UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED
MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number: 811- 21507
Wells Fargo Advantage Utilities & High Income Fund
(Exact name of registrant as specified in charter)
525 Market St., San Francisco, CA 94105
(Address of principal executive offices) (Zip code)
C. David Messman
Wells Fargo Funds Management, LLC
525 Market St., San Francisco, CA 94105
(Name and address of agent for service)
Registrant's telephone number, including area code: 800-643-9691
Date of fiscal year end: August 31, 2010
Date of reporting period: August 31, 2010
ITEM 1. REPORT TO SHAREHOLDERS
(WELLS FARGO ADVANTAGE FUNDS LOGO)
(GRAPHIC)
REDUCE CLUTTER. SAVE TREES.
Sign up for electronic delivery of prospectuses and shareholder reports at
www.wellsfargo.com/advantagedelivery
(GRAPHIC)
Annual Report
August 31, 2010
WELLS FARGO ADVANTAGE UTILITIES AND HIGH INCOME FUND
(FORMERLY EVERGREEN UTILITIES AND HIGH INCOME FUND)
THIS CLOSED-END FUND IS NO LONGER OFFERED AS AN INITIAL PUBLIC OFFERING AND IS
ONLY OFFERED THROUGH BROKER/DEALERS ON THE SECONDARY MARKET. A closed-end fund
is not required to buy its shares back from investors upon request.
REDUCE CLUTTER. SAVE TREES.
Sign up for electronic delivery of shareholder reports at
www.wellsfargo.com/advantagedelivery
Contents
LETTER TO SHAREHOLDERS ................................................... 2
PORTFOLIO OF INVESTMENTS ................................................. 5
FINANCIAL STATEMENTS
Statement of Assets and Liabilities ...................................... 16
Statement of Operations .................................................. 17
Statements of Changes in Net Assets ...................................... 18
Statement of Cash Flows .................................................. 19
Financial Highlights ..................................................... 20
NOTES TO FINANCIAL STATEMENTS ............................................ 21
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM .................. 28
OTHER INFORMATION ........................................................ 29
LIST OF ABBREVIATIONS .................................................... 36
The views expressed are as of August 31, 2010. Any reference to a specific
security in this report is not a recommendation to purchase or sell any specific
security or adopt any investment strategy. The views are subject to change at
any time in response to changing circumstances in the market and are not
intended to predict or guarantee the future performance of any individual
security, market sector or the markets generally, or the WELLS FARGO ADVANTAGE
UTILITIES AND HIGH INCOME FUND.
NOT FDIC INSURED - NO BANK GUARANTEE - MAY LOSE VALUE
2 Wells Fargo Advantage Utilities and High Income Fund
Letter to Shareholders
(PHOTO OF KARLA M. RABUSCH)
KARLA M. RABUSCH,
President
WELLS FARGO ADVANTAGE FUNDS
Dear Valued Shareholder,
We are pleased to provide you with this annual report for the WELLS
FARGO ADVANTAGE UTILITIES AND HIGH INCOME FUND for the 12-month period
that ended August 31, 2010.
ECONOMIC GROWTH TURNED POSITIVE AFTER SEVERE CONTRACTION.
Economic growth was solid throughout the period as the economy began to recover
from the deepest recession since the 1930s. Gross Domestic Product (GDP) became
positive in the third quarter of 2009, after contracting for four consecutive
quarters--something not seen in at least 60 years. GDP growth was 3.7% and 2.4%
in the first and second quarters of 2010, respectively. The consensus among
economists was that the recession that began in December 2007 had likely ended
during the summer of 2009; however, questions remained over the sustainability
of the recovery.
Other economic data were mixed during the period, raising some concerns about
the potential sustainability of the recovery. Retail sales were strong through
April 2010 but then declined in May and June. New and existing home sales also
weakened in the final months of the period as the government tax credit ended,
renewing concerns about the ongoing fragility of the housing market. On the
positive side, industrial production continued to see gains, inflation remained
subdued, and interest rates remained at historically low levels.
THE FED CONTINUED TO FOCUS ON ECONOMIC STIMULUS.
Despite extensive quantitative easing measures by the Federal Reserve, bank
lending remained constrained during the period. Throughout the period, the
Federal Open Market Committee (FOMC) held the federal funds rate between 0% and
0.25%--which it first targeted in December 2008. The Fed did, however, begin to
remove some of its unconventional stimulus measures. After concluding its
purchases of longer-term Treasuries in October 2009, it also ended its program
to invest in mortgage-backed securities in March 2010.
