,
management and administrative services, office facilities, and equipment in
connection with its services for managing the investment and reinvestment of the
Fund's assets. The Advisor pays for all of the expenses incurred in connection
with the provision of its services.
Pursuant to the management contract, the Advisor may enter into an
agreement to retain, at its own expense, a firm or firms to provide the Fund
with all of the services to be provided by the Advisor under the management
contract, provided such agreement is approved as required by law.
The management contract further provides that the Advisor shall not be
liable for any error of judgment or mistake of law or for any loss suffered by
the Fund in connection with the performance of such contract, except a loss
resulting from the Advisor's willful misfeasance, bad faith, gross negligence,
or reckless disregard by it of its obligations and duties under such contract.
The management contract provides that the Fund shall pay to the Advisor a
fee for its services which is equal to the annual rate of 0.60% of the Fund's
average daily Total Assets. The advisory fee will be payable monthly.
Administrator
Evergreen Investment Services, Inc. ("EIS"), serves as administrator,
subject to the supervision and control of the Fund's Board of Trustees. EIS
provides the Fund with administrative office facilities, equipment and
personnel. For these services, the Fund will pay a monthly fee at an annual rate
of 0.05% of its Total Assets.
Transfer Agent
EquiServe Trust Company, N.A. ("EquiServe") has entered into a transfer
agency and service agreement with the Fund pursuant to which, among other
services, EquiServe provides certain transfer agency services to the Fund's
common shares. The transfer agency and service agreement may be terminated by
the Fund or EquiServe (without penalty) at any time upon not less than 60 days'
prior written notice to the other party to the agreement.
Deutsche Bank Trust Company Americas ("Deutsche Bank") has entered into an
auction agency agreement with the Fund pursuant to which, among other services,
Deutsche Bank provides certain transfer agency services to the Fund's Preferred
Shares. The Fund may terminate the action agency agreement at any time, provided
that, if any Preferred Shares are outstanding, the Fund must have entered into
an agreement with a successor auction agent. Deutsche Bank may terminate the
auction agency agreement upon not less than 60 days' prior written notice to the
Fund.
Code of Ethics
The Fund and Advisor have each adopted a code of ethics as required under
the 1940 Act. Subject to certain conditions and restrictions, these codes permit
personnel subject to the codes to invest in securities for their own accounts,
including securities that may be purchased, held or sold by the Fund. Securities
transactions by some of these persons may be subject to prior approval.
Securities transactions of certain personnel are subject to quarterly reporting
and review requirements. The codes of the Fund and Advisor are on public file
with, and available from, the Commission.
The codes of ethics may be reviewed and copied at the Commission's Public
Reference Room ("PRR"), in Washington, D.C. Information on the operation of the
PRR may be obtained by calling the Commission at 1-202-942-8090. The codes of
ethics are also available on the EDGAR database on the Commission's Internet
site at http://www.sec.gov. Copies are also available (subject to a duplicating
fee) at the following E-mail address: publicinfo@sec.gov, or by writing the
Commission's Public Reference Section, Washington, D.C. 20549-0102.
Potential Conflicts of Interest
The Fund is managed by the Advisor, which also serves as investment adviser
to other Evergreen funds and other accounts with investment objectives identical
or similar to those of the Fund. Securities frequently meet the investment
objectives of the Fund, the other Evergreen funds and such other accounts. In
such cases, the decision to recommend a purchase to one fund or account rather
than another is based on a number of factors. The determining factors in most
cases are the amount of securities of the issuer then outstanding, the value of
those securities and the market for them. Other factors considered in the
investment recommendations include other investments which each fund or account
presently has in a particular industry and the availability of investment funds
in each fund or account.
It is possible that at times identical securities will be held by more than
one fund and/or account. However, positions in the same issue may vary and the
length of time that any fund or account may choose to hold its investment in the
same issue may likewise vary. To the extent that more than one of the Evergreen
funds or a private account managed by the Advisor seeks to acquire the same
security at about the same time, the Fund may not be able to acquire as large a
position in such security as it desires or it may have to pay a higher price for
the security. Similarly, the Fund may not be able to obtain as large an
execution of an order to sell or as high a price for any particular portfolio
security if the Advisor decides to sell on behalf of another account the same
portfolio security at the same time. On the other hand, if the same securities
are bought or sold at the same time by more than one fund or account, the
resulting participation in volume transactions could produce better executions
for the Fund. In the event more than one account purchases or sells the same
security on a given date, the purchases and sales will normally be made as
nearly as practicable on a pro rata basis in proportion to the amounts desired
to be purchased or sold by each account. Although the other Evergreen funds may
have the same or similar investment objective and policies as the Fund, their
portfolios may not necessarily consist of the same investments as the Fund or
each other, and their performance results are likely to differ from those of the
Fund.
PORTFOLIO TRANSACTIONS
All orders for the purchase or sale of portfolio securities are placed on
behalf of the Fund by the Advisor pursuant to authority contained in the Fund's
management contract. Securities purchased and sold on behalf of the Fund
normally will be traded in the over-the-counter market on a net basis (i.e.,
without commission) through dealers acting for their own account and not as
brokers or otherwise through transactions directly with the issuer of the
instrument. The cost of securities purchased from underwriters includes an
underwriter's commission or concession, and the prices at which securities are
purchased and sold from and to dealers include a dealer's markup or markdown.
The Advisor normally seeks to deal directly with the primary market makers
unless, in its opinion, better prices are available elsewhere. Some securities
are purchased and sold on an exchange or in over-the-counter transactions
conducted on an agency basis involving a commission. The Advisor seeks to obtain
the best execution on portfolio trades. The price of securities and any
commission rate paid are always factors, but frequently not the only factors, in
judging best execution. In selecting brokers or dealers, the Advisor considers
various relevant factors, including, but not limited to, the size and type of
the transaction; the nature and character of the markets for the security to be
purchased or sold; the execution efficiency, settlement capability and financial
condition of the dealer; the dealer's execution services rendered on a
continuing basis; and the reasonableness of any dealer spreads.
The Advisor may select broker-dealers that provide brokerage and/or
research services to the Fund and/or other investment companies or other
accounts managed by the Advisor. In addition, consistent with Section 28(e) of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), if the
Advisor determines in good faith that the amount of commissions charged by a
broker-dealer is reasonable in relation to the value of the brokerage and
research services provided by such broker, the Fund may pay commissions to such
broker-dealer in an amount greater than the amount another firm may charge. Such
services may include advice concerning the value of securities; the advisability
of investing in, purchasing or selling securities; the availability of
securities or the purchasers or sellers of securities; providing stock quotation
services, credit rating service information and comparative fund statistics;
furnishing analyses, electronic information services, manuals and reports
concerning issuers, industries, securities, economic factors and trends,
portfolio strategy, and performance of accounts and particular investment
decisions; and effecting securities transactions and performing functions
incidental thereto (such as clearance and settlement). The Advisor maintains a
listing of broker-dealers who provide such services on regular basis. However,
because many transactions on behalf of the Fund and other investment companies
or accounts managed by the Advisor are placed with broker-dealers (including
broker-dealers on the listing) without regard to the furnishing of such
services, it is not possible to estimate the proportion of such transactions
directed to such dealers solely because such services were provided. The Advisor
believes that no exact dollar value can be calculated for such services.
The research received from broker-dealers may be useful to the Advisor in
rendering investment management services to the Fund as well as other investment
companies or other accounts managed by the Advisor, although not all such
research may be useful to the Fund. Conversely, such information provided by
brokers or dealers who have executed transaction orders on behalf of such other
accounts may be useful to the Advisor in carrying out its obligations to the
Fund. The receipt of such research has not reduced the Advisor's normal
independent research activities; however, it enables the Advisor to avoid the
additional expenses which might otherwise be incurred if it were to attempt to
develop comparable information through its own staff.
In circumstances where two or more broker-dealers offer comparable prices
and executions, preference may be given to a broker-dealer which has sold shares
of the Fund as well as shares of other investment companies managed by the
Advisor. This policy does not imply a commitment to execute all portfolio
transactions through all broker-dealers that sell shares of the Fund. The
Evergreen funds have entered into third-party brokerage and/or expense offset
arrangements to reduce the funds' total operating expenses. Pursuant to
third-party brokerage arrangements, certain of the funds that invest primarily
in U.S. equity securities may incur lower custody fees by directing brokerage to
third-party broker-dealers. Pursuant to expense offset arrangements, the funds
incur lower transfer agency expenses by maintaining their cash balances with the
custodian.
The Board of Trustees will periodically review the Advisor's performance of
its responsibilities in connection with the placement of portfolio transactions
on behalf of the Fund.
TENDER OFFERS FOR COMMON SHARES
The market price per common share may be greater or less than net asset
value per common share. Common shares of closed-end investment companies
frequently trade at a discount from net asset value, but in some cases trade at
a premium. This characteristic of common shares of closed-end funds is a risk
separate and distinct from the risk that the Fund's net asset value may
decrease. The Board of Trustees has determined that it would be in the best
interests of shareholders of the Fund to take action to attempt to reduce or
eliminate a market value discount from net asset value. To that end, the Board
of Trustees has determined that quarterly tender offers may help reduce any
market discount that may develop.
Accordingly, the Board of Trustees has committed to make tender offers for
the Fund's common shares under certain circumstances and subject to certain
conditions. Beginning six to eight months after the Fund's commencement of
operations (for a total of eight consecutive calendar quarters), in the event
that the common shares trade at a discount to net asset value of greater than 5%
for fifteen of twenty days during a specific measurement period (initially the
twenty-first through fortieth trading days of a quarter)(the "measurement
period"), the Fund, under normal circumstances, will make offers to purchase up
to 5% of its outstanding common shares at their net asset value from all
beneficial shareholders. The Fund will not undertake a tender offer if the
Fund's common shares are not trading at a discount. The Fund will make its first
tender offer within the first six to eight months of the commencement of the
Fund's operations and for the following seven quarters after such initial tender
offer evaluation if the discount exists during the measurement period for the
number of days specified above. The Board of Trustees reserves the right to
modify the conditions described in this paragraph in light of experience. In
addition, the Board of Trustees may consider from time to time open market
repurchases of the Fund's outstanding common shares.
Under certain circumstances described below, the Board of Trustees may
determine not to undertake a tender offer even if the conditions described in
the preceding paragraph are met. Moreover, there can be no assurance that any
such tender offers would cause the common shares to trade at a price equal to
their net asset value or reduce the spread between the market price and the net
asset value per common share. Although the Board of Trustees generally believes
that tender offers are in the best interests of shareholders, the acquisition of
common shares by the Fund will decrease the total assets of the Fund and,
therefore, will have the effect of increasing the Fund's expense ratio.
The Fund will purchase all outstanding common shares tendered in accordance
with the terms of the offer unless the Board of Trustees determined to accept
none of them (based upon the circumstances set forth below). If more common
shares are tendered for repurchase than the Fund has offered to repurchase,
common shares will be repurchased on a pro-rata basis. If authorized by the
Commission, the Fund may make it a condition of each tender offer that no one
shareholder may receive more than 10% of the amount purchased by the Fund in the
tender offer. There can be no assurance that the Commission will approve this
condition. Thus, shareholders may be unable to liquidate all or a given
percentage of their common shares and some shareholders may tender more shares
than they wish to have repurchased in order to ensure repurchase of at least a
specific number of common shares. Shareholders may withdraw tendered common
shares at any time prior to the tender offer deadline.
Tender offers and the need to fund repurchase obligations may affect the
ability of the Fund to be fully invested, which may reduce returns. Moreover,
diminution in the size of the Fund through repurchases without offsetting new
sales of common shares may result in untimely sales of portfolio securities and
a higher expense ratio, and may limit the ability of the Fund to participate in
new investment opportunities. Repurchases resulting in portfolio turnover will
result in additional expenses being borne by the Fund. The Fund may borrow to
meet repurchase obligations, which entails certain risks and costs. See "Risk
Factors- Tender Offers (Evergreen Enhanced Liquidity Plan)."
Although the Board of Trustees has committed to conduct quarterly tender
offers beginning in the Fund's first six to eight months of operations if the
conditions described above are met, it is the policy of the Board of Trustees
(which may be changed by the Board), not to cause the Fund to purchase shares
pursuant to a tender offer if (1) such purchases would impair the Fund's status
as a regulated investment company under the Federal tax laws; (2) the Fund would
not be able to liquidate portfolio securities in a manner that is orderly and
consistent with the Fund's investment objective and policies in order to
purchase tendered common shares; (3) such action would result in the Fund
failing to satisfy the American Stock Exchange's minimum listing requirements;
or (4) there is, in the judgment of the Board of Trustees, any (a) legal action
or proceeding instituted or threatened challenging the tender offer or otherwise
materially adversely affecting the Fund, (b) declaration of a banking moratorium
by Federal or state authorities or any suspension of payment by banks in the
United States, which is material to the Fund, (c) limitation imposed by Federal
or state authorities on the extension of credit by lending institutions, (d)
commencement of war, armed hostilities or other international or national
calamity directly or indirectly involving the United States which is material to
the Fund, or (e) other event or condition that would have a material adverse
effect on the Fund or its shareholders if tendered common shares were purchased.
Thus, there can be no assurance that the Board of Trustees will proceed with any
tender offer. The Board of Trustees may modify these conditions in light of
circumstances existing at the time.
If the Fund's common shares are purchased pursuant to a tender offer, such
purchases could reduce significantly the asset coverage of any borrowing or
outstanding senior securities. The Fund may not purchase common shares to the
extent such purchases would result in the asset coverage with respect to such
borrowing or senior securities being reduced below the asset coverage
requirement set forth in the 1940 Act. Accordingly, in order to purchase all
common shares tendered, the Fund may have to repay all or part of any then
outstanding borrowing or redeem all or part of any then outstanding senior
securities to maintain the required asset coverage. In addition, the amount of
common shares for which the Fund makes any particular tender offer may be
limited for the reasons set forth above or in respect of other concerns related
to liquidity of the Fund's portfolio.
Any tender offer will be made and shareholders will be notified in
accordance with the requirements of the Securities Exchange Act of 1934 and the
1940 Act, either by publication or mailing or both. The offering documents will
contain information prescribed by such laws and the rules thereunder. The
repurchase of tendered shares by the Fund will be a taxable event. See "U.S.
Federal Income Tax Matters." The Fund will pay all costs and expenses associated
with the making of any tender offer.
At any time when the Fund's preferred shares, including the Preferred
Shares, are outstanding, the Fund may not purchase, redeem or otherwise acquire
any of its common shares unless (1) all accrued preferred shares dividends have
been paid and (2) at the time of such purchase, redemption or acquisition, the
net asset value of the Fund's portfolio (determined after deducting the
acquisition price of the common shares) is at least 200% of the liquidation
value of the outstanding preferred shares (expected to equal the original
purchase price per share plus any accrued and unpaid dividends thereon). Any
service fees incurred in connection with any tender offer made by the Fund will
be borne by the Fund and will not reduce the stated consideration to be paid to
tendering shareholders.
Subject to its investment restrictions, the Fund may borrow to finance the
repurchase of shares or to make a tender offer. Interest on any borrowings to
finance share repurchase transactions or the accumulation of cash by the Fund in
anticipation of share repurchases or tenders will reduce the Fund's net income.
Any share repurchase, tender offer or borrowing that might be approved by the
Fund's Board of Trustees would have to comply with the Exchange Act, the 1940
Act and the rules and regulations thereunder.
ADDITIONAL INFORMATION CONCERNING THE AUCTIONS FOR PREFERRED SHARES
General
Depository Trust Company ("DTC") will act as the Securities Depository with
respect to the Preferred Shares. One certificate for all of the Preferred Shares
will be registered in the name of Cede & Co., as nominee of the Securities
Depository. Such certificate will bear a legend to the effect that such
certificate is issued subject to the provisions restricting transfers of the
Preferred Shares contained in the Statement. The Fund will also issue
stop-transfer instructions to the transfer agent for the Preferred Shares. Prior
to the commencement of the right of holders of the Preferred Shares to elect a
majority of the Trustees, as described under "Description of Preferred Shares --
Voting Rights" in the prospectus, Cede & Co. will be the holder of record of the
Preferred Shares and owners of such shares will not be entitled to receive
certificates representing their ownership interest in such shares.
DTC, a New York-chartered limited purpose trust company, performs services
for its participants, some of whom (and/or their representatives) own DTC. DTC
maintains lists of its participants and will maintain the positions (ownership
interests) held by each such participant in the Preferred Shares, whether for
its own account or as a nominee for another person.
Concerning the Auction Agent
Deutsche Bank (the "Auction Agent") will act as agent for the Fund in
connection with the auctions of the Preferred Shares (the "Auctions"). In the
absence of bad faith or negligence on its part, the Auction Agent will not be
liable for any action taken, suffered, or omitted or for any error of judgment
made by it in the performance of its duties under the auction agency agreement
between the Fund and the Auction Agent and will not be liable for any error of
judgment made in good faith unless the Auction Agent was negligent in
ascertaining the pertinent facts.
The Auction Agent may conclusively rely upon, as evidence of the identities
of the holders of the Preferred Shares, the Auction Agent's registry of holders,
and the results of auctions and notices from any Broker-Dealer (or other person,
if permitted by the Fund) with respect to transfers described under "The Auction
-- Secondary Market Trading and Transfers of Preferred Shares" in the prospectus
and notices from the Fund. The Auction Agent is not required to accept any such
notice for an auction unless it is received by the Auction Agent by 3:00 p.m.,
New York City time, on the business day preceding such Auction.
The Auction Agent may terminate its auction agency agreement with the Fund
upon notice to the Fund on a date no earlier than 60 days after such notice. If
the Auction Agent should resign, the Fund will use its best efforts to enter
into an agreement with a successor auction agent containing substantially the
same terms and conditions as the auction agency agreement. The Fund may remove
the Auction Agent provided that prior to such removal the Fund shall have
entered into such an agreement with a successor auction agent.
Broker-Dealers
After each Auction for Preferred Shares, the Auction Agent will pay to each
Broker-Dealer, from funds provided by the Fund, a service charge at the annual
rate of 1/4 of 1% in the case of any Auction immediately preceding the dividend
period of less than one year, or a percentage agreed to by the Fund and the
Broker-Dealer in the case of any auction immediately preceding a dividend period
of one year or longer, of the purchase price of the Preferred Shares placed by
such Broker-Dealer at such auction. For the purposes of the preceding sentence,
the Preferred Shares will be placed by a Broker-Dealer if such shares were (a)
the subject of hold orders deemed to have been submitted to the Auction Agent by
the Broker-Dealer and were acquired by such Broker-Dealer for its customers who
are beneficial owners or (b) the subject of an order submitted by such
Broker-Dealer that is (i) a submitted bid of an existing holder that resulted in
the existing holder continuing to hold such shares as a result of the Auction or
(ii) a submitted bid of a potential bidder that resulted in the potential holder
purchasing such shares as a result of the Auction or (iii) a valid hold order.
The Fund may request the Auction Agent to terminate one or more
Broker-Dealer agreements at any time upon five days' written notice, provided
that at least one Broker-Dealer agreement is in effect after such termination.
Notwithstanding the foregoing, either the auction agent or Citigroup Global
Markets Inc. may terminate the broker-dealer agreement to which they are both
parties only upon 60 days' prior written notice to the other party and to the
Fund.
The broker-dealer agreement provides that a Broker-Dealer (other than an
affiliate of the Fund) may submit orders in auctions for its own account. If a
Broker-Dealer submits an order for its own account in any Auction, it might have
an advantage over other bidders because it would have knowledge of all orders
submitted by it in that Auction; such Broker-Dealer, however, would not have
knowledge of orders submitted by other Broker-Dealers in that auction.
RATING AGENCY GUIDELINES
The descriptions of Fitch's and S&P rating guidelines contained in this
Statement of Additional Information do not purport to be complete and are
subject to and qualified in their entireties by reference to the Statement, a
copy of which is attached as Appendix C to this Statement of Additional
Information. A copy of the Statement is filed as an exhibit to the registration
statement of which the prospectus and this Statement of Additional Information
are a part and may be inspected, and copies thereof may be obtained, as
described in the prospectus.
The composition of the Fund's portfolio reflects guidelines (referred to
herein as the "Rating Agency Guidelines") established by S&P and Fitch in
connection with the Fund's receipt of a rating of `AAA' from S&P and from Fitch
for the Preferred Shares. These Rating Agency Guidelines relate, among other
things, to industry and credit quality characteristics of issuers and
diversification requirements and specify various discount factors for different
types of securities (with the level of discount greater as the rating of a
security becomes lower). Under the Rating Agency Guidelines, certain types of
securities in which the Fund may otherwise invest consistent with its investment
strategy are not eligible for inclusion in the calculation of the discounted
value of the Fund's portfolio. Such instruments include, for example, private
placements (other than Rule 144A Securities(securities which are restricted as
to resale under federal securities laws but are eligible for resale pursuant to
Rule 144A under the Securities Act of 1933)) and other securities not within the
investment guidelines. Accordingly, although the Fund reserves the right to
invest in such securities to the extent set forth herein, they have not and it
is anticipated that they will not constitute a significant portion of the Fund's
portfolio.
The Rating Agency Guidelines require that the Fund maintain assets having
an aggregate discounted value, determined on the basis of the Rating Agency
Guidelines, greater than the aggregate liquidation preference of the Preferred
Shares plus specified liabilities, payment obligations and other amounts, as of
periodic valuation dates. The Rating Agency Guidelines also require the Fund to
maintain asset coverage for the Preferred Shares on a non-discounted basis of at
least 200% as of the end of each month, and the 1940 Act requires this asset
coverage as a condition to paying dividends or other distributions on the Fund's
common shares. The Fund has agreed with S&P and Fitch that the auditors must
certify once per quarter the asset coverage test on a date randomly selected by
the auditor. The effect of compliance with the Rating Agency Guidelines may be
to cause the Fund to invest in higher quality assets and/or to maintain
relatively substantial balances of highly liquid assets or to restrict the
Fund's ability to make certain investments that would otherwise be deemed
potentially desirable by the Advisor, including private placements of other than
Rule 144A Securities (as defined in the Statement). The Rating Agency Guidelines
are subject to change from time to time with the consent of the relevant rating
agency and would not apply if the Fund in the future elected not to use
investment leverage consisting of senior securities rated by one or more rating
agencies, although other similar arrangements might apply with respect to other
senior securities that the Fund may issue.
The Fund intends to maintain, at specified times, a discounted value for
its portfolio at least equal to the amount specified by each rating agency (the
"Preferred Shares Basic Maintenance Amount"). S&P and Fitch have each
established separate guidelines for determining discounted value. To the extent
any particular portfolio holding does not satisfy the applicable Rating Agency's
Guidelines, all or a portion of such holding's value will not be included in the
calculation of discounted value (as defined by such rating agency).
The Rating Agency Guidelines do not impose any limitations on the
percentage of Fund's assets that may be invested in holdings not eligible for
inclusion in the calculation of the discounted value of the Fund's portfolio.
The amount of such assets included in the portfolio at any time may vary
depending upon the rating, diversification and other characteristics of the
assets included in the portfolio which are eligible for inclusion in the
discounted value of the portfolio under the Rating Agency Guidelines. In
particular, the Fund will concentrate its investments (invest 25% or more of its
assets) in the securities of issuers primarily engaged in the utility (water gas
electric and telecommunications) sectors, notwithstanding the Rating Agency
Guidelines.
A credit rating of preferred stock does not address the likelihood that a
resale mechanism (e.g., the Auction) will be successful. As described by S&P, a
preferred stock rating of AAA indicates strong asset protection, conservative
balance sheet ratios and positive indications of continued protection of
preferred dividend requirements. As described by Fitch, an issue of preferred
stock which is rated `AAA' is considered to be of the highest credit quality.
`AAA' ratings denote the lowest expectation of credit risk and are assigned only
in case of exceptionally strong capacity for timely payment of financial
commitments. This capacity is highly unlikely to be adversely affected by
foreseeable events.
Ratings are not recommendations to purchase, hold or sell Preferred Shares,
inasmuch as the rating does not comment as to market price or suitability for a
particular investor. The rating is based on current information furnished to S&P
or Fitch by the Fund and obtained by S&P and Fitch from other sources. The
rating may be changed, suspended or withdrawn as a result of changes in, or
unavailability of, such information.
S&P Guidelines
For purposes of calculating the discounted value of the Fund's portfolio
under current S&P guidelines, the fair market value of portfolio securities
eligible for consideration under such guidelines ("S&P Eligible Assets") must be
discounted by certain discount factors set forth below ("S&P Discount Factors").
The discounted value of a portfolio security under S&P guidelines is the market
value thereof, determined as specified by S&P, divided by the S&P Discount
Factor.
S&P Discount Factor. The following discount factors apply to portfolio
holdings as described below, subject to diversification and other requirements,
in order to constitute S&P Eligible Assets includable within the calculation of
discounted value, provided that the S&P Exposure Period is 20 Business Days or
less:
DISCOUNT FACTOR FOR AAA RATING
----------
TYPE OF S&P ELIGIBLE ASSET
Common Stock 168%
DRD Eligible Preferred Stock with a senior or preferred 228%
stock rating of at least BBB-
REIT and Non-DRD Eligible Preferred Stock with a senior or 155%
preferred stock rating of at least BBB-
DRD Eligible Preferred Stock with a senior or preferred 233%
stock rating below BBB-
REIT and non-DRD Eligible Preferred Stock with a senior or 160%
preferred stock rating below BBB-
Un-rated DRD Eligible Preferred Stock 238%
Un-rated Non-DRD Eligible and un-rated REIT Preferred Stock 165%
Convertible bonds rated AAA to AAA- 148%
Convertible bonds rated AA+ to AA- 155%
Convertible bonds rated A+ to A- 162%
Convertible bonds rated BBB+ to BBB- 168%
Convertible bonds rated BB+ to BB- 175%
Convertible bonds rated B+ to B- 182%
Convertible bonds rated CCC+ to CCC- 189%
Fixed rate Preferred stock 228.10%
Adjustable rate Preferred stock 198.29%
Taxable Preferred stock (Non-DRD) 154.66%
Convertible securities AAA 148.25%
Convertible securities AA 154.97%
Convertible securities A 161.70%
Convertible securities BBB 168.42%
Convertible securities BB 175.15%
Convertible securities B 181.87%
Convertible securities CCC 188.60%
Treasury 1-year 101.99%
Treasury 2-year 103.77%
Treasury 5-year 109.09%
Treasury 10-year 115.14%
Treasury 30-year 126.33%
U.S. Agency Debt Securities 120.48%
U.S. Agency Mortgage Securities 15-year 128.80%
U.S. Agency Mortgage Securities 30-year 131.20%
U.S. Agency Mortgage Securities 1/1 ARMS 121.70%
U.S. Agency Mortgage Securities 3/1 ARMS 122.10%
U.S. Agency Mortgage Securities 5/1 ARMS 122.50%
U.S. Agency Mortgage Securities 10/1 ARMS 122.70%
Corporate Bonds Rated AAA 110.01%
Corporate Bonds Rated AA 113.28%
Corporate Bonds Rated A 116.85%
Corporate Bonds Rated BBB 121.82%
Corporate Bonds Rated BB 135.32%
Corporate Bonds Rated B 168.76%
Corporate Bonds Rated CCC 252.03%
Corporate Bonds Rated CCC- 350.00%
Bank Loan Performing, greater than $.90 117.79%
Bank Loan Performing, between $.85 and $.90 125.47%
Bank Loan Non-performing, greater than $.85 154.08%
Bank Loan Non-performing, less than or equal to $.85 178.25%
Auto Loans (fixed or floating) WAL less than 5-years 130.00%
Auto Loans (fixed or floating) WAL between 5 and 10-years 140.00%
Credit Card Loans (fixed) WAL less than 5-years 130.00%
Credit Card Loans (fixed) WAL between 5 and 10-years 140.00%
Credit Card Loans (floating) 112.70%
REIT Common Stock 148.79%
Standard & Poor's 500 Index (including ADRs) 168.46%
Master Limited Partnerships 625.00%
Credit Linked Notes rate AAA 125.00%
U.S. Short-Term Money Market Investments with maturities 104%
of 180 days or less
U.S. Short-Term Money Market Investments with maturities 113%
of between 181 and 360 days
U.S. Government Obligations (52 week Treasury Bills) 102%
U.S. Government Obligations (Two-Year Treasury Notes) 104%
U.S. Government Obligations (Five-Year Treasury Notes) 110%
U.S. Government Obligations (Ten-Year Treasury Notes) 117%
U.S. Government Obligations (Thirty-Year Treasury Bonds) 130%
Agency Mortgage Collateral (Fixed 15-Year) 129%
Agency Mortgage Collateral (Fixed 30-Year) 132%
Agency Mortgage Collateral (ARM 1/1) 122%
Agency Mortgage Collateral (ARM 3/1) 123%
Agency Mortgage Collateral (ARM 5/1) 123%
Agency Mortgage Collateral (ARM 10/1) 123%
Mortgage Pass-Through Fixed (15 Year) 131%
Mortgage Pass-Through Fixed (30 Year) 134%
Bank Loans (S&P Loan Category A) 132.90%
Bank Loans (S&P Loan Category B) 140.58%
Bank Loans (S&P Loan Category C) 169.19%
Bank Loans (S&P Loan Category D) 193.36%
Corporate Bonds rated at least AAA 110%
Corporate Bonds rated at least AA+ 111%
Corporate Bonds rated at least AA 113%
Corporate Bonds rated at least AA- 115%
Corporate Bonds rated at least A+ 116%
Corporate Bonds rated at least A 117%
Corporate Bonds rated at least A- 118%
Corporate Bonds rated at least BBB+ 120%
Corporate Bonds rated at least BBB 122%
Corporate Bonds rated at least BBB- 124%
Corporate Bonds rated at least BB+ 129%
Corporate Bonds rated at least BB 135%
Corporate Bonds rated at least BB- 142%
Corporate Bonds rated at least B+ 156%
Corporate Bonds rated at least B 169%
Corporate Bonds rated at least B- 184%
Corporate Bonds rated at least CCC+ 202%
Corporate Bonds rated at least CCC 252%
Corporate Bonds rated at least CCC- 350%
Cash and Cash Equivalents 100%
Municipal Bonds rated AAA 146.10%
Municipal Bonds rated AA 149.10%
Municipal Bonds rated A 152.10%
Municipal Bonds rated BBB 155.10%
Municipal Bonds rated BB 175.10%
Municipal Bonds rated B 195.10%
Municipal Bonds rated CCC 215.10%
Unrated Municipal Bonds 220.00%
Common Stock of REITs and other real estate companies 152.82%
Mortgage Pass-Through Certificates 15-yr 145.80%
Mortgage Pass-Through Certificates 30-yr 149.50%
Mortgage Pass-Through Certificates 1/1 137.60%
Mortgage Pass-Through Certificates 3/1 138.30%
Mortgage Pass-Through Certificates 5/1 139.00%
Mortgage Pass-Through Certificates 10/1 139.30%
Conventional/FHA/VA Mortgages and Whole Loans 15-year 148.80%
Conventional/FHA/VA Mortgages and Whole Loans 30-year 152.50%
Conventional/FHA/VA Mortgages and Whole Loans 1/1 143.40%
Conventional/FHA/VA Mortgages and Whole Loans 3/1 144.50%
Conventional/FHA/VA Mortgages and Whole Loans 5/1 144.70%
Conventional/FHA/VA Mortgages and Whole Loans 10/1 145.00%
Collateralized Mortgage Obligations (WAL less than 5-years) 140.00%
Collateralized Mortgage Obligations (WAL more than 5-years 150.00%
and more than 10-years)
FHA-Insured Multifamily Loans 190.00%
ABS (Automobile loans and fixed-rate credit card 135.00%
receivables with WAL less than 5-years)
ABS (Automobile loans and fixed-rate credit card 145.00%
receivables with WAL more than 5-yr and less than 10-years)
ABS (Floating-rate credit cards) 119.00%
Debt securities of REITS and other real estate companies
according to the following corporate bond schedule:
Corporate Bonds rated at least AAA 110%
Corporate Bonds rated at least AA+ 111%
Corporate Bonds rated at least AA 113%
Corporate Bonds rated at least AA- 115%
Corporate Bonds rated at least A+ 116%
Corporate Bonds rated at least A 117%
Corporate Bonds rated at least A- 118%
Corporate Bonds rated at least BBB+ 120%
Corporate Bonds rated at least BBB 122%
Corporate Bonds rated at least BBB- 124%
Corporate Bonds rated at least BB+ 129%
Corporate Bonds rated at least BB 135%
Corporate Bonds rated at least BB- 142%
Corporate Bonds rated at least B+ 156%
Corporate Bonds rated at least B 169%
Corporate Bonds rated at least B- 184%
Corporate Bonds rated at least CCC+ 202%
Corporate Bonds rated at least CCC 252%
Corporate Bonds rated at least CCC- 350%
Notwithstanding the foregoing, the S&P Discount Factor for short-term
Municipal Obligations will be 115% so long as such Municipal Obligations are
rated A-1 + or SP-1 + by S&P and mature or have a demand feature exercisable
within 30 days or less, or 123% so long as such Municipal Obligations are rated
A-1 or SP-1 by S&P and mature or have a demand feature exercisable in 30 days or
less, or 125% if such Municipal Obligations are not rated by S&P but are rated
equivalent to A-1+ or SP-1+ by another nationally recognized statistical rating
organization, on a case by case basis; provided, however, that any such non-S&P
rated short-term Municipal Obligations which have demand features exercisable
within 30 days or less must be backed by a letter of credit, liquidity facility
or guarantee from a bank or other financial institution with a short-term rating
of at least A-l+ from S&P ; and further provided that such non-S&P rated
short-term Municipal Obligations may comprise no more than 50% of short-term
Municipal Obligations that qualify as S&P Eligible Assets; provided, however,
that Municipal Obligations not rated by S&P but rated equivalent to BBB or lower
by another nationally recognized statistical rating organization, rated BB+ or
lower by S&P or non-rated (such Municipal Obligations are hereinafter referred
to as "High Yield Securities") may comprise no more than 20% of the short-term
Municipal Obligations that qualify as S&P Eligible Assets; (ii) the S&P Discount
Factor for Receivables for Municipal Obligations Sold that are due in more than
five Business Days from such Valuation Date will be the S&P Discount Factor
applicable to the Municipal Obligations sold; (iii) no S&P Discount Factor will
be applied to cash or to Receivables for Municipal Obligations Sold if such
receivables are due within five Business Days of such Valuation Date; and (iv)
except as set forth in clause (i) above, in the case of any Municipal Obligation
that is not rated by S&P but qualifies as an S&P Eligible Asset pursuant to
clause (iii) of that definition, such Municipal Obligation will be deemed to
have an S&P rating one full rating category lower than the S&P rating category
that is the equivalent of the rating category in which such Municipal Obligation
is placed by a nationally recognized statistical rating organization.
"Receivables for Municipal Obligations Sold," for purposes of calculating S&P
Eligible Assets as of any Valuation Date, means the book value of receivables
for Municipal Obligations sold as of or prior to such Valuation Date. The Fund
may adopt S&P Discount Factors for Municipal Obligations other than Municipal
Obligations provided that S&P advises the Fund in writing that such action will
not adversely affect its then current rating on the Preferred Shares. For
purposes of the foregoing, Anticipation Notes rated SP-1+ or, if not rated by
S&P, equivalent to A-l+ or SP-1+ by another nationally recognized statistical
rating organization, on a case by case basis, which do not mature or have a
demand feature at par exercisable in 30 days and which do not have a long-term
rating, shall be considered to be short-term Municipal Obligations.
The S&P Discount Factor applied to cash and cash equivalents and demand
deposits in an "A-1+" rated institution are valued at 100%. "A-1+" rated
commercial paper, with maturities no greater than 30 days and held instead of
cash until maturity, is valued at 100%. Securities with next-day maturities
invested in "A-1+" rated institutions are considered cash equivalents and are
valued at 100%. Securities maturing in 181 to 360 calendar days are valued at
114.2%.
For purposes of determining the discount factors applicable to collateral
not rated by S&P, the collateral will carry an S&P rating one full rating
category lower than the equivalent S&P rating.
S&P Eligible Assets. Under current S&P guidelines, the following are
considered to be S&P Eligible Assets:
Deposit Securities.
U.S. Government Obligations of U.S. Government Agencies.
Corporate Indebtedness other than Deposit Securities, U.S. Government
Obligations and Municipal Obligations that are not convertible into or
exchangeable or exercisable for stock of a corporation (except to the extent of
ten percent (10%) in the case of a share exchange or tender offer) ("Other
Debt") and that satisfy all of the following conditions (i) be no more than 10%
of total assets may be below a S&P rating of BBB-, or comparable Moody's or
Fitch rating, or unrated; (ii) the remaining term to maturity of such Other Debt
will not exceed fifty (50) years; (iii) such Other Debt must provide for
periodic interest payments in cash over the life of the security; (iv) no more
than 10% of the issuers of such evidences of indebtedness do not file periodic
financial statements with the Securities and Exchange Commission; and (v) which,
in the aggregate, have an average duration of not more than 12 years.
Mortgage-backed Securities. Mortgage Pass-through Certificates are publicly
issued instruments rated at least "AA-" by S&P. Pass-throughs backed by pools of
convertible adjustable-rate mortgages (ARMs) are discounted at an additional
five percentage points above the levels established for pass-throughs backed by
fixed or nonconventional ARM pools. Fixed-Rate and Adjustable-rate mortgage
collateral (conventional/FHA/VA and Whole Loans) Pool must consist of at least
100 loans each secured by single-family, one-unit, detached primary residence.
25% of the total pool may have an LTV greater than 80% but less than or equal to
90%. 10% may have an original LTV of no greater than 95%. Loans with LTV greater
than 80% must have a `AA' rated primary mortgage insurance. 25% may have
balances between $400,000 and $600,000, provided the maximum size of any loan is
appropriate with respect to the market area of the originator. 10% of the pool
may represent condominiums that are four stories or less. High LTVs, high loan
balance, and condominiums, in aggregate, should not exceed 35% of the pool.
FHAA-Insured Multifamily Loans must have a minimum principal balance of $100,000
and have at least a one-year remaining maturity. The aggregate market value of
any one loan may not exceed 5% of the aggregate market value of the portfolio.
Such loans should be initially included in minimum blocks of $5 million. Project
loans must have at least a 90% occupancy rate at the time the loan is pledged.
After 90 days defaulted mortgage loans must be valued at zero. A loan in default
should be liquidated or substituted within a 90-day period. Collateralized
Mortgage Obligations tranches are publicly issued instruments rated `AAA' by
S&P. No more than 25% of the total market value of collateral may be from one
private sector issuer.
Rule 144A Securities.
Senior Loans, provided, however, that the initial issue amount (facility
size) is at least $100 million. The minimum accepted holding size (notional
amount) of any given loan not rated by S&P, Moody's or other nationally
recognized rating agency is at least $1 million, provided, that participation
loans are limited to not more than 10% of the aggregate value of the S&P
Eligible Asset. For loans rated by S&P, Moody's or other nationally recognized
rating agency, there is no minimum accepted holding size. Senior Loan
Participations and non-Senior Loans will qualify as S&P Eligible Assets only up
to an aggregate maximum of 15% of the Fund's total assets. These levels apply to
U.S. lenders only; any international loans are excluded.
Preferred stocks that satisfy all of the following conditions: (i) the
preferred stock issue has a senior rating from S&P, or the preferred issue must
be rated. In the case of Yankee preferred stock, the issuer should have a S&P
senior rating of at least "BBB-", or the preferred issue must be rated at least
"BBB-"; (ii) the issuer -- or if the issuer is a special purpose corporation,
its parent -- is listed on either the New York Stock Exchange, the American
Stock Exchange or NASDAQ if the traded par amount is less than $1,000. If the
traded par amount is $1,000 or more exchange listing is not required; (iii) the
collateral pays cash dividends denominated in U.S. dollars; (iv) Private
placement 144A with registration rights are eligible assets; and (v) The minimum
market capitalization of eligible issuers is US$100 million. Also, in the case
of floating-rate preferred stock, (1) holdings must be limited to stock with a
dividend period of less than or equal to 49 days, except for a new issue, where
the first dividend period may be up to 64 days and (2) such stock may not have
been subject to a failed auction. In addition, the total fair market value of
adjustable-rate or auction-rate, preferred stock held in the portfolio may not
exceed 10% of eligible assets. Concentration limits may also apply to preferred
stock. For example, total issuer exposure in preferred stock of any one issuer
is limited to 10% of the fair market value of eligible assets and Preferred
stock rated below B- (including non-rated preferred stock) and preferred stock
with a market cap of less than US$100 million are limited to no more than 15% of
the fair market value of the eligible assets.
Common stocks that satisfy all of the following conditions: (i) the issuer
can hold no more than the average monthly trading volume over the past year;
(ii) each stock must have a minimum market capitalization of at least $100
million; (iii) restricted stocks (Rule 144A securities) or any pink sheet stocks
(generally, stocks that are not carried in daily over-the-counter newspaper
listings) are ineligible; (iv) the issuer may not hold any equity unless it has
been listed on an exchange or traded for more than one year and one quarter, or
15 months (eligible stock exchanges are the New York Stock Exchange, American
Stock Exchange, Philadelphia Stock Exchange, Boston Stock Exchange, Washington
Stock Exchange, Midwest Stock Exchange, Pacific Stock Exchange, NASDAQ, and
National Market Quotations); and (v) The collateral is owned by the Fund, or the
trustee or collateral agent has a first perfected priority security interest in
the collateral.
Asset Backed Securities. Receivables-backed tranches are publicly issued
with a rating of "AA" or higher by S&P, tranches are current interest-bearing,
fixed- or floating-rate, and are backed by automobile loans or credit card
(fixed-rate only) receivables with an original issuance size of at least $200
million. No more than 25% of the total market value of the collateral can be
from one private sector issuer. With respect to floating-rate credit card
receivables, not more than 25% of the collateral may be from one
investment-grade private sector issuer. No more than 10% of the market value of
the collateral may be from one non investment-grade private sector issuer.
Interest Rate Swaps, Caps, and Floors. For as long as any Preferred Shares
are rated by S&P, the Fund will not, unless it has received written confirmation
from S&P that such action would not impair the rating then assigned to the
shares of Preferred Shares by S&P, engage in interest rate swaps, caps and
floors, except that the Fund may, without obtaining the written consent
described above, engage in swaps, caps and floors if: (i) the counterparty to
the swap transaction has a short-term rating of A-1 or, if the counterparty does
not have a short-term rating, the counterparty's senior unsecured long-term debt
rating is A- or higher; (ii) the original aggregate notional amount of the
interest rate swap transaction or transactions is not to be greater than the
liquidation preference of the Preferred Shares; (iii) the interest rate swap
transaction will be marked-to-market weekly by the swap counterparty; (iv) if
the Fund fails to maintain an aggregate discounted value at least equal to the
Preferred Shares Basic Maintenance Amount on two consecutive Valuation Dates
then the agreement shall terminate immediately; (v) for the purpose of
calculating the Discounted Value of S&P Eligible Assets, 90% of any positive
mark-to-market valuation of the Fund's rights will be S&P Eligible Assets, 100%
of any negative mark-to-market valuation of the Fund's rights will be included
in the calculation of the Preferred Shares Basic Maintenance Amount, and (vi)
the Fund must maintain liquid assets with a value at least equal to the net
amount of the excess, if any, of the Fund's obligations over its entitlement
with respect to each swap (For caps/floors, the Fund must maintain liquid assets
with a value at least equal to the Fund's obligations with respect to such caps
or floors.)
Securities Lending Transactions. For so long as any Preferred Shares are
rated by S&P, the Fund will enter into securities lending transactions, subject
to the following criteria: (1) The counterparty to the transaction must be rated
AAA; (2) collateral must be marked-to-market daily; (3) all transactions should
be "matched' on both sides (cash collateral received should be invested in a
security with a term as same as the loan); (4) repayment obligation of the cash
collateral is included as a liability in the minimum asset coverage test; (5)
transactions should not exceed 25% of the total portfolio value, with the term
of the transaction limited to 30 days or less.
Reverse Repurchase Agreements. For so long as the Preferred Shares are
rated by S&P, the Fund may engage in reverse repurchase agreements if the
counterparty is rated at least A-/A-1, the securities are marked to market daily
by the counterparty, the agreement is for a term of less than 183 days.
Diversification. In addition to the above, the Fund's portfolio must
consist of no less than 20 issues representing no less than 10 industries as
determined according to Bloomberg Industry Classifications.
Hedging. The Fund may engage in purchases or sales of futures contracts
based on the Municipal Index or Treasury Bonds, the writings, purchases or sales
of put and call options on such contracts, purchases of interest rate locks,
interest rate caps, interest rate floors, interest rate collars, and entering
into interest rate swaps (collectively, "S&P Hedging Transactions"), subject to
the following limitations:
o The Fund may not engage in any S&P Hedging Transaction based on the
Municipal Index (other than transactions that terminate a futures contract or
option held by the Fund by the Fund's taking the opposite position thereto
("Closing Transactions")), which would cause the Fund at the time of such
transaction to own or have sold the least of (A) more than 1,000 outstanding
futures contracts based on the Municipal Index, (B) outstanding futures
contracts based on the Municipal Index exceeding in number 50% of the quotient
of the Market Value of the Fund's total assets divided by $1,000 or (C)
outstanding futures contracts based on the Municipal Index exceeding in number
10% of the average number of daily traded futures contracts based on the
Municipal Index in the 30 days preceding the time of effecting such transaction
as reported by The Wall Street Journal.
o The Fund may not engage in any S&P Hedging Transaction based on Treasury
Bonds (other than Closing Transactions) which would cause the Fund at the time
of such transaction to own or have sold the lesser of (A) outstanding futures
contracts based on Treasury Bonds and on the Municipal Index exceeding in number
50% of the quotient of the Market Value of the Fund's total assets divided by
$100,000 ($200,000 in the case of the two-year United States Treasury Note) or
(B) outstanding futures contracts based on Treasury Bonds exceeding in number
10% of the average number of daily traded futures contracts based on Treasury
Bonds in the 30 days preceding the time of effecting such transaction as
reported by The Wall Street Journal.
o For purposes of the foregoing, the Fund is deemed to own the number of
financial futures contracts that underlie any outstanding options written by the
Fund.
o The Fund may engage in Closing Transactions to close out any outstanding
futures contract which the Fund owns or has sold or any outstanding option
thereon owned by the Fund in the event (A) the Fund does not have S&P Eligible
Assets with an aggregate Discounted Value equal to or greater than the Preferred
Share Basic Maintenance Amount on two consecutive Valuation Dates and (B) the
Fund is required to pay variation margin on the second such Valuation Date.
o The Fund may engage in a Closing Transaction to close out any outstanding
futures contract or option thereon in the month prior to the delivery month
under the terms of such futures contract or option thereon unless the Fund holds
the securities deliverable under such terms.
o When the Fund writes a futures contract or option thereon, it will either
(A) maintain an amount of cash, cash equivalents or high grade (rated A or
better by S&P), fixed-income securities in a segregated account with the Fund's
custodian, so that the amount so segregated plus the amount of initial margin
and variation margin held in the account of or on behalf of the Fund's broker
with respect to such futures contract or option equals the Market Value of the
futures contract or option, or (B) in the event the Fund writes a futures
contract or option thereon which requires delivery of an underlying security,
hold such underlying security in its portfolio.