The FOMC's final statement during the period noted a continuation of the
economic recovery and gradual improvement in the labor market. It also cited
increases in both household and business spending. However, the committee noted
that unemployment remained high and credit continued to be tight, reiterating
that it was likely to keep the federal funds rate at exceptionally low levels
for an extended period because of the continued substantial economic slack.
FINANCIAL MARKETS SAW A SHIFT IN SENTIMENT AS VOLATILITY SPIKED.
The equity markets saw a significant shift in sentiment during the period. The
strong rally that began in March 2009 continued through April 2010, but growing
concerns about the strength of global economic growth resulted in a rapid
correction and an increase in volatility in May and June.
Despite the macroeconomic concerns, strong corporate earnings helped support the
equity markets through the first two quarters of 2010. Approximately
three-quarters of the companies in the S&P 500 Index exceeded analysts'
estimates during both the first and second quarters of 2010. However, investor
focus shifted
Wells Fargo Advantage Utilities and High Income Fund 3
Letter to Shareholders
from improving corporate fundamentals to macroeconomic concerns about sovereign
debt, slowing economic growth in China, and fear of a potential double-dip U.S.
recession.
Within the bond markets, many of the trends that characterized the equity
markets applied to bonds. By the end of 2009, investors appeared to be less
concerned with the risks of a possible deepening recession and instead were more
focused on the potential for increasing interest rates. During the first six
months of 2010, however, not only did short-term interest rates not rise, but
Treasury yields essentially remained unchanged, or even fell. The result was
perhaps the steepest yield curve on record--certainly steeper than at any point
during 2009. In addition, demand for bonds that offered additional yield, albeit
with more risk, helped drive performance of the securitized and credit markets,
especially high yield. However, investor optimism was tempered by global credit
fears and signals from the Fed suggesting that short-term interest rates would
remain at their current historic lows until 2011.
INDIVIDUAL SECURITY SELECTION IS KEY TO MAXIMIZING VALUE AND DRIVING
PERFORMANCE.
As always, the management team of the WELLS FARGO ADVANTAGE UTILITIES AND HIGH
INCOME FUND remained focused on the pursuit of a high level of current income
and moderate capital growth for investors. As the period progressed, the team
began to selectively reduce more defensive names that were in the Fund earlier
in the year, particularly in preferred stock. Within the high-yield sleeve, a
modestly defensive posture was maintained within the Fund throughout most of the
period, favoring investment-grade and higher-rated non-investment-grade bonds
over lower-rated high-yield names. However, the Fund continued to own bank debt
in some of the lower-quality names where the team felt the pricing was
attractive and downside risk minimized. Regardless of the marketplace--equity or
fixed-income--we feel individual security selection will be the primary driver
of performance for the foreseeable future. Within the equity sleeve, the
management team will focus on utility companies with either above-average
dividend yields or the potential to increase dividends. With the bond
allocation, higher-quality, fundamentally sound credits will remain the focus,
in an attempt to minimize downside risk and maximize upside potential at a good
valuation.
DON'T LET SHORT-TERM VOLATILITY DERAIL LONG-TERM INVESTMENT GOALS.
The period saw renewed volatility within both the equity and fixed-income
markets. We believe, however, that the significant rebound that began in March
2009 underscores the importance of maintaining a focus on long-term investment
goals through periods of volatility, so as not to miss potential periods of
strong recovery. Although periods of volatility can present challenges,
experience has taught us that maintaining a long-term investment strategy based
on individual goals and risk tolerance can be an effective way to plan for the
future.
4 Wells Fargo Advantage Utilities and High Income Fund
Letter to Shareholders
Thank you for choosing WELLS FARGO ADVANTAGE FUNDS. We appreciate your
confidence in us. Through each market cycle, we are committed to helping you
meet your financial needs. Please visit us at www.wellsfargo.com/advantagefunds
for more information about our funds and other investment products available to
you. Thank you for your continued support of WELLS FARGO ADVANTAGE FUNDS.