Other. Notwithstanding the foregoing, an asset will not be considered a S&P
Eligible Asset to the extent that it has been irrevocably deposited for the
payment of (i)(a) through (i)(e) under the definition of Preferred Shares Basic
Maintenance Amount in the Statement or it is subject to any liens, except for
(a) liens which are being contested in good faith by appropriate proceedings and
which S&P has indicated to the Fund will not affect the status of such asset as
a S&P Eligible Asset, (b) liens for taxes that are not then due and payable or
that can be paid thereafter without penalty, (c) liens to secure payment for
services rendered or cash advanced to the Fund by its Advisor or portfolio
manager, the Fund's custodian, transfer agent or registrar or the Auction Agent
and (d) liens arising by virtue of any repurchase agreement.
Fitch Rating Guidelines
For purposes of calculating the discounted value of the Fund's portfolio
under current Fitch's guidelines, the fair market value of portfolio securities
eligible for consideration under such guidelines ("Fitch's Eligible Assets")
must be discounted by certain discount factors set forth below ("Fitch's
Discount Factors"). The discounted value of a portfolio security under Fitch's
guidelines is the market value thereof, determined as specified by Fitch's,
divided by the Fitch's Discount Factor.
Fitch Discount Factor. The Fitch Discount Factor for any Fitch Eligible
Asset is as follows, provided however, that for unhedged foreign investments a
discount factor of 105% shall be applied to the Market Value thereof otherwise
determined in accordance with the procedures below, provided further that, if
the foreign issuer of such unhedged foreign investment is from a country whose
sovereign debt rating in a non-local currency is not assigned a rating of `AA'
or better by Fitch, a discount factor of 117% shall be applied to the Market
Value thereof otherwise determined in accordance with the procedures below.
According to Fitch guidelines, the portfolio coverage ratio of Fitch Eligible
Assets to liabilities should not be less than 100% in order to maintain the
rating of `AAA.'
Corporate Debt Securities. The percentage determined by reference to the
rating on such asset with reference to the remaining term to maturity of such
asset, in accordance with the table set forth below.
----------------------------------------------- ---------- ---------- ----------- ---------- ----------- ----------
Term to Maturity of Corporate AAA AA A BBB BB Not
Debt Security rated or
below BB
----------------------------------------------- ---------- ---------- ----------- ---------- ----------- ----------
----------------------------------------------- ---------- ---------- ----------- ---------- ----------- ----------
3 years or less (but longer than 1 year).... 106.38% 108.11% 109.89% 111.73% 129.87% 151.52%
----------------------------------------------- ---------- ---------- ----------- ---------- ----------- ----------
----------------------------------------------- ---------- ---------- ----------- ---------- ----------- ----------
5 years or less (but longer than 3 years).... 111.11 112.99 114.94 116.96 134.24 151.52
----------------------------------------------- ---------- ---------- ----------- ---------- ----------- ----------
----------------------------------------------- ---------- ---------- ----------- ---------- ----------- ----------
7 years or less (but longer than 5 years).... 113.64 115.61 117.65 119.76 135.66 151.52
----------------------------------------------- ---------- ---------- ----------- ---------- ----------- ----------
----------------------------------------------- ---------- ---------- ----------- ---------- ----------- ----------
10 years or less (but longer than 7 years)... 115.61 117.65 119.76 121.95 136.74 151.52
----------------------------------------------- ---------- ---------- ----------- ---------- ----------- ----------
----------------------------------------------- ---------- ---------- ----------- ---------- ----------- ----------
15 years or less (but longer than 10 years).. 119.76 121.95 124.22 126.58 139.05 151.52
----------------------------------------------- ---------- ---------- ----------- ---------- ----------- ----------
----------------------------------------------- ---------- ---------- ----------- ---------- ----------- ----------
More than 15 years.. 124.22 126.58 129.03 131.58 144.55 151.52
----------------------------------------------- ---------- ---------- ----------- ---------- ----------- ----------
(1) If a security is not rated by Fitch Ratings but is rated by two other
NRSROs, then the lower of the ratings on the security from the two other NRSROs
will be used to determine the Fitch Discount Factor (e.g., where the S&P rating
is A- and the Moody's rating is Baa1, a Fitch rating of BBB+ will be used). If a
security is not rated by Fitch Ratings but is rated by only one other NRSRO,
then the rating on the security from the other NRSRO will be used to determine
the Fitch Discount Factor (e.g., where the only rating on a security is an S&P
rating of AAA, a Fitch rating of AAA will be used, and where the only rating on
a security is a Moody's rating of Ba3, a Fitch rating of BB- will be used). If a
security is not rated by any NRSRO, the Fund will use the percentage set forth
under "Not Rated or Below BB" in this table.
The Fitch Discount Factors presented in the immediately preceding table
apply to corporate debt securities that are performing and have a market price
determined by a pricing service or an approved price. The Fitch Discount Factor
noted in the table above for a debt security rated B by Fitch Ratings shall
apply to any non-performing debt security with a price equal to or greater than
$0.90. The Fitch Discount Factor noted in the table above for a debt security
rated CCC by Fitch Ratings apply to any non-performing debt security with a
price less than $0.90 but equal to or greater than $0.20. If a debt security
does not have a market value determined by a pricing service or an approved
price, a rating two rating categories below the actual rating on the debt
security will be used (e.g., where the actual rating is A-, the rating for Debt
Securities rated BB- will be used). The Fitch Discount Factor for a debt
security issued by a limited partnership that is not a Rule 144A Security is the
Discount Factor determined in accordance with the table set forth above
multiplied by 110%.
The Fitch Discount Factors presented in the immediately preceding table
will also apply to (i) interest rate swaps and caps, whereby the rating of the
counterparty to the swap or cap will be the rating used to determine the Fitch
Discount Factor in the table; and (ii) tradable credit baskets, whereby the
ratings in the table will be applied to the underlying securities and the market
value of each underlying security will be its proportionate amount of the market
value of the tradable credit baskets. The Fitch Discount Factors presented in
the immediately preceding table will also apply to corporate obligations backed
by a guaranty, a letter of credit or insurance issued by a third party. If the
third-party credit rating is the basis for the rating on the obligation, then
the rating on the third party will be used to determine the Fitch Discount
Factor in the table. The Fitch Discount Factors presented in the immediately
preceding table also applies to preferred trust certificates, the rating on
which will be determined by the underlying debt instruments in the trust, unless
such preferred trust certificates are determined by Fitch Ratings to qualify for
a traditional equity discount factor, in which case the Fitch Discount Factor
shall be 370%.
Preferred Shares.
Preferred Shares Discount Factor
AAA Taxable Preferred 130%
AA Taxable Preferred 133%
A Taxable Preferred 135%
BBB Taxable Preferred 139%
BB Taxable Preferred 154%
Not rated or below BB Taxable Preferred 161%
Investment Grade DRD Preferred 164%
Not rated or below Investment Grade DRD Preferred 200%
--------------------------------------------------------------------------------
Short-Term Instruments. The Fitch Discount Factor applied to short-term
portfolio securities, including without limitation Debt Securities, Short Term
Money Market Instruments and municipal debt obligations, is (a) 100%, so long as
such portfolio securities mature or have a demand feature at par exercisable
within the Fitch Exposure Period; (b) 115%, so long as such portfolio securities
mature or have a demand feature at par not exercisable within the Fitch Exposure
Period; and (c) 125%, so long as such portfolio securities neither mature nor
have a demand feature at par exercisable within the Fitch Exposure Period. A
Fitch Discount Factor of 100% is applied to cash, including shares of affiliated
money market funds held in conjunction with the Fund's nightly sweep account.
"Fitch Exposure Period" means the period commencing on (and including) a given
Valuation Date and ending 41 days thereafter.
U.S. Government Securities and U.S. Treasury STRIPS.
Time Remaining to Maturity Discount Factor
1 year or less................................. 101.5%
2 years or less (but longer than 1 year)....... 103
3 years or less (but longer than 2 years)...... 105
4 years or less (but longer than 3 years)...... 107
5 years or less (but longer than 4 years)...... 109
7 years or less (but longer than 5 years)...... 112
10 years or less (but longer than 7 years)..... 114
Greater than 10 years............................. 122
Convertible Securities. The Fitch Discount Factor applied to convertible
securities is (a) 200% for investment grade convertibles and (b) 222% for below
investment grade convertibles so long as such convertible securities have
neither (x) conversion premium greater than 100% nor (y) have a yield to
maturity or yield to worst of > 15.00% above the relevant Treasury curve.
The Fitch Discount Factor applied to convertible securities which have
conversion premiums of greater than 100% is (a) 152% for investment grade
convertibles and (b) 179% for below investment grade convertibles so long as
such convertible securities do not have a yield to maturity or yield to worst of
> 15.00% above the relevant Treasury curve.
The Fitch Discount Factor applied to convertible securities which have a
yield to maturity or yield to worst of > 15.00% above the relevant Treasury
curve is 370%.
If a security is not rated by Fitch but is rated by two other rating
agencies, then the lower of the ratings on the security from the two other
rating agencies will be used to determine the Fitch Discount Factor (e.g., where
the S&P rating is A- and the Moody's rating is Baa1, a Fitch rating of BBB+ will
be used). If a security is not rated by Fitch but is rated by only one other
rating agency, then the rating on the security from the other rating agency will
be used to determine the Fitch Discount Factor (e.g., where the only rating on a
security is an S&P rating of AAA, a Fitch rating of AAA will be used, and where
the only rating on a security is a Moody's rating of Ba3, a Fitch rating of BB-
will be used). If a security is not rated by any rating agency, the Fund will
treat the security as if it were below investment grade.
Rule 144A Securties. The Fitch Discount Factor applied to Rule 144A
Securities is 110% of the Fitch Discount Factor which would apply were the
securities registered under the Securities Act.
Asset-Backed and Mortgaged-Backed Securities. The percentage determined by
reference to the asset type in accordance with the table set forth below.
Asset Type (with time remaining to maturity, if applicable) Discount Factor
U.S. Treasury/agency securities (10 years or less). 118%
U.S. Treasury/agency securities (greater than 10 years) 127%
U.S. agency sequentials (10 years or less). 128%
U.S. agency sequentials (greater than 10 years) 142%
U.S. agency principal only securities 236%
U.S. agency interest only securities (with market value greater than $0.40) 696%
U.S. agency interest only securities (with market value less than or equal to $0.40) 214%
AAA LockOut securities, interest only 236%
U.S. agency planned amortization class bonds (10 years or less) 115%
U.S. agency planned amortization class bonds (greater than 10 years) 136%
AAA sequentials (10 years or less) 118%
AAA sequentials (greater than 10 years) 135%
AAA planned amortization class bonds (10 years or less) 115%
AAA planned amortization class bonds (greater than 10 years) 140%
Jumbo mortgages rated AAA(1) 123%
Jumbo mortgages rated AA(1) 130%
Jumbo mortgages rated A(1) 136%
Jumbo mortgages rated BBB(1) 159%
Commercial mortgage-backed securities rated AA 131%
Commercial mortgage backed securities rated AA 139%
Commercial mortgage backed securities rated A 148%
Commercial mortgage backed securities rated BBB 177%
Commercial mortgage backed securities rated BB 283%
Commercial mortgage backed securities rated B 379%
Commercial mortgage backed securities rated CCC or not rated 950%
(1) Applies to jumbo mortgages, credit cards, auto loans, home equity
loans, manufactured housing and prime mortgage-backed securities not issued by a
U.S. agency or instrumentality.
Corporate Loans: The percentage determined by reference to the Fitch Loan
Category in accordance with the table set forth below.
Fitch Loan Category Discount Factor
A 126%
B 157
C 184
D 433
The Fitch Discount Factors presented in the immediately preceding table
also applies to interest rate swaps and caps, and the rating of the counterparty
to the swap or cap is the rating used to determine the Fitch Discount Factor in
the table.
"Fitch Loan Category" means the following four categories (and, for
purposes of this categorization, the market value of a Fitch Eligible Asset
trading at par is equal to $1.00):
"Fitch Loan Category A" means performing corporate loans which have a
market value or an approved price greater than or equal to $0.90.
"Fitch Loan Category B" means: (a) performing corporate loans which have a
market value or an approved price of greater than or equal to $0.80 but
less than $0.90; and (b) non-performing corporate loans which have a market
value or an approved price greater than or equal to $0.85.
"Fitch Loan Category C" means: (a) performing corporate loans which have a
market value or an approved price of greater than or equal to $0.70 but
less than $0.80; (b) non-performing corporate loans which have a market
value or an approved price of greater than or equal to $0.75 but less than
$0.85; and (c) performing corporate loans without an approved price rated
BB- or higher by Fitch Ratings. If a security is not rated by Fitch Ratings
but is rated by two other NRSROs, then the lower of the ratings on the
security from the two other NRSROs will be used to determine the Fitch
Discount Factor (e.g., where the S&P rating is A- and the Moody's rating is
Baa1, a Fitch rating of BBB+ will be used). If a security is not rated by
Fitch Ratings but is rated by only one other NRSRO, then the rating on the
security from the other NRSRO will be used to determine the Fitch Discount
Factor (e.g., where the only rating on a security is an S&P rating of AAA-,
a Fitch rating of AAA- will be used, and where the only rating on a
security is a Moody's rating of Ba3, a Fitch rating of BB- will be used).
"Fitch Loan Category D" means Corporate Loans not described in any of the
foregoing categories.
Notwithstanding any other provision contained above, for purposes of
determining whether a Fitch Eligible Asset falls within a specific Fitch Loan
Category, to the extent that any Fitch Eligible Asset would fall in more than
one of the Fitch Loan Categories, such Fitch Eligible Asset shall be deemed to
fall into the Fitch Loan Category with the lowest applicable Fitch Discount
Factor.
Foreign Bonds. The Fitch Discount Factor (A) for a foreign bond the
principal of which (if not denominated in U.S. dollars) is subject to a currency
hedging transaction will be the Fitch Discount Factor that would otherwise apply
to such foreign bonds and (B) for (1) a foreign bond the principal of which (if
not denominated in U.S. dollars) is not subject to a currency hedging
transaction and (2) a bond issued in a currency other than U.S. dollars by a
corporation, limited liability company or limited partnership domiciled in, or
the government or any agency, instrumentality or political subdivision of, a
nation other than an Approved Foreign Nation, will be 370%.
Structured Notes. The Fitch Discount Factor applied to structured notes
will be (a) in the case of a corporate issuer, the Fitch Discount Factor
determined in accordance with paragraph (i) under Discount Factors for Corporate
Debt Securities, whereby the rating on the issuer of the Structured Note will be
the rating on the Structured Note for purposes of determining the Fitch Discount
Factor in the table in paragraph (i); and (b) in the case of an issuer that is
the U.S. Government or an agency or instrumentality thereof, the Fitch Discount
Factor determined in accordance with paragraph (iii) under Discount Factors for
Short-Term Instruments.
Fitch Eligible Assets. Under current Fitch guidelines, the following are
considered Fitch Eligible Assets:
Cash (including interest and dividends due on assets rated (A) BBB or
higher by Fitch Ratings or the equivalent by another NRSRO if the payment date
is within five Business Days of the Valuation Date, (B) A or higher by Fitch
Ratings or the equivalent by another NRSRO if the payment date is within thirty
days of the Valuation Date, and (C) A+ or higher by Fitch Ratings or the
equivalent by another NRSRO if the payment date is within the Fitch Exposure
Period) and receivables for Fitch Eligible Assets sold if the receivable is due
within five Business Days of the Valuation Date, and if the trades which
generated such receivables are settled within five business days.
Preferred Shares if (i) dividends on such preferred shares are cumulative,
(ii) such securities provide for the periodic payment of dividends thereon in
cash in U.S. dollars or euros and do not provide for conversion or exchange
into, or have warrants attached entitling the holder to receive equity capital
at any time over the respective lives of such securities, (iii) the issuer of
such preferred shares is listed on the New York Stock Exchange, American Stock
Exchange, NASDAQ, or FTSE and has a market capitalization of at least $500
million, and (iv) the issuer of such preferred shares has a senior debt rating
or preferred stock rating from Fitch of BBB- or higher or the equivalent rating
by another Rating Agency. In addition, the preferred shares issue must be at
least $50 million.
Common Stocks (i) (a) which are traded on the New York Stock Exchange, the
American Stock Exchange, the NASDAQ, FTSE or in the over-the-counter market, (b)
which, if cash dividend paying, pay cash dividends in U.S. dollars, and (c)
which may be sold without restriction by the Fund; provided, however, that (1)
common stock which, while a Fitch Eligible Asset owned by the Fund, ceases
paying any regular cash dividend will no longer be considered a Fitch Eligible
Asset until 60 calendar days after the date of the announcement of such
cessation, unless the issuer of the common stock has senior debt securities
rated at least A- by Fitch and (2) the Fund's holdings of the common stock of
any issuer in excess of 5% will not be considered a Fitch Eligible Asset; (ii)
securities denominated in any currency other than the U.S. dollar and securities
of issuers formed under the laws of jurisdictions other than the United States,
its states and the District of Columbia for which there are dollar-denominated
American Depository Receipts ("ADRs") which are traded in the United States on
exchanges or over-the-counter and are issued by banks formed under the laws of
the United States, its states or the District of Columbia; provided, however,
that the aggregate Market Value of the Fund's holdings of securities denominated
in currencies other than the U.S. dollar and ADRs in excess of 3% of the
aggregate Market Value of the Outstanding shares of common stock of such issuer
or in excess of 10% of the Market Value of the Fund's Fitch Eligible Assets with
respect to issuers formed under the laws of any single such non-U.S.
jurisdiction other than Argentina, Australia, Brazil, Chile, France, Germany,
Italy, Japan, Korea, Mexico, Spain or the United Kingdom (the "Approved Foreign
Nations") shall not be a Fitch Eligible Asset.
Short Term Money Market Instruments so long as (a) such securities are
rated at least F1+ by Fitch Ratings or the equivalent by another NRSRO, (b) in
the case of demand deposits, time deposits and overnight funds, the supporting
entity is rated at least A by Fitch Ratings or the equivalent by another NRSRO,
or (c) in all other cases, the supporting entity (1) is rated at least A by
Fitch Ratings or the equivalent by another NRSRO and the security matures within
one month, (2) is rated at least A by Fitch Ratings or the equivalent by another
NRSRO and the security matures within three months or (3) is rated at least AA
by Fitch Ratings or the equivalent by another NRSRO and the security matures
within six months. Unrated securities will not be considered Eligible Assets.
U.S. Government Securities and U.S. Treasury STRIPS.
Debt Securities if such securities have been registered under the
Securities Act or are restricted as to resale under federal securities laws but
are eligible for resale pursuant to Rule 144A under the Securities Act as
determined by the Advisor or portfolio manager acting pursuant to procedures
approved by the Board of Trustees; and (C) such securities are issued by (1) a
U.S. corporation, limited liability company or limited partnership , (2) a
corporation, limited liability company or limited partnership domiciled in
Argentina, Australia, Brazil, Chile, France, Germany, Italy, Japan, Korea,
Mexico, Spain or the United Kingdom (the "Approved Foreign Nations"), (3) the
government of any Approved Foreign Nation or any of its agencies,
instrumentalities or political subdivisions (the debt securities of Approved
Foreign Nation issuers being referred to collectively as "foreign bonds"), (4) a
corporation, limited liability company or limited partnership domiciled in
Canada or (5) the Canadian government or any of its agencies, instrumentalities
or political subdivisions (the debt securities of Canadian issuers being
referred to collectively as "Canadian Bonds"). Foreign bonds held by the Fund
will qualify as Fitch Eligible Assets only up to a maximum of 20% of the
aggregate market value of all assets constituting Fitch Eligible Assets.
Similarly, Canadian bonds held by the Fund will qualify as Fitch Eligible Assets
only up to a maximum of 20% of the aggregate market value of all assets
constituting Fitch Eligible Assets. Notwithstanding the limitations in the two
preceding sentences, foreign bonds and Canadian Bonds held by the Fund will
qualify as Fitch Eligible Assets only up to a maximum of 30% of the aggregate
market value of all assets constituting Fitch Eligible Assets. In addition,
bonds which are issued in connection with a reorganization under U.S. federal
bankruptcy law ("Reorganization Bonds") will be considered debt securities
constituting Fitch Eligible Assets if (a) they provide for periodic payment of
interest in cash in U.S. dollars or euros; (b) they do not provide for
conversion or exchange into equity capital at any time over their lives; (c)
they have been registered under the Securities Act or are restricted as to
resale under federal securities laws but are eligible for trading under Rule
144A promulgated pursuant to the Securities Act as determined by the Fund's
Advisor or portfolio manager acting pursuant to procedures approved by the Board
of Trustees; (d) they were issued by a U.S. corporation, limited liability
company or limited partnership; and (e) at the time of purchase at least one
year had elapsed since the issuer's reorganization. Reorganization Bonds may
also be considered debt securities constituting Fitch Eligible Assets if they
have been approved by Fitch Ratings, which approval shall not be unreasonably
withheld. All debt securities satisfying the foregoing requirements and
restrictions of this paragraph (iv) are herein referred to as "Debt Securities."
Asset-Backed and Mortgage-Backed Securities.
Rule 144A Securities.
Corporate Loans.
Structured Notes.
Tradable credit baskets (e.g., Traded Custody Receipts or TRACERS and
Targeted Return Index Securities Trust or TRAINS).
Interest rate swaps entered into according to International Swap Dealers
Association ("ISDA") standards if (1) the counterparty to the swap transaction
has a short-term rating of not less than F1 by Fitch or the equivalent by
another, NRSRO, or, if the swap counterparty does not have a short-term rating,
the counterparty's senior unsecured long-term debt rating is AA or higher by
Fitch or the equivalent by another NRSRO and (2) the original aggregate notional
amount of the interest rate swap transaction or transactions is not greater than
the liquidation preference of the Preferred Shares originally issued.
Common Stock, Preferred Stock, and any debt security of REITs and Real
Estate Companies.
Unrated Debt Securities issued by an issuer which (1) has not filed for
bankruptcy in the past three years; (2) is current on all interest and principal
on its fixed income obligations; and (3) is current on all preferred stock
dividends.
Financial Contracts, as such term is defined in Section 3(c)(2)(B)(ii) of
the 1940 Act, not otherwise provided for in the foregoing categories of Fitch
Eligible Assets may be included in Fitch Eligible Assets, but, with respect to
any financial contract, only upon receipt by the Fund of a writing from Fitch
Ratings specifying any conditions on including such financial contract in Fitch
Eligible Assets and assuring the Fund that including such financial contract in
the manner so specified would not affect the credit rating assigned by Fitch
Ratings to the Preferred Shares.
Hedging. The Fund may enter into, purchase or sell, exchange-traded
financial futures contracts based on any index approved by Fitch Ratings or
Treasury bonds, and purchase, write or sell exchange-traded put options on such
financial futures contracts, any index approved by Fitch Ratings or Treasury
bonds and purchase, write or sell exchange-traded call options on such financial
futures contracts, any index approved by Fitch Ratings or Treasury bonds ("Fitch
Hedging Transactions"), subject to the following limitations:
(i) The Fund may not engage in any Fitch Hedging Transaction based on any
index approved by Fitch Ratings (other than transactions that terminate a
futures contract or option held by the Fund by the Fund's taking the opposite
position thereto ("closing transactions")) that would cause the Fund at the time
of such transaction to own or have sold outstanding financial futures contracts
based on such index exceeding in number 10% of the average number of daily
traded financial futures contracts based on such index in the 30 days preceding
the time of effecting such transaction as reported by The Wall Street Journal.
(ii) The Fund will not engage in any Fitch Hedging Transaction based on
Treasury bonds (other than closing transactions) that would cause the Fund at
the time of such transaction to own or have sold:
(A) outstanding financial futures contracts based on Treasury bonds with
such contracts having an aggregate market value exceeding 20% of the aggregate
market value of Fitch Eligible Assets owned by the Fund and rated at least AA by
Fitch Ratings (or, if not rated by Fitch Ratings, rated Aa at least by Moody's;
or, if not rated by Moody's, rated at least AAA by S&P); or
(B) outstanding financial futures contracts based on Treasury bonds with
such contracts having an aggregate market value exceeding 40% of the aggregate
market value of all Fitch Eligible Assets owned by the Fund (other than Fitch
Eligible Assets already subject to a Fitch Hedging Transaction) and rated at
least A or BBB by Fitch Ratings (or, if not rated by Fitch Ratings, rated at
least Baa by Moody's; or, if not rated by Moody's, rated at least A or AA by
S&P) (for purposes of the foregoing clauses (i) and (ii), the Fund shall be
deemed to own futures contracts that underlie any outstanding options written by
the Fund);
(iii) The Fund may engage in closing transactions to close out any
outstanding financial futures contract based on any index approved by Fitch
Ratings if the amount of open interest in such index as reported by The Wall
Street Journal is less than an amount to be mutually determined by Fitch Ratings
and the Fund; and
(iv) The Fund may not enter into an option or futures transaction unless,
after giving effect thereto, the Fund would continue to have Fitch Eligible
Assets with an aggregate Discounted Value equal to or greater than the Preferred
Shares Basic Maintenance Amount.
Diversification. Fitch requires that the Fund adhere to a maximum single
issuer concentration, with respect to 75% of its assets, of 5% of total assets.
Fitch Diversification Limitations. Portfolio holdings as described below
must be within the following diversification and issue size requirements in
order to be included in Fitch's Eligible Assets:
Security Rated At Maximum Single Maximum Single Minimum Issue Size
Least Issuer(1) Industry(1),(2) ($ in million)(3)
AAA 100% 100% $100
AA- 20 75 100
A- 10 50 100
BBB- 6 25 100
BB- 4 16 50
B- 3 12 50
CCC 2 8 50
If a security is not rated by Fitch, look to the lower of Moody's or S&P
rating.
(1) Percentages represent a portion of the aggregate market value of corporate
debt securities.
(2) Industries are determined according to Bloomberg's Industry
Classifications.
(3) Preferred stock has a minimum issue size of $50 million for all rating
categories in the table.
Other. Where the Fund sells an asset and agrees to repurchase such asset in
the future, the Discounted Value of such asset will constitute a Fitch Eligible
Asset and the amount the Fund is required to pay upon repurchase of such asset
will count as a liability for the purposes of the Preferred Shares Basic
Maintenance Amount. Where the Fund purchases an asset and agrees to sell it to a
third party in the future, cash receivable by the Fund thereby will constitute a
Fitch Eligible Asset if the long-term debt of such other party is rated at least
A- by Fitch Ratings or the equivalent by another NRSRO and such agreement has a
term of 30 days or less; otherwise the Discounted Value of such purchased asset
will constitute a Fitch Eligible Asset.
Notwithstanding the foregoing, an asset will not be considered a Fitch
Eligible Asset to the extent that it has been irrevocably deposited for the
payment of (i)(A) through (i)(E) under the definition of Preferred Shares Basic
Maintenance Amount or to the extent it is subject to any liens, except for (A)
liens which are being contested in good faith by appropriate proceedings and
which Fitch Ratings has indicated to the Fund will not affect the status of such
asset as a Fitch Eligible Asset, (B) liens for taxes that are not then due and
payable or that can be paid thereafter without penalty, (C) liens to secure
payment for services rendered or cash advanced to the Fund by its Advisor or
portfolio manager, the Fund's custodian, transfer agent or registrar or the
Auction Agent and (D) liens by virtue of any repurchase agreement.
General
The foregoing Rating Agency Guidelines are subject to change from time to
time. The Fund may, but it is not required to, adopt any such change. Nationally
recognized rating agencies other than S&P and Fitch may also from time to time
rate the Preferred Shares; any nationally recognized rating agency providing a
rating for the Preferred Shares may, at any time, change or withdraw any such
rating.
U.S. FEDERAL INCOME TAX MATTERS
The following is a summary discussion of certain U.S. federal income tax
consequences that may be relevant to a shareholder of acquiring, holding and
disposing of Preferred Shares of the Fund. This discussion only addresses U.S.
federal income tax consequences to U.S. shareholders who hold their shares as
capital assets and does not address all of the U.S. federal income tax
consequences that may be relevant to particular shareholders in light of their
individual circumstances. This discussion also does not address the tax
consequences to shareholders who are subject to special rules, including,
without limitation, financial institutions, insurance companies, dealers in
securities or foreign currencies, foreign holders, persons who hold their shares
as or in a hedge against currency risk, a constructive sale, or conversion
transaction, holders who are subject to the alternative minimum tax, or
tax-exempt or tax-deferred plans, accounts, or entities. In addition, the
discussion does not address any state, local, or foreign tax consequences, and
it does not address any federal tax consequences other than U.S. federal income
tax consequences. The discussion reflects applicable tax laws of the United
States as of the date of this Statement of Additional Information, which tax
laws may be changed or subject to new interpretations by the courts or the
Internal Revenue Service (the "IRS") retroactively or prospectively. No attempt
is made to present a detailed explanation of all U.S. federal income tax
concerns affecting the Fund and its shareholders, and the discussion set forth
herein does not constitute tax advice. Investors are urged to consult their own
tax advisers to determine the specific tax consequences to them of investing in
the Fund, including the applicable federal, state, local and foreign tax
consequences to them and the effect of possible changes in tax laws.
The Fund intends to elect to be treated and to qualify each year as a
"regulated investment company" under Subchapter M of the Code and to comply with
applicable distribution requirements so that it generally will not pay U.S.
federal income tax on income and capital gains distributed to shareholders. In
order to qualify as a regulated investment company under Subchapter M of the
Code, which this discussion assumes, the Fund must, among other things, (i)
derive at least 90% of its gross income for each taxable year from dividends,
interest, payments with respect to securities loans, gains from the sale or
other disposition of stock, securities or foreign currencies, or other income
(including gains from options, futures and forward contracts) derived with
respect to its business of investing in such stock, securities or currencies
(the "90% income test") and (ii) diversify its holdings so that, at the end of
each quarter of its taxable year, (x) at least 50% of the value of its total
assets is represented by cash, United States government securities, securities
of other regulated investment companies and other securities, with such other
securities limited, in respect of any one issuer, to an amount that does not
exceed 5% of the value of the Fund's total assets and that does not represent
more than 10% of the issuer's outstanding voting securities and (y) not more
than 25% of the value of its total assets is invested in the securities (other
than United States government securities or the securities of other regulated
investment companies) of any one issuer, or of two or more issuers controlled by
the Fund and engaged in the same, similar or related trades or businesses. For
purposes of the 90% income test, the character of income earned by certain
entities in which the Fund invests that are not treated as corporations (e.g.,
partnerships or trusts) for U.S. federal income tax purposes will generally pass
through to the Fund. Consequently, the Fund may be required to limit its equity
investments in such entities that earn fee income, rental income or other
nonqualifying income.
If the Fund qualifies as a regulated investment company and, for each
taxable year, it distributes to its shareholders an amount equal to or exceeding
the sum of (i) 90% of its "investment company taxable income" as that term is
defined in the Code (which includes, among other things, dividends, taxable
interest, and the excess of any net short-term capital gains over net long-term
capital losses, as reduced by certain deductible expenses) without regard to the
deduction for dividends paid and (ii) 90% of the excess of its gross tax-exempt
interest, if any, over certain disallowed deductions, the Fund will generally be
relieved of U.S. federal income tax on any income of the Fund, including
long-term capital gains, distributed to shareholders. However, if the Fund
retains any investment company taxable income or "net capital gain" (the excess
of net long-term capital gain over net short-term capital loss), it generally
will be subject to U.S. federal income tax at regular corporate rates on the
amounts retained. The Fund intends to distribute at least annually all or
substantially all of its investment company taxable income, net tax-exempt
interest, and net capital gain. If for any taxable year the Fund did not qualify
as a regulated investment company, it would be treated as a corporation subject
to U.S. federal income tax. In addition, in such cases, any distributions out of
current or accumulated earnings and profits (including net capital gain) would
be taxed as dividend income and it may be difficult for the Fund to requalify
under Subchapter M.
Under the Code, the Fund will be subject to a nondeductible 4% federal
excise tax on a portion of its undistributed ordinary income and capital gains
if it fails to meet certain distribution requirements with respect to each
calendar year. The Fund intends to make distributions in a timely manner and
accordingly does not expect to be subject to the excise tax, but, as described
below, there can be no assurance that the Fund's distributions will be
sufficient to entirely avoid this tax.
Based in part on the lack of any present intention on the part of the Fund
to redeem or purchase the Preferred Shares at any time in the future, the Fund
believes that under present law the Preferred Shares will constitute stock of
the Fund and distributions with respect to the Preferred Shares (other than
distributions in redemption of the Preferred Shares that are treated as
exchanges of stock under Section 302(b) of the Code) will constitute dividends
to the extent of the Fund's current or accumulated earnings and profits as
calculated for U.S. federal income tax purposes. Such dividends generally will
be taxable as ordinary income to holders (other than capital gain dividends or
dividends attributable to qualified dividend income of the Fund, as described
below) and if a portion of the Fund's income consists of qualifying dividends
paid by U.S. corporations, a portion of the dividends paid by the Fund may
qualify for the corporate dividends received deduction. The Fund's belief relies
in part on a published ruling of the IRS stating that certain preferred stock
similar in many material respects to the Preferred Shares represents equity (and
the following discussion assumes such treatment will apply). It is possible,
however, that the IRS might take a contrary position asserting, for example that
the Preferred Shares constitute debt of the Fund. If this position were upheld,
the discussion of the treatment of distributions above would not apply. Instead,
distributions by the Fund to holders of Preferred Shares would constitute
interest, whether or not such distributions exceeded the earnings and profits of
the Fund, would be included in full in the income of the recipient and would be
taxed as ordinary income.
The Fund intends to declare a dividend from all or a portion of its net
investment income monthly. The Fund expects to pay its first dividend on the
Preferred Shares on July 20, 2004. The Fund intends to distribute any net short-
and long-term capital gains at least annually. The Fund intends to seek an
exemptive order from the Commission that would allow it to distribute capital
gains in any one taxable year as often as necessary to comply with IRS revenue
rulings. Dividends from income and/or capital gains may also be paid at such
other times as may be necessary for the Fund to avoid U.S. federal income or
excise tax.
In general, assuming there are sufficient current or accumulated earnings
and profits, dividends from investment company taxable income (other than
dividends attributable to qualified dividend income of the Fund as discussed
below) will be taxable as ordinary income, and designated dividends from net
capital gain, if any, will be taxable as long-term capital gains for U.S.
federal income tax purposes without regard to the length of time the shareholder
has held shares of the Fund. As noted above, a portion of the Fund's dividends
may qualify for the corporate dividends received deduction. Distributions by the
Fund in excess of the Fund's current and accumulated earnings and profits will
be treated as a return of capital to the extent of (and in reduction of) the
shareholder's tax basis in its shares, and any such amount in excess of that
basis will be treated as gain from the sale of the shares as discussed below.
The U.S. federal income tax status of all distributions will be reported to
shareholders annually.
If the Fund retains any net capital gain, the Fund may designate the
retained amount as undistributed capital gains in a notice to shareholders who,
if subject to U.S. federal income tax on long-term capital gains, (i) will be
required to include in income for U.S. federal income tax purposes, as long-term
capital gain, their proportionate shares of such undistributed amount, (ii) will
be entitled to credit their proportionate shares of the tax paid by the Fund on
the undistributed amount against their U.S. federal income tax liabilities, if
any, and to claim refunds to the extent the credit exceeds such liabilities, and
(iii) will be entitled to increase the tax basis of their shares by the
difference between their proportionate shares of such includible gains and their
proportionate shares of the tax deemed paid.
Any dividend declared by the Fund in October, November or December with a
record date in such a month and paid during the following January will be
treated for U.S. federal income tax purposes as paid by the Fund and received by
shareholders on December 31 of the calendar year in which it is declared.
Recently enacted legislation reduces the federal income tax rate for
individuals on certain dividend income and net capital gain to a maximum of 15%
for taxable years beginning on or before December 31, 2008. Capital gain
dividends and a portion of ordinary income distributions (allocable to qualified
dividend income received by the Fund) received by individual shareholders of the
Fund may be subject to the reduced tax rate. Qualified dividend income generally
includes dividends from domestic corporations and dividends from foreign
corporations that meet certain specified criteria. Certain holding period and
other requirements must be satisfied in order for the reduced tax rate to apply
to dividends which would otherwise be qualified dividend income. The Fund will
annually inform shareholders of the portion of ordinary dividends paid by the
Fund which qualify for the new reduced federal income tax rate available for
such dividends.
If the Fund acquires any equity interest (under proposed Treasury
regulations, generally including not only stock but also an option to acquire
stock such as is inherent in a convertible bond) in certain foreign corporations
that receive at least 75% of their annual gross income from passive sources
(such as interest, dividends, certain rents and royalties, or capital gains) or
that hold at least 50% of their assets in investments producing such passive
income ("passive foreign investment companies"), the Fund could be subject to
U.S. federal income tax and additional interest charges on "excess
distributions" received from such companies or on gain from the disposition of
stock in such companies, even if all income or gain actually received by the
Fund is timely distributed to its shareholders. The Fund generally will not be
able to pass through to its shareholders any credit or deduction for such a tax.
An election may generally be available that would ameliorate these adverse tax
consequences, but any such election could require the Fund to recognize taxable
income or gain (subject to tax distribution requirements) without the concurrent
receipt of cash. These investments could also result in the treatment of
associated capital gains as ordinary income. The Fund may limit and/or manage
its holdings in passive foreign investment companies to limit its tax liability
or maximize its return from these investments.
The Fund may invest to a significant extent in debt obligations that are in
the lowest rating categories or are unrated, including debt obligations of
issuers not currently paying interest or who are in default. Investments in debt
obligations that are at risk of or in default present special tax issues for the
Fund. Tax rules are not entirely clear about issues such as when and to what
extent deductions may be taken for bad debts or worthless securities and how
payments received on obligations in default should be allocated between
principal and income. These and other issues will be addressed by the Fund, in
the event it invests in such securities, in order to seek to ensure that it
distributes sufficient income to preserve its status as a regulated investment
company and does not become subject to U.S. federal income or excise tax.
If at any time when the Preferred Shares are outstanding the Fund fails to
meet the requirement that it maintain a discounted value of eligible portfolio
securities equal to the Preferred Shares Basic Maintenance Amount or the 1940
Preferred Shares Asset Coverage, the Fund will be required to suspend
distributions to holders of its common shares until such maintenance or asset
coverage, as the case may be, is restored. This could prevent the Fund from
distributing at least 90% of its investment company taxable income as is
required under the Code and therefore might jeopardize the Fund's reduction or
exemption from corporate taxation as a regulated investment company and/or might
subject the Fund to the 4% excise tax. Upon any failure to meet such maintenance
or asset coverage requirements, the Fund may, in its sole discretion, purchase
or redeem shares of preferred stock in order to maintain or restore the
requisite maintenance or asset coverage and avoid the adverse consequences to
the Fund and its shareholders of failing to satisfy the distribution
requirement. There can be no assurance, however, that any such action would
achieve these objectives. The Fund will endeavor to avoid restrictions on its
ability to distribute dividends.
If the Fund invests in certain pay-in-kind securities, zero coupon bonds,
certain preferred shares, deferred interest securities or, in general, any other
securities with original issue discount (or with market discount if the Fund
elects to include market discount in income currently), the Fund generally must
accrue income on such investments for each taxable year, which generally will be
prior to the receipt of the corresponding cash payments. However, the Fund must
distribute, at least annually, all or substantially all of its net income,
including such accrued income, to shareholders to qualify as a regulated
investment company under the Code and avoid U.S. federal income and excise
taxes. Therefore, the Fund may have to dispose of its portfolio securities under
disadvantageous circumstances to generate cash, or may have to leverage itself
by borrowing the cash, to satisfy distribution requirements.
At the time of an investor's purchase of the Fund's shares, a portion of
the purchase price may be attributable to realized or unrealized appreciation in
the Fund's portfolio or undistributed taxable income of the Fund. Consequently,
subsequent distributions by the Fund with respect to these shares from such
appreciation or income may be taxable to such investor even if the net asset
value of the investor's shares is, as a result of the distributions, reduced
below the investor's cost for such shares and the distributions economically
represent a return of a portion of the investment.
Sales and other dispositions of the Fund's shares generally are taxable
events for shareholders that are subject to tax. Shareholders should consult
their own tax advisers with reference to their individual circumstances to
determine whether any particular transaction in the Fund's shares (including a
redemption of Preferred Shares) is properly treated as a sale for tax purposes,
as the following discussion assumes, and the tax treatment of any gains or
losses recognized in such transactions. In general, if Fund shares are sold, the
shareholder will recognize gain or loss equal to the difference between the
amount realized on the sale and the shareholder's adjusted basis in the shares.
Such gain or loss generally will be treated as long-term gain or loss if the
shares were held for more than one year and otherwise generally will be treated
as short-term gain or loss. Any loss recognized by a shareholder upon the sale
or other disposition of shares with a tax holding period of six months or less
generally will be treated as a long-term capital loss to the extent of any
amounts treated as distributions of long-term capital gain with respect to such
shares. Losses on sales or other dispositions of shares may be disallowed under
"wash sale" rules in the event of other investments in the Fund (including those
made pursuant to reinvestment of dividends and/or capital gain distributions)
within a period of 61 days beginning 30 days before and ending 30 days after a
sale or other disposition of the original shares.
The Fund's transactions in foreign currencies, foreign currency denominated
debt securities and certain foreign currency options and contracts may give rise
to ordinary income or loss under Section 988 of the Code to the extent the
income or loss results from fluctuations in the value of the relevant foreign
currency.
Gain or loss, if any, resulting from a redemption of Preferred Shares
generally will be taxed as gain or loss from the sale of the Preferred Shares
under Section 302 of the Code rather than as a dividend, but only if the
redemption distribution (a) is deemed not to be essentially equivalent to a
dividend, (b) is in complete redemption of an owner's interest in the Fund, (c)
is substantially disproportionate with respect to the owner, or (d) with respect
to a non-corporate owner, is in partial liquidation of the Fund. For the
purposes of (a), (b), and (c) above, a shareholder's ownership of common shares
will be taken into account and the Preferred Shares and common shares held by
parties who are related to the redeemed shareholder may also have to be taken
into account. If none of the conditions (a) through (d) above are met, the
redemption proceeds may be considered a dividend distribution taxable as
ordinary income as discussed above.
Options written or purchased and futures contracts entered into by the Fund
on certain securities, indices and foreign currencies, as well as certain
forward foreign currency contracts, may cause the Fund to recognize gains or
losses from marking-to-market even though such options may not have lapsed, been
closed out, or exercised, or such futures or forward contracts may not have been
performed or closed out. The tax rules applicable to these contracts may affect
the characterization of some capital gains and losses recognized by the Fund as
long-term or short-term. As noted above, certain options, futures and forward
contracts relating to foreign currency may be subject to Section 988 of the Code
and accordingly may produce ordinary income or loss. Additionally, the Fund may
be required to recognize gain if an option, futures contract, forward contract,
short sale or other transaction that is not subject to the mark-to-market rules
is treated as a "constructive sale" of an "appreciated financial position" held
by the Fund under Section 1259 of the Code. Any net mark-to-market gains and/or
gains from constructive sales may also have to be distributed to satisfy the
distribution requirements referred to above even though the Fund may receive no
corresponding cash amounts, possibly requiring the disposition of portfolio
securities or borrowing to obtain the necessary cash. Losses on certain options,
futures or forward contracts and/or offsetting positions (portfolio securities
or other positions with respect to which the Fund's risk of loss is
substantially diminished by one or more options, futures or forward contracts)
may also be deferred under the tax straddle rules of the Code, which may also
affect the characterization of capital gains or losses from straddle positions
and certain successor positions as long-term or short-term. Certain tax
elections may be available that would enable the Fund to ameliorate some adverse
effects of the tax rules described in this paragraph. The tax rules applicable
to options, futures, forward contracts and straddles may affect the amount,
timing and character of the Fund's income and gains or losses and hence of its
distributions to shareholders.
The Fund's distributions to its corporate shareholders would potentially
qualify in their hands for the corporate dividends received deduction, subject
to certain holding period requirements and limitations on debt financings under
the Code, but only to the extent the Fund earned dividend income from stock
investments in U.S. domestic corporations and certain other requirements are
satisfied. The Fund is permitted to acquire stocks of U.S. domestic
corporations, and it is therefore possible that a portion of the Fund's
distributions, from the dividends attributable to such stocks, may qualify for
the dividends received deduction. Such qualifying portion, if any, may affect a
corporate shareholder's liability for alternative minimum tax and/or result in
basis reductions and other consequences in certain circumstances.
The IRS has taken the position that if a regulated investment company has
two classes of shares, it must designate distributions made to each class in any
year as consisting of no more than such class's proportionate share of
particular types of income, including dividends qualifying for the corporate
dividends received deduction (if any) and net capital gains. A class's
proportionate share of a particular type of income is determined according to
the percentage of total dividends paid by the regulated investment company
during the year to such class. Consequently, the Fund intends to designate
distributions of particular types of income (such as net capital gains,
dividends qualifying for the corporate dividends received deduction and
qualified dividend income) made to common shareholders and preferred
shareholders in accordance with each such class's proportionate shares of such
income. Distributions in excess of the Fund's current and accumulated earnings
and profits (if any), however, will not be allocated proportionately among the
Preferred Shares and the common shares. Since the Fund's current and accumulated
earnings will first be used to pay dividends on the Preferred Shares,
distributions in excess of such earnings and profits, if any, will be made
disproportionately to holders of common shares.
The Fund may be subject to withholding and other taxes imposed by foreign
countries, including taxes on interest, dividends and capital gains with respect
to its investments in those countries, which would, if imposed, reduce the yield
on or return from those investments. Tax conventions between certain countries
and the U.S. may reduce or eliminate such taxes in some cases. The Fund does not
expect to satisfy the requirements for passing through to its shareholders their
pro rata shares of qualified foreign taxes paid by the Fund, with the general
result that shareholders would not include such taxes in their gross incomes and
would not be entitled to a tax deduction or credit for such taxes on their own
tax returns.
Federal law requires that the Fund withhold (as "backup withholding") tax
at a current rate of 28% on reportable payments, including dividends and capital
gain distributions paid to certain shareholders who have not complied with IRS
regulations. Corporations are generally exempt from backup withholding. In order
to avoid this withholding requirement, shareholders must certify on their
account applications, or on separate IRS Forms W-9, that the Social Security
Number or other Taxpayer Identification Number they provide is their correct
number and that they are not currently subject to backup withholding, or that
they are exempt from backup withholding. The Fund may nevertheless be required
to withhold if it receives notice from the IRS that the number provided is
incorrect or backup withholding is applicable as a result of previous
underreporting of income. Similar backup withholding rules may apply to a
shareholder's broker with respect to the proceeds of sales or other dispositions
of the Fund's shares by such shareholder. Backup withholding is not an
additional tax. Any amounts withheld from payments made to a shareholder may be
refunded or credited against such shareholder's U.S. federal income tax
liability, if any, provided that the required information is provided to the
IRS.
Under recently promulgated Treasury regulations, if a shareholder
recognizes a loss with respect to shares of $2 million or more for an individual
shareholder, or $10 million or more for a corporate shareholder, in any single
taxable year (or a greater amount over a combination of years), the shareholder
must file with the IRS a disclosure statement on IRS Form 8886. Direct
shareholders of portfolio securities are in many cases excepted from this
reporting requirement but under current guidance shareholders of regulated
investment companies are not excepted. The fact that a loss is reportable under
these regulations does not affect the legal determination of whether or not the
taxpayer's treatment of the loss is proper. Shareholders should consult their
tax advisers to determine the applicability of these regulations in light of
their individual circumstances.