Sincerely,
/s/ Karla M. Rabusch
Karla M. Rabusch
President
WELLS FARGO ADVANTAGE FUNDS
Wells Fargo Advantage Utilities and High Income Fund 5
Portfolio of Investments--August 31, 2010
INTEREST MATURITY
PRINCIPAL SECURITY NAME RATE DATE VALUE
----------- -------------------------------------------------- -------- ---------- -------------
CORPORATE BONDS & NOTES: 31.33%
CONSUMER DISCRETIONARY: 5.30%
AUTO COMPONENTS: 0.60%
$ 215,000 COOPER TIRE & RUBBER COMPANY 7.63% 03/15/2027 $ 194,575
55,000 GOODYEAR TIRE & RUBBER COMPANY 9.00 07/01/2015 57,613
335,000 GOODYEAR TIRE & RUBBER COMPANY 10.50 05/15/2016 371,850
624,038
-------------
AUTOMOBILES: 0.24%
235,000 FORD MOTOR CREDIT COMPANY 9.875 08/10/2011 248,043
-------------
DIVERSIFIED CONSUMER SERVICES: 0.96%
185,000 CARRIAGE SERVICES INCORPORATED 7.875 01/15/2015 181,300
40,000 SERVICE CORPORATION INTERNATIONAL 8.00 11/15/2021 42,200
465,000 SERVICE CORPORATION INTERNATIONAL 7.50 04/01/2027 423,731
325,000 STONEMOR PARTNERS LP++ 10.25 12/01/2017 342,063
989,294
-------------
HOTELS, RESTAURANTS & LEISURE: 0.54%
75,000 AMERISTAR CASINOS INCORPORATED 9.25 06/01/2014 79,500
15,000 BOYD GAMING CORPORATION 7.75 12/15/2012 15,094
125,000 GREEKTOWN SUPERHOLDINGS++ 13.00 07/01/2015 133,750
110,000 INN OF THE MOUNTAIN GODS RESORT & CASINO(i)#### 12.00 11/15/2049 48,125
7,000 POKAGON GAMING AUTHORITY++ 10.375 06/15/2014 7,263
60,000 SCIENTIFIC GAMES CORPORATION 9.25 06/15/2019 63,600
15,000 SENECA GAMING CORPORATION 7.25 05/01/2012 14,588
90,000 SHINGLE SPRINGS TRIBAL GAMING AUTHORITY++ 9.375 06/15/2015 68,625
120,000 SPEEDWAY MOTORSPORTS INCORPORATED 8.75 06/01/2016 126,900
557,445
-------------
HOUSEHOLD DURABLES: 0.01%
5,000 LENNAR CORPORATION 12.25 06/01/2017 5,725
9,000 SEALY CORPORATION++ 10.875 04/15/2016 10,035
15,760
-------------
INTERNET & CATALOG RETAIL: 0.08%
75,000 TICKETMASTER ENTERTAINMENT 10.75 08/01/2016 79,875
-------------
MEDIA: 2.17%
145,000 CABLEVISION SYSTEM CORPORATION++ 8.625 09/15/2017 158,050
880,000 CCH II CAPITAL CORPORATION 13.50 11/30/2016 1,042,800
90,000 CHARTER COMMUNICATIONS, INCORPORATED STEP BOND@@++ 8.00 04/30/2012 94,725
595,000 CHARTER COMMUNICATIONS, INCORPORATED STEP BOND@@++ 10.875 09/15/2014 666,400
115,000 DISH DBS CORPORATION 7.875 09/01/2019 119,888
50,000 LIN TELEVISION CORPORATION++ 8.375 04/15/2018 51,063
100,000 SALEM COMMUNICATIONS CORPORATION 9.625 12/15/2016 104,125
2,237,051
-------------
SPECIALTY RETAIL: 0.35%
365,000 AMERICAN ACHIEVEMENT CORPORATION++ 8.25 04/01/2012 361,806
-------------
TEXTILES, APPAREL & LUXURY GOODS: 0.35%
200,000 OXFORD INDUSTRIES INCORPORATED 11.375 07/15/2015 223,000
135,000 VISANT CORPORATION 7.625 10/01/2012 134,831
357,831
-------------
6 Wells Fargo Advantage Utilities and High Income Fund
Portfolio of Investments--August 31, 2010
INTEREST MATURITY
PRINCIPAL SECURITY NAME RATE DATE VALUE