The description of certain federal tax provisions above relates only to
U.S. federal income tax consequences for shareholders who are U.S. persons,
i.e., U.S. citizens or residents or U.S. corporations, partnerships, trusts or
estates, and who are subject to U.S. federal income tax. Investors other than
U.S. persons may be subject to different U.S. tax treatment, including a U.S.
withholding tax on amounts treated as ordinary dividends from the Fund and,
unless an effective IRS Form W-8BEN or other authorized withholding certificate
is on file, to backup withholding on certain other payments from the Fund.
Shareholders should consult their own tax advisers on these matters and on any
specific questions as to U.S. federal, foreign, state, local and other
applicable tax laws.
PERFORMANCE-RELATED AND OTHER INFORMATION
Performance-Related Information
The Fund may quote certain performance-related information and may compare
certain aspects of its portfolio and structure to other similar closed-end funds
as categorized by Lipper, Inc. (Lipper), Morningstar Inc. or other independent
services. Comparison of the Fund to an alternative investment should be made
with consideration of differences in features and expected performance. The Fund
may obtain data from sources or reporting services, such as Bloomberg Financial
and Lipper, that the Fund believes to be generally accurate.
From time to time, the Fund and/or the Advisor may report to shareholders
or to the public in advertisements concerning the Advisor's performance as an
advisor to Evergreen mutual funds and clients other than the Fund, or on the
comparative performance or standing of the Advisor in relation to other money
managers. The Advisor may also provide to current or prospective private account
clients, in connection with standardized performance information for the Fund,
performance information for the Fund gross of fees and expenses for the purpose
of assisting such clients in evaluating similar performance information provided
by other investment managers or institutions. Comparative information may be
compiled or provided by independent ratings services or by news organizations.
Performance information for the Fund or for other Evergreen mutual funds or
accounts managed by the Advisor may also be compared to various unmanaged
indexes or to other benchmarks, some of which may not be available for direct
investment. Any performance information, whether related to the Fund or the
Advisor, should be considered in light of the Fund's investment objective and
policies, the characteristics and quality of the Fund, and the market conditions
during the time period indicated, and it should not be considered to be
representative of what may be achieved in the future. The Advisor may provide
its opinion with respect to general economic conditions including such matters
as trends in default rates or economic cycles.
Past performance is not indicative of future results. At the time common
shareholders sell their shares, they may be worth more or less than their
original investment. At any time in the future, yields and total return may be
higher or lower than past yields and total return, and there can be no assurance
that any historical results will continue.
The Advisor
From time to time, the Advisor or the Fund may use, in advertisements or
information furnished to present or prospective shareholders, information
regarding the Advisor including, without limitation, information regarding the
Advisor's investment style, countries of operation, organization, professional
staff, clients (including other registered investment companies), assets under
management and performance record. These materials may refer to opinions or
rankings of the Advisor's overall investment management performance contained in
third-party reports or publications.
Advertisements for the Fund may make reference to certain other open- or
closed-end investment companies managed by Evergreen.
The Advisor may present an investment allocation model demonstrating the
Fund's weightings in investment types, sectors or rating categories such as U.S.
high yield, emerging markets or investment grade securities. The model
allocations are representative of the Fund's investment strategy, the Advisor's
analysis of the market for high yield securities as of the date of the model and
certain factors that may alter the allocation percentages include global
economic conditions, individual company fundamentals or changes in market
valuations. Such models may also indicate an expected or targeted weighted
average rating of the Fund's portfolio.
The Fund
The Fund's listing of its common shares on the American Stock Exchange is
expected to provide liquidity, convenience and daily price visibility through
electronic services and in newspaper stock tables.
The Fund, in its advertisements, may refer to pending legislation from time
to time and the possible impact of such legislation on investors, investment
strategy and related matters. The Fund may be a suitable investment for a
shareholder who is thinking of adding bond investments to his portfolio to
balance the appreciated stocks that the shareholder is holding.
Performance Calculations
Average Annual Total Return
Described below are the total return calculations the Fund may use from
time to time in advertisements.
Total return quotations for a class of shares of the Fund are calculated by
finding the average annual compounded rates of return over one, five and ten
year periods, or the time periods for which such class of shares has been
effective, whichever is relevant, on a hypothetical $1,000 investment that would
equate the initial amount invested in the class to the ending redeemable value.
To the initial investment all dividends and distributions are added, and all
recurring fees charged to all shareholder accounts are deducted. The ending
redeemable value assumes a complete redemption at the end of the relevant
periods. The following is the formula used to calculate average annual total
return:
P(1+T)n=ERV
P = initial payment of $1,000.
T = average annual total return.
n = number of years.
ERV = ending redeemable value of the initial $1,000.
Yield
Described below are yield calculations the Fund may use. Yield quotations
are expressed in annualized terms and may be quoted on a compounded basis.
Yields based on these calculations do not represent the Fund's yield for any
future period.
30-Day Yield
If the Fund invests primarily in bonds, it may quote its 30-day yield in
advertisements or in reports or other communications to shareholders. It is
calculated by dividing the net investment income per share earned during the
period by the maximum offering price per share on the last day of the period,
according to the following formula:
Yield=2[(a-b)+1)6-1]
___
cd
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
7-Day Current and Effective Yield
If the Fund invests primarily in money market instruments, it may quote its
7-day current yield or effective yield in advertisements or in reports or other
communications to shareholders.
The current yield is calculated by determining the net change, excluding
capital changes and income other than investment income, in the value of a
hypothetical, pre-existing account having a balance of one share at the
beginning of the 7-day base period, subtracting a hypothetical charge reflecting
deductions from shareholder accounts, and dividing the difference by the value
of the account at the beginning of the base period to obtain the base period
return, and then multiplying the base period return by (365/7).
The effective yield is based on a compounding of the current yield,
according to the following formula:
Effective Yield=[(base period return)]+1)365/7]-1
Tax Equivalent Yield
If the Fund invests primarily in municipal bonds, it may quote in
advertisements or in reports or other communications to shareholders a tax
equivalent yield, which is what an investor would generally need to earn from a
fully taxable investment in order to realize, after income taxes, a benefit
equal to the tax free yield provided by the Fund. Tax equivalent yield is
calculated using the following formula:
Tax Equivalent Yield = Yield
_______________
1-Income Tax Rate
The quotient is then added to that portion, if any, of the Fund's yield
that is not tax exempt. Depending on the Fund's objective, the income tax rate
used in the formula above may be federal or a combination of federal and state.
Non-Standardized Performance
In addition to the performance information described above, the Fund may
provide total return information for designated periods, such as for the most
recent six months or most recent twelve months. This total return information is
computed as described under "Total Return" above except that no annualization is
made.
EXPERTS
The financial statement of the Fund as of March 15, 2004 appearing in the
Fund's Statement of Additional Information dated April 27, 2004 relating to the
Fund's common shares, and incorporated by reference herein, was audited by KPMG
LLP, independent auditors, as set forth in their report thereon appearing in
such Statement of Additional Information, and was included in reliance upon such
report given upon the authority of such firm as experts in accounting and
auditing. KPMG LLP, located at 99 High Street, Boston, Massachusetts 02110,
provides accounting and auditing services to the Fund.
ADDITIONAL INFORMATION
A Registration Statement on Form N-2, including amendments thereto,
relating to the shares offered hereby, has been filed by the Fund with the
Commission, Washington, D.C. The prospectus and this Statement of Additional
Information do not contain all of the information set forth in the Registration
Statement, including any exhibits and schedules thereto. For further information
with respect to the Fund and the shares offered hereby, reference is made to the
Registration Statement. Statements contained in the prospectus and this
Statement of Additional Information as to the contents of any contract or other
document referred to are not necessarily complete and in each instance reference
is made to the copy of such contract or other document filed as an exhibit to
the Registration Statement, each such statement being qualified in all respects
by such reference. A copy of the Registration Statement may be inspected without
charge at the Commission's principal office in Washington, D.C., and copies of
all or any part thereof may be obtained from the Commission upon the payment of
certain fees prescribed by the Commission.
FINANCIAL STATEMENTS
EVERGREEN UTILITIES AND HIGH INCOME FUND
FINANCIAL HIGHLIGHTS
(for a common share outstanding throughout the period)
Period Ended
May 31, 2004 (a)
(unaudited)
---------------------
Net asset value, beginning of period $19.10(b)
---------------------
Income from investment operations
Net investment income 0.17
Net realized and unealized gains or losses on securities and
foreign currency related transactions (0.35)
---------------------
Total from investment operations (0.18)
Offering costs charged to capital (0.04)
---------------------
Net asset value, end of period $18.88
---------------------
Market value, end of period $20.01
---------------------
Total return (c)
Based on market value 0.05%
Based on net asset value -1.15%
Ratios and supplemental data
Net assets, end of period (in thousands) $ 217,174
Ratios to average net assets applicable to common shareholders
Expenses (d) 0.85%(e)
Interest expense 0.17%(e)
Net investment income 10.33%(e)
Portfolio turnover rate 14%
(a)For the period from April 30, 2004 (commencement of operations), to May 31, 2004.
(b)Initial public offering price of $20.00 per share less underwriting discount of $0.90 per share.
(c)Total return is calculated assuming a purchase of common stock on the first day and a sale on the
last day of each period reported. Dividends and distributions are assumed for purposes of these
calculations to be reinvested at prices obtained under the Fund's Automatic Dividend Reinvestment
Plan. Total return does not reflect brokerage commissions or sales charges.
(d)Ratio of expenses to average net assets excludes interest expense.
(e)Annualized
See Notes to Financial Statements
EVERGREEN UTILITIES AND HIGH INCOME FUND
STATEMENT OF ASSETS AND LIABILITIES
May 31, 2004 (unaudited)
-----------------------------------------------------------------------------------------------------------------
Assets
Identified cost of securities $ 256,194,004
Net unrealized loss on securities (2,424,889)
-----------------------------------------------------------------------------------------------------------------
Market value of securities 253,769,115
Dividends and interest receivable 2,640,325
-----------------------------------------------------------------------------------------------------------------
Total assets 256,409,440
-----------------------------------------------------------------------------------------------------------------
Liabilities
Payable for reverse repurchase agreements 39,055,895
Payable for offering costs 20,934
Advisory fee payable 112,337
Due to other related parties 9,361
Accrued expenses and other liabilities 37,407
-----------------------------------------------------------------------------------------------------------------
----------------------
Total liabilities
39,235,934
-----------------------------------------------------------------------------------------------------------------
Net assets applicable to common shareholders
$ 217,173,506
-------------------------
Net assets represented by
Paid-in capital $ 219,290,000
Undistributed net investment income
1,939,167
Accumulated net realized loss on securities and foreign currency related
transactions
(1,630,829)
Net unrealized losses on securities and foreign currency related transactions
(2,424,832)
-----------------------------------------------------------------------------------------------------------------
Net assets applicable to common shareholders $ 217,173,506
-----------------------------------------------------------------------------------------------------------------
Net asset value per share applicable to common shareholders
($217,173,506 divided by 11,505,000 common shares issued and
outstanding) $ 18.88
-----------------------------------------------------------------------------------------------------------------
See Notes to Financial Statements
EVERGREEN UTILITIES AND HIGH INCOME FUND
STATEMENT OF OPERATIONS
Period Ended May 31, 2004 (unaudited) (a)
-------------------------------------------------------------------------------------------------------------------------------
Investment income
Dividends (net of foreign tax withholding of $3,565) $1,671,924
Interest 457,623
-------------------------------------------------------------------------------------------------------------------------------
Total investment income 2,129,547
-------------------------------------------------------------------------------------------------------------------------------
Expenses
Advisory fee 112,337
Administrative services fee 9,361
Transfer agent fees 3,716
Trustees' fees and expenses 4,301
Printing and postage expenses 11,613
Custodian and accounting fees 4,493
Professional fees 12,387
Other 1,033
-------------------------------------------------------------------------------------------------------------------------------
Operating expenses before interest expense
159,241
Interest expense 31,139
-------------------------------------------------------------------------------------------------------------------------------
Total expenses
190,380
-------------------------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------
Net investment income 1,939,167
-------------------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gains or losses on securities and foreign currency related transactions
Net realized losses on:
Securities (1,600,964)
Foreign currency related transactions (29,865)
-------------------------------------------------------------------------------------------------------------------------------
Net realized losses on securities and foreign currency related transactions (1,630,829)
Net change in unrealized gains or losses on securities and foreign currency related transactions (2,424,832)
-------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gains or losses on securities and foreign currency related transactions (4,055,661)
-------------------------
-------------------------
Net decrease in net assets applicable to common $ (2,116,494)
shareholders resulting from operations
-------------------------------------------------------------------------------------------------------------------------------
(a) For the period from April 30, 2004 (commencement of operations), to May 31,
2004.
See Notes to Financial Statements
EVERGREEN UTILITIES AND HIGH INCOME FUND
STATEMENT OF CHANGES IN NET ASSETS
Period Ended May 31, 2004 (unaudited) (a)
-------------------------------------------------------------------------------------------------------------
Operations
Net investment income $1,939,167
Net realized losses on securities and foreign currency related transactions
(1,630,829)
Net change in unrealized gains or losses on securities and foreign currency
related transactions (2,424,832)
Net decrease in net assets applicable to common shareholders
resulting from operations (2,116,494)
-------------------------------------------------------------------------------------------------------------
Capital share transactions
Net proceeds from the issuance of common shares
219,650,000
Common share offering expenses charged to paid-in capital
(460,000)
-------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------
Net increase in net assets resulting from capital share transactions
219,190,000
-------------------------------------------------------------------------------------------------------------
Total increase in net assets applicable to common shareholders
217,073,506
Net assets applicable to common shareholders
Beginning of period 100,000
-------------------------------------------------------------------------------------------------------------
----------------------------------------------
End of period $217,173,506
-------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------
Undistributed net investment income
$1,939,167
-------------------------------------------------------------------------------------------------------------
(a) For the period from April 30, 2004 (commencement of operations), to May
31, 2004.
See Notes to Financial Statements
EVERGREEN UTILITIES AND HIGH INCOME FUND
Schedule of Investments
May 31, 2004 (unaudited)
Principal
Amount Value
---------------------------------
CORPORATE BONDS 34.6%
CONSUMER DISCRETIONARY 9.4%
Auto Components 0.5%
HLI Operating, Inc., 10.50%, 06/15/2010 $ 1,000,000$ 1,120,000
------------------
Distributors 0.5%
Roundys, Inc., Ser. B, 8.875%, 06/15/2012 1,000,000 1,070,000
------------------
Hotels, Restaurants & Leisure 2.4%
Friendly Ice Cream Corp., 8.375%, 06/15/2012 144A 1,000,000 995,000
John Q Hammons Hotels LP, Ser. B, 8.875%, 05/15/2012 1,000,000 1,085,000
MTR Gaming Group, Inc., 9.75%, 04/01/2010 1,000,000 1,075,000
Seneca Gaming Corp., 7.25%, 05/01/2012 144A 1,000,000 995,000
Town Sports International, Inc., 9.625%, 04/15/2011 1,000,000 1,000,000
5,150,000
------------------
Household Durables 1.0%
Standard Pacific Corp., 7.75%, 03/15/2013 1,000,000 1,000,000
WCI Communities, Inc., 9.125%, 05/01/2012 1,000,000 1,070,000
2,070,000
------------------
Media 2.4%
Dex Media West LLC, 8.50%, 08/15/2010 144A 1,000,000 1,095,000
Emmis Communications Corp., 6.875%, 05/15/2012 144A 1,000,000 985,000
Houghton Mifflin Co., 8.25%, 02/01/2011 1,000,000 1,020,000
Mediacom LLC, 9.50%, 01/15/2013 1,000,000 970,000
R.H. Donnelley Finance Corp., 10.875%, 12/15/2012 1,000,000 1,175,000
5,245,000
------------------
Specialty Retail 2.1%
Central Garden & Pet Co., 9.125%, 02/01/2013 1,000,000 1,087,500
CSK Auto, Inc., 7.00%, 01/15/2014 144A 1,000,000 970,000
Group 1 Automotive, Inc., 8.25%, 08/15/2013 1,000,000 1,045,000
PETCO Animal Supplies, Inc., 10.75%, 11/01/2011 395,000 448,325
United Auto Group, Inc., 9.625%, 03/15/2012 1,000,000 1,075,000
4,625,825
------------------
Textiles, Apparel & Luxury Goods 0.5%
Oxford Industries, Inc., 8.875%, 06/01/2011 144A 1,000,000 1,065,000
------------------
CONSUMER STAPLES 0.4%
Food Products 0.4%
Dole Food Co., Inc., 7.25%, 06/15/2010 1,000,000 950,000
------------------
ENERGY 4.3%
Energy Equipment & Services 1.0%
Dresser, Inc., 9.375%, 04/15/2011 1,000,000 1,070,000
SESI LLC, 8.875%, 05/15/2011 1,000,000 1,080,000
2,150,000
------------------
Oil & Gas 3.3%
Chesapeake Energy Corp., 6.875%, 01/15/2016 1,000,000 980,000
Exco Resources, Inc., 7.25%, 01/15/2011 144A 1,000,000 1,000,000
Ferrellgas Escrow LLC, 6.75%, 05/01/2014 144A 1,000,000 962,500
Forest Oil Corp., 7.75%, 05/01/2014 1,000,000 1,020,000
Plains Exploration & Production Co., 8.75%, 07/01/2012 1,000,000 1,085,000
Premcor Refining Group, Inc., 6.75%, 05/01/2014 1,000,000 972,500
Stone Energy Corp., 8.25%, 12/15/2011 1,000,000 1,050,000
7,070,000
------------------
FINANCIALS 3.4%
Insurance 1.0%
Couche Tard LP, 7.50%, 12/15/2013 1,000,000 1,010,000
Crum & Forster Holding Corp., 10.375%, 06/15/2013 1,000,000 1,087,500
2,097,500
------------------
Real Estate 2.4%
CB Richard Ellis Services, Inc., 9.75%, 05/15/2010 REIT 2,000,000 2,170,000
HMH Properties, Ser. J, 7.125%, 11/01/2013 REIT 1,000,000 977,500
LNR Property Corp., 7.625%, 07/15/2013 REIT 1,000,000 987,500
Thornburg Mortgage, Inc., 8.00%, 05/15/2013 REIT 1,000,000 987,500
5,122,500
------------------
HEALTH CARE 1.8%
Health Care Equipment & Supplies 0.4%
NeighborCare, Inc., 6.875%, 11/15/2013 144A 1,000,000 1,010,000
------------------
Health Care Providers & Services 0.9%
Omega Healthcare Investors, Inc., 7.00%, 04/01/2014 144A 1,000,000 965,000
Triad Hospitals, Inc., 7.00%, 11/15/2013 1,000,000 965,000
1,930,000
------------------
Pharmaceuticals 0.5%
Alpharma, Inc., 8.625%, 05/01/2011 144A 1,000,000 1,047,500
INDUSTRIALS 7.5%
Aerospace & Defense 0.9%
Da Lite Screen Co., Inc., 9.50%, 05/15/2011 1,000,000 1,041,250
DRS Technologies, Inc., 6.875%, 11/01/2013 1,000,000 970,000
2,011,250
------------------
Commercial Services & Supplies 4.0%
Allied Waste North America, Inc., 6.50%, 11/15/2010 144A 1,000,000 975,000
Geo Group, Inc., 8.25%, 07/15/2013 1,000,000 980,000
Iron Mountain, Inc., 6.625%, 01/01/2016 1,000,000 915,000
Mail Well I Corp., 7.875%, 12/01/2013 144A 1,000,000 925,000
Manitowoc Co., Inc., 7.125%, 11/01/2013 1,000,000 1,005,000
NationsRent, Inc., 9.50%, 10/15/2010 144A 1,000,000 1,065,000
Newpark Resource, Inc., 8.625%, 12/15/2007 1,000,000 1,015,000
Service Corp. International, 6.75%, 04/01/2016 144A 1,000,000 920,000
United Rentals North America, Inc., 6.50%, 02/15/2012 144A 1,000,000 945,000
8,745,000
------------------
Machinery 1.4%
Case New Holland, Inc., 9.25%, 08/01/2011 144A 1,000,000 1,055,000
Cummins, Inc., 9.50%, 12/01/2010 1,000,000 1,140,000
Terex Corp., 7.375%, 01/15/2014 144A 1,000,000 980,000
3,175,000
------------------
Transportation Infrastructure 1.2%
Aviall, Inc., 7.625%, 07/01/2011 1,520,000 1,580,800
Offshore Logistics, Inc., 6.125%, 06/15/2013 1,000,000 935,000
2,515,800
------------------
INFORMATION TECHNOLOGY 0.5%
IT Services 0.5%
Unisys Corp., 6.875%, 03/15/2010 1,000,000 1,030,000
MATERIALS 5.4%
Chemicals 3.5%
Equistar Chemicals LP, 10.625%, 05/01/2011 1,000,000 1,102,500
Ethyl Corp., 8.875%, 05/01/2010 1,000,000 1,060,000
Huntsman Advanced Materials LLC:
11.00%, 07/15/2010 144A 1,000,000 1,117,500
11.625%, 10/15/2010 1,000,000 1,082,500
Lyondell Chemical Co., 9.50%, 12/15/2008 1,000,000 1,035,000
Nalco Co., 7.75%, 11/15/2011 144A 1,000,000 1,050,000
Noveon, Inc., Ser. B, 11.00%, 02/28/2011 1,000,000 1,192,500
7,640,000
------------------
Containers & Packaging 0.9%
Crown Cork & Seal Co., Inc., 7.375%, 12/15/2026 1,000,000 850,000
Stone Container Corp., 9.75%, 02/01/2011 1,000,000 1,090,000
1,940,000
------------------
Metals & Mining 0.5%
U.S. Steel Corp., 10.75%, 08/01/2008 1,000,000 1,135,000
------------------
Paper & Forest Products 0.5%
Millar Western Forest Products, 7.75%, 11/15/2013 144A 1,000,000 1,005,000
------------------
TELECOMMUNICATION SERVICES 1.4%
Diversified Telecommunication Services 0.5%
Insight Midwest LP, 10.50%, 11/01/2010 1,000,000 1,090,000
------------------
Wireless Telecommunications Services 0.9%
Nextel Communications, Inc., 5.95%, 03/15/2014 1,000,000 932,500
Rural Cellular Corp., 8.25%, 03/15/2012 144A 1,000,000 1,030,000
1,962,500
------------------
UTILITIES 0.5%
Multi-Utilities & Unregulated Power 0.5%
Reliant Resources, Inc., 9.50%, 07/15/2013 1,000,000 1,065,000
Total Corporate Bonds (cost $76,858,591) 75,037,875
YANKEE OBLIGATIONS-CORPORATE 0.4%
TELECOMMUNICATION SERVICES 0.4%
Wireless Telecommunications Services 0.4%
Rogers Wireless, Inc., 6.375%, 03/01/2014 144A (cost $930,325) 1,000,000 942,500
------------------
Shares Value
---------------------------------
COMMON STOCKS 67.0%
CONSUMER DISCRETIONARY 3.3%
Specialty Retail 3.3%
Snam Rete Gas, Inc. 1,700,000 7,164,978
------------------
ENERGY 7.5%
Oil & Gas 7.5%
Eni SpA 400,000 8,155,736
Pennon Group LLC 200,000 2,699,716
Western Gas Resources, Inc. 100,000 5,530,000
------------------
16,385,452
------------------
INDUSTRIALS 4.2%
Industrial Conglomerates 4.2%
Allete, Inc. 50,000 1,737,500
Severn Trent, Inc. 500,000 7,404,516
9,142,016
------------------
INFORMATION TECHNOLOGY 1.0%
Communications Equipment 1.0%
Sierra Wireless, Inc. 75,000 2,092,500
------------------
TELECOMMUNICATION SERVICES 1.2%
Diversified Telecommunication Services 1.2%
BellSouth Corp. 100,000 2,496,000
------------------
UTILITIES 49.8%
Electric Utilities 35.6%
American Electric Power Co., Inc. 175,000 5,559,750
Cleco Corp. 75,000 1,301,250
Dominion Resources, Inc. 175,000 11,019,750
DPL, Inc. 100,000 1,975,000
Enel 1,175,000 7,787,408
Entergy Corp. 215,000 11,741,150
Exelon Corp. 350,000 11,655,000
FirstEnergy Corp. 150,000 5,850,000
Hawaiian Electric Industries, Inc. 150,000 7,291,500
Pepco Holdings, Inc. 250,000 4,600,001
TXU Corp. 200,000 8,530,000
77,310,809
------------------
Multi-Utilities & Unregulated Power 14.2%
Crosstex Energy, Inc. 14,000 586,320
Duke Energy Corp. 450,000 8,973,000
Scana Corp. 200,000 7,116,000
United Utilities Plc 1,000,000 9,961,273
Vectren Corp. 175,000 4,200,000
30,836,593
------------------
Total Common Stocks (cost $147,900,727) 145,428,348
------------------
PREFERRED STOCKS 0.4%
FINANCIALS 0.4%
Diversified Financial Services 0.4%
Genworth Financial Inc. (cost $765,000) 30,600 779,534
Shares Value
---------------------------------
SHORT-TERM INVESTMENTS 14.5%
MUTUAL FUND SHARES 14.5%
Evergreen Institutional Money Market Fund 0 (cost $31,580,858) 31,580,858 31,580,858
------------------
Total Investments (cost $256,194,004) 116.9% 253,769,115
Other Assets and Liabilities (16.9%) (36,595,609)
------------------
Net Assets 100.0% $217,173,506
------------------
144A Security that may be sold to qualified institutional buyers under Rule 144A
of the Securities Act of 1933, as amended. This security has been
determined to be liquid under the guidelines established by the Board of
Trustees.
0 Evergreen Investment Management Company, LLC is the investment advisor to
both the Fund and the money market fund.
Summary of Abbreviations:
REIT Real Estate Investment Trust
See Notes to Financial Statements
EVERGREEN UTILITIES AND HIGH INCOME FUND
Notes to Financial Statements
May 31, 2004 (Unaudited)
1. ORGANIZATION
Evergreen Utilities and High Income Fund (the "Fund") is registered under the
Investment Company Act of 1940, as amended, as a non-diversified closed-end
management investment company. The Fund's investment objective is to seek a high
level of current income and moderate capital growth, with an emphasis on
providing tax-advantaged dividend income.
2. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
policies are in conformity with generally accepted accounting principles in the
United States of America, which require management to make estimates and
assumptions that affect amounts reported herein. Actual results could differ
from these estimates.
a. Valuation of investments
Listed equity securities are usually valued at the last sales price or official
closing price on the national securities exchange where the securities are
principally traded.
Portfolio debt securities acquired with more than 60 days to maturity are valued
at prices obtained from an independent pricing service which takes into
consideration such factors as similar security prices, yields, maturities,
liquidity and ratings. Securities for which valuations are not available from an
independent pricing service may be valued by brokers which use prices provided
by market makers or estimates of market value obtained from yield data relating
to investments or securities with similar characteristics.
Short-term securities with remaining maturities of 60 days or less at the time
of purchase are valued at amortized cost, which approximates market value.
Investments in other mutual funds are valued at net asset value. Securities for
which market quotations are not available or not reflective of current market
value are valued at fair value as determined in good faith, according to
procedures approved by the Board of Trustees.
b. Repurchase agreements
Securities pledged as collateral for repurchase agreements are held by the
custodian bank or in a segregated account in the Fund's name until the
agreements mature. Each agreement requires that the market value of the
collateral be sufficient to cover payments of interest and principal. However,
in the event of default or bankruptcy by the other party to the agreement,
retention of the collateral may be subject to legal proceedings. The Fund will
only enter into repurchase agreements with banks and other financial
institutions, which are deemed by the investment advisor to be creditworthy
pursuant to guidelines established by the Board of Trustees.
c. Reverse repurchase agreements
To obtain short-term financing, the Fund may enter into reverse repurchase
agreements with banks and other financial institutions, which are deemed by the
investment advisor to be creditworthy. At the time the Fund enters into a
reverse repurchase agreement, it will establish a segregated account with the
custodian containing qualified assets having a value not less than the
repurchase price, including accrued interest. If the counterparty to the
transaction is rendered insolvent, the Fund may be delayed or limited in the
repurchase of the collateral securities.
d. Foreign currency translation
All assets and liabilities denominated in foreign currencies are translated into
U.S. dollar amounts at the date of valuation. Purchases and sales of portfolio
securities and income items denominated in foreign currencies are translated
into U.S. dollar amounts on the respective dates of such transactions. The Fund
does not separately account for that portion of the results of operations
resulting from changes in foreign exchange rates on investments and the
fluctuations arising from changes in market prices of securities held. Such
fluctuations are included with the net realized and unrealized gains or losses
on securities.
e. When-issued and delayed delivery transactions
The Fund records when-issued securities as of trade date and maintains security
positions such that sufficient liquid assets will be available to make payment
for the securities purchased. Securities purchased on a when-issued or delayed
delivery basis are marked-to-market daily and begin earning interest on the
settlement date. Losses may occur on these transactions due to changes in market
conditions or the failure of counterparties to perform under the contract.
f. Security transactions and investment income
Security transactions are recorded on trade date. Realized gains and losses are
computed using the specific cost of the security sold. Interest income is
recorded on the accrual basis and includes accretion of discounts and
amortization of premiums. Dividend income is recorded on the ex-dividend date,
or in the case of some foreign securities, on the date when the Fund is made
aware of the dividend. Foreign income and capital gains realized on some
securities may be subject to foreign taxes, which are accrued as applicable.
g. Federal taxes
The Fund intends to continue to qualify as a regulated investment company and
distribute all of its taxable income, including any net capital gains.
Accordingly, no provision for federal taxes is required.
h. Distributions
Distributions to shareholders from net investment income and net realized gains,
if any, are recorded on the ex-dividend date. Such distributions are determined
in conformity with income tax regulations, which may differ from generally
accepted accounting principles. Shareholders have the option of receiving their
dividends in cash or in the Fund's common shares in accordance with the Fund's
Automatic Dividend Reinvestment Plan.
3. ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
Evergreen Investment Management Company, LLC ("EIMC"), an indirect, wholly-owned
subsidiary of Wachovia Corporation ("Wachovia"), is the investment advisor to
the Fund and is paid an annual fee of 0.60% of the Fund's average daily total
assets.
From time to time, EIMC may voluntarily or contractually waive its fee and/or
reimburse expenses in order to limit operating expenses. For any fee waivers
and/or reimbursements made after January 1, 2003, EIMC may recoup certain
amounts waived and/or reimbursed up to a period of three years following the end
the fiscal year in which the fee waivers and/or reimbursements were made.
Evergreen Investment Services, Inc. ("EIS"), an indirect, wholly-owned
subsidiary of Wachovia, is the administrator to the Fund. As administrator, EIS
provides the Fund with facilities, equipment and personnel and is paid an annual
rate of 0.05% of the Fund's average daily total assets.
The Fund has placed a portion of its portfolio transactions with brokerage firms
that are affiliates of Wachovia. During the period ended May 31, 2004, the Fund
paid brokerage commissions of $15,000 to Wachovia Securities, LLC.
4. CAPITAL SHARE TRANSACTIONS
The Fund has authorized an unlimited number of common shares, without par value.
For the period from April 30, 2004 (commencement of operations) to May 31, 2004,
the Fund issued 11,505,000 shares of common shares.
5. SECURITIES TRANSACTIONS
Cost of purchases and proceeds from sales of investment securities (excluding
short-term securities) were $53,087,745 and $30,113,313, respectively, for the
period ended May 31, 2004.
During the period ended May 31, 2004, the Fund entered into reverse repurchase
agreements. The average daily balance of reverse repurchase agreements
outstanding during the period ended May 31, 2004 was approximately $20,338,282
at a weighted average interest rate of 1.80 %. The maximum amount outstanding
under reverse repurchase agreements during the period ended May 31, 2004 was
$40,065,000 (including accrued interest). During the period ended May 31, 2004,
the Fund paid $31,039 in interest expense representing 0.17 % of the Fund's
average daily net assets (on an annualized basis).
At May 31, 2004, reverse repurchase agreements outstanding were as follows:
Repurchase Amount Maturity
Counterparty Interest Rate Date
------------------- ----------------------------------------- ----------------
$39,055,895 Lehman Brothers 1.50% 06/15/2004
On May 31, 2004, the aggregate cost of securities for federal income tax
purposes was $256,194,004. The gross unrealized appreciation and depreciation on
securities based on tax cost was $2,258,976 and $4,683,865, respectively, with a
net unrealized depreciation of $2,424,889.
6. DEFERRED TRUSTEES' FEES
Each Trustee of the Fund may defer any or all compensation related to
performance of their duties as Trustees. The Trustees' deferred balances are
allocated to deferral accounts, which are included in the accrued expenses for
the Fund. The investment performance of the deferral accounts are based on the
investment performance of certain Evergreen funds. Any gains earned or losses
incurred in the deferral accounts are reported in the Fund's Trustees' fees and
expenses. At the election of the Trustees, the deferral account will be paid
either in one lump sum or in quarterly installments for up to ten years.
7. CONCENTRATION OF RISK
The Fund may invest a substantial portion of its assets in an industry or sector
and, therefore, may be more affected by changes in that industry or sector than
would be a comparable mutual fund that is not heavily weighted in any industry
or sector.
8. AUTOMATIC DIVIDEND REINVESTMENT PLAN
All common shareholders are eligible to participate in the Automatic Dividend
Reinvestment Plan ("the Plan"). Pursuant to the Plan, unless a common
shareholder is ineligible or elects otherwise, all cash dividends and capital
gains distributions are automatically reinvested by EquiServe Trust Company,
N.A., as agent for shareholders in administering the Plan ("Plan Agent", in
additional common shares of the Fund. Whenever the Fund declares an ordinary
income dividend or capital gain dividend (collectively referred to as
"dividends") payable either in shares or in cash, non-participants in the Plan
will receive cash, and participants in the Plan will receive the equivalent in
shares of common shares. The shares are acquired by the Plan Agent for the
participant's account, depending upon the circumstances described below, either
(i) through receipt of additional unissued but authorized common shares from the
Fund ("newly issued common shares") or (ii) by purchase of outstanding common
shares on the open market (open-market purchases) on the American Stock Exchange
or elsewhere. If, on the payment date for any dividend or distribution, the net
asset value per share of the common shares is equal to or less than the market
price per common share plus estimated brokerage commissions ("market premium"),
the Plan Agent will invest the amount of such dividend or distribution in newly
issued shares on behalf of the participant. The number of newly issued common
shares to be credited to the participant's account will be determined by
dividing the dollar amount of the dividend by the net asset value per share on
the date the shares are issued provided that the maximum discount from the then
current market price per share on the date of issuance may not exceed 5%. If on
the dividend payment date the net asset value per share is greater than the
market value or market premium ("market discount"), the Plan Agent will invest
the dividend amount in shares acquired on behalf of the participant in
open-market purchases. There will be no brokerage charges with respect to shares
issued directly by the Fund as a result of dividends or capital gains
distributions payable either in shares or in cash. However, each participant
will pay a pro rata share of brokerage commissions incurred with respect to the
Plan Agent's open-market purchases in connection with the reinvestment of
dividends. The automatic reinvestment of dividends and distributions will not
relieve participants of any federal, state or local income tax that may be
payable (or required to be withheld) on such dividends. All correspondence
concerning the Plan should be directed to the Plan Agent at P.O. Box 43010,
Providence, Rhode Island 02940-3010.
APPENDIX A - DESCRIPTION OF RATINGS
CORPORATE AND MUNICIPAL BOND RATINGS
The Fund relies on ratings provided by independent rating services to help
determine the credit quality of bonds and other obligations the Fund intends to
purchase or already owns. A rating is an opinion of an issuer's ability to pay
interest and/or principal when due. Ratings reflect an issuer's overall
financial strength and whether it can meet its financial commitments under
various economic conditions.
If a security held by the Fund loses its rating or has its rating reduced
after the Fund has purchased it, the Fund is not required to sell or otherwise
dispose of the security, but may consider doing so.
The principal rating services, commonly used by the Fund and investors
generally, are Moody's, Fitch and S&P. Rating systems are similar among the
different services. As an example, the chart below compares basic ratings for
long-term bonds. The "Credit Quality" terms in the chart are for quick reference
only. Following the chart are the specific definitions each service provides for
its ratings.
COMPARISON OF LONG-TERM BOND RATINGS
================== ================ =============== =================================================
MOODY'S S&P FITCH Credit Quality
================== ================ =============== =================================================
------------------ ---------------- --------------- -------------------------------------------------
Aaa AAA AAA Excellent Quality (lowest risk)
------------------ ---------------- --------------- -------------------------------------------------
------------------ ---------------- --------------- -------------------------------------------------
Aa AA AA Almost Excellent Quality (very low risk)
------------------ ---------------- --------------- -------------------------------------------------
------------------ ---------------- --------------- -------------------------------------------------
A A A Good Quality (low risk)
------------------ ---------------- --------------- -------------------------------------------------
------------------ ---------------- --------------- -------------------------------------------------
Baa BBB BBB Satisfactory Quality (some risk)
------------------ ---------------- --------------- -------------------------------------------------
------------------ ---------------- --------------- -------------------------------------------------
Ba BB BB Questionable Quality (definite risk)
------------------ ---------------- --------------- -------------------------------------------------
------------------ ---------------- --------------- -------------------------------------------------
B B B Low Quality (high risk)
------------------ ---------------- --------------- -------------------------------------------------
------------------ ---------------- --------------- -------------------------------------------------
Caa/Ca/C CCC/CC/C CCC/CC/C In or Near Default
------------------ ---------------- --------------- -------------------------------------------------
------------------ ---------------- --------------- -------------------------------------------------
D DDD/DD/D In Default
================== ================ =============== =================================================
CORPORATE BONDS
LONG-TERM RATINGS
Moody's Corporate Long-Term Bond Ratings
Aaa Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edged." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present which make
the long-term risk appear somewhat larger than the Aaa securities.
A Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper-medium-grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment some time in the future.
Baa Bonds which are rated Baa are considered as medium-grade obligations, (i.e.
they are neither highly protected nor poorly secured). Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well-assured. Often the protection of interest
and principal payments may be very moderate, and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
C Bonds which are rated C are the lowest rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
Note: Moody's applies numerical modifiers, 1, 2 and 3 in each generic rating
classification from Aa to Caa. The modifier 1 indicates that the company ranks
in the higher end of its generic rating category; the modifier 2 indicates a
mid-range raking and the modifier 3 indicates that the company ranks in the
lower end of its generic rating category.
S&P Corporate Long-Term Bond Ratings
AAA An obligation rated AAA has the highest rating assigned by S&P. The
obligor's capacity to meet its financial commitment on the obligation is
extremely strong.
AA An obligation rated AA differs from the highest-rated obligations only in
small degree. The obligor's capacity to meet its financial commitment on the
obligation is very strong.
A An obligation rated A is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than obligations in
higher-rated categories. However, the obligor's capacity to meet its financial
commitment on the obligation is still strong.
BBB An obligation rated BBB exhibits adequate protection parameters. However,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity of the obligor to meet its financial commitment on the
obligation.
BB, B, CCC, CC and C: As described below, obligations rated BB, B, CCC, CC, and
C are regarded as having significant speculative characteristics. BB indicates
the least degree of speculation and C the highest. While such obligations will
likely have some quality and protective characteristics, these may be outweighed
by large uncertainties or major exposures to adverse conditions.
BB An obligation rated BB is less vulnerable to nonpayment than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions, which could lead to the
obligor's inadequate capacity to meet its financial commitment on the
obligation.
B An obligation rated B is more vulnerable to nonpayment than obligations rated
BB, but the obligor currently has the capacity to meet its financial commitment
on the obligation. Adverse business, financial, or economic conditions will
likely impair the obligor's capacity or willingness to meet it financial
commitment on the obligation.
CCC An obligation rated CCC is currently vulnerable to nonpayment and is
dependent upon favorable business, financial, and economic conditions for the
obligor to meet its financial commitment on the obligation. In the event of
adverse business, financial, or economic conditions, the obligor is not likely
to have the capacity to meet its financial commitment on the obligation.
CC An obligation rated CC is currently highly vulnerable to nonpayment.
C The C rating may be used to cover a situation where a bankruptcy petition has
been filed or similar action has been taken, but payments on this obligation are
being continued.
D The D rating, unlike other ratings, is not prospective; rather, it is used
only where a default has actually occurred--and not where a default is only
expected. S&P changes ratings to D either:
o On the day an interest and/or principal payment is due and is not paid. An
exception is made if there is a grace period and S&P believes that a
payment will be made, in which case the rating can be maintained; or
o Upon voluntary bankruptcy filing or similar action. An exception is made if
S&P expects that debt service payments will continue to be made on a
specific issue. In the absence of a payment default or bankruptcy filing, a
technical default (i.e., covenant violation) is not sufficient for
assigning a D rating.
Plus (+) or minus (-) The ratings from AA to CCC may be modified by the addition
of a plus or minus sign to show relative standing within the major rating
categories.
Fitch Corporate Long-Term Bond Ratings
Investment Grade
AAA Highest credit quality. AAA ratings denote the lowest expectation of credit
risk. They are assigned only in case of exceptionally strong capacity for timely
payment of financial commitments. This capacity is highly unlikely to be
adversely affected by foreseeable events.
AA Very high credit quality. AA ratings denote a very low expectation of credit
risk. They indicate very strong capacity for timely payment of financial
commitments. This capacity is not significantly vulnerable to foreseeable
events.
A High credit quality. A ratings denote a lower expectation of credit risk. The
capacity for timely payment of financial commitments is considered strong. This
capacity may, nevertheless, be more vulnerable to changes in circumstances or in
economic conditions than is the case for higher ratings.
BBB Good credit quality. BBB ratings indicate that there is currently a low
expectation of credit risk. The capacity for timely payment of financial
commitments is considered adequate, but adverse changes in circumstances and in
economic conditions are more likely to impair this capacity. This is the lowest
investment-grade category.
Speculative Grade
BB Speculative. BB ratings indicate that there is a possibility of credit risk
developing, particularly as the result of adverse economic change over time;
however, business or financial alternatives may be available to allow financial
commitments to be met. Securities rated in this category are not investment
grade.
B Highly speculative. B ratings indicate that significant credit risk is
present, but a limited margin of safety remains. Financial commitments are
currently being met; however, capacity for continued payment is contingent upon
a sustained, favorable business and economic environment.
CCC, CC, C High default risk. Default is a real possibility. Capacity for
meeting financial commitment is solely reliant upon sustained, favorable
business or economic developments. A CC rating indicates that default of some
kind appears probable. C ratings signal imminent default.
DDD, DD, D Default. Securities are not meeting current obligations and are
extremely speculative. DDD designates the highest potential for recovery of
amounts outstanding on any securities involved. For U.S. corporates, for
example, DD indicates expected recovery of 50%-90% of such outstandings, and D
the lowest recovery potential, i.e. below 50%.
+ or - may be appended to a rating to denote relative status within major rating
categories. Such suffixes are not added to the AAA rating category or to
categories below CCC.
CORPORATE SHORT-TERM RATINGS
Moody's Corporate Short-Term Issuer Ratings
Prime-1 Issuers rated Prime-1 (or supporting institutions) have a superior
ability for repayment of senior short-term debt obligations. Prime-1 repayment
ability will often be evidenced by many of the following characteristics.
-- Leading market positions in well-established industries.
-- High rates of return on funds employed.
-- Conservative capitalization structure with moderate reliance on debt and
ample asset protection.
-- Broad margins in earnings coverage of fixed financial changes and high
internal cash generation.
-- Well-established access to a range of financial markets and assured sources
of alternate liquidity.
Prime-2 Issuers rated Prime-2 (or supporting institutions) have a strong ability
for repayment of senior short-term debt obligations. This will normally be
evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
Prime-3 Issuers rated Prime-3 (or supporting institutions) have an acceptable
ability for repayment of senior short-term obligations. The effect of industry
characteristics and market compositions may be more pronounced. Variability in
earnings and profitability may result in changes in the level of debt protection
measurements and may require relatively high financial leverage. Adequate
alternate liquidity is maintained.
Not Prime Issuers rated Not Prime do not fall within any of the Prime rating
categories.
S&P Corporate Short-Term Obligation Ratings
A-1 A short-term obligation rated A-1 is rated in the highest category by S&P.
The obligor's capacity to meet its financial commitment on the obligation is
strong. Within this category certain obligations are designated with a plus sign
(+). This indicates that the obligor's capacity to meet its financial commitment
on these obligations is extremely strong.
A-2 A short-term obligation rated A-2 is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than
obligations in higher rating categories. However, the obligor's capacity to meet
its financial commitment on the obligation is satisfactory.
A-3 A short-term obligation rated A-3 exhibits adequate protection parameters.
However, adverse economic conditions or changing circumstances are more likely
to lead to a weakened capacity of the obligor to meet its financial commitment
on the obligation.
B A short-term obligation rated B is regarded as having significant speculative
characteristics. The obligor currently has the capacity to meet its financial
commitment on the obligation; however, it faces major ongoing uncertainties
which could lead to the obligor's inadequate capacity to meet its financial
commitment on the obligation.
C A short-term obligation rated C is currently vulnerable to nonpayment and is
dependent upon favorable business, financial, and economic conditions for the
obligor to meet its financial commitment on the obligation.
D The D rating, unlike other ratings, is not prospective; rather, it is used
only where a default has actually occurred--and not where a default is only
expected. S&P changes ratings to D either:
o On the day an interest and/or principal payment is due and is not paid. An
exception is made if there is a grace period and S&P believes that a
payment will be made, in which case the rating can be maintained; or
o Upon voluntary bankruptcy filing or similar action, An exception is made if
S&P expects that debt service payments will continue to be made on a
specific issue. In the absence of a payment default or bankruptcy filing, a
technical default (i.e., covenant violation) is not sufficient for
assigning a D rating.
Fitch Corporate Short-Term Obligation Ratings
F1 Highest credit quality. Indicates the strongest capacity for timely payment
of financial commitments; may have an added "+" to denote any exceptionally
strong credit feature.
F2 Good credit quality. A satisfactory capacity for timely payment of financial
commitments, but the margin of safety is not as great as in the case of the
higher ratings.
F3 Fair credit quality. The capacity for timely payment of financial commitments
is adequate; however, near-term adverse changes could result in a reduction to
non-investment grade.
B Speculative. Minimal capacity for timely payment of financial commitments,
plus vulnerability to near-term adverse changes in financial and economic
conditions.
C High default risk. Default is a real possibility. Capacity for meeting
financial commitments is solely reliant upon a sustained, favorable business and
economic environment.
D Default. Denotes actual or imminent payment default.
MUNICIPAL BONDS
LONG-TERM RATINGS
Moody's Municipal Long-Term Bond Ratings
Aaa Bonds rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as "gilt edge."
Interest payments are protected by a large or by an exceptionally stable margin
and principal is secure. While the various protective elements are likely to
change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa Bonds rated Aa are judged to be of high quality by all standards. Together
with the Aaa group they comprise what are generally known as high grade bonds.
They are rated lower than the best bonds because margins of protection may not
be as large as in Aaa securities or fluctuation of protective elements may be of
greater amplitude or there may be other elements present which make the
long-term risk appear somewhat larger than the Aaa securities.
A Bonds rated A possess many favorable investment attributes and are to be
considered as upper-medium grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment some time in the future.
Baa Bonds 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 issues may be in default or there
may be present elements of danger with respect to principal or interest.
Ca Bonds rated Ca represent obligations which are speculative in a high degree.
Such issues are often in default or have other marked shortcomings.
C Bonds rated C are the lowest rated class of bonds, and issues so rated can be
regarded as having extremely poor prospects of ever attaining any real
investment standing.
Note: Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa to B. The modifier 1 indicates that the company ranks in
the higher end of its generic rating category; the modifier 2 indicates a
mid-range raking and the modifier 3 indicates that the company ranks in the
lower end of its generic rating category.
S&P Municipal Long-Term Bond Ratings
AAA An obligation rated AAA has the highest rating assigned by S&P. The
obligor's capacity to meet its financial commitment on the obligation is
extremely strong.
AA An obligation rated AA differs from the highest-rated obligations only in
small degree. The obligor's capacity to meet its financial commitment on the
obligation is very strong.
A An obligation rated A is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than obligations in
higher-rated categories. However, the obligor's capacity to meet its financial
commitment on the obligation is still strong.
BBB An obligation rated BBB exhibits adequate protection parameters. However,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity of the obligor to meet its financial commitment on the
obligation.
BB, B, CCC, CC and C: As described below, obligations rated BB, B, CCC, CC, and
C are regarded as having significant speculative characteristics. BB indicates
the least degree of speculation and C the highest. While such obligations will
likely have some quality and protective characteristics, these may be outweighed
by large uncertainties or major exposures to adverse conditions.
BB An obligation rated BB is less vulnerable to nonpayment than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions, which could lead to the
obligor's inadequate capacity to meet its financial commitment on the
obligation.
B An obligation rated B is more vulnerable to nonpayment than obligations rated
BB, but the obligor currently has the capacity to meet its financial commitment
on the obligation. Adverse business, financial, or economic conditions will
likely impair the obligor's capacity or willingness to meet it financial
commitment on the obligation.
CCC An obligation rated CCC is currently vulnerable to nonpayment and is
dependent upon favorable business, financial, and economic conditions for the
obligor to meet its financial commitment on the obligation. In the event of
adverse business, financial, or economic conditions, the obligor is not likely
to have the capacity to meet its financial commitment on the obligation.
CC An obligation rated CC is currently highly vulnerable to nonpayment.
C The C rating may be used to cover a situation where a bankruptcy petition has
been filed or similar action has been taken, but payments on this obligation are
being continued.
D An obligation rated D is in payment default. The D rating category is used
when payments on an obligation are not made on the date due even if the
applicable grace period has not expired, unless S&P believes that such payments
will be made during such grace period. The D rating also will be used upon the
filing of a bankruptcy petition or the taking of a similar action if payments on
an obligation are jeopardized.
Plus (+) or minus (-) The ratings from AA to CCC may be modified by the addition
of a plus or minus sign to show relative standing within the major rating
categories.
Fitch Municipal Long-Term Bond Ratings
Investment Grade
AAA Highest credit quality. AAA ratings denote the lowest expectation of credit
risk. They are assigned only in case of exceptionally strong capacity for timely
payment of financial commitments. This capacity is highly unlikely to be
adversely affected by foreseeable events.
AA Very high credit quality. AA ratings denote a very low expectation of credit
risk. They indicate very strong capacity for timely payment of financial
commitments. This capacity is not significantly vulnerable to foreseeable
events.
A High credit quality. A ratings denote a lower expectation of credit risk. The
capacity for timely payment of financial commitments is considered strong. This
capacity may, nevertheless, be more vulnerable to changes in circumstances or in
economic conditions than is the case for higher ratings.
BBB Good credit quality. BBB ratings indicate that there is currently a low
expectation of credit risk. The capacity for timely payment of financial
commitments is considered adequate, but adverse changes in circumstances and in
economic conditions are more likely to impair this capacity. This is the lowest
investment-grade category.
Speculative Grade
BB Speculative. BB ratings indicate that there is a possibility of credit risk
developing, particularly as the result of adverse economic change over time;
however, business or financial alternatives may be available to allow financial
commitments to be met. Securities rated in this category are not investment
grade.
B Highly speculative. B ratings indicate that significant credit risk is
present, but a limited margin of safety remains. Financial commitments are
currently being met; however, capacity for continued payment is contingent upon
a sustained, favorable business and economic environment.
CCC, CC, C High default risk. Default is a real possibility. Capacity for
meeting financial commitments is solely reliant upon sustained, favorable
business or economic developments. A CC rating indicates that default of some
kind appears probable. C ratings signal imminent default.
DDD, DD, D Default. The ratings of obligations in this category are based on
their prospects for achieving partial or full recovery in a reorganization or
liquidation of the obligor. While expected recovery values are highly
speculative and cannot be estimated with any precision, the following serve as
general guidelines. 'DDD' obligations have the highest potential for recovery,
around 90% - 100% of outstanding amounts and accrued interest. "DD' indicates
potential recoveries in the range of 50% - 90% and 'D' the lowest recovery
potential, i.e., below 50%.
Entities rated in this category have defaulted on some or all of their
obligations. Entities rated 'DDD' have the highest prospect for resumption of
performance or continued operation with or without a formal reorganization
process. Entities rated 'DD' and 'D' are generally undergoing a formal
reorganization or liquidation process; those rated 'DD' are likely to satisfy a
higher portion of their outstanding obligations, while entities rated 'D' have a
poor prospect of repaying all obligations.
+ or - may be appended to a rating to denote relative status within major rating
categories. Such suffixes are not added to the AAA rating category or to
categories below CCC or to short-term ratings (as discussed below) other than
F1.
SHORT-TERM MUNICIPAL RATINGS
Moody's Municipal Short-Term Issuer Ratings
Prime-1 Issuers rated Prime-1 (or supporting institutions) have a superior
ability for repayment of senior short-term debt obligations. Prime-1 repayment
ability will often be evidence by many of the following characteristics.
-- Leading market positions in well-established industries.
-- High rates of return on funds employed.
-- Conservative capitalization structure with moderate reliance on debt and
ample asset protection.
-- Broad margins in earnings coverage of fixed financial changes and high
internal cash generation.
-- Well-established access to a range of financial markets and assured sources
of alternate liquidity.
Prime-2 Issuers rated Prime-2 (or supporting institutions) have a strong ability
for repayment of senior short-term debt obligations. This will normally be
evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
Prime-3 Issuers rated Prime-3 (or supporting institutions) have an acceptable
ability for repayment of senior short-term obligations. The effect of industry
characteristics and market compositions may be more pronounced. Variability in
earnings and profitability may result in changes in the level of debt protection
measurements and may require relatively high financial leverage. Adequate
alternate liquidity is maintained.
Not Prime Issuers rated Not Prime do not fall within any of the Prime rating
categories.
Moody's Municipal Short-Term Loan Ratings
MIG 1 This designation denotes best quality. There is strong protection by
established cash flows, superior liquidity support, or demonstrated broad-based
access to the market for refinancing.
MIG 2 This designation denotes high quality. Margins of protection are ample
although not so large as in the preceding group.
MIG 3 This designation denotes favorable quality. Liquidity and cash-flow
protection may be narrow and market access for refinancing is likely to be less
well established.
SG This designation denotes speculative quality. Debt instruments in this
category may lack margins of protection.
S&P Commercial Paper Ratings
A-1 This designation indicates that the degree of safety regarding timely
payment is strong. Those issues determined to possess extremely strong safety
characteristics are denoted with a plus sign (+) designation.
A-2 Capacity for timely payment on issues with this designation is satisfactory.
However, the relative degree of safety is not as high as for issues designated
A-1.
A-3 Issues carrying this designation have an adequate capacity for timely
payment. They are, however, more vulnerable to the adverse effects of changes in
circumstances than obligations carrying the higher designations.
B Issues rated B are regarded as having only speculative capacity for timely
payment.
C This rating is assigned to short-term debt obligations with a doubtful
capacity for payment.
D Debt rated D is in payment default. The D rating category is used when
interest payments or principal payments are not made on the date due, even if
the applicable grace period has not expired, unless S&P believes such payments
will be made during such grace period.
S&P Municipal Short-Term Obligation Ratings
SP-1 Strong capacity to pay principal and interest. An issue determined to
possess a very strong capacity to pay debt service is given a plus (+)
designation.
SP-2 Satisfactory capacity to pay principal and interest, with some
vulnerability to adverse financial and economic changes over the term of the
notes.
SP-3 Speculative capacity to pay principal and interest.
Fitch Municipal Short-Term Obligation Ratings
F1 Highest credit quality. Indicates the strongest capacity for timely payment
of financial commitments; may have an added "+" to denote any exceptionally
strong credit feature.
F2 Good credit quality. A satisfactory capacity for timely payment of financial
commitments, but the margin of safety is not as great as in the case of the
higher ratings.
F3 Fair credit quality. The capacity for timely payment of financial commitments
is adequate; however, near-term adverse changes could result in a reduction to
non-investment grade.
B Speculative. Minimal capacity for timely payment of financial commitments,
plus vulnerability to near-term adverse changes in financial and economic
conditions.
C High default risk. Default is a real possibility. Capacity for meeting
financial commitments is solely reliant upon a sustained, favorable business and
economic environment.
D Default. Denotes actual or imminent payment default.
APPENDIX B--PROXY VOTING POLICY AND PROCEDURES
Evergreen Investment Management Company, LLC
Proxy Voting Policy and Procedures
ISS Proxy Voting Guidelines Summary
June 16, 2003
Statement of Principles
Evergreen Investment Management Company, LLC (EIMCO) recognizes it has a
fiduciary duty to vote proxies on behalf of clients who have delegated such
responsibility to EIMCO, and that in all cases proxies should be voted in a
manner reasonably believed to be in the clients' best interest.
Corporate Governance Committee
EIMCOhas established a corporate governance committee (Committee) which is a
sub-committee of EIMCO's Investment Policy Committee. The Committee is
responsible for approving EIMCO's proxy voting policies and procedures, for
overseeing the proxy voting process, and for reviewing proxy voting on a
regular basis. The Committee will meet quarterly to review reports of all
proxies voted for the prior period and to conduct other business as
required.
Conflicts of Interest
EIMCO recognizes that under certain circumstances it may have a conflict of
interest in voting proxies on behalf of its clients. Such circumstances may
include, but are not limited to, situations where EIMCO or one or more of its
affiliates has a client or customer relationship with the issuer of the security
that is the subject of the proxy vote.
In most cases, structural and informational barriers within EIMCO and Wachovia
Corporation will prevent EIMCO from becoming aware of the relationship giving
rise to the potential conflict of interest. In such circumstances, EIMCO will
vote the proxy according to its standard guidelines and procedures described
above.
If persons involved in proxy voting on behalf of EIMCO becomes aware of a
potential conflict of interest, the Committee shall consult with EIMCO's Legal
Department and consider whether to implement special procedures with respect to
the voting of that proxy, including whether an independent third party should be
retained to vote the proxy.
Share Blocking
EIMCO does not vote global proxies, with share blocking restrictions, requiring
shares to be prohibited from sale.
Proxy Voting Guideline Summary
I. The Board of Directors
Voting on Director Nominees in Uncontested Elections
Votes on director nominees should be made on a case-by-case basis, examining the
following factors: composition of the board and key board committees, attendance
at board meetings, corporate governance provisions and takeover activity,
long-term company performance relative to a market index, directors' investment
in the company, whether the chairman is also serving as CEO, and whether a
retired CEO sits on the board. However, there are some actions by directors that
should result in votes being withheld. These instances include directors who:
o Attend less than 75 percent of the board and committee meetings without a
valid excuse
o Implement or renew a dead-hand or modified dead-hand poison pill
o Ignore a shareholder proposal that is approved by a majority of the shares
outstanding
o Ignore a shareholder proposal that is approved by a majority of the votes
cast for two consecutive years
o Have failed to act on takeover offers where the majority of the
shareholders have tendered their shares
o Are inside directors and sit on the audit, compensation, or nominating
committees
o Are inside directors and the full board serves as the audit, compensation,
or nominating committee or the company does not have one of these
committees
In addition, directors who enacted egregious corporate governance policies or
failed to replace management as appropriate would be subject to recommendations
to withhold votes.
Separating Chairman and CEO
Vote on a case-by-case basis on shareholder proposals requiring that the
positions of chairman and CEO be held separately.
Proposals Seeking a Majority of Independent Directors
Shareholder proposals asking that a majority of directors be independent should
be evaluated on a case-by-case basis. Vote for shareholder proposals asking that
board audit, compensation, and/or nominating committees be composed exclusively
of independent directors.
Stock Ownership Requirements
Vote against shareholder proposals requiring directors to own a minimum amount
of company stock in order to qualify as a director or to remain on the board.
Term of Office
Vote against shareholder proposals to limit the tenure of outside directors.
Age Limits
Vote against shareholder proposals to impose a mandatory retirement age for
outside directors.
Director and Officer Indemnification and Liability Protection
Proposals on director and officer indemnification and liability protection
should be evaluated on a case-by-case basis, using Delaware law as the standard.
Vote against proposals to eliminate entirely directors' and officers' liability
for monetary damages for violating the duty of care. Vote against
indemnification proposals that would expand coverage beyond just legal expenses
to acts, such as negligence, that are more serious violations of fiduciary
obligation than mere carelessness. Vote for only those proposals providing such
expanded coverage in cases when a director's or officer's legal defense was
unsuccessful if: (1) the director was found to have acted in good faith and in a
manner that he reasonably believed was in the best interests of the company, and
(2) only if the director's legal expenses would be covered.
Charitable Contributions
Vote against proposals regarding charitable contributions.
II. Proxy Contests
Voting for Director Nominees in Contested Elections
Votes in a contested election of directors must be evaluated on a case-by-case
basis, considering the following factors: long-term financial performance of the
target company relative to its industry; management's track record; background
to the proxy contest; qualifications of director nominees (both slates);
evaluation of what each side is offering shareholders as well as the likelihood
that the proposed objectives and goals can be met; and stock ownership
positions.
Reimburse Proxy Solicitation Expenses
Voting to reimburse proxy solicitation expenses should be analyzed on a
case-by-case basis. In cases where Evergreen recommends in favor of the
dissidents, we also recommend voting for reimbursing proxy solicitation
expenses.
III. Auditors
Ratifying Auditors
Vote for proposals to ratify auditors, unless: an auditor has a financial
interest in or association with the company, and is therefore not independent;
or there is reason to believe that the independent auditor has rendered an
opinion which is neither accurate nor indicative of the company's financial
position.
IV. Proxy Contest Defenses
Board Structure: Staggered vs. Annual Elections
Vote against proposals to classify the board.
Vote for proposals to repeal classified boards and to elect all directors
annually.
Shareholder Ability to Remove Directors
Vote against proposals that provide that directors may be removed only for
cause.
Vote for proposals to restore shareholder ability to remove directors with or
without cause.
Vote against proposals that provide that only continuing directors may elect
replacements to fill board vacancies.
Vote for proposals that permit shareholders to elect directors to fill board
vacancies.
Cumulative Voting
Vote against proposals to eliminate cumulative voting.
Vote proposals to restore or permit cumulative voting on a case-by-case basis
relative to the company's other governance provisions.
Shareholder Ability to Call Special Meetings
Vote against proposals to restrict or prohibit shareholder ability to call
special meetings.
Vote for proposals that remove restrictions on the right of shareholders to act
independently of management.
Shareholder Ability to Act by Written Consent
Vote against proposals to restrict or prohibit shareholder ability to take
action by written consent.
Vote for proposals to allow or make easier shareholder action by written
consent.
Shareholder Ability to Alter the Size of the Board
Vote for proposals that seek to fix the size of the board.
Vote against proposals that give management the ability to alter the size of the
board without shareholder approval.
V. Tender Offer Defenses
Poison Pills
Vote for shareholder proposals that ask a company to submit its poison pill for
shareholder ratification.
Review on a case-by-case basis shareholder proposals to redeem a company's
poison pill.
Review on a case-by-case basis management proposals to ratify a poison pill.
Fair Price Provisions
Vote proposals to adopt fair price provisions on a case-by-case basis,
evaluating factors such as the vote required to approve the proposed
acquisition, the vote required to repeal the fair price provision, and the
mechanism for determining the fair price.
Generally, vote against fair price provisions with shareholder vote requirements
greater than a majority of disinterested shares.
Greenmail
Vote for proposals to adopt antigreenmail charter of bylaw amendments or
otherwise restrict a company's ability to make greenmail payments.
Review on a case-by-case basis antigreenmail proposals when they are bundled
with other charter or bylaw amendments.
Pale Greenmail
Review on a case-by-case basis restructuring plans that involve the payment of
pale greenmail.
Unequal Voting Rights
Vote against dual-class exchange offers.
Vote against dual-class recapitalizations.
Supermajority Shareholder Vote Requirement to Amend the Charter or Bylaws
Vote against management proposals to require a supermajority shareholder vote to
approve charter and bylaw amendments.
Vote for shareholder proposals to lower supermajority shareholder vote
requirements for charter and bylaw amendments.
Supermajority Shareholder Vote Requirement to Approve Mergers
Vote against management proposals to require a supermajority shareholder vote to
approve mergers and other significant business combinations.
Vote for shareholder proposals to lower supermajority shareholder vote
requirements for mergers and other significant business combinations.
White Squire Placements
Vote for shareholder proposals to require approval of blank check preferred
stock Issues for other than general corporate purposes.
VI. Miscellaneous Governance Provisions
Confidential Voting
Vote for shareholder proposals that request companies to adopt confidential
voting, use independent tabulators, and use independent inspectors of election
as long as the proposals include clauses for proxy contests as follows: In the
case of a contested election, management should be permitted to request that the
dissident group honor its confidential voting policy. If the dissidents agree,
the policy remains in place. If the dissidents do not agree, the confidential
voting policy is waived.
Vote for management proposals to adopt confidential voting.
Equal Access
Vote for shareholder proposals that would allow significant company shareholders
equal access to management's proxy material in order to evaluate and propose
voting recommendations on proxy proposals and director nominees, and in order to
nominate their own candidates to the board.
Bundled Proposals
Review on a case-by-case basis bundled or "conditioned" proxy proposals. In the
case of items that are conditioned upon each other, examine the benefits and
costs of the packaged items. In instances when the joint effect of the
conditioned items is not in shareholders' best interests, vote against the
proposals. If the combined effect is positive, support such proposals.
Shareholder Advisory Committees
Review on a case-by-case basis proposals to establish a shareholder advisory
committee.
VII. Capital Structure
Common Stock Authorization
Review proposals to increase the number of shares of common stock authorized for
issue on a case-by-case basis.
Vote against proposals to increase the number of authorized shares of the class
of stock that has superior voting rights in companies that have dual-class
capitalization structures.
Stock Distributions: Splits and Dividends
Vote for management proposals to increase common share authorization for a stock
split, provided that the increase in authorized shares would not result in an
excessive number of shares available for issuance given a company's industry and
performance in terms of shareholder returns.
Reverse Stock Splits
Vote for management proposals to implement a reverse stock split when the number
of shares will be proportionately reduced to avoid delisting.
Review on a case-by-case basis on proposals to implement a reverse stock split
that do not proportionately reduce the number of shares authorized for Issue.
Preferred Stock
Vote against proposals authorizing the creation of new classes of preferred
stock with unspecified voting, conversion, dividend distribution, and other
rights ("blank check" preferred stock).
Vote for proposals to create blank check preferred stock in cases when the
company expressly states that the stock will not be used as a takeover defense.
Vote for proposals to authorize preferred stock in cases where the company
specifies the voting, dividend, conversion, and other rights of such stock and
the terms of the preferred stock appear reasonable.
Vote case-by-case on proposals to increase the number of blank check preferred
shares after analyzing the number of preferred shares available for Issue given
a company's industry and performance in terms of shareholder returns.
Shareholder Proposals Regarding Blank Check Preferred Stock
Vote for shareholder proposals to have blank check preferred stock placements,
other than those shares issued for the purpose of raising capital or making
acquisitions in the normal course of business, submitted for shareholder
ratification.
Adjustments to Par Value of Common Stock
Vote for management proposals to reduce the par value of common stock.
Preemptive Rights
Review on a case-by-case basis shareholder proposals that seek preemptive
rights. In evaluating proposals on preemptive rights, consider the size of a
company and the characteristics of its shareholder base.
Debt Restructurings
Review on a case-by-case basis proposals to increase common and/or preferred
shares and to Issue shares as part of a debt restructuring plan. Consider the
following Issues: Dilution--How much will ownership interest of existing
shareholders be reduced, and how extreme will dilution to any future earnings
be? Change in Control--Will the transaction result in a change in control of the
company? Bankruptcy--Generally, approve proposals that facilitate debt
restructurings unless there are clear signs of self-dealing or other abuses.
Share Repurchase Programs
Vote for management proposals to institute open-market share repurchase plans in
which all shareholders may participate on equal terms.
Tracking Stock
Votes on the creation of tracking stock are determined on a case-by-case basis,
weighing the strategic value of the transaction against such factors as:
o adverse governance changes
o excessive increases in authorized capital stock
o unfair method of distribution
o diminution of voting rights
o adverse conversion features
o negative impact on stock option plans
o other alternatives such as spinoff
VIII. Executive and Director Compensation
Votes with respect to compensation plans should be determined on a case-by-case
basis.
Our new methodology for reviewing compensation plans primarily focuses on the
transfer of shareholder wealth (the dollar cost of pay plans to shareholders
instead of simply focusing on voting power dilution). Using the expanded
compensation data disclosed under the SEC's new rules, Evergreen will value
every award type. Evergreen will include in its analyses an estimated dollar
cost for the proposed plan and all continuing plans. This cost, dilution to
shareholders' equity, will also be expressed as a percentage figure for the
transfer of shareholder wealth, and will be considered along with dilution to
voting power. Once Evergreen determines the estimated cost of the plan, we
compare it to a company-specific dilution cap.
Our model determines a company-specific allowable pool of shareholder wealth
that may be transferred from the company to executives, adjusted for (1)
long-term corporate performance (on an absolute basis and relative to a standard
industry peer group and an appropriate market index), (2) cash compensation, and
(3) categorization of the company as emerging, growth, or mature. These
adjustments are pegged to market capitalization. Evergreen will continue to
examine other features of proposed pay plans such as administration, payment
terms, plan duration, and whether the administering committee is permitted to
reprice underwater stock options without shareholder approval.
Management Proposals Seeking Approval to Reprice Options
Vote on management proposals seeking approval to reprice options on a
case-by-case basis.
Director Compensation
Votes on stock-based plans for directors are made on a case-by-case basis.
Employee Stock Purchase Plans
Votes on employee stock purchase plans should be made on a case-by-case basis.
OBRA-Related Compensation Proposals:
Amendments that Place a Cap on Annual Grants or Amend Administrative Features
Vote for plans that simply amend shareholder-approved plans to include
administrative features or place a cap on the annual grants any one participant
may receive to comply with the provisions of Section 162(m) of OBRA.
Amendments to Added Performance-Based Goals
Vote for amendments to add performance goals to existing compensation plans to
comply with the provisions of Section 162(m) of OBRA.
Amendments to Increase Shares and Retain Tax Deductions Under OBRA
Votes on amendments to existing plans to increase shares reserved and to qualify
the plan for favorable tax treatment under the provisions of Section 162(m)
should be evaluated on a case-by-case basis.
Approval of Cash or Cash-and-Stock Bonus Plans
Vote for cash or cash-and-stock bonus plans to exempt the compensation from
taxes under the provisions of Section 162(m) of OBRA.
Shareholder Proposals to Limit Executive and Director Pay
Generally, vote for shareholder proposals that seek additional disclosure of
executive and director pay information.
Review on a case-by-case basis all other shareholder proposals that seek to
limit executive and director pay.
Golden and Tin Parachutes
Vote for shareholder proposals to have golden and tin parachutes submitted for
shareholder ratification.
Review on a case-by-case basis all proposals to ratify or cancel golden or tin
parachutes.
Employee Stock Ownership Plans (ESOPs)
Vote for proposals that request shareholder approval in order to implement an
ESOP or to increase authorized shares for existing ESOPs, except in cases when
the number of shares allocated to the ESOP is "excessive" (i.e., generally
greater than five percent of outstanding shares).
401(k) Employee Benefit Plans
Vote for proposals to implement a 401(k) savings plan for employees.
IX. State of Incorporation
Voting on State Takeover Statutes
Review on a case-by-case basis proposals to opt in or out of state takeover
statutes (including control share acquisition statutes, control share cash-out
statutes, freezeout provisions, fair price provisions, stakeholder laws, poison
pill endorsements, severance pay and labor contract provisions, antigreenmail
provisions, and disgorgement provisions).
Voting on Reincorporation Proposals
Proposals to change a company's state of incorporation should be examined on a
case-by-case basis.
X. Mergers and Corporate Restructurings
Mergers and Acquisitions
Votes on mergers and acquisitions should be considered on a case-by-case basis,
taking into account at least the following: anticipated financial and operating
benefits; offer price (cost vs. premium); prospects of the combined companies;
how the deal was negotiated; and changes in corporate governance and their
impact on shareholder rights.
Corporate Restructuring
Votes on corporate restructuring proposals, including minority squeezeouts,
leveraged buyouts, spinoffs, liquidations, and asset sales should be considered
on a case-by-case basis.
Spinoffs
Votes on spinoffs should be considered on a case-by-case basis depending on the
tax and regulatory advantages, planned use of sale proceeds, market focus, and
managerial incentives.
Asset Sales
Votes on asset sales should be made on a case-by-case basis after considering
the impact on the balance sheet/working capital, value received for the asset,
and potential elimination of diseconomies.
Liquidations
Votes on liquidations should be made on a case-by-case basis after reviewing
management's efforts to pursue other alternatives, appraisal value of assets,
and the compensation plan for executives managing the liquidation.
Appraisal Rights
Vote for proposals to restore, or provide shareholders with, rights of
appraisal.
Changing Corporate Name
Vote for changing the corporate name.
XI. Mutual Fund Proxies
Election of Directors
Vote the election of directors on a case-by-case basis, considering the
following factors: board structure; director independence and qualifications;
and compensation of directors within the fund and the family of funds attendance
at board and committee meetings.
Votes should be withheld from directors who:
o attend less than 75 percent of the board and committee meetings without a
valid excuse for the absences. Valid reasons include illness or absence due
to company business. Participation via telephone is acceptable. In
addition, if the director missed only one meeting or one day's meetings,
votes should not be withheld even if such absence dropped the director's
attendance below 75 percent.
o ignore a shareholder proposal that is approved by a majority of shares
outstanding
o ignore a shareholder proposal that is approved by a majority of the votes
cast for two consecutive years
o are interested directors and sit on the audit or nominating committee
o are interested directors and the full board serves as the audit or
nominating committee or the company does not have one of these committees.
Converting Closed-end Fund to Open-end Fund
Vote conversion proposals on a case-by-case basis, considering the following
factors: past performance as a closed-end fund; market in which the fund
invests; measures taken by the board to address the discount; and past
shareholder activism, board activity, and votes on related proposals.
Proxy Contests
Vote proxy contests on a case-by-case basis, considering the following factors:
past performance; market in which fund invests; and measures taken by the board
to address the Issues past shareholder activism, board activity, and votes on
related proposals.
Investment Advisory Agreements
Vote the investment advisory agreements on a case-by-case basis, considering the
following factors: proposed and current fee schedules; fund category/investment
objective; performance benchmarks; share price performance as compared with
peers; and the magnitude of any fee increase.
Approving New Classes or Series of Shares
Vote for the establishment of new classes or series of shares.
Preferred Stock Proposals
Vote the authorization for or increase in preferred shares on a case-by-case
basis, considering the following factors: stated specific financing purpose and
other reasons management gives possible dilution for common shares.
1940 Act Policies
Vote these proposals on a case-by-case basis, considering the following factors:
potential competitiveness; regulatory developments; current and potential
returns; and current and potential risk.
Changing a Fundamental Restriction to a Nonfundamental Restriction
Vote these proposals on a case-by-case basis, considering the following factors:
fund's target investments; reasons given by fund for change; and the projected
impact of change on portfolio.
Change Fundamental Investment Objective to Nonfundamental
Vote against proposals to change a fund's fundamental investment objective to
nonfundamental.
Name Rule Proposals
Vote these proposals on a case-by-case basis, considering the following factors:
political/economic changes in target market; bundling with quorum requirements;
bundling with asset allocation changes; and consolidation in the fund's target
market.
Disposition of Assets/Termination/Liquidation
Vote this proposal on a case-by-case basis, considering the following factors:
strategies employed to salvage the company; company's past performance; and
terms of the liquidation.
Changes to the Charter Document
Vote changes to the charter document on a case-by-case basis, considering the
following factors: degree of change implied by the proposal; efficiencies that
could result; state of incorporation; and regulatory standards and implications.
Changing the Domicile of a Fund
Vote reincorporations on a case-by-case basis, considering the following
factors: state regulations of both states; required fundamental policies of both
states; and the increased flexibility available.
Change in Fund's Subclassification
Vote these proposals on a case-by-case basis, considering the following factors:
potential competitiveness; current and potential returns; risk of concentration;
and consolidation in the target industry.
Authorizing the Board to Hire and Terminate Subadvisors Without Shareholder
Approval
Vote against these proposals.
Distribution Agreements
Vote these proposals on a case-by-case basis, considering the following factors:
fees charged to comparably sized funds with similar objectives; proposed
distributor's reputation and past performance; and competitiveness of fund in
industry.
Master-Feeder Structure
Vote for the establishment of a master-feeder structure.
Changes to the Charter Document
Vote changes to the charter document on a case-by-case basis, considering the
following factors: degree of change implied by the proposal; efficiencies that
could result; state of incorporation; and regulatory standards and implications.
Mergers
Vote merger proposals on a case-by-case basis, considering the following
factors: resulting fee structure; performance of both funds; and continuity of
management personnel.
Shareholder Proposals
Establish Director Ownership Requirement
Vote against the establishment of a director ownership requirement.
Reimburse Shareholder for Expenses Incurred
Voting to reimburse proxy solicitation expenses should be analyzed on a
case-by-case basis. In cases where Evergreen recommends in favor of the
dissidents, we also recommend voting for reimbursing proxy solicitation
expenses.
Terminate the Investment Advisor
Vote to terminate the investment advisor on a case-by-case basis, considering
the following factors: performance of the fund's NAV and the history of
shareholder relations.
XII. Social and Environmental Issues
Energy and Environment
In most cases, Evergreen refrains from providing a vote recommendation on
proposals that request companies to file the CERES Principles.
Generally, vote for disclosure reports that seek additional information,
particularly when it appears companies have not adequately addressed
shareholders' environmental concerns.
South Africa
In most cases, Evergreen refrains from providing a vote recommendation on
proposals pertaining to South Africa.
Generally, vote for disclosure reports that seek additional information such as
the amount of business that could be lost by conducting business in South
Africa.
Northern Ireland
In most cases, Evergreen refrains from providing a vote recommendation on
proposals pertaining to the MacBride Principles.
Generally, vote for disclosure reports that seek additional information about
progress being made toward eliminating employment discrimination, particularly
when it appears companies have not adequately addressed shareholder concerns.
Military Business
In most cases, Evergreen refrains from providing a vote recommendation on
defense Issue proposals.
Generally, vote for disclosure reports that seek additional information on
military related operations, particularly when the company has been unresponsive
to shareholder requests.
Maquiladora Standards and International Operations Policies
In most cases, Evergreen refrains from providing a vote recommendation on
proposals relating to the Maquiladora Standards and international operating
policies.
Generally, vote for disclosure reports on these Issues, particularly when it
appears companies have not adequately addressed shareholder concerns.
World Debt Crisis
In most cases, Evergreen refrains from providing a vote recommendation on
proposals dealing with third world debt.
Generally, vote for disclosure reports on these Issues, particularly when it
appears companies have not adequately addressed shareholder concerns.
Equal Employment Opportunity and Discrimination
In most cases, Evergreen refrains from providing a vote recommendation on
proposals regarding equal employment opportunities and discrimination.
Generally, vote for disclosure reports that seek additional information about
affirmative action efforts, particularly when it appears companies have been
unresponsive to shareholder requests.
Animal Rights
In most cases, Evergreen refrains from providing a vote recommendation on
proposals that deal with animal rights.
Product Integrity and Marketing
In most cases, Evergreen refrains from providing a vote recommendation on
proposals that ask companies to end their production of legal, but socially
questionable, products.
Generally, vote for disclosure reports that seek additional information
regarding product integrity and marketing Issues, particularly when it appears
companies have been unresponsive to shareholder requests.
Human Resources issues
In most cases, Evergreen refrains from providing a vote recommendation on
proposals regarding human resources Issues.
Generally, vote for disclosure reports that seek additional information
regarding human resources Issues, particularly when it appears companies have
been unresponsive to shareholder requests.
APPENDIX C
EVERGREEN UTILITIES AND HIGH INCOME FUND
STATEMENT OF PREFERENCES OF
AUCTION PREFERRED SHARES
TABLE OF CONTENTS
DEFINITIONS..................................................................2
PART I......................................................................38
Number of Authorized Shares.................................................38
Dividends...................................................................38
Designation of Special Rate Periods.........................................43
Voting Rights...............................................................44
Investment Company Act Preferred Share Asset Coverage.......................50
Preferred Shares Basic Maintenance Amount...................................50
Restrictions on Dividends and Other Distributions...........................52
Rating Agency Restrictions..................................................54
Redemption..................................................................58
Liquidation Rights..........................................................62
Miscellaneous...............................................................63
PART II.....................................................................64
Orders......................................................................64
Submission of Orders by Broker-Dealers to Auction Agent.....................66
Determination of Sufficient Clearing Bids, Winning Bids
Rate and Applicable Rate....................................................68
Acceptance and Rejection of Submitted Bids and Submitted Sell
Orders and Allocation of Shares.............................................70
Auction Agent...............................................................72
Transfer of Preferred Shares................................................73
Global Certificate..........................................................73
Force Majeure...............................................................73
EVERGREEN UTILITIES AND HIGH INCOME FUND, a Delaware statutory trust (the
"Fund"), certifies that:
First: Pursuant to authority expressly vested in the Board of Trustees of
the Fund by Article III of the Fund's Amended and Restated Agreement and
Declaration of Trust, dated February 9, 2004 (which, as hereafter restated or
amended from time to time is, together with this Statement, herein called the
"Declaration"), the Board of Trustees adopts this Statement of Preferences of
Auction Preferred Shares (the "Statement"), authorizes the establishment,
designation and issuance of an unlimited number of shares of the Fund's Auction
Preferred Shares, liquidation preference $25,000 per share plus an amount equal
to accumulated but unpaid dividends (whether or not earned or declared), having
the designation or designations as set forth in this Statement (the "Preferred
Shares").
Second: That 3,200 shares of Preferred Shares are hereby designated as
Auction Preferred Shares, Series M28.
Third: That any provision of the Declaration that conflicts with or is
inconsistent with the provisions of this Statement are hereby amended to conform
to the terms of this Statement. As set forth herein, this Statement shall be
deemed to be a supplement to and amendment of the Declaration.
Fourth: The preferences, voting powers, restrictions, limitations as to
dividends, qualifications, terms and conditions of redemption, and other rights
and limitations of the shares of the Auction Preferred Shares, Series M28
(hereinafter the "Series M28 Preferred Shares") are as set forth in this
Statement.
DEFINITIONS
As used in Parts I and II of this Statement, the following terms shall have
the following meanings (with terms defined in the singular having comparable
meanings when used in the plural and vice versa), unless the context otherwise
requires:
"Accountant's Confirmation" has the meaning set forth in Section 6(c) of
Part I of this Statement.
"Adviser" means the Fund's investment adviser which initially shall be
Evergreen Investment Management Company, LLC.
"Affected Series" has the meaning set forth in Section 4(c) of Part I of
this Statement.
"Affiliate" means any Person known to the Auction Agent to be controlled
by, in control of, or under common control with, the Fund.
"Agent Member" means a member of, or participant in, the Securities
Depository that will act on behalf of a Bidder.
"Applicable Rate" means the rate per annum at which cash dividends are
payable on the Preferred Shares for any Dividend Period.
"Applicable Percentage" means the percentage determined based on the lower
of the credit ratings assigned to the Series M28 Preferred Shares on such date
by S&P and Fitch as follows:
Credit Ratings Applicable
S&P Fitch Percentage
AAA AAA 125%
AA- to AA+ AA- to AA+ 150%
A- to A+ A- to A+ 200%
BBB- to BBB+ BBB- to BBB+ 250%
BB+ and lower BB+ and lower 300%
For purposes of this definition, the "prevailing rating" of the Series M28
Preferred Shares shall be (i) AAA if such shares have a rating of AAA by S&P or
Fitch or the equivalent of such ratings by such agencies or a Substitute Rating
Agency or Substitute Rating Agencies; (ii) if not AAA, then AA- if such shares
have a rating of AA- or better by S&P or Fitch or the equivalent of such rating
by such agencies or a Substitute Rating Agency or Substitute Rating Agencies,
(iii) if not AA- or higher, then A- if such shares have a rating of A- or better
by S&P or Fitch or the equivalent of such ratings by such agencies or a
Substitute Rating Agency or Substitute Rating Agencies, (iv) if not A- or
higher, then BBB- if such shares have a rating of BBB- or better by S&P or Fitch
or the equivalent of such ratings by such agencies or Substitute Rating Agency
or Substitute Rating Agencies, (v) if not BBB- or higher, then below BBB-.
The Applicable Percentage as so determined shall be further subject to
upward but not downward adjustment in the discretion of the Board of Trustees of
the Fund after consultation with the Broker-Dealers, provided that immediately
following any such increase the Fund would be in compliance with the Preferred
Shares Basic Maintenance Amount. The Fund shall take all reasonable action
necessary to enable S&P and Fitch to provide a rating for the Series M28
Preferred Shares. If S&P or Fitch shall not make such a rating available, the
Fund shall select another Rating Agency to act as a Substitute Rating Agency.
Notwithstanding the foregoing, the Fund shall not be required to have more than
one Rating Agency provide a rating for the Series M28 Preferred Shares.
"Applicable Spread" means the spread determined based on the credit rating
assigned to the Series M28 Preferred Shares on such date by S&P (if S&P is then
rating the Preferred Shares) and Fitch (if Fitch is then rating the Preferred
Shares) as follows:
Applicable
Credit Ratings Spread
S&P Fitch
AAA AAA 125 bps
AA- to AA+ AA- to AA+ 150 bps
A- to A+ A- to A+ 200 bps
BBB- to BBB+ BBB- to BBB+ 250 bps
BB+ and lower BB+ and lower 300 bps
For purposes of this definition, the "prevailing rating" of the Series M28
Preferred Shares shall be (i) AAA if such shares have a rating of AAA by S&P or
Fitch or the equivalent of such ratings by such agencies or a Substitute Rating
Agency or Substitute Rating Agencies; (ii) if not AAA, then AA- if such shares
have a rating of AA- or better by S&P or Fitch or the equivalent of such rating
by such agencies or a Substitute Rating Agency or Substitute Rating Agencies,
(iii) if not AA- or higher, then A- if such shares have a rating of A- or better
by S&P or Fitch or the equivalent of such ratings by such agencies or a
Substitute Rating Agency or Substitute Rating Agencies, (iv) if not A- or
higher, then BBB- if such shares have a rating of BBB- or better by S&P or Fitch
or the equivalent of such ratings by such agencies or Substitute Rating Agency
or Substitute Rating Agencies, (v) if not BBB- or higher, then below BBB-.
The Applicable Spread as so determined shall be further subject to upward
but not downward adjustment in the discretion of the Board of Trustees after
consultation with the Broker-Dealers, provided that immediately following any
such increase the Fund would be in compliance with the Preferred Shares Basic
Maintenance Amount.
"Approved Foreign Nations" has the meaning set forth in the definition of
"Fitch Eligible Assets."
"Approved Price" means the "fair value" as determined by the Fund in
accordance with the valuation procedures adopted from time to time by the Board
of Trustees of the Fund and for which the Fund receives a mark-to-market price
(which, for the purpose of clarity, shall not mean Market Value) from an
independent source at least semi-annually.
"Auction" means a periodic operation of the Auction Procedures.
"Auction Agent" means Deutsche Bank Trust Company Americas unless and until
another commercial bank, trust company or other financial institution appointed
by a resolution of the Board of Trustees of the Fund or a duly authorized
committee thereof enters into an agreement with the Fund to follow the Auction
Procedures for the purpose of determining the Applicable Rate and to act as
transfer agent, registrar, dividend disbursing agent and redemption agent for
the Preferred Shares.
"Auction Date" with respect to any Rate Period shall mean the Business Day
next preceding the first day of such Rate Period.
"Auction Procedures" means the procedures for conducting Auctions set forth
in Part II of this Statement.
"Available Preferred Shares" shall have the meaning specified in paragraph
(a) of Section 3 of Part II of this Statement.
"Bank Loans" means direct purchases of, assignments of, participations in
and other interests in (a) any bank loan or (b) any loan made by an investment
bank, investment fund or other financial institution, provided that such loan
under this clause (b) is similar to those typically made, syndicated, purchased
or participated by a commercial bank or institutional loan investor in the
ordinary course of business.
"Beneficial Owner" means a customer of a Broker-Dealer who is listed on the
records of that Broker-Dealer (or, if applicable, the Auction Agent) as a holder
of Preferred Shares or a Broker-Dealer that holds Preferred Shares for its own
account.
"Bid" and "Bids" shall have the respective meanings specified in paragraph
(a) of Section 1 of Part II of this Statement.
"Bidder" and "Bidders" shall have the respective meanings specified in
paragraph (a) of Section 1 of Part II of this Statement; provided, however, that
neither the Fund nor any affiliate thereof shall be permitted to be a Bidder in
an Auction, except that any Broker-Dealer that is an affiliate of the Fund may
be a Bidder in an Auction, but only if the Orders placed by such Broker-Dealer
are not for its own account.
"Bloomberg Industry Classifications" means, for the purposes of determining
both Fitch Eligible Assets and S&P Eligible Assets, industry classifications as
Bloomberg defines them.
The Fund shall use its discretion in determining which industry
classification is applicable to a particular investment.
"Broker-Dealer" means any broker-dealer, or other entity permitted by law
to perform the functions required of a Broker-Dealer in Part II of this
Statement, that has been selected by the Fund and has entered into a
Broker-Dealer Agreement with the Auction Agent that remains effective that is a
member of, or a participant in, the Securities Depository or is an affiliate of
such member or participant.
"Broker-Dealer Agreement" means an agreement between the Auction Agent and
a Broker-Dealer pursuant to which such Broker-Dealer agrees to follow the
procedures specified in Part II of this Statement.
"Business Day" means a day on which the New York Stock Exchange is open for
trading and which is not a Saturday, Sunday or other day on which banks in New
York City are authorized or obligated by law to close.
"Canadian Bonds" has the meaning set forth in the definition of "Fitch
Eligible Assets."
"Closing Transaction" has the meaning set forth in Section 8(a) of Part I
of this Statement.
"Common Shares" means the shares of beneficial interest designated as
common shares, no par value, of the Fund.
"Cure Date" shall mean the Preferred Shares Basic Maintenance Cure Date or
the Investment Company Act Cure Date.
"Date of Original Issue" means the date on which the Fund first issues
Series M28 Preferred Shares.
"Debt Securities" has the meaning set forth in paragraph (iv) of the
definition of "Fitch Eligible Assets."
"Deposit Securities" means cash and portfolio securities rated at least A2
(having a remaining maturity of 12 months or less), P-1, VMIG-1 or MIG-1 by
Moody's or A (having a remaining maturity of 12 months or less), A-1+ or SP-1+
by S&P.
"Discount Factor" means a Fitch Discount Factor or a S&P Discount Factor,
as applicable.
"Discounted Value" of any asset of the Fund means the quotient of the
Market Value of an Eligible Asset divided by the applicable Discount Factor.
"Dividend Payment Date" shall mean any date on which dividends are payable
on the Series M28 Preferred Shares pursuant to the provisions of paragraph (d)
of Section 2 of Part I of this Statement.
"Dividend Period" shall mean the period from and including the Date of
Original Issue of the Series M28 Preferred Shares to but excluding the initial
Dividend Payment Date for the Series M28 Preferred Shares and any period
thereafter from and including one Dividend Payment Date for the Series M28
Preferred Shares to but excluding the next succeeding Dividend Payment Date for
the Series M28 Preferred Shares.
"Eligible Asset" means a Fitch Eligible Asset (if Fitch is then rating the
Preferred Shares), a S&P Eligible Asset (if S&P is then rating the Preferred
Shares) and/or any asset included in the calculations used by any Rating Agency
then rating the Preferred Shares for purposes of determining such Rating
Agency's rating on the Preferred Shares, as applicable.
"Existing Holder" means a Broker-Dealer, or any such other Person that may
be permitted by the Fund, that is listed as the holder of record of Preferred
Shares in the Share Books.
"Failure to Deposit" shall mean a failure by the Fund to pay to the Auction
Agent, not later than 12:00 noon, New York City time, (A) on the Business Day
next preceding any Dividend Payment Date for the Series M28 Preferred Shares, in
funds available on such Dividend Payment Date in the City of New York, New York,
the full amount of any dividend (whether or not earned or declared) to be paid
on such Dividend Payment Date on any Series M28 Preferred Share or (B) on the
Business Day next preceding any redemption date in funds available on such
redemption date for the Series M28 Preferred Shares in the City of New York, New
York, the Redemption Price to be paid on such redemption date for any Series M28
Preferred Share after Notice of Redemption is mailed pursuant to paragraph (c)
of Section 9 of Part I of this Statement; provided, however, that the foregoing
clause (B) shall not apply to the Fund's failure to pay the Redemption Price in
respect of Preferred Shares when the related Notice of Redemption provides that
redemption of such shares is subject to one or more conditions precedent and any
such condition precedent shall not have been satisfied at the time or times and
in the manner specified in such Notice of Redemption.
"Fitch" means Fitch Ratings or its successors.
"Fitch Discount Factor" means, for purposes of determining the Discounted
Value of any Fitch Eligible Asset, the percentage determined as follows,
provided however, that for unhedged foreign investments a discount factor of
105% shall be applied to the Market Value thereof otherwise determined in
accordance with the procedures below, provided further that, if the foreign
issuer of such unhedged foreign investment is from a country whose sovereign
debt rating in a non-local currency is not assigned a rating of `AA' or better
by Fitch, a discount factor of 117% shall be applied to the Market Value thereof
otherwise determined in accordance with the procedures below. According to Fitch
guidelines, the portfolio coverage ratio of Fitch Eligible Assets to liabilities
should not be less than 100% in order to maintain the rating of "AAA." The Fitch
Discount Factor for any Fitch Eligible Asset other than the securities set forth
below will be the percentage provided in writing by Fitch.
(i) CORPORATE DEBT SECURITIES: The percentage determined by reference to
the rating of a corporate debt security in accordance with the table set forth
below.