----------- -------------------------------------------------- -------- ---------- -------------
CONSUMER STAPLES: 0.32%
FOOD PRODUCTS: 0.32%
$ 181,000 DOLE FOOD COMPANY INCORPORATED 13.875% 03/15/2014 $ 217,653
115,000 SMITHFIELD FOODS INCORPORATED 7.00 08/01/2011 117,444
335,097
-------------
ENERGY: 4.76%
ENERGY EQUIPMENT & SERVICES: 1.45%
110,000 BRISTOW GROUP INCORPORATED 7.50 09/15/2017 110,000
190,000 FORBES ENERGY SERVICES LIMITED 11.00 02/15/2015 173,375
225,000 GULFMARK OFFSHORE INCORPORATED 7.75 07/15/2014 218,250
170,000 HERCULES OFFSHORE INCORPORATED++ 10.50 10/15/2017 154,700
260,000 HORNBECK OFFSHORE SERVICES INCORPORATED SERIES B 6.125 12/01/2014 243,750
230,000 HORNBECK OFFSHORE SERVICES INCORPORATED SERIES B 8.00 09/01/2017 216,200
10,000 OFFSHORE LOGISTICS INCORPORATED 6.125 06/15/2013 10,050
370,000 PHI INCORPORATED 7.125 04/15/2013 356,588
10,000 PRIDE INTERNATIONAL INCORPORATED 8.50 06/15/2019 11,325
1,494,238
-------------
OIL, GAS & CONSUMABLE FUELS: 3.31%
50,000 ALON REFINING KROTZ SPRINGS INCORPORATED 13.50 10/15/2014 49,000
65,000 ATLAS ENERGY RESOURCES LLC 12.125 08/01/2017 74,669
255,000 CHESAPEAKE ENERGY CORPORATION 9.50 02/15/2015 286,875
50,000 COFFEYVILLE RESOURCES++ 10.88 04/01/2017 50,625
20,000 CONNACHER OIL & GAS LIMITED++ 11.75 07/15/2014 21,700
55,000 CONNACHER OIL & GAS LIMITED++ 10.25 12/15/2015 55,000
165,000 CONSOL ENERGY INCORPORATED++ 8.25 04/01/2020 175,106
45,000 EL PASO CORPORATION 12.00 12/12/2013 54,225
50,000 EL PASO CORPORATION 7.80 08/01/2031 50,329
90,000 EL PASO CORPORATION 7.42 02/15/2037 82,141
65,000 FOREST OIL CORPORATION 8.50 02/15/2014 69,063
95,000 FOREST OIL CORPORATION 7.25 06/15/2019 95,119
220,000 HOLLY CORPORATION 9.875 06/15/2017 231,000
55,000 NEWFIELD EXPLORATION COMPANY 6.875 02/01/2020 57,338
60,000 OPTI CANADA INCORPORATED 7.875 12/15/2014 46,200
390,000 PEABODY ENERGY CORPORATION 7.875 11/01/2026 401,213
10,000 PENN VIRGINIA CORPORATION 10.375 06/15/2016 10,875
60,000 PETROHAWK ENERGY CORPORATION 10.50 08/01/2014 67,050
95,000 PETROHAWK ENERGY CORPORATION 7.875 06/01/2015 98,563
145,000 PIONEER NATURAL RESOURCE COMPANY 7.50 01/15/2020 155,785
325,000 PLAINS EXPLORATION & PRODUCTION COMPANY 8.625 10/15/2019 339,625
250,000 SABINE PASS LNG LP 7.25 11/30/2013 235,000
290,000 SANDRIDGE ENERGY INCORPORATED++ 8.75 01/15/2020 275,500
60,000 SOUTHWESTERN ENERGY COMPANY++ 7.50 02/01/2018 67,650
55,000 STALLION OILFIELD HOLDINGS INCORPORATED++ 10.50 02/15/2015 55,825
125,000 TESORO CORPORATION 7.50 07/17/2012 124,279
70,000 TESORO CORPORATION 6.50 06/01/2017 67,375
110,000 TESORO CORPORATION 9.75 06/01/2019 118,525
3,415,655
-------------
FINANCIALS: 6.87%
CAPITAL MARKETS: 0.14%
68,000 E*TRADE FINANCIAL CORPORATION 12.50 11/30/2017 75,820
70,000 PENSON WORLDWIDE INCORPORATED++ 12.50 05/15/2017 69,125
144,945
-------------
Wells Fargo Advantage Utilities and High Income Fund 7
Portfolio of Investments--August 31, 2010
INTEREST MATURITY