------------------ ------------ ------------- ------------ ------------ ------------ -------------------
Term to Maturity AAA AA A BBB BB Not Rated or
of Corporate Below BB(1)
Debt Security
------------------ ------------ ------------- ------------ ------------ ------------ -------------------
------------------ ------------ ------------- ------------ ------------ ------------ -------------------
3 years or less 106.38% 108.11% 109.89% 111.73% 129.87% 151.52%
(but longer than
1 year)
------------------ ------------ ------------- ------------ ------------ ------------ -------------------
------------------ ------------ ------------- ------------ ------------ ------------ -------------------
5 years or less 111.11% 112.99% 114.94% 116.96% 134.24% 151.52%
(but longer than
3 years)
------------------ ------------ ------------- ------------ ------------ ------------ -------------------
------------------ ------------ ------------- ------------ ------------ ------------ -------------------
7 years or less 113.64% 115.61% 117.65% 119.76% 135.66% 151.52%
(but longer than
5 years)
------------------ ------------ ------------- ------------ ------------ ------------ -------------------
------------------ ------------ ------------- ------------ ------------ ------------ -------------------
10 years or less 115.61% 117.65% 119.76% 121.95% 136.74% 151.52%
(but longer than
7 years)
------------------ ------------ ------------- ------------ ------------ ------------ -------------------
------------------ ------------ ------------- ------------ ------------ ------------ -------------------
15 years or less 119.76% 121.95% 124.22% 126.58% 139.05% 151.52%
(but longer than
10 years)
------------------ ------------ ------------- ------------ ------------ ------------ -------------------
------------------ ------------ ------------- ------------ ------------ ------------ -------------------
More than 15 124.22% 126.58% 129.03% 131.58% 144.55% 151.52%
years
------------------ ------------ ------------- ------------ ------------ ------------ -------------------
(1) If a security is not rated by Fitch but is rated by two other Rating
Agencies, then the lower of the ratings on the security from the two other
Rating Agencies will be used to determine the Fitch Discount Factor (e.g.,
where the S&P rating is A- and the Moody's rating is Baa1, a Fitch rating
of BBB+ will be used). If a security is not rated by Fitch but is rated by
only one other Rating Agency, then the rating on the security from the
other Rating Agency will be used to determine the Fitch Discount Factor
(e.g., where the only rating on a security is an S&P rating of AAA, a Fitch
rating of AAA will be used, and where the only rating on a security is a
Moody's rating of Ba3, a Fitch rating of BB- will be used). If a security
is not rated by any Rating Agency, the Fund will use the percentage set
forth under "Not Rated or Below BB" in this table.
The Fitch Discount Factors presented in the immediately preceding table
apply to corporate debt securities that are Performing and have a Market Value
determined by a Pricing Service or an Approved Price. The Fitch Discount Factor
noted in the table above for a Debt Security rated B by Fitch shall apply to any
non-Performing Debt Security with a price equal to or greater than $0.90. The
Fitch Discount Factor noted in the table above for a Debt Security rated CCC by
Fitch shall apply to any non-Performing Debt Security with a price less than
$0.90 but equal to or greater than $0.20. If a Debt Security does not have a
Market Value determined by a Pricing Service or an Approved Price, a rating two
rating categories below the actual rating on the Debt Security will be used
(e.g., where the actual rating is A-, the rating for Debt Securities rated BB-
will be used). The Fitch Discount Factor for a Debt Security issued by a limited
partnership that is not a Rule 144A Security shall be the Discount Factor
determined in accordance with the table set forth above multiplied by 110%.
The Fitch Discount Factors presented in the immediately preceding table
will also apply to (i) interest rate swaps and caps, whereby the rating of the
counterparty to the swap or cap will be the rating used to determine the Fitch
Discount Factor in the table; and (ii) tradable credit baskets, whereby the
ratings in the table will be applied to the underlying securities and the Market
Value of each underlying security will be its proportionate amount of the Market
Value of the tradable credit baskets. The Fitch Discount Factors presented in
the immediately preceding table will also apply to corporate obligations backed
by a guaranty, a letter of credit or insurance issued by a third party. If the
third-party credit rating is the basis for the rating on the obligation, then
the rating on the third party will be used to determine the Fitch Discount
Factor in the table. The Fitch Discount Factors presented in the immediately
preceding table will also apply to preferred trust certificates, the rating on
which will by determined by the underlying debt instruments in the trust, unless
such preferred trust certificates are determined by Fitch to qualify for a
traditional equity discount factor, in which case the Fitch Discount Factor
shall be 370%.
(ii) PREFERRED SHARES:
Preferred Shares Discount Factor
AAA Taxable Preferred 130%
AA Taxable Preferred 133%
A Taxable Preferred 135%
BBB Taxable Preferred 139%
BB Taxable Preferred 154%
Not rated or below BB Taxable Preferred 161%
Investment Grade DRD Preferred 164%
Not rated or below Investment Grade DRD Preferred 200%
(iii) SHORT-TERM INSTRUMENTS: The Fitch Discount Factor applied to
short-term portfolio securities, including without limitation Debt Securities,
Short Term Money Market Instruments and municipal debt obligations, will be (A)
100%, so long as such portfolio securities mature or have a demand feature at
par exercisable within the Fitch Exposure Period; (B) 115%, so long as such
portfolio securities mature or have a demand feature at par not exercisable
within the Fitch Exposure Period; and (C) 125%, so long as such portfolio
securities neither mature nor have a demand feature at par exercisable within
the Fitch Exposure Period. A Fitch Discount Factor of 100% will be applied to
cash, including shares of affiliated money market funds held in conjunction with
the Fund's nightly sweep account.
(iv) U.S. GOVERNMENT SECURITIES AND U.S. TREASURY STRIPS:
TIME REMAINING TO MATURITY DISCOUNT FACTOR
1 year or less 101.5%
2 years or less (but longer than 1 year) 103%
3 years or less (but longer than 2 years) 105%
4 years or less (but longer than 3 years) 107%
5 years or less (but longer than 4 years) 109%
7 years or less (but longer than 5 years) 112%
10 years or less (but longer than 7 years) 114%
Greater than 10 years 122%
(v) CONVERTIBLE SECURITIES. The Fitch Discount Factor applied to
convertible securities is (A) 200% for investment grade convertibles and (B)
222% for below investment grade convertibles so long as such convertible
securities have neither (x) conversion premium greater than 100% nor (y) have a
yield to maturity or yield to worst of > 15.00% above the relevant Treasury
curve.
The Fitch Discount Factor applied to convertible securities which have
conversion premiums of greater than 100% is (A) 152% for investment grade
convertibles and (B) 179% for below investment grade convertibles so long as
such convertible securities do not have a yield to maturity or yield to worst of
> 15.00% above the relevant Treasury curve.
The Fitch Discount Factor applied to convertible securities which have a
yield to maturity or yield to worst of > 15.00% above the relevant Treasury
curve is 370%.
If a security is not rated by Fitch but is rated by two other Rating
Agencies, then the lower of the ratings on the security from the two other
Rating Agencies will be used to determine the Fitch Discount Factor (e.g., where
the S&P rating is A- and the Moody's rating is Baa1, a Fitch rating of BBB+ will
be used). If a security is not rated by Fitch but is rated by only one other
Rating Agency, then the rating on the security from the other Rating Agency will
be used to determine the Fitch Discount Factor (e.g., where the only rating on a
security is an S&P rating of AAA, a Fitch rating of AAA will be used, and where
the only rating on a security is a Moody's rating of Ba3, a Fitch rating of BB-
will be used). If a security is not rated by any Rating Agency, the Fund will
treat the security as if it were below investment grade.
(vi) RULE 144A SECURITIES: The Fitch Discount Factor applied to Rule 144A
Securities will be 110% of the Fitch Discount Factor which would apply were the
securities registered under the Securities Act.
(vii) ASSET-BACKED AND MORTGAGE-BACKED SECURITIES: The percentage
determined by reference to the asset type in accordance with the table set forth
below.
ASSET TYPE (WITH TIME REMAINING TO MATURITY, IF APPLICABLE)
DISCOUNT
FACTOR
U.S. Treasury/agency securities (10 years or less) 118%
U.S. Treasury/agency securities (greater than 10 years) 127%
U.S. agency sequentials (10 years or less) 128%
U.S. agency sequentials (greater than 10 years) 142%
U.S. agency principal only securities 236%
U.S. agency interest only securities (with Market Value greater than
$0.40) 696%
U.S. agency interest only securities 214%
(with Market Value less than or equal to $0.40)
AAA LockOut securities, interest only 236%
U.S. agency planned amortization class bonds (10 years or less) 115%
U.S. agency planned amortization class bonds (greater than 10 years) 136%
AAA sequentials (10 years or less) 118%
AAA sequentials (greater than 10 years) 135%
AAA planned amortization class bonds (10 years or less) 115%
AAA planned amortization class bonds (greater than 10 years) 140%
Jumbo mortgage rated AAA(1) 123%
Jumbo mortgage rated AA(1) 130%
Jumbo mortgage rated A(1) 136%
Jumbo mortgage rated BBB(1) 159%
Commercial mortgage-backed securities rated AAA 131%
Commercial mortgage-backed securities rated AA 139%
Commercial mortgage-backed securities rated A 148%
Commercial mortgage-backed securities rated BBB 177%
Commercial mortgage-backed securities rated BB 283%
Commercial mortgage-backed securities rated B 379%
Commercial mortgage-backed securities rated CCC or not rated 950%
(1) Applies to jumbo mortgages, credit cards, auto loans, home equity loans,
manufactured housing and prime mortgage-backed securities not issued by a U.S.
agency or instrumentality.
(viii) BANK LOANS: The percentage determined by reference to the Fitch Loan
Category in accordance with the table set forth below.
FITCH LOAN CATEGORY DISCOUNT FACTOR
A 126%
B 157%
C 184%
D 433%
The Fitch Discount Factors presented in the immediately preceding table
will also apply to interest rate swaps and caps, and the rating of the
counterparty to the swap or cap will be the rating used to determine the Fitch
Discount Factor in the table.
(ix) MUNICIPAL DEBT OBLIGATIONS: The Fitch Discount Factor applied to
municipal debt obligations will be the percentage determined by reference to the
table set forth below:
------------------- -----------------------------------------------------------------------------------------
FITCH RATING CATEGORY
------------------- -----------------------------------------------------------------------------------------
------------------- -------------- ------------- ------------ -------------- ----------- --------------------
FITCH EXPOSURE AAA (1) AA (1) A (1) BBB (1) F1 (2) UNRATED (3)
PERIOD
------------------- -------------- ------------- ------------ -------------- ----------- --------------------
------------------- -------------- ------------- ------------ -------------- ----------- --------------------
7 weeks 151% 159% 166% 173% 136% 225%
------------------- -------------- ------------- ------------ -------------- ----------- --------------------
------------------- -------------- ------------- ------------ -------------- ----------- --------------------
8 weeks or less 154% 161% 168% 176% 137% 231%
but greater than
7 weeks
------------------- -------------- ------------- ------------ -------------- ----------- --------------------
------------------- -------------- ------------- ------------ -------------- ----------- --------------------
9 weeks or less 158% 163% 170% 177% 138% 240%
but greater than
8 weeks
------------------- -------------- ------------- ------------ -------------- ----------- --------------------
(1) Fitch rating.
(2) Municipal debt obligations rated by Fitch which do not mature or
have a demand feature at par exercisable in 30 days and which do not
have a long-term rating.
(3) If a security is not rated by Fitch but is rated by two other
Rating Agencies, then the lower of the ratings on the security from
the two other Rating Agencies will be used to determine the Fitch
Discount Factor (e.g., where the S&P rating is A- and the Moody's
rating is Baa1, a Fitch rating of BBB+ will be used). If a security is
not rated by Fitch but is rated by only one other Rating Agency, then
the rating on the security from the other Rating Agency will be used
to determine the Fitch Discount Factor (e.g., where the only rating on
a security is an S&P rating of AAA, a Fitch rating of AAA will be
used, and where the only rating on a security is a Moody's rating of
Ba3, a Fitch rating of BB- will be used). If a security is not rated
by any Rating Agency, the Fund will use the percentage set forth under
"Unrated" in this table.
The Fitch Discount Factors presented in the immediately preceding table
will also apply to interest rate swaps and caps, and the rating of the
counterparty to the swap or cap will be the rating used to determine the Fitch
Discount Factor in the table. The Fitch Discount Factors presented in the
immediately preceding table will also apply to municipal debt obligations backed
by a guaranty, a letter of credit or insurance issued by a third party. If the
third-party credit rating is the basis for the rating on the securities, then
the rating on the third party will be used to determine the Fitch Discount
Factor in the table.
(x) FOREIGN BONDS: The Fitch Discount Factor (A) for a Foreign Bond the
principal of which (if not denominated in U.S. dollars) is subject to a currency
hedging transaction will be the Fitch Discount Factor that would otherwise apply
to such Foreign Bonds in accordance with this definition and (B) for (1) a
Foreign Bond the principal of which (if not denominated in U.S. dollars) is not
subject to a currency hedging transaction and (2) a bond issued in a currency
other than U.S. dollars by a corporation, limited liability company or limited
partnership domiciled in, or the government or any agency, instrumentality or
political subdivision of, a nation other than an Approved Foreign Nation, will
be 370%.
(xi) REITS.
(a) Common Stock and Preferred Stock of REITs and Other Real Estate Companies:
Discount Factor(1)(2)
REIT or Other Real Estate Company Preferred Shares 154%
REIT or Other Real Estate Company Common Stock 196%
(b) Corporate Debt Securities of REITs:
Term to Maturity.. AAA AA A BBB BB B CCC
---------------- --- -- - -- -- - ---
1 year....... .... 111% 114% 117% 120 121% 127% 227%
2 year....... .... 116% 125% 125% 127% 132% 137% 137%
3 year............ 121% 123% 127% 131% 133% 140% 225%
4 year............ 126% 126% 129% 132% 136% 140% 164%
5 year....... .... 131% 132% 135% 139% 144% 149% 185%
7 year....... .... 140% 143% 146% 152% 159% 167% 228%
10 year...... .... 141% 143% 147% 153% 160% 168% 232%
12 year...... .... 144% 144% 150% 157% 165% 174% 249%
15 year...... .... 148% 151% 155% 163% 172% 182% 274%
20-30 year... .... 152% 156% 160% 169% 180% 191% 306%
(1) The Fitch Discount Factors will also apply to interest rate swaps and
caps, whereby the rating on the counterparty will determine the appropriate
Discount Factor to apply.
(2) If a security is unrated by Fitch, but is rated by two other Rating
Agencies, then the lower of the ratings on the security from the two other
Rating Agencies should be used to determine the Fitch Discount Factor. If the
security is not rated by Fitch, but has a rating from only one other Rating
Agency, and the security is above investment grade, then the security will be
notched one rating category, i.e., considered as if it had been rated one rating
category lower than the rating category assigned by that Rating Agency, for
purposes of computing the Discount Factor. If the security is not rated by
Fitch, but has a rating from only one other Rating Agency, and the security is
below investment grade, then the security will be notched two rating categories
for purposes of computing the Discount Factor.
(xii) STRUCTURED NOTES: The Fitch Discount Factor applied to Structured
Notes will be (A) in the case of a corporate issuer, the Fitch Discount Factor
determined in accordance with paragraph (i) under this definition, whereby the
rating on the issuer of the Structured Note will be the rating on the Structured
Note for purposes of determining the Fitch Discount Factor in the table in
paragraph (i); and (B) in the case of an issuer that is the U.S. government or
an agency or instrumentality thereof, the Fitch Discount Factor determined in
accordance with paragraph (iii) under this definition.
"Fitch Eligible Assets" means
(i) cash (including interest and dividends due on assets rated (A) BBB or
higher by Fitch or the equivalent by another Rating Agency if the payment date
is within five Business Days of the Valuation Date, (B) A or higher by Fitch or
the equivalent by another Rating Agency if the payment date is within thirty
days of the Valuation Date, and (C) A+ or higher by Fitch or the equivalent by
another Rating Agency if the payment date is within the Fitch Exposure Period)
and receivables for Fitch Eligible Assets sold if the receivable is due within
five Business Days of the Valuation Date, and if the trades which generated such
receivables are settled within five business days;
(ii) Preferred shares if (i) dividends on such preferred shares are
cumulative, (ii) such securities provide for the periodic payment of dividends
thereon in cash in U.S. dollars or euros and do not provide for conversion or
exchange into, or have warrants attached entitling the holder to receive equity
capital at any time over the respective lives of such securities, (iii) the
issuer of such preferred shares is listed on the New York Stock Exchange,
American Stock Exchange, NASDAQ, or FTSE and has a market capitalization of at
least $500 million, and (iv) the issuer of such preferred shares has a senior
debt rating or preferred stock rating from Fitch of BBB- or higher or the
equivalent rating by another Rating Agency. In addition, the preferred shares
issue must be at least $50 million;
(iii) Common stocks (i) (a) which are traded on the New York Stock
Exchange, the American Stock Exchange, the NASDAQ, FTSE or in the
over-the-counter market, (b) which, if cash dividend paying, pay cash dividends
in U.S. dollars, and (c) which may be sold without restriction by the Fund;
provided, however, that (1) common stock which, while a Fitch Eligible Asset
owned by the Fund, ceases paying any regular cash dividend will no longer be
considered a Fitch Eligible Asset until 60 calendar days after the date of the
announcement of such cessation, unless the issuer of the common stock has senior
debt securities rated at least A- by Fitch and (2) the Fund's holding of the
common stock of any issuer in excess of 5% will not be considered a Fitch
Eligible Asset; (ii) securities denominated in any currency other than the U.S.
dollar and securities of issuers formed under the laws of jurisdictions other
than the United States, its states and the District of Columbia for which there
are dollar-denominated American Depository Receipts ("ADRs") which are traded in
the United States on exchanges or over-the-counter and are issued by banks
formed under the laws of the United States, its states or the District of
Columbia; provided, however, that the aggregate Market Value of the Fund's
holdings of securities denominated in currencies other than the U.S. dollar and
ADRs in excess of 3% of the aggregate Market Value of the Outstanding shares of
common stock of such issuer or in excess of 10% of the Market Value of the
Fund's Fitch Eligible Assets with respect to issuers formed under the laws of
any single such non-U.S. jurisdiction other than Argentina, Australia, Brazil,
Chile, France, Germany, Italy, Japan, Korea, Mexico, Spain or the United Kingdom
(the "Approved Foreign Nations") shall not be a Fitch Eligible Asset;
(iv) Short Term Money Market Instruments so long as (A) such securities are
rated at least F1+ by Fitch or the equivalent by another Rating Agency, (B) in
the case of demand deposits, time deposits and overnight funds, the supporting
entity is rated at least A by Fitch or the equivalent by another Rating Agency,
or (C) in all other cases, the supporting entity (1) is rated at least A by
Fitch or the equivalent by another Rating Agency and the security matures within
one month, (2) is rated at least A by Fitch or the equivalent by another Rating
Agency and the security matures within three months or (3) is rated at least AA
by Fitch or the equivalent by another Rating Agency and the security matures
within six months. Unrated securities will not be considered Eligible Assets;
(v) U.S. Government Securities and U.S. Treasury Strips;
(vi) debt securities if such securities have been registered under the
Securities Act or are restricted as to resale under federal securities laws but
are eligible for resale pursuant to Rule 144A under the Securities Act as
determined by the Fund's investment adviser or portfolio manager acting pursuant
to procedures approved by the Board of Trustees of the Fund; and (C) such
securities are issued by (1) a U.S. corporation, limited liability company or
limited partnership, (2) a corporation, limited liability company or limited
partnership domiciled in Argentina, Australia, Brazil, Chile, France, Germany,
Italy, Japan, Korea, Mexico, Spain or the United Kingdom (the "Approved Foreign
Nations"), (3) the government of any Approved Foreign Nation or any of its
agencies, instrumentalities or political subdivisions (the debt securities of
Approved Foreign Nation issuers being referred to collectively as "Foreign
Bonds"), (4) a corporation, limited liability company or limited partnership
domiciled in Canada or (5) the Canadian government or any of its agencies,
instrumentalities or political subdivisions (the debt securities of Canadian
issuers being referred to collectively as "Canadian Bonds"). Foreign Bonds held
by the Fund will qualify as Fitch Eligible Assets only up to a maximum of 20% of
the aggregate Market Value of all assets constituting Fitch Eligible Assets.
Similarly, Canadian Bonds held by the Fund will qualify as Fitch Eligible Assets
only up to a maximum of 20% of the aggregate Market Value of all assets
constituting Fitch Eligible Assets. Notwithstanding the limitations in the two
preceding sentences, Foreign Bonds and Canadian Bonds held by the Fund will
qualify as Fitch Eligible Assets only up to a maximum of 30% of the aggregate
Market Value of all assets constituting Fitch Eligible Assets. In addition,
bonds which are issued in connection with a reorganization under U.S. federal
bankruptcy law ("Reorganization Bonds") will be considered debt securities
constituting Fitch Eligible Assets if (a) they provide for periodic payment of
interest in cash in U.S. dollars or euros; (b) they do not provide for
conversion or exchange into equity capital at any time over their lives; (c)
they have been registered under the Securities Act or are restricted as to
resale under federal securities laws but are eligible for trading under Rule
144A promulgated pursuant to the Securities Act as determined by the Fund's
investment manager or portfolio manager acting pursuant to procedures approved
by the Board of Trustees of the Fund; (d) they were issued by a U.S.
corporation, limited liability company or limited partnership; and (e) at the
time of purchase at least one year had elapsed since the issuer's
reorganization. Reorganization Bonds may also be considered debt securities
constituting Fitch Eligible Assets if they have been approved by Fitch, which
approval shall not be unreasonably withheld. All debt securities satisfying the
foregoing requirements and restrictions of this paragraph (iv) are herein
referred to as "Debt Securities."
(vii) asset-backed and mortgage-backed securities;
(viii) Rule 144A Securities;
(ix) Bank Loans;
(x) municipal debt obligations that (a) pay interest in cash (b) are part
of an issue of municipal debt obligations of at least $5 million, except for
municipal debt obligations rated below A by Fitch or the equivalent rating by
another Rating Agency, in which case the minimum issue size is $10 million;
(xi) Structured Notes;
(xii) tradable credit baskets (e.g., Traded Custody Receipts or TRACERS and
Targeted Return Index Securities Trust or TRAINS);
(xiv) Interest rate swaps entered into according to International Swap
Dealers Association ("ISDA") standards if (1) the counterparty to the swap
transaction has a short-term rating of not less than F1 by Fitch or the
equivalent by another Rating Agency, or, if the swap counterparty does not have
a short-term rating, the counterparty's senior unsecured long-term debt rating
is AA or higher by Fitch or the equivalent by another Rating Agency and (2) the
original aggregate notional amount of the interest rate swap transaction or
transactions is not greater than the liquidation preference of the Preferred
Shares originally issued;
(xv) Common Stock, Preferred Stock, and any debt security of REITs and Real
Estate Companies; and
(xvi) Unrated Debt Securities issued by an issuer which (1) has not filed
for bankruptcy in the past three years; (2) is current on all interest and
principal on its fixed income obligations; and (3) is current on all preferred
stock dividends.
Financial contracts, as such term is defined in Section 3(c)(2)(B)(ii) of
the Investment Company Act, not otherwise provided for in this definition may be
included in Fitch Eligible Assets, but, with respect to any financial contract,
only upon receipt by the Fund of a writing from Fitch specifying any conditions
on including such financial contract in Fitch Eligible Assets and assuring the
Fund that including such financial contract in the manner so specified would not
affect the credit rating assigned by Fitch to the Preferred Shares.
Where the Fund sells an asset and agrees to repurchase such asset in the
future, the Discounted Value of such asset will constitute a Fitch Eligible
Asset and the amount the Fund is required to pay upon repurchase of such asset
will count as a liability for the purposes of the Preferred Shares Basic
Maintenance Amount. Where the Fund purchases an asset and agrees to sell it to a
third party in the future, cash receivable by the Fund thereby will constitute a
Fitch Eligible Asset if the long-term debt of such other party is rated at least
A- by Fitch or the equivalent by another Rating Agency and such agreement has a
term of 30 days or less; otherwise the Discounted Value of such purchased asset
will constitute a Fitch Eligible Asset.
Notwithstanding the foregoing, an asset will not be considered a Fitch
Eligible Asset to the extent that it has been irrevocably deposited for the
payment of (i)(A) through (i)(E) under the definition of Preferred Shares Basic
Maintenance Amount or to the extent it is subject to any Liens, except for (A)
Liens which are being contested in good faith by appropriate proceedings and
which Fitch has indicated to the Fund will not affect the status of such asset
as a Fitch Eligible Asset, (B) Liens for taxes that are not then due and payable
or that can be paid thereafter without penalty, (C) Liens to secure payment for
services rendered or cash advanced to the Fund by its investment manager or
portfolio manager, the Fund's custodian, transfer agent or registrar or the
Auction Agent and (D) Liens arising by virtue of any repurchase agreement.
Diversification. Fitch requires that the Fund adhere to a maximum single
issuer concentration, with respect to 75% of its assets, of 5% of total assets.
Fitch Diversification Limitations. Portfolio holdings as described below
must be within the following diversification and issue size requirements in
order to be included in Fitch's Eligible Assets:
Security Rated At Maximum Single Maximum Single Minimum Issue Size
Least Issuer(1) Industry(1),(2) ($ in million)(3)
AAA 100% 100% $100
AA- 20 75 100
A- 10 50 100
BBB- 6 25 100
BB- 4 16 50
B- 3 12 50
CCC 2 8 50
If a security is not rated by Fitch, look to the lower of Moody's or S&P rating.
(1) Percentages represent a portion of the aggregate market value of corporate
debt securities.
(2) Industries are determined according to Bloomberg's Industry
Classifications, as defined herein.
(3) Preferred stock has a minimum issue
size of $50 million for all rating categories in the table.
"Fitch Exposure Period" means the period commencing on (and including) a
given Valuation Date and ending 41 days thereafter.
"Fitch Hedging Transactions" has the meaning set forth in Section 8 of Part
I of this Declaration.
"Fitch Loan Category" means the following four categories (and, for
purposes of this categorization, the Market Value of a Fitch Eligible Asset
trading at par is equal to $1.00):
(i) "Fitch Loan Category A" means Performing Bank Loans which have a
Market Value or an Approved Price greater than or equal to $0.90.
(ii) "Fitch Loan Category B" means: (A) Performing Bank Loans which
have a Market Value or an Approved Price of greater than or equal to
$0.80 but less than $0.90; and (B) non-Performing Bank Loans which
have a Market Value or an Approved Price greater than or equal to
$0.85.
(iii) "Fitch Loan Category C" means: (A) Performing Bank Loans which
have a Market Value or an Approved Price of greater than or equal to
$0.70 but less than $0.80; (B) non-Performing Bank Loans which have a
Market Value or an Approved Price of greater than or equal to $0.75
but less than $0.85; and (C) Performing Bank Loans without an Approved
Price rated BB- or higher by Fitch. If a security is not rated by
Fitch but is rated by two other Rating Agencies, then the lower of the
ratings on the security from the two other Rating Agencies will be
used to determine the Fitch Discount Factor (e.g., where the S&P
rating is A- and the Moody's rating is Baa1, a Fitch rating of BBB+
will be used). If a security is not rated by Fitch but is rated by
only one other Rating Agency, then the rating on the security from the
other Rating Agency will be used to determine the Fitch Discount
Factor (e.g., where the only rating on a security is an S&P rating of
AAA, a Fitch rating of AAA will be used, and where the only rating on
a security is a Moody's rating of Ba3, a Fitch rating of BB- will be
used).
(iv) "Fitch Loan Category D" means Bank Loans not described in any of
the foregoing categories.
Notwithstanding any other provision contained above, for purposes of
determining whether a Fitch Eligible Asset falls within a specific Fitch Loan
Category, to the extent that any Fitch Eligible Asset would fall within more
than one of the Fitch Loan Categories, such Fitch Eligible Asset shall be deemed
to fall into the Fitch Loan Category with the lowest applicable Fitch Discount
Factor.
"Foreign Bonds" has the meaning set forth in the definition of "Fitch
Eligible Assets."
"Forward Commitment" has the meaning set forth in Section 8 of Part I of
this Statement.
"Holder" means a Person identified as a holder of record of Preferred
Shares in the Share Register.
"Hold Order" and "Hold Orders" shall have the respective meanings specified
in paragraph (a) of Section 1 of Part II of this Statement.
"Independent Accountant" means a nationally recognized accountant, or firm
of accountants, that is, with respect to the Fund, an independent public
accountant or firm of independent public accountants under the Securities Act
and serving as such for the Fund.
"Interest Equivalent" has the meaning set forth in the definition of "'AA'
Financial Composite Commercial Paper Rate."
"Initial Rate Period" shall have the meaning specified with respect to the
Series M28 Preferred Shares in Section 2(d) of Part I of this Statement.
"Investment Company Act" shall mean the Investment Company Act of 1940, as
amended from time to time.
"Investment Company Act Cure Date," with respect to the failure by the Fund
to maintain the Investment Company Act Preferred Share Asset Coverage (as
required by Section 5 of Part I of this Statement) as of the last Business Day
of each month, shall mean the last Business Day of the following month.
"Investment Company Act Preferred Share Asset Coverage" shall mean asset
coverage, as defined in Section 18(h) of the Investment Company Act, of at least
200% with respect to all outstanding senior securities of the Fund which are
shares of beneficial interest including all outstanding Preferred Shares (or
such other asset coverage as may in the future be specified in or under the
Investment Company Act as the minimum asset coverage for senior securities which
are shares or stock of a closed-end investment company as a condition of
declaring dividends on its common shares or stock).
"Late Charge" shall have the meaning specified in subparagraph (e)(i)(B) of
Section 2 of Part I of this Statement.
"LIBOR Dealers" means Citigroup Global Markets Inc. ("Citigroup") and such
other dealer or dealers as the Fund may from time to time appoint, or, in lieu
of any thereof, their respective affiliates or successors.
"LIBOR Rate" on any Auction Date, means (i) the rate for deposits in U.S.
dollars for the designated Dividend Period, which appears on display page 3750
of Moneyline's Telerate Service ("Telerate Page 3750") (or such other page as
may replace that page on that service, or such other service as may be selected
by the LIBOR Dealer or its successors that are LIBOR Dealers) as of 11:00 a.m.,
London time, on the day that is the London Business Day preceding the Auction
Date (the "LIBOR Determination Date"), or (ii) if such rate does not appear on
Telerate Page 3750 or such other page as may replace such Telerate Page 3750,
(A) the LIBOR Dealer shall determine the arithmetic mean of the offered
quotations of the Reference Banks to leading banks in the London interbank
market for deposits in U.S. dollars for the designated Dividend Period in an
amount determined by such LIBOR Dealer by reference to requests for quotations
as of approximately 11:00 a.m. (London time) on such date made by such LIBOR
Dealer to the Reference Banks, (B) if at least two of the Reference Banks
provide such quotations, LIBOR Rate shall equal such arithmetic mean of such
quotations, (C) if only one or none of the Reference Banks provide such
quotations, LIBOR Rate shall be deemed to be the arithmetic mean of the offered
quotations that leading banks in The City of New York selected by the LIBOR
Dealer (after obtaining the Fund's approval) are quoting on the relevant
Determination Date for deposits in U.S. dollars for the designated Dividend
Period in an amount determined by the LIBOR Dealer (after obtaining the Fund's
approval) that is representative of a single transaction in such market at such
time by reference to the principal London offices of leading banks in the London
interbank market; provided, however, that if one of the LIBOR Dealers does not
quote a rate required to determine the LIBOR Rate, the LIBOR Rate will be
determined on the basis of the quotation or quotations furnished by any
Substitute LIBOR Dealer or Substitute LIBOR Dealers selected by the Fund to
provide such rate or rates not being supplied by the LIBOR Dealer; provided
further, that if the LIBOR Dealer and Substitute LIBOR Dealers are required but
unable to determine a rate in accordance with at least one of the procedures
provided above, LIBOR Rate shall be LIBOR Rate as determined on the previous
Auction Date. If the number of Dividend Period days shall be (i) 7 or more but
fewer than 21 days, such rate shall be the seven-day LIBOR rate; (ii) more than
21 but fewer than 49 days, such rate shall be the one-month LIBOR rate; (iii) 49
or more but fewer than 77 days, such rate shall be the two-month LIBOR rate;
(iv) 77 or more but fewer than 112 days, such rate shall be the three-month
LIBOR rate; (v) 112 or more but fewer than 140 days, such rate shall be the
four-month LIBOR rate; (vi) 140 or more but fewer that 168 days, such rate shall
be the five-month LIBOR rate; (vii) 168 or more but fewer 189 days, such rate
shall be the six-month LIBOR rate; (viii) 189 or more but fewer than 217 days,
such rate shall be the seven-month LIBOR rate; (ix) 217 or more but fewer than
252 days, such rate shall be the eight-month LIBOR rate; (x) 252 or more but
fewer than 287 days, such rate shall be the nine-month LIBOR rate; (xi) 287 or
more but fewer than 315 days, such rate shall be the ten-month LIBOR rate; (xii)
315 or more but fewer than 343 days, such rate shall be the eleven-month LIBOR
rate; and (xiii) 343 or more but fewer than 365 days, such rate shall be the
twelve-month LIBOR rate.
"Liquidation Preference," with respect to a given number of Preferred
Shares, means $25,000 times that number.
"Lien" means any material lien, mortgage, pledge, security interest or
security agreement of any kind.
"London Business Day" means any day on which commercial banks are generally
open for business in London.
"Market Value" of any asset of the Fund shall be the market value thereof
determined by a Pricing Service. Market Value of any asset shall include any
interest accrued thereon. A Pricing Service shall value portfolio securities at
the quoted bid prices or the mean between the quoted bid and asked price or the
yield equivalent when quotations are not readily available. Securities for which
quotations are not readily available shall be valued at fair value as determined
by a Pricing Service using methods which include consideration of: yields or
prices of securities of comparable quality, type of issue, coupon, maturity and
rating; indications as to value from dealers; and general market conditions. A
Pricing Service may employ electronic data processing techniques and/or a matrix
system to determine valuations. In the event a Pricing Service is unable to
value a security, the security shall be valued at the lower of two dealer bids
obtained by the Fund from dealers who are members of the National Association of
Securities Dealers, Inc. and who make a market in the security, at least one of
which shall be in writing. The Fund shall notify Fitch and S&P of the valuation.
Futures contracts and options are valued at closing prices for such instruments
established by the exchange or board of trade on which they are traded, or if
market quotations are not readily available, are valued at fair value on a
consistent basis using methods determined in good faith by the Board of Trustees
of the Fund.
"Maximum Rate" with respect to Preferred Shares for any Dividend Period
will be the greater of the Applicable Percentage of the Reference Rate or the
Applicable Spread plus the Reference Rate. The Auction Agent will round each
applicable Maximum Rate to the nearest one-thousandth (0.001) of one percent per
annum, with any such number ending in five ten-thousandths of one percent being
rounded upwards to the nearest one-thousandth (0.001) of one percent.
"Minimum Rate Period" shall mean any rate period of seven (7) Rate Period
days.
"Moody's" means Moody's Investors Service, Inc. or its successors.
"Non-Payment Period Rate" means 300% of the applicable Reference Rate,
provided that the Board of Trustees of the Fund shall have the authority to
adjust, modify, alter or change from time to time the initial Non-Payment Period
Rate if the Board of Trustees of the Fund determines and each of Fitch and S&P
(and any Substitute Rating Agency in lieu of Fitch or S&P in the event Fitch or
S&P shall not rate the Preferred Shares) advises the Fund in writing that such
adjustment, modification, alteration or change will not adversely affect its
then current ratings on the Preferred Shares.
"Notice of Redemption" shall mean any notice with respect to the redemption
of Preferred Shares pursuant to paragraph (c) of Section 9 of Part I of this
Statement.
"Notice of Special Rate Period" shall mean any notice with respect to a
Special Rate Period of Preferred Shares pursuant to subparagraph (d)(i) of
Section 3 of Part I of this Statement.
"Order" and "Orders" shall have the respective meanings specified in
paragraph (a) of Section 1 of Part II of this Statement.
"Outstanding" means, as of any date (i) with respect to Preferred Shares,
Preferred Shares theretofore issued by the Fund except, without duplication, (A)
any Preferred Shares theretofore canceled or delivered to the Auction Agent for
cancellation, or redeemed by the Fund, or as to which a Notice of Redemption
shall have been given and Deposit Securities shall have been deposited in trust
or segregated by the Fund pursuant to Section 9 of Part I of this Statement and
(B) any Preferred Shares as to which the Fund or any Affiliate (other than an
Affiliate that is a Broker-Dealer) thereof shall be a Beneficial Owner, provided
that Preferred Shares held by an Affiliate shall be deemed outstanding for
purposes of calculating the Preferred Shares Basic Maintenance Amount and (ii)
with respect to other preferred shares of beneficial interest of the Fund, the
meaning equivalent to that for Preferred Shares as set forth in clause (i).
"Performing" means with respect to any asset that is a Bank Loan or other
debt, the issuer of such investment is not in default of any payment obligations
in respect thereof.
"Person" means and includes an individual, a partnership, a trust, an
unincorporated association, a joint venture or other entity or a government or
any agency or political subdivision thereof.
"Potential Beneficial Owner" means a customer of a Broker-Dealer or a
Broker-Dealer that is not a Beneficial Owner of Preferred Shares but that wishes
to purchase such shares, or that is a Beneficial Owner that wishes to purchase
additional Preferred Shares.
"Potential Holder" means any Broker-Dealer or any such other Person as may
be permitted by the Fund, including any Existing Holder, who may be interested
in acquiring Preferred Shares (or, in the case of an Existing Holder, additional
Preferred Shares).
"Preferred Shares Basic Maintenance Amount," as of any Valuation Date,
means the dollar amount equal (i) to the sum of (A) the product of the number of
Preferred Shares outstanding on such date multiplied by $25,000 (plus the
product of the number of shares of any other series of preferred shares
outstanding on such date multiplied by the liquidation preference of such
shares), plus any redemption premium applicable to the Preferred Shares (or
other preferred shares) then subject to redemption; (B) the aggregate amount of
dividends that will have accumulated at the respective Applicable Rates (whether
or not earned or declared) to (but not including) the first respective Dividend
Payment Dates for the Series M28 Preferred Shares outstanding that follow such
Valuation Date (plus the aggregate amount of dividends, whether or not earned or
declared, that will have accumulated in respect of other outstanding preferred
shares to, but not including, the first respective dividend payment dates for
such other shares that follow such Valuation Date); (C) the aggregate amount of
dividends that would accumulate on the Series M28 Preferred Shares outstanding
from such first respective Dividend Payment Date therefor through the 49th day
after such Valuation Date, at the Maximum Rate (calculated as if such Valuation
Date were the Auction Date for the Rate Period commencing on such Dividend
Payment Date) for a Minimum Rate Period of the Series M28 Preferred Shares to
commence on such Dividend Payment Date, assuming, solely for purposes of the
foregoing, that if on such Valuation Date the Fund shall have delivered a Notice
of Special Rate Period to the Auction Agent pursuant to Section 3(d)(i) of this
Part I with respect to the Series M28 Preferred Shares, such Maximum Rate shall
be the Maximum Rate for the Special Rate Period of the Series M28 Preferred
Shares to commence on such Dividend Payment Date (except that (1) if such
Valuation Date occurs at a time when a Failure to Deposit (or, in the case of
preferred shares other than the Preferred Shares, a failure similar to a Failure
to Deposit) has occurred that has not been cured, the dividend for purposes of
calculation would accumulate at the current dividend rate then applicable to the
shares in respect of which such failure has occurred and (2) for those days
during the period described in this subparagraph (D) in respect of which the
Applicable Rate in effect immediately prior to such Dividend Payment Date will
remain in effect (or, in the case of preferred shares other than the Preferred
Shares, in respect of which the dividend rate or rates in effect immediately
prior to such respective dividend payment dates will remain in effect), the
dividend for purposes of calculation would accumulate at such Applicable Rate
(or other rate or rates, as the case may be) in respect of those days); (D) the
amount of anticipated non-interest expenses of the Fund for the 90 days
subsequent to such Valuation Date; (E) the amount of any indebtedness or
obligations of the Fund senior in right of payment to the Preferred Shares; (F)
any current liabilities as of such Valuation Date to the extent not reflected in
any of (i)(A) through (i)(D) (including, without limitation, any payables for
portfolio securities of the Fund purchased as of such Valuation Date and any
liabilities incurred for the purpose of clearing securities transactions) less
(ii) the value (i.e., the face value of cash, short-term securities rated MIG-1,
VMIG-1, or P-1, and short-term securities that are the direct obligation of the
U.S. government, provided in each case that such securities mature on or prior
to the date upon which any of (i)(A) through (i)(F) become payable, otherwise
the Discounted Value) of any of the Fund's assets irrevocably deposited by the
Fund for the payment of any of (i)(A) through (i)(F).
"Preferred Shares Basic Maintenance Cure Date," with respect to the failure
by the Fund to satisfy the Preferred Shares Basic Maintenance Amount (as
required by Section 6 of Part I of this Statement) as of a given Valuation Date,
means the sixth Business Day following such Valuation Date.
"Preferred Shares Basic Maintenance Report" means a report signed by any of
the President, Treasurer, any Vice President or any Assistant Treasurer of the
Fund which sets forth, as of the related Valuation Date, the assets of the Fund,
the Market Value and the Discounted Value thereof (seriatim and in aggregate),
the Preferred Shares Basic Maintenance Amount, the net asset value of the Fund,
the trade price and the Fund's total return.
"Pricing Service" means any of the pricing services listed below, provided
such pricing service has been approved by the Board of Trustees of the Fund, for
purposes of determining whether the Fund has Eligible Assets with an aggregate
Discounted Value that equals or exceeds the Preferred Shares Basic Maintenance
Amount:
Bear Stearns Pricing Direct Securities Evaluation Services
Bloomberg J.J. Kenny Drake
Bridge Global Pricing Standard & Poor's Evaluation Services
Data Resources Inc. Thomson Financial Securities Management
FT Interactive Data Telekurs
JP Morgan Pricing Services Trepp Pricing Service
Van Kampen Merritt Investment Advisory Corp Pricing
Loan Pricing Corporation Service
Reuters CIBC World Markets
"Quarterly Valuation Date" means the last Friday of the last month of each
fiscal quarter of the Fund in each fiscal year of the Fund, commencing August
27, 2004, provided that if such day is not a Business Day, then the immediately
prior Business Day.
"Rate Period" shall mean the Initial Rate Period of the Series M28
Preferred Shares and any Subsequent Rate Period, including any Special Rate
Period, of the Series M28 Preferred Shares.
"Rating Agency" means a nationally recognized statistical rating
organization.
"Redemption Price" shall mean the applicable redemption price specified in
paragraph (a) or (b) of Section 9 of Part I of this Statement.
"Reference Banks" means four major banks in the London interbank market
selected by Citigroup or its affiliates or successors or such other party as the
Fund may from time to time appoint.
"Reference Rate" means LIBOR Rate (for a Dividend Period of fewer than 365
days) or the applicable Treasury Index Rate (for a Dividend Period of 365 days
or more).
"Reorganization Bonds" has the meaning set forth under the definition of
"Fitch Eligible Assets."
"Rule 144A Securities" means securities which are restricted as to resale
under federal securities laws but are eligible for resale pursuant to Rule 144A
under the Securities Act as determined by the Fund's investment adviser or
portfolio manager acting pursuant to procedures approved by the Board of
Trustees of the Fund.
"S&P" means Standard & Poor's, a division of The McGraw-Hill Companies,
Inc., or its successors.
"S&P Discount Factor" means, with respect to an S&P Eligible Asset
specified below, the following applicable number, provided that the S&P Exposure
Period is 20 Business Days or less:
DISCOUNT FACTOR FOR AAA RATING
----------
TYPE OF S&P ELIGIBLE ASSET
Common Stock 168%
DRD Eligible Preferred Stock with a senior or preferred 228%
stock rating of at least BBB-
REIT and Non-DRD Eligible Preferred Stock with a senior or 155%
preferred stock rating of at least BBB-
DRD Eligible Preferred Stock with a senior or preferred 233%
stock rating below BBB-
REIT and non-DRD Eligible Preferred Stock with a senior or 160%
preferred stock rating below BBB-
Un-rated DRD Eligible Preferred Stock 238%
Un-rated Non-DRD Eligible and un-rated REIT Preferred Stock 165%
Convertible bonds rated AAA to AAA- 148%
Convertible bonds rated AA+ to AA- 155%
Convertible bonds rated A+ to A- 162%
Convertible bonds rated BBB+ to BBB- 168%
Convertible bonds rated BB+ to BB- 175%
Convertible bonds rated B+ to B- 182%
Convertible bonds rated CCC+ to CCC- 189%
Fixed rate Preferred stock 228.10%
Adjustable rate Preferred stock 198.29%
Taxable Preferred stock (Non-DRD) 154.66%
Convertible securities AAA 148.25%
Convertible securities AA 154.97%
Convertible securities A 161.70%
Convertible securities BBB 168.42%
Convertible securities BB 175.15%
Convertible securities B 181.87%
Convertible securities CCC 188.60%
Treasury 1-year 101.99%
Treasury 2-year 103.77%
Treasury 5-year 109.09%
Treasury 10-year 115.14%
Treasury 30-year 126.33%
U.S. Agency Debt Securities 120.48%
U.S. Agency Mortgage Securities 15-year 128.80%
U.S. Agency Mortgage Securities 30-year 131.20%
U.S. Agency Mortgage Securities 1/1 ARMS 121.70%
U.S. Agency Mortgage Securities 3/1 ARMS 122.10%
U.S. Agency Mortgage Securities 5/1 ARMS 122.50%
U.S. Agency Mortgage Securities 10/1 ARMS 122.70%
Corporate Bonds Rated AAA 110.01%
Corporate Bonds Rated AA 113.28%
Corporate Bonds Rated A 116.85%
Corporate Bonds Rated BBB 121.82%
Corporate Bonds Rated BB 135.32%
Corporate Bonds Rated B 168.76%
Corporate Bonds Rated CCC 252.03%
Corporate Bonds Rated CCC- 350.00%
Bank Loan Performing, greater than $.90 117.79%
Bank Loan Performing, between $.85 and $.90 125.47%
Bank Loan Non-performing, greater than $.85 154.08%
Bank Loan Non-performing, less than or equal to $.85 178.25%
Auto Loans (fixed or floating) WAL less than 5-years 130.00%
Auto Loans (fixed or floating) WAL between 5 and 10-years 140.00%
Credit Card Loans (fixed) WAL less than 5-years 130.00%
Credit Card Loans (fixed) WAL between 5 and 10-years 140.00%
Credit Card Loans (floating) 112.70%
REIT Common Stock 148.79%
Standard & Poor's 500 Index (including ADRs) 168.46%
Master Limited Partnerships 625.00%
Credit Linked Notes rate AAA 125.00%
U.S. Short-Term Money Market Investments with maturities 104%
of 180 days or less
U.S. Short-Term Money Market Investments with maturities 113%
of between 181 and 360 days
U.S. Government Obligations (52 week Treasury Bills) 102%
U.S. Government Obligations (Two-Year Treasury Notes) 104%
U.S. Government Obligations (Five-Year Treasury Notes) 110%
U.S. Government Obligations (Ten-Year Treasury Notes) 117%
U.S. Government Obligations (Thirty-Year Treasury Bonds) 130%
Agency Mortgage Collateral (Fixed 15-Year) 129%
Agency Mortgage Collateral (Fixed 30-Year) 132%
Agency Mortgage Collateral (ARM 1/1) 122%
Agency Mortgage Collateral (ARM 3/1) 123%
Agency Mortgage Collateral (ARM 5/1) 123%
Agency Mortgage Collateral (ARM 10/1) 123%
Mortgage Pass-Through Fixed (15 Year) 131%
Mortgage Pass-Through Fixed (30 Year) 134%
Bank Loans (S&P Loan Category A) 132.90%
Bank Loans (S&P Loan Category B) 140.58%
Bank Loans (S&P Loan Category C) 169.19%
Bank Loans (S&P Loan Category D) 193.36%
Corporate Bonds rated at least AAA 110%
Corporate Bonds rated at least AA+ 111%
Corporate Bonds rated at least AA 113%
Corporate Bonds rated at least AA- 115%
Corporate Bonds rated at least A+ 116%
Corporate Bonds rated at least A 117%
Corporate Bonds rated at least A- 118%
Corporate Bonds rated at least BBB+ 120%
Corporate Bonds rated at least BBB 122%
Corporate Bonds rated at least BBB- 124%
Corporate Bonds rated at least BB+ 129%
Corporate Bonds rated at least BB 135%
Corporate Bonds rated at least BB- 142%
Corporate Bonds rated at least B+ 156%
Corporate Bonds rated at least B 169%
Corporate Bonds rated at least B- 184%
Corporate Bonds rated at least CCC+ 202%
Corporate Bonds rated at least CCC 252%
Corporate Bonds rated at least CCC- 350%
Cash and Cash Equivalents 100%
Municipal Bonds rated AAA 146.10%
Municipal Bonds rated AA 149.10%
Municipal Bonds rated A 152.10%
Municipal Bonds rated BBB 155.10%
Municipal Bonds rated BB 175.10%
Municipal Bonds rated B 195.10%
Municipal Bonds rated CCC 215.10%
Unrated Municipal Bonds 220.00%
Common Stock of REITs and other real estate companies 152.82%
Mortgage Pass-Through Certificates 15-yr 145.80%
Mortgage Pass-Through Certificates 30-yr 149.50%
Mortgage Pass-Through Certificates 1/1 137.60%
Mortgage Pass-Through Certificates 3/1 138.30%
Mortgage Pass-Through Certificates 5/1 139.00%
Mortgage Pass-Through Certificates 10/1 139.30%
Conventional/FHA/VA Mortgages and Whole Loans 15-year 148.80%
Conventional/FHA/VA Mortgages and Whole Loans 30-year 152.50%
Conventional/FHA/VA Mortgages and Whole Loans 1/1 143.40%
Conventional/FHA/VA Mortgages and Whole Loans 3/1 144.50%
Conventional/FHA/VA Mortgages and Whole Loans 5/1 144.70%
Conventional/FHA/VA Mortgages and Whole Loans 10/1 145.00%
Collateralized Mortgage Obligations (WAL less than 5-years) 140.00%
Collateralized Mortgage Obligations (WAL more than 5-years 150.00%
and more than 10-years)
FHA-Insured Multifamily Loans 190.00%
ABS (Automobile loans and fixed-rate credit card 135.00%
receivables with WAL less than 5-years)
ABS (Automobile loans and fixed-rate credit card 145.00%
receivables with WAL more than 5-yr and less than 10-years)
ABS (Floating-rate credit cards) 119.00%
Debt securities of REITS and other real estate companies
according to the following corporate bond schedule:
Corporate Bonds rated at least AAA 110%
Corporate Bonds rated at least AA+ 111%
Corporate Bonds rated at least AA 113%
Corporate Bonds rated at least AA- 115%
Corporate Bonds rated at least A+ 116%
Corporate Bonds rated at least A 117%
Corporate Bonds rated at least A- 118%
Corporate Bonds rated at least BBB+ 120%
Corporate Bonds rated at least BBB 122%
Corporate Bonds rated at least BBB- 124%
Corporate Bonds rated at least BB+ 129%
Corporate Bonds rated at least BB 135%
Corporate Bonds rated at least BB- 142%
Corporate Bonds rated at least B+ 156%
Corporate Bonds rated at least B 169%
Corporate Bonds rated at least B- 184%
Corporate Bonds rated at least CCC+ 202%
Corporate Bonds rated at least CCC 252%
Corporate Bonds rated at least CCC- 350%
Notwithstanding the foregoing, the S&P Discount Factor for short-term
Municipal Obligations will be 115% so long as such Municipal Obligations are
rated A-1 + or SP-1 + by S&P and mature or have a demand feature exercisable
within 30 days or less, or 123% so long as such Municipal Obligations are rated
A-1 or SP-1 by S&P and mature or have a demand feature exercisable in 30 days or
less, or 125% if such Municipal Obligations are not rated by S&P but are rated
equivalent to A-1+ or SP-1+ by another nationally recognized statistical rating
organization, on a case by case basis; provided, however, that any such non-S&P
rated short-term Municipal Obligations which have demand features exercisable
within 30 days or less must be backed by a letter of credit, liquidity facility
or guarantee from a bank or other financial institution with a short-term rating
of at least A-l+ from S&P ; and further provided that such non-S&P rated
short-term Municipal Obligations may comprise no more than 50% of short-term
Municipal Obligations that qualify as S&P Eligible Assets; provided, however,
that Municipal Obligations not rated by S&P but rated equivalent to BBB or lower
by another nationally recognized statistical rating organization, rated BB+ or
lower by S&P or non-rated (such Municipal Obligations are hereinafter referred
to as "High Yield Securities") may comprise no more than 20% of the short-term
Municipal Obligations that qualify as S&P Eligible Assets; (ii) the S&P Discount
Factor for Receivables for Municipal Obligations Sold that are due in more than
five Business Days from such Valuation Date will be the S&P Discount Factor
applicable to the Municipal Obligations sold; (iii) no S&P Discount Factor will
be applied to cash or to Receivables for Municipal Obligations Sold if such
receivables are due within five Business Days of such Valuation Date; and (iv)
except as set forth in clause (i) above, in the case of any Municipal Obligation
that is not rated by S&P but qualifies as an S&P Eligible Asset pursuant to
clause (iii) of that definition, such Municipal Obligation will be deemed to
have an S&P rating one full rating category lower than the S&P rating category
that is the equivalent of the rating category in which such Municipal Obligation
is placed by a nationally recognized statistical rating organization.
"Receivables for Municipal Obligations Sold," for purposes of calculating S&P
Eligible Assets as of any Valuation Date, means the book value of receivables
for Municipal Obligations sold as of or prior to such Valuation Date. The Fund
may adopt S&P Discount Factors for Municipal Obligations other than Municipal
Obligations provided that S&P advises the Fund in writing that such action will
not adversely affect its then current rating on the Preferred Shares. For
purposes of the foregoing, Anticipation Notes rated SP-1+ or, if not rated by
S&P, equivalent to A-l+ or SP-1+ by another nationally recognized statistical
rating organization, on a case by case basis, which do not mature or have a
demand feature at par exercisable in 30 days and which do not have a long-term
rating, shall be considered to be short-term Municipal Obligations.
The S&P Discount Factor applied to cash and cash equivalents and demand
deposits in an "A-1+" rated institution are valued at 100%. "A-1+" rated
commercial paper, with maturities no greater than 30 days and held instead of
cash until maturity, is valued at 100%. Securities with next-day maturities
invested in "A-1+" rated institutions are considered cash equivalents and are
valued at 100%. Securities maturing in 181 to 360 calendar days are valued at
114.2%.
The S&P Discount Factor for shares of unrated Money Market Funds affiliated
with the Fund used as "sweep" vehicles will be 110%. Money Market Funds rated
"AAAm" will be discounted at the appropriate level as dictated by the exposure
period. No S&P Discount Factor will be applied to Money Market Funds rated AAAm
by S&P with effective next day maturities.
Receivables due within five business days of a valuation will be treated as
cash and are valued at 100%.
Receivables that are due in more than five business days of a valuation
date qualify as a S&P's-eligible asset at a value no greater than the settlement
price discounted at the applicable credit rating and/or exposure period discount
factor.
For purposes of determining the discount factors applicable to collateral
not rated by S&P, the collateral will carry an S&P rating one full rating
category lower than the equivalent S&P rating.
"S&P Eligible Assets" will mean:
(A) Deposit Securities;
(B) U.S. Government Obligations of U.S. Government Agencies;
(C) Corporate Indebtedness. Evidences of indebtedness other than Deposit
Securities, U.S. Government Obligations and Municipal Obligations that are
not convertible into or exchangeable or exercisable for stock of a
corporation (except to the extent of ten percent (10%) in the case of a
share exchange or tender offer) ("Other Debt") and that satisfy all of the
following conditions:
(1) be no more than 10% of total assets may be below a S&P rating of
BBB-, or comparable Moody's or Fitch rating, or unrated;
(2) the remaining term to maturity of such Other Debt will not exceed
fifty (50) years;
(3) such Other Debt must provide for periodic interest payments in
cash over the life of the security;
(4) no more than 10% of the issuers of such evidences of indebtedness
do not file periodic financial statements with the Securities and
Exchange Commission;
(5) which, in the aggregate, have an average duration of not more than
12 years.
(D) Convertible Corporate Indebtedness. Evidences of indebtedness other
than Deposit Securities, U.S. Government Obligations and Municipal
Obligations that are convertible into or exchangeable or exercisable for
stock of a corporation and that satisfy all of the following conditions:
(1) such evidence of indebtedness is rated at least CCC by S&P; and
(2) if such evidence of indebtedness is rated BBB or lower by S&P, the
market capitalization of the issuer of such evidence of indebtedness
is at least $100 million;
(E) Agency Mortgage Collateral. Certificates guaranteed by U.S. Government
Agencies (as defined below) (e.g., FNMA, GNMA and FHLMC) for timely payment
of interest and full and ultimate payment of principal. Agency Mortgage
Collateral also evidence undivided interests in pools of level-payment,
fixed, variable, or adjustable rate, fully amortizing loans that are
secured by first liens on one- to four-family residences residential
properties (or in the case of Plan B FHLMC certificates, five or more units
primarily designed for residential use) ("Agency Mortgage Collateral").
Agency Mortgage Collateral the following conditions apply:
(1) For GNMA certificates backed by pools of graduated payment
mortgages, levels are 20 points above established levels;
(2) Qualifying "large pool" FNMA mortgage-backed securities and FHLMC
participation certificates are acceptable as eligible collateral. The
eligible fixed-rate programs include FNMA MegaPools, FNMA Majors,
FHLMC Multilender Swaps, and FHLMC Giant certificates. Eligible
adjustable rate mortgage ("ARMs") programs include nonconvertible FNMA
ARM MegaPools and FHLMC weighted average coupon ARM certificates.
Eligible FHLMC Giant programs exclude interest-only and principal only
stripped securities;
(3) FNMA certificates backed by multifamily ARMs pegged to the 11th
District Cost of Funds Index are acceptable as eligible collateral at
5 points above established levels; and
(4) Multiclass REMICs issued by FNMA and FHLMC are acceptable as
eligible collateral at the collateral levels established for CMOs.
(F) Mortgage Pass-Through Certificates. Publicly issued instruments
maintaining at least a AA - ratings by S&P. Certificates evidence
proportional, undivided interests in pools of whole residential mortgage
loans. Pass-through certificates backed by pools of convertible ARMs are
acceptable as eligible collateral at 5 points above the levels established
for pass-through certificates backed by fixed or non-convertible ARM pools.
(G) Mortgage-backed Securities.
(1) Mortgage Pass-through Certificates are publicly issued instruments
rated at least "AA-" by S&P. Pass-throughs backed by pools of
convertible adjustable-rate mortgages (ARMs) are discounted at an
additional five percentage points above the levels established for
pass-throughs backed by fixed or nonconventional ARM pools.
(2) Fixed-Rate and Adjustable-rate mortgage collateral
(conventional/FHA/VA and Whole Loans) Pool must consist of at least
100 loans each secured by single-family, one-unit, detached primary
residence. 25% of the total pool may have an LTV greater than 80% but
less than or equal to 90%. 10% may have an original LTV of no greater
than 95%. Loans with LTV greater than 80% must have a `AA' rated
primary mortgage insurance. 25% may have balances between $400,000 and
$600,000, provided the maximum size of any loan is appropriate with
respect to the market area of the originator. 10% of the pool may
represent condominiums that are four stories or less. High LTVs, high
loan balance, and condominiums, in aggregate, should not exceed 35% of
the pool.
(3) FHAA-Insured Multifamily Loans must have a minimum principal
balance of $100,000 and have at least a one-year remaining maturity.
The aggregate market value of any one loan may not exceed 5% of the
aggregate market value of the portfolio. Such loans should be
initially included in minimum blocks of $5 million. Project loans must
have at least a 90% occupancy rate at the time the loan is pledged.
After 90 days defaulted mortgage loans must be valued at zero. A loan
in default should be liquidated or substituted within a 90-day period.
(4) Collateralized Mortgage Obligations tranches are publicly issued
instruments rated `AAA' by S&P. No more than 25% of the total market
value of collateral may be from one private sector issuer.
(H) Rule 144A Securities;
(I) Senior Loans, provided, however, that the initial issue amount
(facility size) is at least $100 million. The minimum accepted holding size
(notional amount) of any given loan not rated by S&P, Moody's or other
nationally recognized rating agency is at least $1 million, provided, that
participation loans are limited to not more than 10% of the aggregate value
of the S&P Eligible Asset. For loans rated by S&P, Moody's or other
nationally recognized rating agency, there is no minimum accepted holding
size. Senior Loan Participations and non-Senior Loans will qualify as S&P
Eligible Assets only up to an aggregate maximum of 15% of the Fund's total
assets. These levels apply to U.S. lenders only; any international loans
are excluded.
(J) Preferred Stocks. Preferred stocks that satisfy all of the following
conditions:
1. The preferred stock issue has a senior rating from S&P, or the
preferred issue must be rated. In the case of Yankee preferred stock,
the issuer should have a S&P senior rating of at least "BBB-", or the
preferred issue must be rated at least "BBB-".
2. The issuer -- or if the issuer is a special purpose corporation,
its parent -- is listed on either the New York Stock Exchange, the
American Stock Exchange or NASDAQ if the traded par amount is less
than $1,000. If the traded par amount is $1,000 or more exchange
listing is not required.
3. The collateral pays cash dividends denominated in U.S. dollars.
4. Private placement 144A with registration rights are eligible
assets.
5. The minimum market capitalization of eligible issuers is US$100
million.
Restrictions for floating-rate preferred stock:
1. Holdings must be limited to stock with a dividend period of less
than or equal to 49 days, except for a new issue, where the first
dividend period may be up to 64 days.
2. The floating-rate preferred stock may not have been subject to a
failed auction.
Restrictions for adjustable -- or auction-rate preferred stock:
1. The total fair market value of adjustable-rate preferred stock held
in the portfolio may not exceed 10% of eligible assets.
Concentration Limits:
1. Total issuer exposure in preferred stock of any one issuer is
limited to 10% of the fair market value of eligible assets.
2. Preferred stock rated below B- (including non-rated preferred
stock) and preferred stock with a market cap of less than US$100
million are limited to no more than 15% of the fair market value of
the eligible assets.
3. Add 5 points to over-collateralization level for issuers with a
senior rating or preferred stock rating of less than BBB-.
4. Add 10 points to over-collateralization level of issuers with no
senior rating, preferred stock rating or dividend history.
(K) Common stocks that satisfy all of the following conditions:
1. The issuer can hold no more than the average monthly trading volume
over the past year.
2. Each stock must have a minimum market capitalization of at least
$100 million.
3. Restricted stocks (144a securities) or any pink sheet stocks
(generally, stocks that are not carried in daily over-the-counter
newspaper listings) are ineligible.
4. The issuer may not hold any equity unless it has been listed on an
exchange or traded for more than one year and one quarter, or 15
months (eligible stock exchanges are the New York Stock Exchange,
American Stock Exchange, Philadelphia Stock Exchange, Boston Stock
Exchange, Washington Stock Exchange, Midwest Stock Exchange, Pacific
Stock Exchange, NASDAQ, and National Market Quotations).
5. The collateral is owned by the Fund, or the trustee or collateral
agent has a first perfected priority security interest in the
collateral. (For S&P's perfection of Security Interest Criteria, see
Legal Criteria For Structured Finance Transactions, April 2002).
Note:
Add 20 points to the overcollateralization level for common stock that do
not meet the requirement of item number 4 above.
(L) Municipal Obligations. A Municipal Obligation owned by the Fund that
(i) is interest bearing and pays interest at least semi-annually; (ii) is
payable with respect to principal and interest in U.S. Dollars; (iii) has
an original issuance size of $10 million or greater and any securities with
an issuance size of under $10 million must be rated `AA' or better by S&P;
or, if not rated by S&P but rated AAA by another nationally recognized
statistical rating organization, on a case by case basis; (iv) except for
Inverse Floaters, is not part of a private placement of Municipal
Obligations; (v) is issued by any of the 50 states of the U.S., its
territories, and their subdivisions, counties, cities, towns, villages, and
school districts; by agencies such as authorities and special districts
created by the states; and by certain federally sponsored agencies such as
local housing authorities. Payments made on these bonds are exempt from
federal income taxes and are generally exempt from state and local taxes in
the state of issuance; and (vi) Fifty percent of the aggregate fair market
value of the pledged pool may be rated by a nationally recognized
statistical rating organization other than S&P. Notwithstanding the
foregoing limitations:
(1) Municipal Obligations (excluding Escrowed Bonds) of any one issuer
or guarantor (excluding bond insurers) rated at least "BBB" by S&P or
"A" by another NRSRO shall be considered S&P Eligible Assets only to
the extent the Market Value of such Municipal Obligations (including
short-term Municipal Obligations) does not exceed 10% of the aggregate
Market Value of S&P Eligible Assets, provided that either (i) 2% is
added to the S&P Discount Factor for every 1% by which the Market
Value for any issuer exceeds 5%, up to a maximum of 10% or (ii) 10% is
added to the S&P Discount Factor for any issuer that exceeds 5% of the
aggregate S&P Eligible Assets. High Yield Securities (as defined
below) of any one issuer shall be considered S&P Eligible Assets only
to the extent the Market Value of such Municipal Obligations does not
exceed 5% of the aggregate Market Value of S&P Eligible Assets;
(2) Municipal Obligations not rated by S&P shall be considered S&P
Eligible Assets only to the extent the Market Value of such Municipal
Obligations does not exceed 50% of the aggregate Market Value of S&P
Eligible Assets; provided, however, that High Yield Securities (as
defined below) shall be considered S&P Eligible Assets only to the
extent the Market Value of such Municipal Obligations does not exceed
20% of the aggregate Market Value of S&P Eligible Assets; and
(3) Municipal Obligations issued by issuers in any one state or
territory will be considered S&P Eligible Assets only to the extent
the Market Value of such Municipal Obligations does not exceed 25% of
the aggregate Market Value of S&P Eligible Assets; or
(M) Asset Backed Securities. Receivables-backed tranches are publicly
issued with a rating of "AA" or higher by S&P, tranches are current
interest-bearing, fixed- or floating-rate, and are backed by automobile
loans or credit card (fixed-rate only) receivables with an original
issuance size of at least $200 million. No more than 25% of the total
market value of the collateral can be from one private sector issuer. With
respect to floating-rate credit card receivables, not more than 25% of the
collateral may be from one investment-grade private sector issuer. No more
than 10% of the market value of the collateral may be from one non
investment-grade private sector issuer.
Escrow Bonds may comprise 100% of the Fund's S&P Eligible Assets. Bonds
that are legally defeased and secured by direct U.S. Government Obligations are
not required to meet any minimum issuance size requirement. Bonds that are
economically defeased or secured by other U.S. Agency paper must meet the
minimum issuance size requirement for the Fund described above. Bonds initially
rated or rerated as an escrow bond by another Rating Agency are limited to 50%
of the Fund's S&P Eligible Assets, and carry one full rating lower than the
equivalent S&P rating for purposes of determining the applicable discount
factors. Bonds economically defeased and either initially rated or rerated by
S&P or another Rating Agency are assigned that same rating level as its debt
issuer, and will remain in its original industry category unless it can be
demonstrated that a legal defeasance has occurred.
With respect to the above, the Fund's portfolio must consist of no less
than 20 issues representing no less than 10 industries as determined according
to Bloomberg Industry Classifications. For industry concentration, the following
sectors represent distinct industry classifications: electric-distribution,
electric-integrated, natural gas-distribution, natural gas-integrated, and
unregulated utilities.
Notwithstanding the foregoing, an asset will not be considered a S&P
Eligible Asset to the extent that it has been irrevocably deposited for the
payment of (i)(A) through (i)(E) under the definition of Preferred Shares Basic
Maintenance Amount or to the extent it is subject to any Liens, except for (A)
Liens which are being contested in good faith by appropriate proceedings and
which S&P has indicated to the Fund will not affect the status of such asset as
a S&P Eligible Asset, (B) Liens for taxes that are not then due and payable or
that can be paid thereafter without penalty, (C) Liens to secure payment for
services rendered or cash advanced to the Fund by its investment manager or
portfolio manager, the Fund's custodian, transfer agent or registrar or the
Auction Agent and (D) Liens arising by virtue of any repurchase agreement.
For purposes of determining the discount factors applicable to collateral
not rated by S&P, the collateral will carry an S&P rating one full rating level
lower than the equivalent S&P rating.
Any asset of the Fund that does not have an S&P Discount Factor will be
valued at $0.00.
"S&P Exposure Period" will mean the sum of (i) that number of days from the
last Valuation Date on which the Fund's Discounted Value of S&P Eligible Assets
were greater than the Preferred Shares Basic Maintenance Amount to the Valuation
Date on which the Fund's Discounted Value of S&P Eligible Assets failed to
exceed the Preferred Shares Basic Maintenance Amount, (ii) the maximum number of
days following a Valuation Date that the Fund has under this Statement to cure
any failure to maintain a Discounted Value of S&P Eligible Assets at least equal
to the Preferred Shares Basic Maintenance Amount, and (iii) the maximum number
of days the Fund has to effect a mandatory redemption under Section 9(b) of Part
I of this Statement.
"S&P Hedging Transactions" has the meaning set forth in Section 8 of Part I
of this Statement.
"S&P Loan Category" means the following four categories (and, for purposes
of this categorization, the Market Value of an S&P Eligible Asset trading at par
is equal to $1.00):
(i) "S&P Loan Category A" means Performing Senior Loans which have a
Market Value greater than $0.90;
(ii) "S&P Loan Category B" means Performing Senior Loans which have a
Market Value greater than or equal to $0.85
but equal to or less than $0.90;
(iii) "S&P Loan Category C" means non-Performing Senior Loans which
have a Market Value greater than $0.85;
(iv) "S&P Loan Category D" means:
(a) Performing Senior Loans which have a Market Value less than
$.85; and
(b) Non-Performing Senior Loans which have a Market Value less
than or equal to $.85.
(v) "Performing" means that no default as to the payment of principal
or interest has occurred and is continuing.
"Securities Act" means the Securities Act of 1933, as amended from time to
time.
"Securities Depository" means The Depository Trust Company and its
successors and assigns or any successor securities depository selected by the
Fund as securities depository for the Preferred Shares that agrees to follow the
procedures required to be followed by such securities depository in connection
with the Preferred Shares.
"Sell Order" and "Sell Orders" shall have the respective meanings specified
in paragraph (a) of Section 1 of Part II of this Statement.
"Series M28 Preferred Shares" means the Auction Preferred Shares, Series
M28.
"Share Books" means the books maintained by the Auction Agent setting forth
at all times a current list, as determined by the Auction Agent, of Existing
Holders of the Preferred Shares.
"Share Register" means the register of Holders maintained on behalf of the
Fund by the Auction Agent in its capacity as transfer agent and registrar for
the Preferred Shares.
"Short Term Money Market Instruments" means the following types of
instruments if, on the date of purchase or other acquisition thereof by the
Fund, the remaining term to maturity thereof is not in excess of 180 days:
(i) commercial paper rated either F1 by Fitch or A-1 by S&P if such
commercial paper matures in 30 days or P-1 by Moody's and either F1+ by
Fitch or A-1+ by S&P if such commercial paper matures in over 30 days;
(ii) demand or time deposits in, and banker's acceptances and
certificates of deposit of (A) a depository institution or trust company
incorporated under the laws of the United States of America or any state
thereof or the District of Columbia or (B) a United States branch office or
agency of a foreign depository institution (provided that such branch
office or agency is subject to banking regulation under the laws of the
United States, any state thereof or the District of Columbia);
(iii) overnight funds;
(iv) U.S. Government Securities; and
(v) Eurodollar demand or time deposits in, or certificates of deposit
of, the head office or the London branch office of a depository institution
or trust company if the certificates of deposit, if any, and the long-term
unsecured debt obligations (other than such obligations the ratings of
which are based on the credit of a person or entity other than such
depository institution or trust company) of such depository institution or
trust company that have (1) credit ratings on each Valuation Date of at
least P-1 from Moody's and either F1+ from Fitch or A-1+ from S&P, in the
case of commercial paper or certificates of deposit, and (2) credit ratings
on each Valuation Date of at least Aa3 from Moody's and either AA- from
Fitch or AA- from S&P, in the case of long-term unsecured debt obligations;
provided, however, that in the case of any such investment that matures in
no more than one Business Day from the date of purchase or other
acquisition by the Fund, all of the foregoing requirements shall be
applicable except that the required long-term unsecured debt credit rating
of such depository institution or trust company from Moody's, Fitch and S&P
shall be at least A2, A and A, respectively; and provided further, however,
that the foregoing credit rating requirements shall be deemed to be met
with respect to a depository institution or trust company if (1) such
depository institution or trust company is the principal depository
institution in a holding company system, (2) the certificates of deposit,
if any, of such depository institution or trust company are not rated on
any Valuation Date below P-1 by Moody's, F1+ by Fitch or A-1+ by S&P and
there is no long-term rating, and (3) the holding company shall meet all of
the foregoing credit rating requirements (including the preceding proviso
in the case of investments that mature in no more than one Business Day
from the date of purchase or other acquisition by the Fund); and provided
further, that the interest receivable by the Fund shall not be subject to
any withholding or similar taxes.
"Special Rate Period" shall have the meaning specified in paragraph (a) of
Section 3 of Part I of this Statement.
"Special Redemption Provisions" shall have the meaning specified in
subparagraph (a)(i) of Section 9 of Part I of this Statement.
"Structured Notes" means privately negotiated debt obligations where the
principal and/or interest is determined by reference to the performance of a
benchmark asset or market (an "embedded index"), such as selected securities or
an index of securities, or the differential performance of two assets or
markets, such as indices reflecting bonds.
"Submission Deadline" shall mean 1:30 P.M., New York city time, on any
Auction Date or such other time on any Auction Date by which Broker-Dealers are
required to submit Orders to the Auction Agent as specified by the Auction Agent
from time to time.
"Submitted Bid" And "Submitted Bids" shall have the respective meanings
specified in paragraph (a) of Section 3 of Part II of this Statement.
"Submitted Hold Order" and "Submitted Hold Orders" shall have the
respective meanings specified in paragraph (a) of Section 3 of Part II of this
Statement.
"Submitted Order" and "Submitted Orders" shall have the respective meanings
specified in paragraph (a) of section 3 of part II of this Statement.
"Submitted Sell Order" and "Submitted Sell Orders" shall have the
respective meanings specified in paragraph (a) of Section 3 of Part II of this
Statement.
"Subsequent Rate Period" shall mean the period from and including the first
day following the Initial Rate Period of the Series M28 Preferred Shares to but
excluding the next Dividend Payment Date for the Series M28 Preferred Shares and
any period thereafter from and including one Dividend Payment Date for the
Series M28 Preferred Shares to but excluding the next succeeding Dividend
Payment Date for the Series M28 Preferred Shares; provided, however, that if any
Subsequent Rate Period is also a Special Rate Period, such term shall mean the
period commencing on the first day of such Special Rate Period and ending on the
last day of the last Dividend Period thereof.
"Substitute Rating Agency" means a Rating Agency selected by the Fund to
act as the substitute Rating Agency to determine the credit ratings of the
Preferred Shares.
"Sufficient Clearing Bids" has the meaning set forth in Section 3 of Part
II of this Statement.
"Treasury Bill" means a direct obligation of the U.S. government having a
maturity at the time of issuance of 364 days or less.
"Treasury Bonds" means United States Treasury Bonds or Notes.
"Treasury Index Rate" shall mean the average yield to maturity for actively
traded marketable U.S. Treasury fixed interest rate securities having the same
number of 30-day periods to maturity as the applicable Dividend Period,
determined, to the extent necessary, by linear interpolation based upon the
yield for such securities having the next shorter and next longer number of
30-day periods to maturity, treating all Dividends Periods with a length greater
than the longest maturity for such securities as having a length equal to such
longest maturity, in all cases based upon data set forth in the most recent
weekly statistical release published by the Board of Governors of the Federal
Reserve System (currently H.15 (519)); provided, however, if the most recent
such statistical release shall not have been published during the 15 days
preceding the date of computation, then the foregoing computations shall be
based upon the average of comparable data as quoted to the Fund by at least
three U.S. Government Securities Dealers.
"U.S. Government Securities" means direct obligations of the United States
or of its agencies or instrumentalities that are entitled to the full faith and
credit of the United States and that, other than Treasury Bills, provide for the
periodic payment of interest and the full payment of principal at maturity or
call for redemption.
"U.S. Government Securities Dealer" shall mean Lehman Government
Securities, Incorporated, Goldman, Sachs & Co., Citigroup, Morgan Guaranty Trust
Company of New York and any other U.S. Government Securities dealer selected by
the Fund as to which S&P (if S&P is then rating the Preferred Shares) or Fitch
(if Fitch is then rating the Preferred Shares) shall not have objected, and in
each case their respective affiliates or successors, if such entity is a U.S.
Government securities dealer.
"U.S. Treasury Securities" means direct obligations of the United States
Treasury that are entitled to the full faith and credit of the United States.
"U.S. Treasury Strips" means securities based on U.S. Treasury Securities
created through the Separate Trading of Registered Interest and Principal of
Securities program.
"Valuation Date" means, for purposes of determining whether the Fund is
maintaining the Preferred Shares Basic Maintenance Amount, the last Business Day
of each week commencing with the Date of Original Issue.
"Voting Period" has the meaning set forth in Section 4 of Part I of this
Statement.
"Winning Bid Rate" shall have the meaning specified in paragraph (a) of
Section 3 of Part II of this Statement.
PART I.
1. NUMBER OF AUTHORIZED SHARES.
The number of authorized Preferred Shares constituting the Series M28
Preferred Shares shall be unlimited, of which 3,200 shares shall be issued on
June 25, 2004, or such other date as the officers of the Fund shall determine.
2. DIVIDENDS.
(a) RANKING. The Series M28 Preferred Shares shall rank on a parity with
each other and with shares of any other series of preferred shares as to the
payment of dividends by the Fund and the distribution of assets upon liquidation
of the Fund.
(b) CUMULATIVE CASH DIVIDENDS. The Holders of Series M28 Preferred Shares
shall be entitled to receive, when, as and if declared by the Board of Trustees,
out of funds legally available therefor in accordance with the Declaration and
applicable law, cumulative cash dividends at the Applicable Rate for the Series
M28 Preferred Shares, determined as set forth in paragraph (e) of this Section
2, and no more, payable on the Dividend Payment Dates with respect to the Series
M28 Preferred Shares determined pursuant to paragraph (d) of this Section 2.
Holders of Preferred Shares shall not be entitled to any dividend, whether
payable in cash, property or shares, in excess of full cumulative dividends, as
herein provided, on Preferred Shares. No interest, or sum of money in lieu of
interest, shall be payable in respect of any dividend payment or payments on
Preferred Shares which may be in arrears, and, except to the extent set forth in
subparagraph (e)(i) of this Section 2, no additional sum of money shall be
payable in respect of any such arrearage.
(c) DIVIDENDS CUMULATIVE FROM DATE OF ORIGINAL ISSUE. Dividends on the
Series M28 Preferred Shares shall accumulate at the Applicable Rate for the
Series M28 Preferred Shares from the Date of Original Issue thereof.
(d) DIVIDEND PAYMENT DATES AND ADJUSTMENT THEREOF. The Dividend Payment
Dates with respect to the Series M28 Preferred Shares, for the Initial Rate
Period, shall be on July 20, 2004, and on each 28th day thereafter; provided,
however, that:
(i) if the day on which dividends would otherwise be payable on the
Series M28 Preferred Shares is not a Business Day, then such dividends
shall be payable on the Series M28 Preferred Shares on the first Business
Day that falls after such day (subject to Part II, Section 8); and
(ii) notwithstanding the foregoing, the Fund in its discretion may
establish the Dividend Payment Dates in respect of any Special Rate Period
of the Series M28 Preferred Shares consisting of more than 28 Rate Period
days; provided, however, that such dates shall be set forth in the Notice
of Special Rate Period relating to such Special Rate Period, as delivered
to the Auction Agent, which Notice of Special Rate Period shall be filed
with the Secretary of the Fund; and further provided that (1) any such
Dividend Payment Date shall be a Business Day and (2) the last Dividend
Payment Date in respect of such Special Rate Period shall be the Business
Day immediately following the last day thereof, as such last day is
determined in accordance with paragraph (b) of Section 3 of this Part I
provided, however, that with respect to any Special Rate Period consisting
of more than 30 days, dividends shall be payable on the first Business Day
of each calendar month within such Special Rate Period, if applicable.
(iii) Although any particular Dividend Payment Date may not occur on
the originally scheduled date because of the provisions hereof, the next
succeeding Dividend Payment Date, subject to such provisions, will occur on
the next following originally scheduled date.
(iv) Notwithstanding the above, if for any reason a Dividend Period
for the Preferred Shares is scheduled to begin on the same day and end on
the same day as a Dividend Period for any other series of preferred shares
of beneficial interest of the Fund, then the last day of such Dividend
Period for such other series of preferred shares of beneficial interests
shall be the second Business Day next succeeding such scheduled day unless
the Fund obtains the opinion of tax counsel referred to in this paragraph.
Subject to the limitation in the next sentence, if for any reason a
Dividend Payment Date cannot be fixed as described above, then the Trustees
shall otherwise fix the Dividend Payment Date. In no event, however, may
the Dividend Period of the Preferred Shares be co-extensive with any
dividend period of any other series of preferred shares of beneficial
interest unless the Fund has received an opinion of tax counsel that having
such co-extensive periods will not affect the deductibility, for federal
income tax purposes, of dividends paid on the different series of preferred
shares of beneficial interest. The Dividend Payment Dates for any series of
Preferred Shares subsequently established by the Fund shall be as set forth
in resolutions of the Board of Trustees establishing such series.
(e) DIVIDEND RATES AND CALCULATION OF DIVIDENDS.
(i) DIVIDEND RATES. The dividend rate on the Series M28 Preferred
Shares during the period from and after the Date of Original Issue of the
Series M28 Preferred Shares to and including the last day of the Initial
Rate Period of the Series M28 Preferred Shares shall be equal to the rate
of 1.45% per annum.
The initial dividend rate on any series of Preferred Shares
subsequently established by the Fund shall be the rate set forth in or
determined in accordance with the resolutions of the Board of Trustees
establishing such series.
For each Subsequent Rate Period of the Series M28 Preferred Shares,
the dividend rate on the Series M28 Preferred Shares shall be equal to the
rate per annum that results from an Auction for the Series M28 Preferred
Shares on the Auction Date next preceding such Subsequent Rate Period;
provided, however, that if:
(A) an Auction for any such Subsequent Rate Period is not held
for any reason other than as described below (subject to the
provisions of Section 8 of Part II of this Statement), the dividend
rate on the Series M28 Preferred Shares for such Subsequent Rate
Period will be the Maximum Rate for the Series M28 Preferred Shares on
the Auction Date therefor;
(B) any Failure to Deposit shall have occurred with respect to
the Series M28 Preferred Shares during any Rate Period thereof (other
than any Special Rate Period consisting of more than 364 Rate Period
days or any Rate Period succeeding any Special Rate Period consisting
of more than 364 Rate Period days during which a Failure to Deposit
occurred that has not been cured), but, prior to 12:00 Noon, New York
City time, on the third Business Day next succeeding the date on which
such Failure to Deposit occurred, such Failure to Deposit shall have
been cured in accordance with paragraph (f) of this Section 2 and the
Fund shall have paid to the Auction Agent a late charge ("Late
Charge") equal to the sum of (1) if such Failure to Deposit consisted
of the failure timely to pay to the Auction Agent the full amount of
dividends with respect to any Dividend Period of the Series M28
Preferred Shares, an amount computed by multiplying (x) 300% of the
Reference Rate for the Rate Period during which such Failure to
Deposit occurs on the Dividend Payment Date for such Dividend Period
by (y) a fraction, the numerator of which shall be the number of days
for which such Failure to Deposit has not been cured in accordance
with paragraph (f) of this Section 2 (including the day such Failure
to Deposit occurs and excluding the day such Failure to Deposit is
cured) and the denominator of which shall be 360, and applying the
rate obtained against the aggregate Liquidation Preference of the
outstanding shares of the Series M28 Preferred Shares and (2) if such
Failure to Deposit consisted of the failure timely to pay to the
Auction Agent the Redemption Price, if any, of the Series M28
Preferred Shares for which Notice of Redemption has been mailed by the
Fund pursuant to paragraph (c) of Section 9 of this Part I, an amount
computed by multiplying (x) 300% of the Reference Rate for the Rate
Period during which such Failure to Deposit occurs on the redemption
date by (y) a fraction, the numerator of which shall be the number of
days for which such Failure to Deposit is not cured in accordance with
paragraph (f) of this Section 2 (including the day such Failure to
Deposit occurs and excluding the day such Failure to Deposit is cured)
and the denominator of which shall be 360, and applying the rate
obtained against the aggregate Liquidation Preference of the
outstanding Series M28 Preferred Shares to be redeemed, no Auction
will be held in respect of the Series M28 Preferred Shares for the
Subsequent Rate Period thereof and the dividend rate for the Series
M28 Preferred Shares for such Subsequent Rate Period will be the
Maximum Rate for the Series M28 Preferred Shares on the Auction Date
for such Subsequent Rate Period;
(C) any Failure to Deposit shall have occurred with respect to
the Series M28 Preferred Shares during any Rate Period thereof (other
than any Special Rate Period consisting of more than 364 Rate Period
days or any Rate Period succeeding any Special Rate Period consisting
of more than 364 Rate Period days during which a Failure to Deposit
occurred that has not been cured), and, prior to 12:00 Noon, New York
City time, on the third Business Day next succeeding the date on which
such Failure to Deposit occurred, such Failure to Deposit shall not
have been cured in accordance with paragraph (f) of this Section 2 or
the Fund shall not have paid the applicable Late Charge to the Auction
Agent, no Auction will be held in respect of the Series M28 Preferred
Shares for the first Subsequent Rate Period thereof thereafter (or for
any Rate Period thereof thereafter to and including the Rate Period
during which (1) such Failure to Deposit is cured in accordance with
paragraph (f) of this Section 2 no later than 12:00 Noon, New York
City time, on the fourth Business Day prior to the end of such Rate
Period), and the dividend rate for the Series M28 Preferred Shares for
each such Subsequent Rate Period shall be a rate per annum equal to
the Non-Payment Period Rate for the Series M28 Preferred Shares on the
Auction Date for such Subsequent Rate Period; or
(D) any Failure to Deposit shall have occurred with respect to
the Series M28 Preferred Shares during a Special Rate Period thereof
consisting of more than 364 Rate Period days, or during any Rate
Period thereof succeeding any Special Rate Period consisting of more
than 364 Rate Period days during which a Failure to Deposit occurred
that has not been cured, and, prior to 12:00 Noon, New York City time,
on the fourth Business Day preceding the Auction Date for the Rate
Period subsequent to such Rate Period, such Failure to Deposit shall
not have been cured in accordance with paragraph (f) of this Section 2
or the Fund shall not have paid the applicable Late Charge to the
Auction Agent (such Late Charge, for purposes of this subparagraph
(D), to be calculated by using the Reference Rate, applicable to a
Rate Period (x) consisting of more than 184 Rate Period days and (y)
commencing on the date on which the Rate Period during which Failure
to Deposit occurs commenced), no Auction will be held in respect of
the Series M28 Preferred Shares for such Subsequent Rate Period (or
for any Rate Period thereof thereafter to and including the Rate
Period during which (1) such Failure to Deposit is cured in accordance
with paragraph (f) of this Section 2 and (2) the Fund pays the
applicable Late Charge to the Auction Agent, in each case no later
than 12:00 Noon, New York City time, on the fourth Business Day prior
to the end of such Rate Period), and the dividend rate for the Series
M28 Preferred Shares for each such Subsequent Rate Period shall be a
rate per annum equal to the Non-Payment Period Rate for the Series M28
Preferred Shares on the Auction Date for such Subsequent Rate Period.
(ii) CALCULATION OF DIVIDENDS. The amount of dividends per
share payable on the Series M28 Preferred Shares on any date on
which dividends shall be payable on the Series M28 Preferred
Shares shall be computed by multiplying the Applicable Rate for
the Series M28 Preferred Shares in effect for such Dividend
Period or Dividend Periods or part thereof for which dividends
have not been paid by a fraction, the numerator of which shall be
the number of days in such Dividend Period or Dividend Periods or
part thereof and the denominator of which shall be 360 for all
Dividend Periods, and applying the rate obtained against $25,000.
(f) CURING A FAILURE TO DEPOSIT. A Failure to Deposit with respect to the
Series M28 Preferred Shares shall have been cured (if such Failure to Deposit is
not solely due to the willful failure of the Fund to make the required payment
to the Auction Agent) with respect to any Rate Period of the Series M28
Preferred Shares if, within the respective time periods described in
subparagraph (e)(i) of this Section 2, the Fund shall have paid to the Auction
Agent (A) all accumulated and unpaid dividends on shares of such Series and (B)
without duplication, the Redemption Price for the Series M28 Preferred Shares,
if any, for which Notice of Redemption has been mailed by the Fund pursuant to
paragraph (c) of Section 9 of Part I of this Statement; provided, however, that
the foregoing clause (B) shall not apply to the Fund's failure to pay the
Redemption Price in respect of Preferred Shares when the related Notice of
Redemption provides that redemption of Series M28 Preferred Shares is subject to
one or more conditions precedent and any such condition precedent shall not have
been satisfied at the time or times and in the manner specified in such Notice
of Redemption.
(g) DIVIDEND PAYMENTS BY FUND TO AUCTION AGENT. The Fund shall pay to the
Auction Agent, not later than 12:00 Noon, New York City time, on the Business
Day next preceding each Dividend Payment Date for the Series M28 Preferred
Shares, an aggregate amount of funds available on the next Business Day in the
City of New York, New York, equal to the dividends to be paid to all Holders of
Series M28 Preferred Shares on such Dividend Payment Date.
(h) AUCTION AGENT AS TRUSTEE OF DIVIDEND PAYMENTS BY FUND. All moneys paid
to the Auction Agent for the payment of dividends (or for the payment of any
Late Charge) shall be held in trust for the payment of such dividends (and any
such Late Charge) by the Auction Agent for the benefit of the Holders specified
in paragraph (i) of this Section 2. Any moneys paid to the Auction Agent in
accordance with the foregoing but not applied by the Auction Agent to the
payment of dividends (and any such Late Charge) will, to the extent permitted by
law, be repaid to the Fund at the end of 90 days from the date on which such
moneys were so to have been applied.
(i) DIVIDENDS PAID TO HOLDERS. Each dividend on Preferred Shares shall be
paid on the Dividend Payment Date therefor to the Holders thereof as their names
appear on the record books of the Fund on the Business Day next preceding such
Dividend Payment Date.
(j) DIVIDENDS CREDITED AGAINST EARLIEST ACCUMULATED BUT UNPAID DIVIDENDS.
Any dividend payment made on Preferred Shares shall first be credited against
the earliest accumulated but unpaid dividends due with respect to such shares.
Dividends in arrears for any past Dividend Period may be declared and paid at
any time, without reference to any regular Dividend Payment Date, to the Holders
as their names appear on the record books of the Fund on such date, not
exceeding 15 days preceding the payment date thereof, as may be fixed by the
Board of Trustees.
3. DESIGNATION OF SPECIAL RATE PERIODS.
(a) LENGTH OF AND PRECONDITIONS FOR SPECIAL RATE PERIOD. The Fund, in
consultation with the lead Broker-Dealer, may designate any succeeding
Subsequent Rate Period of the Series M28 Preferred Shares as a Special Rate
Period consisting of a specified number of Rate Period days evenly divisible by
seven and not more than 1,820; provided, however, that such Special Rate Period
may consist of a number of Rate Period days not evenly divisible by seven if all
the Series M28 Preferred Shares are to be redeemed at the end of such Special
Rate Period, subject to adjustment as provided in paragraph (b) of this Section
3. A designation of a Special Rate Period shall be effective only if, (i) notice
thereof shall have been given as provided herein, (ii) any failure to pay in a
timely manner to the Auction Agent the full amount of any dividend on, or the
redemption price of, the Series M28 Preferred Shares shall have been cured as
provided above, (iii) Sufficient Clearing Orders shall have existed in an
Auction held on the Auction Date immediately preceding the first day of such
proposed Special Dividend Period, (iv) if the Fund, shall have mailed a Notice
of Redemption with respect to any shares, the redemption price with respect to
such shares shall have been deposited with Paying Agent, (v) in the case of the
designation of a Special Dividend Period, Citigroup, or any successor
Broker-Dealer designated by the Fund shall have notified the Fund that it does
not object to the designation of such Special Rate Period, and (vi) each Rating
Agency that is then rating the Series M28 Preferred Shares shall have confirmed
in writing to the Fund that such designation shall not adversely affect their
respective then-current ratings of the Preferred Shares.
(b) ADJUSTMENT OF LENGTH OF SPECIAL RATE PERIOD. With respect to the Series
M28 Preferred Shares, if the Fund wishes to designate a Subsequent Rate Period
as a Special Rate Period, but if the day following what would otherwise be the
last day of such Special Rate Period is not a Tuesday that is a Business Day
then the Fund shall designate such Subsequent Rate Period as Special Rate Period
consisting of the period commencing on the first day following the end of the
immediately preceding Rate Period and ending on the first Monday that is
followed by a Tuesday that is a Business Day preceding what would otherwise be
such last day.
(c) NOTICE OF PROPOSED SPECIAL RATE PERIOD. If the Fund proposes to
designate any succeeding Subsequent Rate Period of the Series M28 Preferred
Shares as a Special Rate Period pursuant to paragraph (a) of this Section 3, not
less than seven (7) (or such lesser number of days as may be agreed to from time
to time by the Auction Agent) nor more than 30 days prior to the date the Fund
proposes to designate as the first day of such Special Rate Period (which shall
be such day that would otherwise be the first day of a Minimum Rate Period),
notice shall be (i) made by press release, and (ii) communicated by the Fund by
telephonic or other means to the Auction Agent and each Broker-Dealer and
confirmed in writing promptly thereafter. Each such notice shall state (A) that
the Fund may exercise its option to designate a succeeding Subsequent Rate
Period of the Series M28 Preferred Shares as a Special Rate Period, specifying
the first day thereof and (B) that the Fund will, by 3:00 P.M., New York City
time, on the second Business Day next preceding the first day of such Special
Rate Period (or by such later time or date, or both, as may be agreed to by the
Auction Agent) notify the Auction Agent of either (x) its determination, subject
to certain conditions, to exercise such option, in which case the Fund shall
specify the Special Rate Period designated, or (y) its determination not to
exercise such option.
(d) NOTICE OF SPECIAL RATE PERIOD. No later than 3:00 P.M., New York City
time, on the second Business Day next preceding the first day of any proposed
Special Rate Period of the Series M28 Preferred Shares as to which notice has
been given as set forth in paragraph (c) of this Section 3 (or such later time
or date, or both, as may be agreed to by the Auction Agent), the Fund shall
deliver to the Auction Agent either:
(i) a notice ("Notice of Special Rate Period") stating (A) that the
Fund has determined to designate the next succeeding Rate Period of the
Series M28 Preferred Shares as a Special Rate Period, specifying the same
and the first day and last day thereof, and (B) the terms of any Special
Redemption Provisions; or
(ii) a notice stating that the Fund has determined not to exercise its
option to designate a Special Rate Period of the Series M28 Preferred
Shares.