PRINCIPAL SECURITY NAME RATE DATE VALUE
----------- -------------------------------------------------- -------- ---------- -------------
COMMERCIAL BANKS: 0.44%
$ 215,000 CAPITALSOURCE INCORPORATED++ 12.75% 07/15/2014 $ 247,250
200,000 PROVIDENT FUNDING ASSOCIATION++ 10.25 04/15/2017 203,500
450,750
-------------
CONSUMER FINANCE: 3.19%
75,000 CALPINE CONSTRUCTION FINANCE CORPORATION++ 8.00 06/01/2016 78,750
125,000 CALPINE CONSTRUCTION FINANCE CORPORATION++ 7.25 10/15/2017 124,688
130,000 CLEARWIRE COMMUNICATIONS FINANCE CORPORATION++ 12.00 12/01/2015 130,000
6,000 GMAC LLC 6.875 09/15/2011 6,105
146,000 GMAC LLC 6.875 08/28/2012 149,285
36,000 GMAC LLC++ 6.75 12/01/2014 35,730
101,000 GMAC LLC 8.00 12/31/2018 97,339
130,000 GMAC LLC++ 8.00 03/15/2020 133,250
310,000 GMAC LLC++ 8.00 11/01/2031 305,350
146,351 HOMER CITY FUNDING LLC 8.725 10/01/2026 126,594
75,000 INTERNATIONAL LEASE FINANCE CORPORATION++ 8.625 09/15/2015 75,469
140,000 INTERNATIONAL LEASE FINANCE CORPORATION 4.75 01/13/2012 136,500
275,000 INTERNATIONAL LEASE FINANCE CORPORATION 5.30 05/01/2012 267,438
50,000 INTERNATIONAL LEASE FINANCE CORPORATION SERIES MTN 5.75 06/15/2011 49,938
420,000 JBS USA FINANCE INCORPORATED 11.625 05/01/2014 481,425
75,000 LBI ESCROW CORPORATION++ 8.00 11/01/2017 80,531
285,000 SPRINT CAPITAL CORPORATION 8.375 03/15/2012 301,388
120,000 SPRINT CAPITAL CORPORATION 6.90 05/01/2019 112,800
725,000 SPRINT CAPITAL CORPORATION 6.875 11/15/2028 605,375
3,297,955
-------------
DIVERSIFIED FINANCIAL SERVICES: 2.24%
825,000 ALLY FINANCIAL INCORPORATED++ 8.30 02/12/2015 858,000
1,025,000 CITIGROUP INCORPORATED 7.00 05/01/2013 1,016,031
90,000 FMG FINANCE PROPERTY LIMITED++ 10.625 09/01/2016 104,288
313,000 LEUCADIA NATIONAL CORPORATION 8.13 09/15/2015 333,345
2,311,664
-------------
REAL ESTATE INVESTMENT TRUSTS: 0.86%
565,000 DUPONT FABROS TECHNOLOGY INCORPORATED 8.50 12/15/2017 597,488
30,000 HOST MARRIOTT CORPORATION 9.00 05/15/2017 33,000
160,000 OMEGA HEALTHCARE INVESTORS INCORPORATED 7.00 04/01/2014 163,200
90,000 VENTAS INCORPORATED 9.00 05/01/2012 95,254
888,942
-------------
HEALTH CARE: 0.99%
BIOTECHNOLOGY: 0.06%
55,000 TALECRIS BIOTHERAPEUTICS HOLDINGS CORPORATION 7.75 11/15/2016 59,813
-------------
HEALTH CARE EQUIPMENT & SUPPLIES: 0.06%
60,000 BIOMET INCORPORATED 10.375 10/15/2017 65,250
-------------
HEALTH CARE PROVIDERS & SERVICES: 0.75%
120,000 APRIA HEALTHCARE GROUP++ 11.25 11/01/2014 129,750
400,000 HCA INCORPORATED 9.25 11/15/2016 429,000
129,000 HCA INCORPORATED 9.625 11/15/2016 138,514
75,000 OMNICARE INCORPORATED 6.875 12/15/2015 74,250
771,514
-------------
8 Wells Fargo Advantage Utilities and High Income Fund
Portfolio of Investments--August 31, 2010
INTEREST MATURITY
PRINCIPAL SECURITY NAME RATE DATE VALUE
----------- -------------------------------------------------- -------- ---------- -------------
LIFE SCIENCES TOOLS & SERVICES: 0.10%