(iii) A Notice of Special Rate Period may contain Special Redemption
Provisions only if the Trustees, after consultation with the
Broker-Dealers, determine that such Special Redemption Provisions are in
the best interests of the Fund.
(e) FAILURE TO DELIVER NOTICE OF SPECIAL RATE PERIOD. If the Fund fails to
deliver either of the notices described in subparagraphs (d)(i) or (d)(ii) of
this Section 3 or is unable to make the confirmations required by clause (v) of
this Section 3(a) by 3:00 P.M., New York City time, on the second Business Day
next preceding the first day of the proposed Special Rate Period, the Fund shall
be deemed to have delivered a notice to the Auction Agent with respect to such
Special Rate Period to the effect set forth in subparagraph (d)(ii) of this
Section 3. In the event the Fund delivers to the Auction Agent a notice
described in subparagraph (d)(i) of this Section 3, it shall file a copy of such
notice with the Secretary of the Fund, and the contents of such notice shall be
binding on the Fund.
4. VOTING RIGHTS.
(a) ONE VOTE PER SHARE OF PREFERRED SHARES. Except as otherwise provided in
the Declaration or as otherwise required by law, (i) each Holder of Preferred
Shares shall be entitled to one vote for each share of Preferred Shares held by
such Holder on each matter submitted to a vote of shareholders of the Fund, and
(ii) the holders of outstanding preferred shares, including each share of
Preferred Shares, and of Common Shares shall vote together as a single class;
provided, however, that, at any meeting of Shareholders of the Fund held for the
election of Trustees, the holders of outstanding preferred shares, including the
Preferred Shares, represented in person or by proxy at said meeting, shall be
entitled, as a class, to the exclusion of the holders of all other securities
and classes of shares of beneficial interest of the Fund, to elect two Trustees
of the Fund out of the entire Board of Trustees (regardless of the number of
Trustees), each share of preferred shares entitling the holder thereof to one
vote; provided, further, that if the Board of Trustees shall be divided into one
or more classes, the Board of Trustees shall determine to which class or classes
the Trustees elected by the holders of preferred shares shall be assigned and
the holders of the Preferred Shares shall only be entitled to elect the Trustees
so designated as being elected by the holders of the Preferred Shares, when
their term shall have expired; provided, finally, that such Trustees appointed
by the holders of preferred shares shall be allocated as evenly as possible
among the classes of Trustees. Subject to paragraph (b) of this Section 4, the
holders of outstanding Common Shares and preferred shares voting together as a
single class, shall elect the balance of the Trustees.
(b) VOTING FOR ADDITIONAL TRUSTEES.
(i) VOTING PERIOD. Except as otherwise provided in the Declaration or
as otherwise required by law, during any period in which any one or more of
the conditions described in subparagraphs (A) or (B) of this subparagraph
(b)(i) shall exist (such period being referred to herein as a "Voting
Period"), the number of Trustees constituting the Board of Trustees shall
be automatically increased by the smallest number that, when added to the
two Trustees elected exclusively by the holders of preferred shares,
including the Preferred Shares, would constitute a majority of the Board of
Trustees as so increased by such smallest number, and the holders of
preferred shares, including the Preferred Shares, shall be entitled, voting
as a class on a one-vote-per-share basis (to the exclusion of the holders
of all other securities and classes of shares of beneficial interest of the
Fund), to elect such smallest number of additional Trustees, together with
the two Trustees that such holders are in any event entitled to elect. A
Voting Period shall commence:
(A) If at the close of business on any dividend payment date
accumulated dividends (whether or not earned or declared) on any
outstanding Preferred Shares, equal to at least two full years'
dividends shall be due and unpaid and sufficient cash or specified
securities shall not have been deposited with the Auction Agent for
the payment of such accumulated dividends;
or
(B) If at any time holders of preferred shares, including the
Preferred Shares, are entitled under the Investment Company Act to
elect a majority of the Trustees of the Fund.
Upon the termination of a Voting Period, the voting rights
described in this subparagraph (b)(i) shall cease, subject always,
however, to the revesting of such voting rights in the Holders upon
the further occurrence of any of the events described in this
subparagraph (b)(i).
(ii) NOTICE OF SPECIAL MEETING. As soon as practicable after the
accrual of any right of the holders of preferred shares, including the
Preferred Shares, to elect additional Trustees as described in
subparagraph (b)(i) of this Section 4, the Fund shall notify the
Auction Agent and the Auction Agent shall call a special meeting of
such holders, by mailing a notice of such special meeting to such
holders, such meeting to be held not less than 10 nor more than 20
days after the date of mailing of such notice. If the Fund fails to
send such notice to the Auction Agent or if the Auction Agent does not
call such a special meeting, it may be called by any such holder on
like notice. The record date for determining the holders entitled to
notice of and to vote at such special meeting shall be the close of
business on the fifth Business Day preceding the day on which such
notice is mailed. At any such special meeting and at each meeting of
holders of preferred shares, including the Preferred Shares, held
during a Voting Period at which Trustees are to be elected, such
holders, voting together as a class (to the exclusion of the holders
of all other securities and classes of shares of beneficial interest
of the Fund), shall be entitled to elect the number of Trustees
prescribed in subparagraph (b)(i) of this Section 4 on a
one-vote-per-share basis.
(iii) TERMS OF OFFICE OF EXISTING TRUSTEES. The terms of office
of all persons who are Trustees of the Fund at the time of a special
meeting of Holders and holders of other preferred shares to elect
Trustees shall continue, notwithstanding the election at such meeting
by the Holders and such other holders of the number of Trustees that
they are entitled to elect, and the persons so elected by the Holders
and such other holders, together with the two incumbent Trustees
elected by the Holders and such other holders of preferred shares and
the remaining incumbent Trustees elected by the holders of the Common
Shares and Preferred Shares, shall constitute the duly elected
Trustees of the Fund.
(iv) TERMS OF OFFICE OF CERTAIN TRUSTEES TO TERMINATE UPON
TERMINATION OF VOTING PERIOD. Simultaneously with the termination of a
Voting Period, the terms of office of the additional Trustees elected
by the Holders and holders of other Preferred Shares pursuant to
subparagraph (b)(i) of this Section 4 shall terminate, the remaining
Trustees shall constitute the Trustees of the Fund and the voting
rights of the Holders and such other holders to elect additional
Trustees pursuant to subparagraph (b)(i) of this Section 4 shall
cease, subject to the provisions of the last sentence of subparagraph
(b)(i) of this Section 4.
(c) HOLDERS OF PREFERRED SHARES TO VOTE ON CERTAIN OTHER MATTERS.
(i) INCREASES IN CAPITALIZATION. So long as any Preferred Shares
are outstanding, the Fund shall not, without the affirmative vote or
consent of the Holders of at least a majority of the Preferred Shares
outstanding at the time, in person or by proxy, either in writing or
at a meeting, voting as a separate class: (a) authorize, create or
issue any class or series of shares ranking prior to or on a parity
with the Preferred Shares with respect to the payment of dividends or
the distribution of assets upon dissolution, liquidation or winding up
of the affairs of the Fund, or authorize, create or issue additional
shares of any series of Preferred Shares (except that, notwithstanding
the foregoing, but subject to the provisions of paragraph (c)(i) of
Section 9 of this Part I, the Board of Trustees, without the vote or
consent of the Holders of Preferred Shares, may from time to time
authorize and create, and the Fund may from time to time issue,
additional Series M28 Preferred Shares or classes or series of other
preferred shares ranking on a parity with Preferred Shares with
respect to the payment of dividends and the distribution of assets
upon dissolution, liquidation or winding up of the affairs of the
Fund, if the Fund obtains written confirmation from S&P (if S&P is
then rating the Preferred Shares), Fitch (if Fitch is then rating the
Preferred Shares) or any Substitute Rating Agency (if any such
Substitute Rating Agency is then rating the Preferred Shares) that the
issuance of a class or series would not impair the rating then
assigned by such rating agency to the Preferred Shares and the Fund
continues to comply with Section 13 of the Investment Company Act, the
Investment Company Act Preferred Share Asset Coverage and the
Preferred Shares Basic Maintenance Amount requirements; or (b) amend,
alter or repeal the provisions of the Declaration or this Statement,
whether by merger, consolidation or otherwise, so as to adversely
affect any preference, right or power of such Preferred Shares or the
Holders thereof; provided, however, that (i) none of the actions
permitted by the exception to (a) above will be deemed to affect such
preferences, rights or powers, (ii) a division of Preferred Shares
will be deemed to affect such preferences, rights or powers only if
the terms of such division adversely affect the Holders of Preferred
Shares and (iii) the authorization, creation and issuance of classes
or series of shares ranking junior to the Preferred Shares with
respect to the payment of dividends and the distribution of assets
upon dissolution, liquidation or winding up of the affairs of the
Fund, will be deemed to affect such preferences, rights or powers only
if S&P or Fitch is then rating the Preferred Shares and such issuance
would, at the time thereof, cause the Fund not to satisfy the
Investment Company Act Preferred Share Asset Coverage or the Preferred
Shares Basic Maintenance Amount. So long as any shares of the
Preferred Shares are outstanding, the Fund shall not, without the
affirmative vote or consent of the Holders of at least 66 2/3% of the
Preferred Shares outstanding at the time, in person or by proxy,
either in writing or at a meeting, voting as a separate class, file a
voluntary application for relief under Federal bankruptcy law or any
similar application under state law for so long as the Fund is solvent
and does not foresee becoming insolvent. If any action set forth above
would adversely affect the rights of one or more series (the "Affected
Series") of preferred shares in a manner different from any other
series of preferred shares, the Fund will not approve any such action
without the affirmative vote or consent of the Holders of at least a
majority of the shares of each such Affected Series outstanding at the
time, in person or by proxy, either in writing or at a meeting (each
such Affected Series voting as a separate class).
(ii) INVESTMENT COMPANY ACT MATTERS. Unless a higher percentage
is provided for in the Declaration, (A) the affirmative vote of the
Holders of at least a majority of the Preferred Shares outstanding at
the time, voting as a separate class, shall be required to approve any
conversion of the Fund from a closed-end to an open-end investment
company, (B) the affirmative vote of the Holders of at least a
majority of the Preferred Shares outstanding at the time, voting as a
separate class, shall be negotiated to amend the provisions of the
Declaration, which provides for the classification of the Board of
Trustees into three classes, and (C) the affirmative vote of the
Holders of a "majority of the outstanding Preferred Shares," voting as
a separate class, shall be required to approve any plan of
reorganization (as such term is used in the Investment Company Act)
adversely affecting such shares. The affirmative vote of the holders
of a "majority of the outstanding Preferred Shares," voting as a
separate class, shall be required to approve any action not described
in the first sentence of this Section 4(c)(ii) requiring a vote of
security holders of the Fund under section 13(a) of the Investment
Company Act. For purposes of the foregoing, "majority of the
outstanding Preferred Shares" means (i) 67% or more of such shares
present at a meeting, if the Holders of more than 50% of such shares
are present or represented by proxy, or (ii) more than 50% of such
shares, whichever is less. In the event a vote of Holders of Preferred
Shares is required pursuant to the provisions of section 13(a) of the
Investment Company Act, the Fund shall, not later than ten Business
Days prior to the date on which such vote is to be taken, notify S&P
(if S&P is then rating the Preferred Shares) and Fitch (if Fitch is
then rating the Preferred Shares) that such vote is to be taken and
the nature of the action with respect to which such vote is to be
taken. The Fund shall, not later than ten Business Days after the date
on which such vote is taken, notify S&P (if S&P is then rating the
Preferred Shares) and Fitch (if Fitch is then rating the Preferred
Shares) of the results of such vote.
(d) BOARD MAY TAKE CERTAIN ACTIONS WITHOUT SHAREHOLDER APPROVAL. The Board
of Trustees, without the vote or consent of the shareholders of the Fund, may
from time to time amend, alter or repeal any or all of the definitions of the
terms listed below, any provision of this Statement viewed by S&P or Fitch as a
predicate for any such definition, or Section 8 of Part I of the Statement, and
any such amendment, alteration or repeal will not be deemed to affect the
preferences, rights or powers of Preferred Shares or the Holders thereof;
provided, however, that the Board of Trustees receives written confirmation from
Moody's or Fitch (such confirmation being required to be obtained only in the
event Moody's or Fitch is rating the Preferred Shares) that any such amendment,
alteration or repeal would not impair the ratings then assigned by S&P or Fitch,
as the case may be, to the Preferred Shares:
Accountant's Confirmation Investment Company Act Preferred Asset
Coverage
Approved Foreign Nations Market Value
Approved Price Maximum Rate
Bank Loans Preferred Shares Basic Maintenance Amount
Bloomberg Industry Classifications Preferred Shares Basic Maintenance Cure Date
Canadian Bonds Preferred Shares Basic Maintenance Report
Closing Transaction Pricing Service
Debt Securities Quarterly Valuation Date
Deposit Securities Reorganization Bond
Discount Factor S&P Discount Factor
Discounted Value S&P Eligible Assets
Eligible Assets S&P Exposure Period
Fitch Discount Factor S&P Hedging Transactions
Fitch Eligible Assets S&P Loan Category
Fitch Exposure Period Senior Loans
Fitch Hedging Transactions Short Term Money Market Instruments
Fitch Loan Category Structured Notes
Foreign Bonds Treasury Bonds
Forward Commitment Valuation Date
Independent Accountant
Investment Company Act Cure Date
(e) VOTING RIGHTS SET FORTH HEREIN ARE SOLE VOTING RIGHTS. Unless otherwise
required by law, the Holders of Preferred Shares shall not have any relative
rights or preferences or other special rights other than those specifically set
forth herein.
(f) NO PREEMPTIVE RIGHTS OR CUMULATIVE VOTING. The Holders of Preferred
Shares shall have no preemptive rights or rights to cumulative voting.
(g) VOTING FOR TRUSTEES SOLE REMEDY FOR FUND'S FAILURE TO PAY DIVIDENDS. In
the event that the Fund fails to pay any dividends on the Preferred Shares, the
exclusive remedy of the Holders shall be the right to vote for trustees pursuant
to the provisions of this Section 4.
(h) HOLDERS ENTITLED TO VOTE. For purposes of determining any rights of the
Holders to vote on any matter, whether such right is created by this Statement,
by the other provisions of the Declaration, by statute or otherwise, no Holder
shall be entitled to vote any share of Preferred Shares and no share of
Preferred Shares shall be deemed to be "outstanding" for the purpose of voting
or determining the number of shares required to constitute a quorum if, prior to
or concurrently with the time of determination of shares entitled to vote or
shares deemed outstanding for quorum purposes, as the case may be, the requisite
Notice of Redemption with respect to such shares shall have been mailed as
provided in paragraph (c) of Section 9 of this Part I and the Redemption Price
for the redemption of such shares shall have been deposited in trust with the
Auction Agent for that purpose. No share of Preferred Shares held by the Fund or
any affiliate of the Fund (except for shares held by a Broker-Dealer that is an
affiliate of the Fund for the account of its customers) shall have any voting
rights or be deemed to be outstanding for voting or other purposes.
5. INVESTMENT COMPANY ACT PREFERRED SHARE COVERAGE.
The Fund shall maintain, as of the last Business Day of each month in which
any Preferred Shares are Outstanding, the Investment Company Act Preferred Share
Asset Coverage.
6. PREFERRED SHARES BASIC MAINTENANCE AMOUNT.
(a) So long as Preferred Shares are Outstanding or any Rating Agency so
requires, the Fund shall maintain, on each Valuation Date, and shall verify to
its satisfaction that it is maintaining on such Valuation Date (i) S&P Eligible
Assets having an aggregate Discounted Value equal to or greater than the
Preferred Shares Basic Maintenance Amount (if S&P is then rating the Preferred
Shares) and Fitch Eligible Assets having an aggregate Discounted Value equal to
or greater than the Preferred Shares Basic Maintenance Amount (if Fitch is then
rating the Preferred Shares), in accordance with the requirements of each rating
agency.
(b) On or before 5:00 PM., New York City time, on the third Business Day
after a Valuation Date on which the Fund fails to satisfy the Preferred Shares
Basic Maintenance Amount, and on the third Business Day after the Preferred
Shares Basic Maintenance Cure Date with respect to such Valuation Date, the Fund
shall complete and deliver to S&P (if S&P is then rating the Preferred Shares),
Fitch (if Fitch is then rating the Preferred Shares) and the Auction Agent (if
either S&P or Fitch is then rating the Preferred Shares) a Preferred Shares
Basic Maintenance Report as of the date of such failure or such Preferred Shares
Basic Maintenance Cure Date, as the case may be, which will be deemed to have
been delivered to the Auction Agent if the Auction Agent receives a copy or
telecopy, telex or other electronic transcription thereof and on the same day
the Fund mails to the Auction Agent for delivery on the next Business Day the
full Preferred Shares Basic Maintenance Report. The Fund shall also deliver a
Preferred Shares Basic Maintenance Report to (i) the Auction Agent (if either
S&P or Fitch is then rating the Preferred Shares) as of the last Friday of the
month (or, if such day is not a Business Day, the next succeeding Business Day),
and (ii) S&P (if S&P is then rating the Preferred Shares) and Fitch (if Fitch is
then rating the Preferred Shares) as of the last Friday of the month (or, if
such day is not a Business Day, the next preceding Business Day), in each case
on or before the third Business Day after such day. A failure by the Fund to
deliver a Preferred Shares Basic Maintenance Report pursuant to the preceding
sentence shall be deemed to be delivery of a Preferred Shares Basic Maintenance
Report indicating the Discounted Value for all assets of the Fund is less than
the Preferred Shares Basic Maintenance Amount, as of the relevant Valuation
Date. With respect to S&P, the Fund may notify S&P electronically, in lieu of
furnishing it with the Preferred Shares Basic Maintenance Report required by
this Section (6)(b), if: (i) the Preferred Shares Basic Maintenance Amount falls
below 110%, (ii) the Fund fails to meet the Preferred Shares Basic Maintenance
Amount; or (iii) the Fund meets the Preferred Shares Basic Maintenance Amount by
the Preferred Shares Basic Maintenance Cure Date.
(c) Within ten Business Days after the date of delivery of a Preferred
Shares Basic Maintenance Report in accordance with paragraph (b) of this Section
6 relating to a Quarterly Valuation Date, the Fund shall cause the Independent
Accountant to confirm in writing to S&P (if S&P is then rating the Preferred
Shares), Fitch (if Fitch is then rating the Preferred Shares) and the Auction
Agent (if either S&P or Fitch is then rating the Preferred Shares) (i) the
mathematical accuracy of the calculations reflected in such Preferred Shares
Basic Maintenance Report (and in any other Preferred Shares Basic Maintenance
Report, randomly selected by the Independent Accountant, that was prepared by
the Fund during the quarter ending on such Quarterly Valuation Date), (ii) that,
in such Preferred Shares Basic Maintenance Report (and in such randomly selected
Preferred Shares Basic Maintenance Report), the Fund correctly determined in
accordance with this Statement the assets of the Fund which constitute S&P
Eligible Assets (if S&P is then rating the Preferred Shares) and Fitch Eligible
Assets (if Fitch is then rating the Preferred Shares), (iii) that, in such
Preferred Shares Basic Maintenance Report (and in such randomly selected
Preferred Shares Basic Maintenance Report), the Fund determined whether the Fund
had, at such Quarterly Valuation Date (and at the Valuation Date addressed in
such randomly selected Report) in accordance with this Statement, S&P Eligible
Assets and Fitch Eligible Assets of an aggregate Discounted Value at least equal
to the Preferred Shares Basic Maintenance Amount, (iv) with respect to the S&P
ratings on portfolio securities of the Fund, the issuer name, issue size and
coupon rate, if any, listed in such Report, that the Independent Accountant has
requested that S&P verify such information and the Independent Account and shall
provide a listing in its letter of any differences, (v) with respect to the
Fitch ratings on portfolio securities of the Fund, the issuer name, issue size
and coupon rate, if any, listed in such Preferred Shares Basic Maintenance
Report, that such information has been verified by Fitch (in the event such
information is not verified by Fitch, the Independent Accountant will inquire of
Fitch what such information is, and provide a listing in its letter of any
differences), (vi) with respect to the Moody's ratings on portfolio securities
of the Fund, the issuer name, issue size and coupon rate, if any, listed in such
Preferred Shares Basic Maintenance Report, that such information has been
verified by Moody's (in the event such information is not verified by Moody's,
the Independent Accountant will inquire of Moody's what such information is, and
provide a listing in its letter of any differences) and (vii) with respect to
the bid or mean price (or such alternative permissible factor used in
calculating the Market Value) provided by the custodian of the Fund's assets to
the Fund for purposes of valuing securities in the Fund's portfolio, the
Independent Accountant has traced the price used in such Preferred Shares Basic
Maintenance Report to the bid or mean price listed in such Preferred Shares
Basic Maintenance Report as provided to the Fund and verified that such
information agrees (in the event such information does not agree, the
Independent Accountant will provide a listing in its letter of such differences)
(such confirmation is herein called the "Accountant's Confirmation").
(d) Within ten Business Days after the date of delivery of a Preferred
Shares Basic Maintenance Report in accordance with paragraph (b) of this Section
6 relating to any Valuation Date on which the Fund failed to satisfy the
Preferred Shares Basic Maintenance Amount, and relating to the Preferred Shares
Basic Maintenance Cure Date with respect to such failure to satisfy the
Preferred Shares Basic Maintenance Amount, the Fund shall cause the Independent
Accountant to provide to S&P (if S&P is then rating the Preferred Shares), Fitch
(if Fitch is then rating the Preferred Shares) and the Auction Agent (if either
S&P or Fitch is then rating the Preferred Shares) an Accountant's Confirmation
as to such Preferred Shares Basic Maintenance Report.
(e) If any Accountant's Confirmation delivered pursuant to paragraph (c) or
(d) of this Section 6 shows that an error was made in the Preferred Shares Basic
Maintenance Report for a particular Valuation Date for which such Accountant's
Confirmation was required to be delivered, or shows that a lower aggregate
Discounted Value for the aggregate of all S&P Eligible Assets (if S&P is then
rating the Preferred Shares) or Fitch Eligible Assets (if Fitch is then rating
the Preferred Shares), as the case may be, of the Fund was determined by the
Independent Accountant, the calculation or determination made by such
Independent Accountant shall be final and conclusive and shall be binding on the
Fund, and the Fund shall accordingly amend and deliver the Preferred Shares
Basic Maintenance Report to S&P (if S&P is then rating the Preferred Shares),
Fitch (if Fitch is then rating the Preferred Shares) and the Auction Agent (if
either S&P or Fitch is then rating the Preferred Shares) promptly following
receipt by the Fund of such Accountant's Confirmation.
(f) On or before 5:00 p.m., New York City time, on the first Business Day
after the Date of Original Issue of any Preferred Shares, the Fund shall
complete and deliver to S&P (if S&P is then rating the Preferred Shares) and
Fitch (if Fitch is then rating the Preferred Shares) a Preferred Shares Basic
Maintenance Report as of the close of business on such Date of Original Issue.
Within five Business Days of such Date of Original Issue, the Fund shall cause
the Independent Accountant to confirm in writing to the Auction Agent (if either
S&P or Fitch is then rating the Preferred Shares), S&P (if S&P is then rating
the Preferred Shares) and Fitch (if Fitch is then rating the Preferred Shares)
(i) the mathematical accuracy of the calculations reflected in such Report and
(ii) that the Discounted Value of S&P Eligible Assets or Fitch Eligible Assets
reflected thereon equals or exceeds, as applicable, the Preferred Shares Basic
Maintenance Amount reflected thereon.
(g) On or before 5:00 p.m., New York City time, on the third Business Day
after either (i) the Fund shall have redeemed Common Shares or (ii) the ratio of
the Discounted Value of S&P Eligible Assets or the Fitch Eligible Assets to the
Preferred Shares Basic Maintenance Amount is less than or equal to 105%, or
(iii) whenever requested by S&P or Fitch, the Fund shall complete and deliver to
S&P) (if S&P is then rating the Preferred Shares) or Fitch (if Fitch is then
rating the Preferred Shares), as the case may be, a Preferred Shares Basic
Maintenance Report as of the date of such event.
(h) As soon as practicable after the Fund's fiscal year end (but no later
than 60 days after the Fund's fiscal year end), the Fund shall deliver its
annual financial statements to S&P (if S&P is then rating the Preferred Shares).
7. RESTRICTIONS ON DIVIDENDS AND OTHER DISTRIBUTIONS.
(a) DIVIDENDS ON SHARES OTHER THAN THE PREFERRED SHARES. Except as set
forth in the next sentence, no dividends shall be declared or paid or set apart
for payment on the shares of any class or series of shares of beneficial
interest of the Fund ranking, as to the payment of dividends, on a parity with
the Preferred Shares for any period unless full cumulative dividends have been
or contemporaneously are declared and paid on the Series M28 Preferred Shares
through its most recent Dividend Payment Date. When dividends are not paid in
full upon the Series M28 Preferred Shares through its most recent Dividend
Payment Date or upon the shares of any other class or series of shares of
beneficial interest of the Fund ranking on a parity as to the payment of
dividends with the Preferred Shares through their most recent respective
dividend payment dates, all dividends declared upon the Preferred Shares and any
other such class or series of shares of beneficial interest ranking on a parity
as to the payment of dividends with Preferred Shares shall be declared pro rata
so that the amount of dividends declared per share on Preferred Shares and such
other class or series of shares of beneficial interest shall in all cases bear
to each other the same ratio that accumulated dividends per share on the Fund
and such other class or series of shares of beneficial interest bear to each
other (for purposes of this sentence, the amount of dividends declared per share
of Preferred Shares shall be based on the Applicable Rate for such share for the
Dividend Periods during which dividends were not paid in full).
(b) DIVIDENDS AND OTHER DISTRIBUTIONS WITH RESPECT TO COMMON SHARES UNDER
THE INVESTMENT COMPANY ACT. The Board of Trustees shall not declare any dividend
(except a dividend payable in Common Shares), or declare any other distribution,
upon the Common Shares, or purchase Common Shares, unless in every such case the
Preferred Shares have, at the time of any such declaration or purchase, an asset
coverage (as defined in and determined pursuant to the Investment Company Act)
of at least 200% (or such other asset coverage as may in the future be specified
in or under the Investment Company Act as the minimum asset coverage for senior
securities which are shares or stock of a closed- end investment company as a
condition of declaring dividends on its common shares or stock) after deducting
the amount of such dividend, distribution or purchase price, as the case may be.
(c) OTHER RESTRICTIONS ON DIVIDENDS AND OTHER DISTRIBUTIONS. For so long as
any Preferred Shares are outstanding, and except as set forth in paragraph (a)
of this Section 7 and paragraph (c) of Section 9 of this Part I, (A) the Fund
shall not declare, pay or set apart for payment any dividend or other
distribution (other than a dividend or distribution paid in shares of, or in
options, warrants or rights to subscribe for or purchase, Common Shares or other
shares, if any, ranking junior to the Preferred Shares as to the payment of
dividends and the distribution of assets upon dissolution, liquidation or
winding up) in respect of the Common Shares or any other shares of the Fund
ranking junior to or on a parity with the Preferred Shares as to the payment of
dividends or the distribution of assets upon dissolution, liquidation or winding
up, or call for redemption, redeem, purchase or otherwise acquire for
consideration any Common Shares or any other such junior shares (except by
conversion into or exchange for shares of the Fund ranking junior to the
Preferred Shares as to the payment of dividends and the distribution of assets
upon dissolution, liquidation or winding up), or any such parity shares (except
by conversion into or exchange for shares of the Fund ranking junior to or on a
parity with Preferred Shares as to the payment of dividends and the distribution
of assets upon dissolution, liquidation or winding up), unless (i) full
cumulative dividends on the Series M28 Preferred Shares through their most
recently ended Dividend Period shall have been paid or shall have been declared
and sufficient funds for the payment thereof deposited with the Auction Agent
and (ii) the Fund has redeemed the full number of Preferred Shares required to
be redeemed by any provision for mandatory redemption pertaining thereto, and
(B) the Fund shall not declare, pay or set apart for payment any dividend or
other distribution (other than a dividend or distribution paid in shares of, or
in options, warrants or rights to subscribe for or purchase, Common Shares or
other shares, if any, ranking junior to Preferred Shares as to the payment of
dividends and the distribution of assets upon dissolution, liquidation or
winding up) in respect of Common Shares or any other shares of the Fund ranking
junior to Preferred Shares as to the payment of dividends or the distribution of
assets upon dissolution, liquidation or winding up, or call for redemption,
redeem, purchase or otherwise acquire for consideration any Common Shares or any
other such junior shares (except by conversion into or exchange for shares of
the Fund ranking junior to Preferred Shares as to the payment of dividends and
the distribution of assets upon dissolution, liquidation or winding up), unless
immediately after such transaction the Discounted Value of S&P Eligible Assets
(if S&P is then rating the Preferred Shares) and Fitch Eligible Assets (if Fitch
is then rating the Preferred Shares) would at least equal to or greater than the
Preferred Shares Basic Maintenance Amount, as applicable.
8. RATING AGENCY RESTRICTIONS.
(a) For so long as any Preferred Shares are rated by S&P, the Fund will not
purchase or sell futures contracts, write, purchase or sell options on futures
contracts or write put options (except covered put options) or call options
(except covered call options) on portfolio securities unless it receives written
confirmation from S&P that engaging in such transactions will not impair the
ratings then assigned to the Preferred Shares by S&P except that the Fund may
engage in purchases or sales of futures contracts based on the Municipal Index
or Treasury Bonds, the writings, purchases or sales of put and call options on
such contracts, purchases of interest rate locks, interest rate caps, interest
rate floors, interest rate collars, and entering into interest rate swaps
(collectively, "S&P Hedging Transactions"), subject to the following
limitations:
(i) the Fund will not engage in any S&P Hedging Transaction based on the
Municipal Index (other than transactions that terminate a futures contract or
option held by the Fund by the Fund's taking the opposite position thereto
("Closing Transactions")), which would cause the Fund at the time of such
transaction to own or have sold the least of:
(A) more than 1,000 outstanding futures contracts based on the
Municipal Index,
(B) outstanding futures contracts based on the Municipal Index
exceeding in number 50% of the quotient of the Market Value of the Fund's
total assets divided by $1,000 or
(C) outstanding futures contracts based on the Municipal Index
exceeding in number 10% of the average number of daily traded futures
contracts based on the Municipal Index in the 30 days preceding the time of
effecting such transaction as reported by The Wall Street Journal;
(ii) the Fund will not engage in any S&P Hedging Transaction based on
Treasury Bonds (other than Closing Transactions) which would cause the Fund at
the time of such transaction to own or have sold the lesser of:
(A) outstanding futures contracts based on Treasury Bonds and on the
Municipal Index exceeding in number 50% of the quotient of the Market Value
of the Fund's total assets divided by $100,000 ($200,000 in the case of the
two-year United States Treasury Note) or
(B) outstanding futures contracts based on Treasury Bonds exceeding in
number 10% of the average number of daily traded futures contracts based on
Treasury Bonds in the 30 days preceding the time of effecting such
transaction as reported by The Wall Street Journal;
(iii) the Fund will engage in Closing Transactions to close out any
outstanding futures contract which the Fund owns or has sold or any outstanding
option thereon owned by the Fund in the event:
(A) the Fund does not have S&P Eligible Assets with an aggregate
Discounted Value equal to or greater than the Preferred Share Basic
Maintenance Amount on two consecutive Valuation Dates and
(B) the Fund is required to pay variation margin on the second such
Valuation Date;
(iv) the Fund will engage in a Closing Transaction to close out any
outstanding futures contract or option thereon in the month prior to the
delivery month under the terms of such futures contract or option thereon unless
the Fund holds the securities deliverable under such terms; and
(v) when the Fund writes a futures contract or option thereon, it will
either:
(A) maintain an amount of cash, cash equivalents or high grade (rated
A or better by S&P), fixed-income securities in a segregated account with
the Fund's custodian, so that the amount so segregated plus the amount of
initial margin and variation margin held in the account of or on behalf of
the Fund's broker with respect to such futures contract or option equals
the Market Value of the futures contract or option, or,
(B) in the event the Fund writes a futures contract or option thereon
which requires delivery of an underlying security, hold such underlying
security in its portfolio.
For purposes of determining whether the Fund has S&P Eligible Assets with a
Discounted Value that equals or exceeds the Preferred Shares Basic Maintenance
Amount, the Discounted Value of cash or securities held for the payment of
initial margin or variation margin shall be zero and the aggregate Discounted
Value of S&P Eligible Assets shall be reduced by an amount equal to (i) 30% of
the aggregate settlement value, as marked-to-market, of any outstanding futures
contracts based on the Municipal Index which are owned by the Fund, plus (ii)
25% of the aggregate settlement value, as marked to market, of any outstanding
futures contracts based on Treasury Bonds which contracts are owned by the Fund.
(b) For so long as any Preferred Shares are rated by S&P, the Fund will
not, unless it has received written confirmation from S&P that such action would
not impair the rating then assigned to the shares of Preferred Shares by S&P,
engage in interest rate swaps, caps and floors, except that the Fund may,
without obtaining the written consent described above, engage in swaps, caps and
floors if:
(i) the counterparty to the swap transaction has a short-term rating of A-1
or, if the counterparty does not have a short-term rating, the
counterparty's senior unsecured long-term debt rating is A- or higher,
(ii) the original aggregate notional amount of the interest rate swap
transaction or transactions is not to be greater than the liquidation
preference of the Preferred Shares,
(iii) the interest rate swap transaction will be marked-to-market weekly by
the swap counterparty,
(iv) if the Fund fails to maintain an aggregate discounted value at least
equal to the Preferred Shares Basic Maintenance Amount on two consecutive
Valuation Dates then the agreement shall terminate immediately,
(v) for the purpose of calculating the Discounted Value of S&P Eligible
Assets, 90% of any positive mark-to-market valuation of the Fund's rights
will be S&P Eligible Assets, 100% of any negative mark-to-market valuation
of the Fund's rights will be included in the calculation of the Preferred
Shares Basic Maintenance Amount, and
(vi) the Fund must maintain liquid assets with a value at least equal to
the net amount of the excess, if any, of the Fund's obligations over its
entitlement with respect to each swap.
For caps/floors, the Fund must maintain liquid assets with a value at least
equal to the Fund's obligations with respect to such caps or floors.
(c) For so long as any Preferred Shares are rated by S&P, the Fund will
enter into securities lending transactions, subject to the following criteria:
(1) The counterparty to the transaction must be rated AAA.
(2) Collateral must be marked-to-market daily.
(3) All transactions should be "matched' on both sides (cash
collateral received should be invested in a security with a term
as same as the loan).
(4) Repayment obligation of the cash collateral is included as a
liability in the minimum asset coverage test.
(5) Transactions should not exceed 25% of the total portfolio value,
with the term of the transaction limited to 30 days or less.
(d) For as long as the Preferred Shares are rated by S&P, the Fund may
engage in reverse repurchase agreements if the counterparty is rated at least
A-/A-1, the securities are marked to market daily by the counterparty, the
agreement is for a term of less than 183 days.
(e) For so long as any Preferred Shares are rated by S&P, the Fund will not
engage in any of the following transactions unless it gets a confirm from S&P:
(i) except in connection with a refinancing of the Preferred Shares,
issue additional shares of any series of preferred stock,
including any Series M28 Preferred Shares or reissue any shares
of preferred stock, including any Series M28 Preferred Shares
previously purchased or redeemed by the Fund;
(ii) engage in any short sales of securities;
(iii) merge or consolidate into or with any other trust; or
(iv) change the pricing service referred to in the definition of
"Market Value."
(f) The Fund may enter into, purchase or sell, exchange-traded financial
futures contracts based on any index approved by Fitch or Treasury Bonds, and
purchase, write or sell exchange-traded put options on such financial futures
contracts, any index approved by Fitch or Treasury Bonds and purchase, write or
sell exchange-traded call options on such financial futures contracts, any index
approved by Fitch or Treasury bonds ("Fitch Hedging Transactions"), subject to
the following limitations:
(i) The Fund may not engage in any Fitch Hedging Transaction based on any
index approved by Fitch (other than transactions that terminate a futures
contract or option held by the Fund by the Fund's taking the opposite position
thereto ("closing transactions")) that would cause the Fund at the time of such
transaction to own or have sold outstanding financial futures contracts based on
such index exceeding in number 10% of the average number of daily traded
financial futures contracts based on such index in the 30 days preceding the
time of effecting such transaction as reported by The Wall Street Journal.
(ii) The Fund will not engage in any Fitch Hedging Transaction based on
Treasury Bonds (other than closing transactions) that would cause the Fund at
the time of such transaction to own or have sold:
(A) outstanding financial futures contracts based on Treasury Bonds
with such contracts having an aggregate market value exceeding 20% of the
aggregate market value of Fitch Eligible Assets owned by the Fund and rated
at least AA by Fitch (or, if not rated by Fitch Ratings, rated at least Aa
by Moody's; or, if not rated by Moody's, rated at least AAA by S&P); or
(B) outstanding financial futures contracts based on Treasury Bonds
with such contracts having an aggregate market value exceeding 40% of the
aggregate market value of all Fitch Eligible Assets owned by the Fund
(other than Fitch Eligible Assets already subject to a Fitch Hedging
Transaction) and rated at least A or BBB by Fitch (or, if not rated by
Fitch Ratings, rated at least Baa by Moody's; or, if not rated by Moody's,
rated at least A or AA by S&P) (for purposes of the foregoing clauses (i)
and (ii), the Fund shall be deemed to own futures contracts that underlie
any outstanding options written by the Fund);
(iii) The Fund may engage in closing transactions to close out any
outstanding financial futures contract based on any index approved by Fitch if
the amount of open interest in such index as reported by The Wall Street Journal
is less than an amount to be mutually determined by Fitch and the Fund.
(iv) The Fund may not enter into an option or futures transaction unless,
after giving effect thereto, the Fund would continue to have Fitch Eligible
Assets with an aggregate Discounted Value equal to or greater than the Preferred
Shares Basic Maintenance Amount.
9. REDEMPTION.
(a) OPTIONAL REDEMPTION.
(i) To the extent permitted under the Investment Company Act and
Delaware law, the Fund at its option may, without the consent of the
holders of Preferred Shares, redeem Preferred Shares having a Dividend
Period of one year or less, in whole or in part, on the business day after
the last day of such Dividend Period upon not less than 15 calendar days'
and not more than 40 calendar days' prior notice; provided, however, that
Preferred Shares may not be redeemed at the option of the Fund during the
Initial Rate Period. The optional redemption price per share will be the
Liquidation Preference per share, plus an amount equal to accumulated but
unpaid Dividends thereon (whether or not earned or declared) to the date
fixed for redemption. Preferred Shares having a Dividend Period of more
than one year are redeemable at the option of the Fund, in whole or in
part, prior to the end of the relevant Dividend Period, subject to any
specific redemption provision, which may include the payment of redemption
premiums to the extent required under any applicable specific redemption
provisions; provided, however, that Preferred Shares may not be redeemed at
the option of the Fund during the Initial Rate Period. The Fund will not
make any optional redemption unless, after giving effect thereto (i) the
Fund has available certain Deposit Securities with maturities or tender
dates not later than the day preceding the applicable Redemption Date and
having a value not less than the amount (including any applicable premium)
due to holders of the Preferred Shares by reasons of the redemption of the
Preferred Shares on such date fixed for the redemption and (ii) the Fund
has eligible assets with an aggregate discounted value greater than or
equal to the Preferred Shares Basic Maintenance Amount, as applicable.
Notwithstanding the foregoing, Preferred Shares may not be redeemed at the
option of the Fund unless all dividends in arrears on the outstanding
Preferred Shares, and all other outstanding preferred shares have been or
are being contemporaneously paid or set aside for payment. Notice of
Special Rate Period relating to a Special Rate Period of the Series M28
Preferred Shares, as delivered to the Auction Agent and filed with the
Secretary of the Fund, may provide that the Series M28 Preferred Shares
shall not be redeemable during the whole or any part of such Special Rate
Period (except as provided in subparagraph (iv) of this paragraph (a)) or
shall be redeemable during the whole or any part of such Special Rate
Period only upon payment of such redemption premium or premiums as shall be
specified therein ("Special Redemption Provisions").
(ii) If fewer than all of the outstanding Series M28 Preferred Shares
are to be redeemed pursuant to subparagraph (i) of this paragraph (a), the
number of the Series M28 Preferred Shares to be redeemed shall be
determined by the Board of Trustees, and such shares shall be redeemed pro
rata from the Holders of the Series M28 Preferred Shares in proportion to
the number of Series M28 Preferred Shares held by such Holders.
(iii) The Fund may not on any date mail a Notice of Redemption
pursuant to paragraph (c) of this Section 9 in respect of a redemption
contemplated to be effected pursuant to this paragraph (a) unless on such
date (A) the Fund has available Deposit Securities with maturity or tender
dates not later than the day preceding the applicable redemption date and
having a value not less than the amount (including any applicable premium)
due to Holders of Preferred Shares by reason of the redemption of such
shares on such redemption date, and (B) the Discounted Value of S&P
Eligible Assets (if S&P is then rating the Preferred Shares) and Fitch
Eligible Assets (if Fitch is then rating the Preferred Shares) each at
least equals or exceeds the Preferred Shares Basic Maintenance Amount, as
applicable, and would at least equal or exceed the Preferred Shares Basic
Maintenance Amount immediately subsequent to such redemption if such
redemption were to occur on such date.
(b) MANDATORY REDEMPTION. The Fund shall redeem, at a redemption price
equal to $25,000 per share plus accumulated but unpaid dividends thereon
(whether or not earned or declared) to (but not including) the date fixed by the
Board of Trustees for redemption, certain of the Preferred Shares, if the Fund
fails to have either S&P Eligible Assets or Fitch Eligible Assets with a
Discounted Value greater than or equal to the Preferred Shares Basic Maintenance
Amount or fails to maintain the Investment Company Act Preferred Share Asset
Coverage, in accordance with the requirements of the rating agency or agencies
then rating the Preferred Shares, and such failure is not cured on or before the
Preferred Shares Basic Maintenance Cure Date or the Investment Company Act Cure
Date, as the case may be. The number of Preferred Shares to be redeemed shall be
equal to the lesser of (i) the minimum number of Preferred Shares, together with
all other preferred shares subject to redemption or retirement, the redemption
of which, if deemed to have occurred immediately prior to the opening of
business on the Cure Date, would have resulted in the Fund's having S&P Eligible
Assets and Fitch Eligible Assets with a Discounted Value greater than or equal
to the Preferred Shares Basic Maintenance Amount or maintaining the Investment
Company Act Preferred Shares Asset Coverage, as the case may be, on such Cure
Date (provided, however, that if there is no such minimum number of Preferred
Shares and other preferred shares the redemption or retirement of which would
have had such result, all Preferred Shares and other preferred shares then
outstanding shall be redeemed), and (ii) the maximum number of Preferred Shares,
together with all other preferred shares subject to redemption or retirement,
that can be redeemed out of funds expected to be legally available therefor in
accordance with the Declaration and applicable law. In determining the Preferred
Shares required to be redeemed in accordance with the foregoing, the Fund shall
allocate the number required to be redeemed to satisfy the Preferred Shares
Basic Maintenance Amount or the Investment Company Act Preferred Share Asset
Coverage, as the case may be, pro rata among Preferred Shares and other
preferred shares (and, then, pro rata among the Series M28 Preferred Shares)
subject to redemption or retirement. The Fund shall effect such redemption no
later than 30 days after the Fund last met the Preferred Shares Basic
Maintenance Amount, except that if the Fund does not have funds legally
available for the redemption of all of the required number of the Preferred
Shares and other preferred shares which are subject to redemption or retirement
or the Fund otherwise is unable to effect such redemption within the prescribed
time period, the Fund shall redeem those Preferred Shares and other preferred
shares which it was unable to redeem on the earliest practicable date on which
it is able to effect such redemption. If fewer than all of the outstanding
Series M28 Preferred Shares are to be redeemed pursuant to this paragraph (b),
the Series M28 Preferred Shares to be redeemed shall be selected by lot or such
other method that the Fund deems fair and equitable.
(c) NOTICE OF REDEMPTION. If the Fund shall determine or be required to
redeem the Series M28 Preferred Shares pursuant to paragraph (a) or (b) of this
Section 9, it shall mail a Notice of Redemption with respect to such redemption
by first-class mail, postage prepaid, to each Holder of the Series M28 Preferred
Shares to be redeemed, at such Holder's address as the same appears on the
record books of the Fund on the record date established by the Board of Trustees
and to the Auction Agent. Such Notice of Redemption shall be so mailed not less
than 15 nor more than 45 days prior to the date fixed for redemption. Each such
Notice of Redemption shall state: (i) the redemption date; (ii) the number of
Series M28 Preferred Shares to be redeemed; (iii) the CUSIP number for the
Series M28 Preferred Shares; (iv) the Redemption Price; (v) the place or places
where the certificate(s) for such shares (properly endorsed or assigned for
transfer, if the Board of Trustees shall so require and the Notice of Redemption
shall so state) are to be surrendered for payment of the Redemption Price; (vi)
that dividends on the shares to be redeemed will cease to accumulate on such
redemption date; (vii) that the Holders of any Series M28 Preferred Shares being
so redeemed shall not participate in the Auction, if any, immediately preceding
the redemption date; and (viii) the provisions of this Section 9 under which
such redemption is made. If fewer than all the Series M28 Preferred Shares held
by any Holder are to be redeemed, the Notice of Redemption mailed to such Holder
shall also specify the number of Series M28 Preferred Shares to be redeemed from
such Holder. The Fund may provide in any Notice of Redemption relating to a
redemption contemplated to be effected pursuant to paragraph (a) of this Section
9 that such redemption is subject to one or more conditions precedent and that
the Fund shall not be required to effect such redemption unless each such
condition shall have been satisfied at the time or times and in the manner
specified in such Notice of Redemption.
(d) NO REDEMPTION UNDER CERTAIN CIRCUMSTANCES. Notwithstanding the
provisions of paragraphs (a) or (b) of this Section 9, if any dividends on the
Series M28 Preferred Shares (whether or not earned or declared) are in arrears,
no Series M28 Preferred Shares shall be redeemed unless all outstanding the
Series M28 Preferred Shares are simultaneously redeemed, and the Fund shall not
purchase or otherwise acquire any Series M28 Preferred Shares; provided,
however, that the foregoing shall not prevent the purchase or acquisition of all
outstanding Series M28 Preferred Shares pursuant to the successful completion of
an otherwise lawful purchase or exchange offer made on the same terms to, and
accepted by, Holders of all outstanding Series M28 Preferred Shares.
(e) ABSENCE OF FUNDS AVAILABLE FOR REDEMPTION. To the extent that any
redemption for which Notice of Redemption has been mailed is not made by reason
of the absence of legally available funds therefor in accordance with the
Declaration and applicable law, such redemption shall be made as soon as
practicable to the extent such funds become available. Failure to redeem
Preferred Shares shall be deemed to exist at any time after the date specified
for redemption in a Notice of Redemption when the Fund shall have failed, for
any reason whatsoever, to deposit in trust with the Auction Agent the Redemption
Price with respect to any shares for which such Notice of Redemption has been
mailed; provided, however, that the foregoing shall not apply in the case of the
Fund's failure to deposit in trust with the Auction Agent the Redemption Price
with respect to any shares where (1) the Notice of Redemption relating to such
redemption provided that such redemption was subject to one or more conditions
precedent and (2) any such condition precedent shall not have been satisfied at
the time or times and in the manner specified in such Notice of Redemption.
Notwithstanding the fact that the Fund may not have redeemed Preferred Shares
for which a Notice of Redemption has been mailed, dividends may be declared and
paid on Preferred Shares and shall include those Preferred Shares for which a
Notice of Redemption has been mailed.
(f) AUCTION AGENT AS TRUSTEE OF REDEMPTION PAYMENTS BY FUND. All moneys
paid to the Auction Agent for payment of the Redemption Price of Preferred
Shares called for redemption shall be held in trust by the Auction Agent for the
benefit of Holders of shares so to be redeemed.
(g) SHARES FOR WHICH NOTICE OF REDEMPTION HAS BEEN GIVEN ARE NO LONGER
OUTSTANDING. Provided a Notice of Redemption has been mailed pursuant to
paragraph (c) of this Section 9, upon the deposit with the Auction Agent (on the
Business Day next preceding the date fixed for redemption thereby, in funds
available on the next Business Day in The City of New York, New York) of funds
sufficient to redeem the Preferred Shares that are the subject of such notice,
dividends on such shares shall cease to accumulate and such shares shall no
longer be deemed to be outstanding for any purpose, and all rights of the
Holders of the shares so called for redemption shall cease and terminate, except
the right of such Holders to receive the Redemption Price, but without any
interest or other additional amount, except as provided in subparagraph (e)(i)
of Section 2 of this Part I. The Auction Agent shall pay the Redemption Price to
the Holders of Preferred Shares subject to redemption upon surrender of the
certificates for the shares (properly endorsed or assigned for transfer, if the
Board of Trustees shall so require and the Notice of Redemption shall so state)
to be redeemed in accordance with the Notice of Redemption. In the case that
fewer than all of the shares represented by any such certificate are redeemed, a
new certificate shall be issued, representing the unredeemed shares, without
cost to the Holder thereof. The Fund shall be entitled to receive from the
Auction Agent, promptly after the date fixed for redemption, any cash deposited
with the Auction Agent in excess of (i) the aggregate Redemption Price of the
Preferred Shares called for redemption on such date and (ii) all other amounts
to which Holders of Preferred Shares called for redemption may be entitled. Any
funds so deposited that are unclaimed at the end of 90 days from such redemption
date shall, to the extent permitted by law, be repaid to the Fund, after which
time the Holders of Preferred Shares so called for redemption may look only to
the Fund for payment of the Redemption Price and all other amounts to which they
may be entitled.
(h) COMPLIANCE WITH APPLICABLE LAW. In effecting any redemption pursuant to
this Section 9, the Fund shall use its best efforts to comply with all
applicable conditions precedent to effecting such redemption under the
Investment Company Act and any applicable Delaware law, but shall effect no
redemption except in accordance with the Investment Company Act and any
applicable Delaware law.
(i) ONLY WHOLE PREFERRED SHARES MAY BE REDEEMED. In the case of any
redemption pursuant to this Section 9, only whole Preferred Shares shall be
redeemed, and in the event that any provision of the Declaration would require
redemption of a fractional share, the Auction Agent shall be authorized to round
up so that only whole shares are redeemed.
(j) MODIFICATION OF REDEMPTION PROCEDURES. Notwithstanding any of the
foregoing provisions of this Section 9, the Fund may modify any or all of the
requirements relating to the Notice of Redemption provided that (i) any such
modification does not materially and adversely affect any Holder of the relevant
series of Preferred Shares, and (ii) the Fund receives written notice from S&P
(if S&P is then rating the Preferred Shares) and Fitch (if Fitch is then rating
the Preferred Shares) that such modification would not impair the ratings
assigned by S&P and Fitch to shares of Preferred Shares.
10. LIQUIDATION RIGHTS.
(a) RANKING. The Series M28 Preferred Shares shall rank on a parity with
each other and with shares of any other series of preferred shares as to the
distribution of assets upon dissolution, liquidation or winding up of the
affairs of the Fund.
(b) DISTRIBUTIONS UPON LIQUIDATION. Upon the dissolution, liquidation or
winding up of the affairs of the Fund, whether voluntary or involuntary, the
Holders of Preferred Shares then outstanding shall be entitled to receive and to
be paid out of the assets of the Fund available for distribution to its
shareholders, before any payment or distribution shall be made on the Common
Shares or on any other class of shares of the Fund ranking junior to the
Preferred Shares upon dissolution, liquidation or winding up, an amount equal to
the Liquidation Preference with respect to such shares plus an amount equal to
all dividends thereon (whether or not earned or declared) accumulated but unpaid
to (but not including) the date of final distribution in same day funds. After
the payment to the Holders of the Preferred Shares of the full preferential
amounts provided for in this paragraph (b), the Holders of Preferred Shares as
such shall have no right or claim to any of the remaining assets of the Fund.
(c) PRO RATA DISTRIBUTIONS. In the event the assets of the Fund available
for distribution to the Holders of Preferred Shares upon any dissolution,
liquidation, or winding up of the affairs of the Fund, whether voluntary or
involuntary, shall be insufficient to pay in full all amounts to which such
Holders are entitled pursuant to paragraph (b) of this Section 10, no such
distribution shall be made on account of any shares of any other class or series
of preferred shares ranking on a parity with the Preferred Shares with respect
to the distribution of assets upon such dissolution, liquidation or winding up
unless proportionate distributive amounts shall be paid on account of the
Preferred Shares, ratably, in proportion to the full distributable amounts for
which holders of all such parity shares are respectively entitled upon such
dissolution, liquidation or winding up.
(d) RIGHTS OF JUNIOR SHARES. Subject to the rights of the holders of shares
of any series or class or classes of shares ranking on a parity with the
preferred shares with respect to the distribution of assets upon dissolution,
liquidation or winding up of the affairs of the Fund, after payment shall have
been made in full to the Holders of the Preferred Shares as provided in
paragraph (b) of this Section 10, but not prior thereto, any other series or
class or classes of shares ranking junior to the Preferred Shares with respect
to the distribution of assets upon dissolution, liquidation or winding up of the
affairs of the Fund shall, subject to the respective terms and provisions (if
any) applying thereto, be entitled to receive any and all assets remaining to be
paid or distributed, and the Holders of the Preferred Shares shall not be
entitled to share therein.
(e) CERTAIN EVENTS NOT CONSTITUTING LIQUIDATION. Neither the sale of all or
substantially all the property or business of the Fund, nor the merger or
consolidation of the Fund into or with any business trust or corporation nor the
merger or consolidation of any business trust or corporation into or with the
Fund shall be a dissolution, liquidation or winding up, whether voluntary or
involuntary, for the purposes of this Section 10.
11. MISCELLANEOUS.
(a) AMENDMENT TO ADD ADDITIONAL SERIES. The Board of Trustees may, by
resolution duly adopted, without shareholder approval (except as otherwise
provided by this Statement or required by applicable law), amend this Statement
to (1) reflect any amendments hereto which the Board of Trustees is entitled to
adopt pursuant to the terms of this Statement without shareholder approval or
(2) add additional series of Preferred Shares or additional Series M28 Preferred
Shares (and terms relating thereto) to the Series and Preferred Shares
theretofore described thereon. Each such additional Series and all such
additional shares shall be governed by the terms of this statement.
(b) NO FRACTIONAL SHARES. No fractional shares of Preferred Shares shall be
issued.
(c) STATUS OF PREFERRED SHARES REDEEMED, EXCHANGED OR OTHERWISE ACQUIRED BY
THE FUND. Preferred Shares, which are redeemed, exchanged or otherwise acquired
by the Fund, shall return to the status of authorized and unissued preferred
shares without designation as to series.
(d) BOARD MAY RESOLVE AMBIGUITIES. To the extent permitted by applicable
law, the Board of Trustees may interpret or adjust the provisions of this
Statement to resolve any inconsistency or ambiguity or to remedy any formal
defect, and may amend this Statement with respect to the Series M28 Preferred
Shares prior to the issuance of such shares.
(e) HEADINGS NOT DETERMINATIVE. The headings contained in this Statement
are for convenience of reference only and shall not affect the meaning or
interpretation of this statement.
(f) NOTICES. All notices or communications, unless otherwise specified in
the By-Laws of the Fund or this Statement, shall be sufficiently given if in
writing and delivered in person or mailed by first-class mail, postage prepaid.
(g) CERTIFICATE FOR PREFERRED SHARES. No certificates representing the
shares of Preferred Shares will be issued unless otherwise authorized by the
Board of Trustees of the Fund.
(h) RATINGS. The Fund shall take all reasonable action necessary to enable
either Moody's or Fitch to provide a rating for the Series M28 Preferred Shares.
If neither Moody's nor Fitch shall make such a rating available, the Fund shall
select another Rating Agency to act as a Substitute Rating Agency.
The Rating Agency guidelines contained herein are subject to change from
time to time. The Fund may, but it is not required to, adopt any such change.
PART II.
1. ORDERS.
(a) Prior to the Submission Deadline on each Auction Date for the Series
M28 Preferred Shares:
(i) each Beneficial Owner of the Series M28 Preferred Shares may
submit to its Broker-Dealer by telephone or otherwise information as to:
(A) the number of Outstanding Series M28 Preferred Shares, if
any, held by such Beneficial Owner which such Beneficial Owner desires
to continue to hold without regard to the Applicable Rate for the
Series M28 Preferred Shares for the next succeeding Rate Period;
(B) the number of Outstanding Series M28 Preferred Shares, if
any, held by such Beneficial Owner which such Beneficial Owner offers
to sell if the Applicable Rate for the Series M28 Preferred Shares for
the next succeeding Rate Period shall be less than the rate per annum
specified by such Beneficial Owner; and/or
(C) the number of Outstanding Series M28 Preferred Shares, if
any, held by such Beneficial Owner which such Beneficial Owner offers
to sell without regard to the Applicable Rate for the Series M28
Preferred Shares for the next succeeding Rate Period; and
(ii) one or more Broker-Dealers, using lists of Potential Beneficial
Owners, shall in good faith for the purpose of conducting a competitive
Auction in a commercially reasonable manner, contact Potential Beneficial
Owners (by telephone or otherwise), including Persons that are not
Beneficial Owners, on such lists to determine the number of Series M28
Preferred Shares, if any, which each such Potential Beneficial Owner offers
to purchase if the Applicable Rate for the Series M28 Preferred Shares for
the next succeeding Rate Period shall not be less than the rate per annum
specified by such Potential Beneficial Owner.
For the purposes hereof, the communication by a Beneficial Owner or
Potential Beneficial Owner to a Broker-Dealer, or by a Broker-Dealer to the
Auction Agent, of information referred to in clause (i) (A), (i) (B), (i)
(C) or (ii) of this paragraph (a) is hereinafter referred to as an "Order"
and collectively as "Orders" and each Beneficial Owner and each Potential
Beneficial Owner placing an Order with a Broker-Dealer, and such
Broker-Dealer placing an order with the Auction Agent, is hereinafter
referred to as a "Bidder" and collectively as "Bidders"; an Order
containing the information referred to in clause (i)(A) of this paragraph
(a) is hereinafter referred to as a "Hold Order" and collectively as "Hold
Orders"; an Order containing the information referred to in clause (i)(B)
or (ii) of this paragraph (a) is hereinafter referred to as a "Bid" and
collectively as "Bids"; and an Order containing the information referred to
in clause (i)(C) of this paragraph (a) is hereinafter referred to as a
"Sell Order" and collectively as "Sell Orders."
(b) (i) A Bid by a Beneficial Owner or an Existing Holder of the Series M28
Preferred Shares subject to an Auction on any Auction Date shall constitute an
irrevocable offer to sell:
(A) the number of Outstanding Series M28 Preferred Shares specified in
such Bid if the Applicable Rate for the Series M28 Preferred Shares
determined on such Auction Date shall be less than the rate specified
therein;
(B) such number or a lesser number of Outstanding Series M28 Preferred
Shares to be determined as set forth in clause (iv) of paragraph (a) of
Section 4 of this Part II if the Applicable Rate for the Series M28
Preferred Shares determined on such Auction Date shall be equal to the rate
specified therein; or
(C) the number of Outstanding Series M28 Preferred Shares specified in
such Bid if the rate specified therein shall be higher than the Maximum
Rate for the Series M28 Preferred Shares, or such number or a lesser number
of Outstanding Series M28 Preferred Shares to be determined as set forth in
clause (iii) of paragraph (b) of Section 4 of this Part II if the rate
specified therein shall be higher than the Maximum Rate for the Series M28
Preferred Shares and Sufficient Clearing Bids the Series M28 Preferred
Shares do not exist.
(ii) A Sell Order by a Beneficial Owner or an Existing Holder of
Series M28 Preferred Shares subject to an Auction on any Auction Date shall
constitute an irrevocable offer to sell:
(A) the number of Outstanding Series M28 Preferred Shares
specified in such Sell Order; or
(B) such number or a lesser number of Outstanding Series M28
Preferred Shares as set forth in clause (iii) of paragraph (b) of
Section 4 of this Part II if Sufficient Clearing Bids for the Series
M28 Preferred Shares do not exist; provided, however, that a
Broker-Dealer that is an Existing Holder with respect to the Series
M28 Preferred Shares shall not be liable to any Person for failing to
sell such shares pursuant to a Sell Order described in the proviso to
paragraph (c) of Section 2 of this Part II if (1) such shares were
transferred by the Beneficial Owner thereof without compliance by such
Beneficial Owner or its transferee Broker-Dealer (or other transferee
person, if permitted by the Fund) with the provisions of Section 6 of
this Part II or (2) such Broker-Dealer has informed the Auction Agent
pursuant to the terms of its Broker-Dealer Agreement that, according
to such Broker-Dealer's records, such Broker Dealer believes it is not
the Existing Holder of such shares.
(iii) A Bid by a Potential Beneficial Holder or a Potential Holder of
Series M28 Preferred Shares subject to an Auction on any Auction Date shall
constitute an irrevocable offer to purchase:
(A) the number of Outstanding Series M28 Preferred Shares
specified in such Bid if the Applicable Rate for the Series M28
Preferred Shares determined on such Auction Date shall be higher than
the rate specified therein; or
(B) such number or a lesser number of Outstanding Series M28
Preferred Shares as set forth in clause (v) of paragraph (a) of
Section 4 of this Part II if the Applicable Rate for the Series M28
Preferred Shares determined on such Auction Date shall be equal to the
rate specified therein.
(C) No Order for any number of Preferred Shares other than whole
shares shall be valid.
2. SUBMISSION OF ORDERS BY BROKER-DEALERS TO AUCTION AGENT.
(a) Each Broker-Dealer shall submit in writing to the Auction Agent prior
to the Submission Deadline on each Auction Date all Orders for Series M28
Preferred Shares subject to an Auction on such Auction Date obtained by such
Broker-Dealer, designating itself (unless otherwise permitted by the Fund) as an
Existing Holder in respect of shares subject to Orders submitted or deemed
submitted to it by Beneficial Owners and as a Potential Holder in respect of
shares subject to Orders submitted to it by Potential Beneficial Owners, and
shall specify with respect to each Order for such shares:
(i) the name of the Bidder placing such Order (which shall be the
Broker-Dealer unless otherwise permitted by the Fund);
(ii) the aggregate number of Series M28 Preferred Shares that are the
subject of such Order;
(iii) to the extent that such Bidder is an Existing Holder of Series
M28 Preferred Shares:
(A) the number of Series M28 Preferred Shares, if any, subject to
any Hold Order of such Existing Holder;
(B) the number of Series M28 Preferred Shares, if any, subject to
any Bid of such Existing Holder and the rate specified in such Bid;
and
(C) the number of Series M28 Preferred Shares, if any, subject to
any Sell Order of such Existing Holder; and
(iv) to the extent such Bidder is a Potential Holder of Series M28
Preferred Shares, the rate and number of Series M28 Preferred Shares
specified in such Potential Holder's Bid.
(b) If any rate specified in any Bid contains more than three figures to
the right of the decimal point, the Auction Agent shall round such rate up to
the next highest one thousandth (.001) of 1%.
(c) If an Order or Orders covering all of the outstanding Series M28
Preferred Shares held by any Existing Holder is not submitted to the Auction
Agent prior to the Submission Deadline, the Auction Agent shall deem a Hold
Order to have been submitted by or on behalf of such Existing Holder covering
the number of Outstanding Series M28 Preferred Shares held by such Existing
Holder and not subject to Orders submitted to the Auction Agent; provided,
however, that if an Order or Orders covering all of the Outstanding Series M28
Preferred Shares held by any Existing Holder is not submitted to the Auction
Agent prior to the Submission Deadline for an Auction relating to a Special Rate
Period consisting of more than 28 Rate Period Days, the Auction Agent shall deem
a Sell order to have been submitted by or on behalf of such Existing Holder
covering the number of outstanding Series M28 Preferred Shares held by such
Existing Holder and not subject to Orders submitted to the Auction Agent.
(d) If one or more Orders of an Existing Holder is submitted to the Auction
Agent covering in the aggregate more than the number of Outstanding Series M28
Preferred Shares subject to an Auction held by such Existing Holder, such Orders
shall be considered valid in the following order of priority:
(i) all Hold Orders for the Series M28 Preferred Shares shall be
considered valid, but only up to and including in the aggregate the number
of Outstanding Series M28 Preferred Shares held by such Existing Holder,
and if the number of Series M28 Preferred Shares subject to such Hold
Orders exceeds the number of Outstanding Series M28 Preferred Shares held
by such Existing Holder, the number of Series M28 Preferred Shares subject
to each such Hold Order shall be reduced pro rata to cover the number of
Outstanding Series M28 Preferred Shares held by such Existing Holder;
(ii) (A) any Bid for Series M28 Preferred Shares shall be considered
valid up to and including the excess of the number of Outstanding Series
M28 Preferred Shares held by such Existing Holder over the number of Series
M28 Preferred Shares subject to any Hold Orders referred to in clause (i)
above;
(B) subject to subclause (A), if more than one Bid of an Existing
Holder for Series M28 Preferred Shares is submitted to the Auction Agent
with the same rate and the number of Outstanding Series M28 Preferred
Shares subject to such Bids is greater than such excess, such Bids shall be
considered valid up to and including the amount of such excess, and the
number of Series M28 Preferred Shares subject to each Bid with the same
rate shall be reduced pro rata to cover the number of Series M28 Preferred
Shares equal to such excess;
(C) subject to subclauses (A) and (B), if more than one Bid of an
Existing Holder for Series M28 Preferred Shares is submitted to the Auction
Agent with different rates, such Bids shall be considered valid in the
ascending order of their respective rates up to and including the amount of
such excess; and
(D) in any such event, the number, if any, of such Outstanding Series
M28 Preferred Shares subject to any portion of Bids considered not valid in
whole or in part under this clause (ii) shall be treated as the subject of
a Bid for Series M28 Preferred Shares by or on behalf of a Potential Holder
at the rate therein specified; and
(iii) all Sell Orders for Series M28 Preferred Shares shall be
considered valid up to and including the excess of the number of
Outstanding Series M28 Preferred Shares held by such Existing Holder over
the sum of Series M28 Preferred Shares subject to valid Hold Orders
referred to in clause (i) above and valid Bids referred to in clause (ii)
above.
(e) If more than one Bid for one or more Series M28 Preferred Shares is
submitted to the Auction Agent by or on behalf of any Potential Holder, each
such Bid submitted shall be a separate Bid with the rate and number of Series
M28 Preferred Shares therein specified.
(f) Any Order submitted by a Beneficial Owner or a Potential Beneficial
Owner to its Broker-Dealer, or by a Broker-Dealer to the Auction Agent, prior to
the Submission Deadline on any Auction Date, shall be irrevocable.
3. DETERMINATION OF SUFFICIENT CLEARING BIDS, WINNING BIDS RATE AND APPLICABLE
RATE.
(a) Not earlier than the Submission Deadline on each Auction Date for
Series M28 Preferred Shares, the Auction Agent shall assemble all valid Orders
submitted or deemed submitted to it by the Broker-Dealers in respect of Series
M28 Preferred Shares (each such Order as submitted or deemed submitted by a
Broker-Dealer being hereinafter referred to individually as a "Submitted Hold
Order," a "Submitted Bid" or a "Submitted Sell Order," as the case may be, or as
a "Submitted Order" and collectively as "Submitted Hold Orders," "Submitted
Bids" or "Submitted Sell Orders," as the case may be, or as "Submitted Orders")
and shall determine for the Series M28 Preferred Shares:
(i) the excess of the number of Outstanding Series M28 Preferred
Shares over the number of Outstanding Series M28 Preferred Shares subject
to Submitted Hold Orders (such excess being hereinafter referred to as the
"Available Preferred Shares" of the Series M28 Preferred Shares);
(ii) from the Submitted Orders for the Series M28 Preferred Shares
whether:
(A) the number of Outstanding Series M28 Preferred Shares subject
to Submitted Bids of Potential Holders specifying one or more rates
equal to or lower than the Maximum Rate for the Series M28 Preferred
Shares, exceeds or is equal to the sum of;
(B) the number of Outstanding Series M28 Preferred Shares subject
to Submitted Bids of Existing Holders specifying one or more rates
higher than the Maximum Rate for the Series M28 Preferred Shares; and
(C) the number of Outstanding Series M28 Preferred Shares subject
to Submitted Sell Orders
(in the event such excess or such equality exists (other than because
the number of Series M28 Preferred Shares in subclauses (B) and (C)
above is zero because all of the Outstanding Series M28 Preferred
Shares are subject to Submitted Hold Orders), such Submitted Bids in
subclause (A) above being hereinafter referred to collectively as
"Sufficient Clearing Bids" for the Series M28 Preferred Shares); and
(iii) if Sufficient Clearing Bids for the Series M28 Preferred Shares,
the lowest rate specified in such Submitted Bids (the "Winning Bid Rate"
for the Series M28 Preferred Shares) which if:
(A) (I) each such Submitted Bid of Existing Holders specifying
such lowest rate and (II) all other such Submitted Bids of Existing
Holders specifying lower rates were rejected, thus entitling such
Existing Holders to continue to hold the Series M28 Preferred Shares
that are subject to such Submitted Bids; and
(B) (I) each such Submitted Bid of Potential Holders specifying
such lowest rate and (II) all other such Submitted Bids of Potential
Holders specifying lower rates were accepted; would result in such
Existing Holders described in subclause (A) above continuing to hold
an aggregate number of Outstanding Series M28 Preferred Shares which,
when added to the number of Outstanding Series M28 Preferred Shares to
be purchased by such Potential Holders described in subclause (B)
above, would equal not less than the Available Preferred Shares of the
Series M28 Preferred Shares.
(b) Promptly after the Auction Agent has made the determinations pursuant
to paragraph (a) of this Section 3, the Auction Agent shall advise the Fund of
the Maximum Rate for the Series M28 Preferred Shares for which an Auction is
being held on the Auction Date and, based on such determination the Applicable
Rate for the Series M28 Preferred Shares for the next succeeding Rate Period
thereof as follows:
(i) if Sufficient Clearing Bids for the Series M28 Preferred Shares
exist, that the Applicable Rate for all Series M28 Preferred Shares for the
next succeeding Rate Period thereof shall be equal to the Winning Bid Rate
for the Series M28 Preferred Shares so determined;
(ii) if Sufficient Clearing Bids for Series M28 Preferred Shares do
not exist (other than because all of the Outstanding Series M28 Preferred
Shares are subject to Submitted Hold Orders), that the Applicable Rate for
all Series M28 Preferred Shares for the next succeeding Rate Period thereof
shall be equal to the Maximum Rate for the Series M28 Preferred Shares; or
(iii) if all of the Outstanding Series M28 Preferred Shares are
subject to Submitted Hold Orders, that the Applicable Rate for all Series
M28 Preferred Shares for the next succeeding Rate Period thereof shall be
90% of the Reference Rate.
4. ACCEPTANCE AND REJECTION OF SUBMITTED BIDS AND SUBMITTED SELL ORDERS AND
ALLOCATION OF SHARES.
Existing Holders shall continue to hold the Preferred Shares that are
subject to Submitted Hold Orders, and, based on the determinations made pursuant
to paragraph (a) of Section 3 of this Part II, the Submitted Bids and Submitted
Sell Orders shall be accepted or rejected by the Auction Agent and the Auction
Agent shall take such other action as set forth below:
(a) If Sufficient Clearing Bids for the Series M28 Preferred Shares have
been made, all Submitted Sell Orders with respect to the Series M28 Preferred
Shares shall be accepted and, subject to the provisions of paragraphs (d) and
(e) of this section 4, Submitted Bids with respect to the Series M28 Preferred
Shares shall be accepted or rejected as follows in the following order of
priority and all other Submitted Bids with respect to the Series M28 Preferred
Shares shall be rejected:
(i) Existing Holders' Submitted Bids for the Series M28 Preferred
Shares specifying any rate that is higher than the Winning Bid Rate for the
Series M28 Preferred Shares shall be accepted, thus requiring each such
Existing Holder to sell the Preferred Shares subject to such Submitted
Bids;
(ii) Existing Holders' Submitted Bids for Series M28 Preferred Shares
specifying any rate that is lower than the Winning Bid Rate for the Series
M28 Preferred Shares shall be rejected, thus entitling each such Existing
Holder to continue to hold the Preferred Shares subject to such Submitted
Bids;
(iii) Potential Holders' Submitted Bids for the Series M28 Preferred
Shares specifying any rate that is lower than the Winning Bid Rate for the
Series M28 Preferred Shares shall be accepted;
(iv) each Existing Holder's Submitted Bid for the Series M28 Preferred
Shares specifying a rate that is equal to the Winning Bid Rate for the
Series M28 Preferred Shares shall be rejected, thus entitling such Existing
Holder to continue to hold the Preferred Shares subject to such Submitted
Bid, unless the number of Outstanding Preferred Shares subject to all such
Submitted Bids shall be greater than the number of Preferred Shares
("remaining shares") in the excess of the Available Preferred Shares of the
Series M28 Preferred Shares over the number of Preferred Shares subject to
Submitted Bids described in clauses (ii) and (iii) of this paragraph (a),
in which event such Submitted Bid of such Existing Holder shall be rejected
in part, and such Existing Holder shall be entitled to continue to hold
Preferred Shares subject to such Submitted Bid, but only in an amount equal
to the number of Series M28 Preferred Shares obtained by multiplying the
number of remaining shares by a fraction, the numerator of which shall be
the number of Outstanding Preferred Shares held by such Existing Holder
subject to such Submitted Bid and the denominator of which shall be the
aggregate number of Outstanding Preferred Shares subject to such Submitted
Bids made by all such Existing Holders that specified a rate equal to the
Winning Bid Rate for the Series M28 Preferred Shares; and
(v) each Potential Holder's Submitted Bid for the Series M28 Preferred
Shares specifying a rate that is equal to the Winning Bid Rate for the
Series M28 Preferred Shares shall be accepted but only in an amount equal
to the number of the Series M28 Preferred Shares obtained by multiplying
the number of shares in the excess of the Available Preferred Shares of the
Series M28 Preferred Shares over the number of Preferred Shares subject to
Submitted Bids described in clauses (ii) through (iv) of this paragraph (a)
by a fraction, the numerator of which shall be the number of Outstanding
Preferred Shares subject to such Submitted Bid and the denominator of which
shall be the aggregate number of Outstanding Preferred Shares subject to
such Submitted Bids made by all such Potential Holders that specified a
rate equal to the Winning Bid Rate for the Series M28 Preferred Shares.
(b) If Sufficient Clearing Bids for the Series M28 Preferred Shares have
not been made (other than because all of the Outstanding Series M28 Preferred
Shares are subject to Submitted Hold Orders), subject to the provisions of
paragraph (d) of this Section 4, Submitted Orders for the Series M28 Preferred
Shares shall be accepted or rejected as follows in the following order of
priority and all other Submitted Bids for the Series M28 Preferred Shares shall
be rejected:
(i) Existing Holders' Submitted Bids for the Series M28 Preferred
Shares specifying any rate that is equal to or lower than the Maximum Rate
for the Series M28 Preferred Shares shall be rejected, thus entitling such
Existing Holders to continue to hold the Preferred Shares subject to such
Submitted Bids;
(ii) Potential Holders' Submitted Bids for Series M28 Preferred Shares
specifying any rate that is equal to or lower than the Maximum Rate for the
Series M28 Preferred Shares shall be accepted; and
(iii) Each Existing Holder's Submitted Bid for Series M28 Preferred
Shares specifying any rate that is higher than the Maximum Rate for the
Series M28 Preferred Shares and the Submitted Sell Orders for the Series
M28 Preferred Shares of each Existing Holder shall be accepted, thus
entitling each Existing Holder that submitted or on whose behalf was
submitted any such Submitted Bid or Submitted Sell Order to sell the Series
M28 Preferred Shares subject to such Submitted Bid or Submitted Sell Order,
but in both cases only in an amount equal to the number of Series M28
Preferred Shares obtained by multiplying the number of Series M28 Preferred
Shares subject to Submitted Bids described in clause (ii) of this paragraph
(b) by a fraction, the numerator of which shall be the number of
Outstanding Series M28 Preferred Shares held by such Existing Holder
subject to such Submitted Bid or Submitted Sell Order and the denominator
of which shall be the aggregate number of Outstanding Series M28 Preferred
Shares subject to all such Submitted Bids and Submitted Sell Orders.
(c) If all of the Outstanding Series M28 Preferred Shares are subject to
Submitted Hold Orders, all Submitted Bids for the Series M28 Preferred Shares
shall be rejected.
(d) If, as a result of the procedures described in clause (iv) or (v) of
paragraph (a) or clause (iii) of paragraph (b) of this Section 4, any Existing
Holder would be entitled or required to sell, or any Potential Holder would be
entitled or required to purchase, a fraction of a Series M28 Preferred Share on
any Auction Date, the Auction Agent shall, in such manner as it shall determine
in its sole discretion, round up or down the number of Series M28 Preferred
Shares to be purchased or sold by any Existing Holder or Potential Holder on
such Auction Date as a result of such procedures so that the number of shares so
purchased or sold by each Existing Holder or Potential Holder on such Auction
Date shall be whole Preferred Shares.
(e) If, as a result of the procedures described in clause (v) of paragraph
(a) of this Section 4, any Potential Holder would be entitled or required to
purchase less than a whole share of a Series M28 Preferred Share on any Auction
Date, the Auction Agent shall, in such manner as it shall determine in its sole
discretion, allocate Series M28 Preferred Shares for purchase among Potential
Holders so that only whole Series M28 Preferred Shares are purchased on such
Auction Date as a result of such procedures by any Potential Holder, even if
such allocation results in one or more Potential Holders not purchasing Series
M28 Preferred Shares on such Auction Date.
(f) Based on the results of each Auction for the Series M28 Preferred
Shares, the Auction Agent shall determine the aggregate number of Series M28
Preferred Shares to be purchased and the aggregate number of Series M28
Preferred Shares to be sold by Potential Holders and Existing Holders and, with
respect to each Potential Holder and Existing Holder, to the extent that such
aggregate number of shares to be purchased and such aggregate number of shares
to be sold differ, determine to which other Potential Holder(s) or Existing
Holder(s) they shall deliver, or from which other Potential Holder(s) or
Existing Holder(s) they shall receive, as the case may be, Series M28 Preferred
Shares. Notwithstanding any provision of the Auction Procedures to the contrary,
in the event an Existing Holder or Beneficial Owner of Series M28 Preferred
Shares with respect to whom a Broker-Dealer submitted a Bid to the Auction Agent
for such shares that was accepted in whole or in part, or submitted or is deemed
to have submitted a Sell Order for such shares that was accepted in whole or in
part, fails to instruct its Agent Member to deliver such shares against payment
therefor, partial deliveries of Preferred Shares that have been made in respect
of Potential Holders' or Potential Beneficial Owners' submitted Bids for Series
M28 Preferred Shares that have been accepted in whole or in part shall
constitute good delivery to such Potential Holders and Potential Beneficial
Owners.
(g) None of the Fund, the Adviser, nor the Auction Agent nor any affiliate
of either shall have any responsibility or liability with respect to the failure
of an Existing Holder, a Potential Holder, a Beneficial Owner, a Potential
Beneficial Owner or its respective Agent Member to deliver Series M28 Preferred
Shares or to pay for Series M28 Preferred Shares sold or purchased pursuant to
the Auction Procedures or otherwise.
5. AUCTION AGENT.
For so long as any Preferred Shares are outstanding, the Auction Agent,
duly appointed by the Fund to so act, shall be in each case a commercial bank,
trust company or other financial institution independent of the Fund and its
Affiliates (which however may engage or have engaged in business transactions
with the Fund or its Affiliates) and at no time shall the Fund or any of its
affiliates act as the Auction Agent in connection with the Auction Procedures.
If the Auction Agent resigns or for any reason its appointment is terminated
during any period that any Preferred Shares are outstanding, the Board of
Trustees shall use its best efforts promptly thereafter to appoint another
qualified commercial bank, trust company or financial institution to act as the
Auction Agent. The Auction Agent's registry of Existing Holders of Series M28
Preferred Shares shall be conclusive and binding on the Broker-Dealers. A
Broker-Dealer may inquire of the Auction Agent between 3:00 p.m. on the Business
Day preceding an Auction for the Series M28 Preferred Shares and 9:30 a.m. on
the Auction Date for such Auction to ascertain the number of Series M28
Preferred Shares in respect of which the Auction Agent has determined such
Broker-Dealer to be an Existing Holder. If such Broker-Dealer believes it is the
Existing Holder of fewer Series M28 Preferred Shares than specified by the
Auction Agent in response to such Broker-Dealer's inquiry, such Broker-Dealer
may so inform the Auction Agent of that belief. Such Broker-Dealer shall not, in
its capacity as Existing Holder of Series M28 Preferred Shares, submit Orders in
such Auction in respect of the Series M28 Preferred Shares covering in the
aggregate more than the number of Series M28 Preferred Shares specified by the
Auction Agent in response to such Broker-Dealer's inquiry.
6. TRANSFER OF PREFERRED SHARES.
Unless otherwise permitted by the Fund, a Beneficial Owner or an Existing
Holder may sell, transfer or otherwise dispose of Preferred Shares only in whole
shares and only pursuant to a Bid or Sell Order placed with the Auction Agent in
accordance with the procedures described in this Part II or to a Broker-Dealer;
provided, however, that (a) a sale, transfer or other disposition of Preferred
Shares from a customer of a Broker-Dealer who is listed on the records of that
Broker-Dealer as the holder of such shares to that Broker-Dealer or another
customer of that Broker-Dealer shall not be deemed to be a sale, transfer or
other disposition for purposes of this Section 6 if such Broker-Dealer remains
the Existing Holder of the shares so sold, transferred or disposed of
immediately after such sale, transfer or disposition and (b) in the case of all
transfers other than pursuant to Auctions, the Broker-Dealer (or other Person,
if permitted by the Fund) to whom such transfer is made shall advise the Auction
Agent of such transfer.
7. GLOBAL CERTIFICATE.
Prior to the commencement of a Voting Period, (i) all of the Series M28
Preferred Shares outstanding from time to time shall be represented by one
global certificate registered in the name of the Securities Depository or its
nominee and (ii) no registration of transfer of Series M28 Preferred Shares
shall be made on the books of the Fund to any Person other than the Securities
Depository or its nominee.
8. FORCE MAJEURE.
(a) Notwithstanding anything else set forth herein, if an Auction Date is
not a Business Day because the New York Stock Exchange is closed for more than
three consecutive business days due to an act of God, natural disaster, act of
war, civil or military disturbance, act of terrorism, sabotage, riots or a loss
or malfunction of utilities or communications services or the Auction Agent is
not able to conduct an Auction in accordance with the Auction Procedures for any
such reason, then the Applicable Rate for the next Dividend Period shall be the
Applicable Rate determined on the previous Auction Date.
However, if the New York Stock Exchange is closed for such reason for three
or less than three consecutive business days, then the Applicable Rate for the
next Dividend Period shall be the Applicable Rate determined by Auction on the
first business day following such Auction Date.
(b) Notwithstanding anything else set forth herein, if a Dividend Payment
Date is not a Business Day because the New York Stock Exchange is closed for
more than three consecutive business days due to an act of God, natural
disaster, act of war civil or military disturbance, act of terrorism, sabotage,
riots or a loss or malfunction of utilities or communications services or the
dividend payable on such date can not be paid for any such reason, then:
(i) the Dividend Payment Date for the affected Dividend Period shall
be the next Business Day on which the Fund and its paying agent, if any,
are able to cause the dividend to be paid using their reasonable best
efforts;
(ii) the affected Dividend Period shall end on the day it would have
ended had such event not occurred and the Dividend Payment Date had
remained the scheduled date; and
(iii) the next Dividend Period will begin and end on the dates on
which it would have begun and ended had such event not occurred and the
Dividend Payment Date remained the scheduled date.
IN WITNESS WHEREOF, the undersigned being all the Trustees of the Fund
have executed this instrument as of the 17th day of June, 2004.
/s/ Charles A. Austin, III
--------------------------
CHARLES A. AUSTIN, III
Charles A. Austin, III, as Trustee and not individually
/s/ Gerald M. McDonnell
-----------------------
GERALD M. MCDONNELL
Gerald M. McDonnell, as Trustee and not individually
/s/ Dr. Russell A. Salton, III
------------------------------
DR. RUSSELL A. SALTON, III
Dr. Russell A. Salton, III, as Trustee and not individually
/s/ K. Dun Gifford
------------------
K. DUN GIFFORD
K. Dun Gifford, as Trustee and not individually
/s/ Dr. Leroy Keith
-------------------
DR. LEROY KEITH
Dr. Leroy Keith, as Trustee and not individually
/s/ David M. Richardson
-----------------------
DAVID M. RICHARDSON
David M. Richardson, as Trustee and not individually
/s/ Michael S. Scofield
-----------------------
MICHAEL S. SCOFIELD
Michael S. Scofield, as Trustee and not individually
/s/ Richard J. Shima
--------------------
RICHARD J. SHIMA
Richard J. Shima, as Trustee and not individually
/s/ William W. Pettit
---------------------
WILLIAM W. PETTIT
William W. Pettit, as Trustee and not individually
/s/ Richard Wagoner
RICHARD WAGONER
Richard Wagoner, as Trustee and not individually
/s/ Shirley L. Fulton
---------------------
SHIRLEY L. FULTON
Shirley L. Fulton, as Trustee and not individually
APPENDIX D
SETTLEMENT PROCEDURES
The following summary of Settlement Procedures sets forth the procedures
expected to be followed in connection with the settlement of each Auction and
will be incorporated by reference in the Broker-Dealer Agreement.
(a) On each Auction Date, the Auction Agent shall notify by telephone or
through the Auction Agent's auction processing system the Broker-Dealers that
participated in the Auction held on such Auction Date and submitted an Order on
behalf of any Beneficial Owner or Potential Beneficial Owner of:
(i) the Applicable Rate fixed for the next succeeding Dividend
Period;
(ii) whether Sufficient Clearing Bids existed for the determination of
the Applicable Rate;
(iii)if such Broker-Dealer (a "Seller's Broker-Dealer") submitted a
Bid or a Sell Order on behalf of a Beneficial Owner, the number
of Preferred Shares, if any, to be sold by such Beneficial Owner;
(iv) if such Broker-Dealer (a "Buyer's Broker-Dealer") submitted a Bid
on behalf of a Potential Beneficial Owner, the number of
Preferred Shares, if any, to be purchased by such Potential
Beneficial Owner;
(v) if the aggregate number of Preferred Shares to be sold by all
Beneficial Owners on whose behalf such Broker-Dealer submitted a
Bid or a Sell Order exceeds the aggregate number of Preferred
Shares to be purchased by all Potential Beneficial Owners on
whose behalf such Broker-Dealer submitted a Bid, the name or
names of one or more Buyer's Broker-Dealers (and the name of the
Agent Member, if any, of each such Buyer's Broker-Dealer) acting
for one or more purchasers of such excess number of Preferred
Shares and the number of such shares to be purchased from one or
more Beneficial Owners on whose behalf such Broker-Dealer acted
by one or more Potential Beneficial Owners on whose behalf each
of such Buyer's Broker-Dealers acted;
(vi) if the aggregate number of Preferred Shares to be purchased by
all Potential Beneficial Owners on whose behalf such
Broker-Dealer submitted a Bid exceeds the aggregate number of
Preferred Shares to be sold by all Beneficial Owners on whose
behalf such Broker-Dealer submitted a Bid or a Sell Order, the
name or names of one or more Seller's Broker-Dealers (and the
name of the Agent Member, if any, of each such Seller's
Broker-Dealer) acting for one or more sellers of such excess
number of Preferred Shares and the number of such shares to be
sold to one or more Potential Beneficial Owners on whose behalf
such Broker-Dealer acted by one or more Beneficial Owners on
whose behalf each of such Seller's Broker-Dealers acted; and
(vii)the Auction Date of the next succeeding Auction with respect to
the Preferred Shares.
(b) On each Auction Date, each broker-Dealer that submitted an Order on
behalf of any Beneficial Owner or Potential Beneficial Owner shall:
(i) (aa) in the case of a Broker-Dealer that is a Buyer's
Broker-Dealer, instruct each Potential Beneficial Owner on whose
behalf such Broker-Dealer submitted a Bid that we accepted, in
whole or in part, to instruct such Potential Beneficial Owner's
Agent Member to pay to such Broker-Dealer (or its Agent Member)
through the Securities Depository the amount necessary to
purchase the number of Preferred Shares to be purchased pursuant
to such Bid against receipt of such shares and advise such
Potential Beneficial Owner of the Applicable Rate for the next
succeeding Dividend Period, and, (bb) in the case that the
aggregate number of Preferred Shares to be purchased by all
Potential Beneficial Owners on whose behalf such Buyer's
Broker-Dealer submitted a Bid exceeds the aggregate number of
Preferred Shares to be sold by all Beneficial Owners on whose
behalf such Broker-Dealer submitted a Bid or a Sell Order, as
described in (a)(vi), then such Buyer's Broker-Dealer shall
instruct each Potential Beneficial Owner of such excess Preferred
Shares to instruct such Potential Beneficial Owner's Agent Member
to pay to the Seller's Broker-Dealer (or its Agent Member), the
names of whom are to be provided pursuant to (a)(vi), through the
Securities Depository the amount necessary to purchase the number
of such excess Preferred Shares to be purchased by such Potential
Beneficial Owner against receipt of such shares;
(ii) (aa) in the case of a Broker-Dealer that is a Seller's
Broker-Dealer, instruct each Beneficial Owner on whose behalf
such Broker-Dealer submitted a Sell Order that was accepted, in
whole or in part, or a Bid that was accepted, in whole or in
part, to instruct such Beneficial Owner's Agent Member to deliver
to such broker-Dealer (or its Agent Member) through the
Securities Depository the number of Preferred Shares to be sold
pursuant to such Order against payment therefor and advise any
such Beneficial Owner that will continue to hold Preferred Shares
of the Applicable Rate for the next succeeding Dividend Period,
and, (bb) in the case that the aggregate number of Preferred
Shares to be sold by all Beneficial Owners on whose behalf such
Broker-Dealer submitted a Bid or a Sell Order exceeds the
aggregate number of Preferred Shares to be purchased by all
Potential Beneficial Owners on whose behalf such Broker-Dealer
submitted a Bid, as described in (a)(v), then such Seller's
Broker-Dealer shall instruct each Beneficial Owner of such excess
Preferred Shares to instruct such Beneficial Owner's Agent Member
to deliver to the Buyer's Broker-Dealer (or its Agent Member),
the names of whom are to be provided pursuant to (a)(v), through
the Securities Depository the number of Preferred Shares to be
sold pursuant to such Order against payment therefor;
(iii)advise each Beneficial Owner on whose behalf such Broker-Dealer
submitted a Hold Order of the Applicable Rate for the next
succeeding Dividend period;
(iv) advise each Beneficial Owner on whose behalf such Broker-Dealer
submitted an Order of the Auction Date for the next succeeding
Auction; and
(v) advise each Potential Beneficial Owner on whose behalf such
broker-Dealer submitted a Bid that was accepted, in whole or in
part, of the Auction Date for the next succeeding Auction.
(c) On the basis of the information provided to it pursuant to (a) above,
each broker-Dealer that submitted a Bid or a Sell Order on behalf of a Potential
Beneficial Owner or a Beneficial Owner shall, in such manner and at such time or
times as in its sole discretion it may determine, allocate any funds received by
it pursuant to (b)(i) above and any Preferred Shares received by it pursuant to
(b)(ii) above among the Potential Beneficial Owners, if any, on whose behalf
such Broker-Dealer submitted Bids, the Beneficial Owner, if any, on whose behalf
such Broker-Dealer submitted Bids that were accepted or Sell Orders, and any
Broker-Dealer or Broker-Dealers identified to it by the Auction Agent pursuant
to (a)(v) or (a)(vi) above.
(d) On each Auction Date:
(i) each Potential Beneficial Owner and Beneficial Owner shall
instructs its Agent Member as provided in (b)(i) or (ii) above,
as the case may be;
(ii) each Seller's Broker-Dealer which is not an Agent Member of the
Securities Depository shall instruct its Agent Member to (A) pay
through the Securities Depository to the Agent Member of the
Beneficial Owner delivering shares to such Broker-Dealer pursuant
to (b)(ii) above the amount necessary to purchase such shares
against receipt of such shares, and (B) deliver such shares
through the Securities Depository to a Buyer's Broker-Dealer (or
its Agent Member) identified to such Seller's Broker-Dealer
pursuant to (a)(v) above against payment therefore; and
(iii)each Buyer's Broker-Dealer which is not an Agent Member of the
Securities Depository shall instruct its Agent Member to (A) pay
through the Securities Depository to any Seller's Broker-Dealer
(or its Agent Member) identified pursuant to (a)(vi) above the
amount necessary to purchase the shares to be purchased pursuant
to (b)(i) above against receipt of such shares, and (B) deliver
such shares through the Securities Depository to the Agent Member
of the purchaser thereof against payment therefor.
(e) On the day after the Auction Date:
(i) Each Bidder's Agent Member referred to in (d)(i) above shall
instruct the Securities Depository to execute the transactions
described in (b)(i) or (ii) above, and the Securities Depository
shall execute such transactions;
(ii) each Seller's Broker-Dealer or its Agent Member shall instruct
the Securities Depository to execute the transactions described
in (d)(ii) above, and the Securities Depository shall execute
such transactions; and
(iii)each Buyer's Broker-Dealer or its Agent Member shall instruct
the Securities Depository to execute the transactions described
in (d)(iii) above, and the Securities Depository shall execute
such transactions.
If a Beneficial Owner selling Preferred Shares in an Auction fails to
deliver such shares (by authorized book-entry), a Broker-Dealer may deliver to
the Potential Beneficial Owner on behalf of which it submitted a Bid that was
accepted a number of whole Preferred Shares that is less than the number of
shares that otherwise was to be purchased by such Potential Beneficial Owner. In
such event, the number of Preferred Shares to be so delivered shall be
determined solely by such Broker-Dealer. Delivery of such lesser number of
shares shall constitute good deliver. Notwithstanding the foregoing terms of
this paragraph (f), any delivery or non-delivery of shares which shall represent
any departure from the results of an Auction, as determined by the Auction
Agent, shall be of no effect unless and until the Auction Agent shall have been
notified of such delivery or non-delivery in accordance with the provisions of
the Auction Agency Agreement and the Broker-Dealer Agreements.