$ 95,000 BIO-RAD LABORATORIES INCORPORATED 8.00% 09/15/2016 $ 101,888
-------------
PHARMACEUTICALS: 0.02%
25,000 MYLAN INCORPORATED++ 7.625 07/15/2017 25,813
-------------
INDUSTRIALS: 2.69%
AEROSPACE & DEFENSE: 1.20%
225,000 ALLIANT TECHSYSTEMS INCORPORATED 6.75 04/01/2016 226,125
55,000 GEOEYE INCORPORATED++ 9.625 10/01/2015 59,194
160,000 HEXCEL CORPORATION 6.75 02/01/2015 159,200
130,000 KRATOS DEFENSE & SECURITY++ 10.00 06/01/2017 134,225
216,000 L-3 COMMUNICATIONS HOLDINGS INCORPORATED 5.875 01/15/2015 220,050
360,000 L-3 COMMUNICATIONS HOLDINGS INCORPORATED 6.375 10/15/2015 368,550
70,000 WYLE SERVICES CORPORATION++ 10.50 04/01/2018 68,775
1,236,119
-------------
COMMERCIAL SERVICES & SUPPLIES: 0.84%
220,000 CASELLA WASTE SYSTEMS INCORPORATED 11.00 07/15/2014 240,350
60,000 CORRECTIONS CORPORATION OF AMERICA 6.25 03/15/2013 60,600
70,000 CORRECTIONS CORPORATION OF AMERICA 7.75 06/01/2017 74,375
50,000 DIGITALGLOBE INCORPORATED 10.50 05/01/2014 54,625
100,000 GEO GROUP INCORPORATED 7.75 10/15/2017 103,000
5,000 INTERFACE INCORPORATED 11.375 11/01/2013 5,650
155,000 IRON MOUNTAIN INCORPORATED 8.375 08/15/2021 164,688
155,000 SGS INTERNATIONAL INCORPORATED 12.00 12/15/2013 160,425
863,713
-------------
INDUSTRIAL CONGLOMERATES: 0.22%
215,000 OTTER TAIL CORPORATION 9.00 12/15/2016 228,438
-------------
MACHINERY: 0.39%
55,000 CLEAVER-BROOKS INCORPORATED++ 12.25 05/01/2016 56,581
181,050 COMMERCIAL VEHICLE GROUP INCORPORATED++ 13.00 02/15/2013 181,050
150,000 CPM HOLDINGS INCORPORATED++ 10.63 09/01/2014 162,000
399,631
-------------
ROAD & RAIL: 0.05%
50,000 RAILAMERICA INCORPORATED 9.25 07/01/2017 54,250
-------------
INFORMATION TECHNOLOGY: 1.76%
COMMUNICATIONS EQUIPMENT: 0.24%
155,000 LUCENT TECHNOLOGIES INCORPORATED 6.45 03/15/2029 104,625
160,000 LUCENT TECHNOLOGIES INCORPORATED SERIES B 2.75 06/15/2025 141,800
246,425
-------------
ELECTRONIC EQUIPMENT & INSTRUMENTS: 1.04%
105,000 INTCOMEX INCORPORATED++ 13.25 12/15/2014 111,038
620,000 JABIL CIRCUIT INCORPORATED 8.25 03/15/2018 674,250
160,000 KEMET CORPORATION++ 10.50 05/01/2018 166,400
115,000 VIASYSTEM GROUP INCORPORATED++ 12.00 01/15/2015 125,063
1,076,751
-------------
INTERNET SOFTWARE & SERVICES: 0.26%
95,000 EQUINIX INCORPORATED 8.125 03/01/2018 99,275
150,000 TERREMARK WORLDWIDE INCORPORATED 12.00 06/15/2017 169,500
268,775
-------------
Wells Fargo Advantage Utilities and High Income Fund 9
Portfolio of Investments--August 31, 2010
INTEREST MATURITY
PRINCIPAL SECURITY NAME RATE DATE VALUE
----------- -------------------------------------------------- -------- ---------- -------------
IT SERVICES: 0.22%
$ 75,000 SUNGARD DATA SYSTEMS INCORPORATED 10.25% 08/15/2015 $ 78,750
70,000 UNISYS CORPORATION++ 12.75 10/15/2014 81,550
55,000 UNISYS CORPORATION++ 14.25 09/15/2015 64,350
224,650
-------------
MATERIALS: 1.83%
CHEMICALS: 0.46%
140,000 HUNTSMAN INTERNATIONAL LLC++ 5.50 06/30/2016 131,775
240,241 LYONDELL CHEMICAL COMPANY 11.00 05/01/2018 260,962
15,000 NOVA CHEMICALS CORPORATION 8.375 11/01/2016 15,338
15,000 NOVA CHEMICALS CORPORATION 8.625 11/01/2019 15,450
50,000 SOLUTIA INCORPORATED 7.875 03/15/2020 52,250
475,775
-------------
CONSTRUCTION MATERIALS: 0.35%
40,000 CPG INTERNATIONAL INCORPORATED 7.50 07/01/2012 38,650
140,000 CPG INTERNATIONAL INCORPORATED 10.50 07/01/2013 139,825
170,000 HEADWATERS INCORPORATED 11.38 11/01/2014 179,350
357,825
-------------
CONTAINERS & PACKAGING: 0.32%
280,000 EXOPACK HOLDING CORPORPATION 11.25 02/01/2014 281,400
50,000 GRAHAM PACKAGING COMPANY INCORPORATED 9.88 10/15/2014 51,125
332,525
-------------
METALS & MINING: 0.42%
105,000 CALIFORNIA STEEL INDUSTRIES INCORPORATED 6.13 03/15/2014 101,850
295,000 FREEPORT-MCMORAN COPPER & GOLD INCORPORATED 8.375 04/01/2017 327,450
429,300
-------------
PAPER & FOREST PRODUCTS: 0.28%
70,000 CLEARWATER PAPER CORPORATION++ 10.625 06/15/2016 78,750
75,000 GEORGIA-PACIFIC CORPORATION++ 7.00 01/15/2015 77,625
125,000 GEORGIA-PACIFIC CORPORATION 8.875 05/15/2031 138,750
295,125
-------------
TELECOMMUNICATION SERVICES: 3.85%
DIVERSIFIED TELECOMMUNICATION SERVICES: 2.92%
185,000 CINCINNATI BELL INCORPORATED 8.25 10/15/2017 181,300
475,000 CITIZENS COMMUNICATIONS COMPANY 7.875 01/15/2027 456,000
140,000 FRONTIER COMMUNICATIONS CORPORATION 8.25 05/01/2014 151,200
220,000 FRONTIER COMMUNICATIONS CORPORATION 8.25 04/15/2017 232,650
260,000 FRONTIER COMMUNICATIONS CORPORATION 8.13 10/01/2018 275,600
215,000 FRONTIER COMMUNICATIONS CORPORATION 8.50 04/15/2020 228,169
340,000 FRONTIER COMMUNICATIONS CORPORATION 8.75 04/15/2022 358,700
5,000 GLOBAL CROSSING LIMITED++ 12.00 09/15/2015 5,550
350,000 QWEST CORPORATION 8.875 03/15/2012 385,000
20,000 QWEST CORPORATION 7.63 08/03/2021 19,900
180,000 QWEST CORPORATION 7.50 06/15/2023 183,600
25,000 QWEST CORPORATION 6.875 07/15/2028 23,000
125,000 U.S. WEST COMMUNICATIONS INCORPORATED 7.25 09/15/2025 129,219
120,000 U.S. WEST COMMUNICATIONS INCORPORATED 7.125 11/15/2043 116,400
265,000 WINDSTREAM CORPORATION 7.875 11/01/2017 268,975
3,015,263
-------------
10 Wells Fargo Advantage Utilities and High Income Fund
Portfolio of Investments--August 31, 2010
INTEREST MATURITY
PRINCIPAL SECURITY NAME RATE DATE VALUE
----------- -------------------------------------------------- -------- ---------- -------------
WIRELESS TELECOMMUNICATION SERVICES: 0.93%
$ 70,000 CRICKET COMMUNICATIONS INCORPORATED 9.375% 11/01/2014 $ 70,875
10,000 CROWN CASTLE INTERNATIONAL CORPORATION 7.125 11/01/2019 10,375
165,000 METROPCS COMMUNICATIONS INCORPORATED 9.25 11/01/2014 171,600
475,000 SPRINT NEXTEL CORPORATION SERIES D 7.375 08/01/2015 470,250
240,000 SPRINT NEXTEL CORPORATION SERIES F 5.95 03/15/2014 231,900
955,000
-------------
UTILITIES: 2.96%
ELECTRIC UTILITIES: 2.07%
794,000 AQUILA INCORPORATED STEP BOND@@ 11.875 07/01/2012 913,186
110,000 EDISON MISSON ENERGY 7.20 05/15/2019 73,150
44,105 ENERGY FUTURE HOLDINGS CORPORATION 12.00 11/01/2017 21,170
105,000 ENERGY FUTURE HOLDINGS CORPORATION FRN 10.00 12/01/2020 100,903
438,432 MIRANT MID-ATLANTIC LLC SERIES C 10.06 12/30/2028 477,891
260,000 MIRANT NORTH AMERICA LLC 7.375 12/31/2013 265,850
75,000 NRG ENERGY INCORPORATED 7.375 01/15/2017 75,563
185,000 NRG ENERGY INCORPORATED 8.50 06/15/2019 190,088
15,000 PUBLIC SERVICE COMPANY OF NEW MEXICO 7.95 05/15/2018 16,462
2,134,263
-------------
INDEPENDENT POWER PRODUCERS & ENERGY TRADERS: 0.89%
95,000 AES CORPORATION 8.875 02/15/2011 97,256
190,000 DYNEGY HOLDINGS INCORPORATED 7.63 10/15/2026 104,500
120,000 DYNEGY HOLDINGS INCORPORATED 6.875 04/01/2011 120,000
108,798 RELIANT ENERGY INCORPORATED 9.24 07/02/2017 113,150
10,000 RELIANT ENERGY INCORPORATED 9.68 07/02/2026 10,425
50,000 RRI ENERGY INCORPORATED 7.63 06/15/2014 49,125
391,000 RRI ENERGY INCORPORATED 6.75 12/15/2014 394,910
30,000 RRI ENERGY INCORPORATED 7.875 06/15/2017 27,675
917,041
-------------
TOTAL CORPORATE BONDS & NOTES (COST $30,618,896) 32,345,536
-------------
YANKEE OBLIGATIONS - CORPORATE: 1.79%
ENERGY: 0.18%
OIL GAS & CONSUMABLE FUELS: 0.18%
321,000 GRIFFIN COAL MINING COMPANY LIMITED####++ 9.50 12/01/2016 187,785
-------------
FINANCIALS: 0.22%
CONSUMER FINANCE: 0.12%
110,000 WIND ACQUISITION FINANCE SA++ 11.75 07/15/2017 121,000
-------------
DIVERSIFIED FINANCIAL SERVICES: 0.10%
105,000 SHIP FINANCE INTERNATIONAL LIMITED 8.50 12/15/2013 104,738
-------------
INDUSTRIALS: 0.80%
ROAD & RAIL: 0.80%
725,000 KANSAS CITY SOUTHERN DE MEXICO 7.375 06/01/2014 744,938
65,000 KANSAS CITY SOUTHERN DE MEXICO 12.50 04/01/2016 77,919
822,857
-------------
Wells Fargo Advantage Utilities and High Income Fund 11
Portfolio of Investments--August 31, 2010
INTEREST MATURITY
PRINCIPAL SECURITY NAME RATE DATE VALUE
----------- -------------------------------------------------- -------- ---------- -------------
MATERIALS: 0.20%
METALS & MINING: 0.07%
$ 55,000 TECK RESOURCES LIMITED 10.75% 05/15/2019 $ 68,338
-------------
PAPER & FOREST PRODUCTS: 0.13%
55,000 SAPPI LIMITED++ 6.75 06/15/2012 55,275
100,000 SAPPI LIMITED++ 7.50 06/15/2032 82,250
137,525
-------------
TELECOMMUNICATION SERVICES: 0.39%
WIRELESS TELECOMMUNICATION SERVICES: 0.39%
20,000 DIGICEL GROUP LIMITED++ 12.00 04/01/2014 22,850
375,000 INTELSAT LIMITED 8.50 01/15/2013 379,688
402,538
-------------
TOTAL YANKEE OBLIGATIONS - CORPORATE (COST $1,764,867) 1,844,781
-------------
SHARES
-----------
COMMON STOCKS: 71.06%
CONSUMER DISCRETIONARY: 0.83%
MEDIA: 0.83%
50,000 COMCAST CORPORATION CLASS A 856,000
-------------
ENERGY: 3.92%
OIL, GAS & CONSUMABLE FUELS: 3.92%
25,000 EL PASO CORPORATION 284,750
25,000 SOUTHWESTERN ENERGY COMPANY+ 818,000
100,000 SPECTRA ENERGY CORPORATION 2,034,000
50,000 WILLIAMS COMPANIES 906,500
4,043,250
-------------
FINANCIALS: 3.92%
CONSUMER FINANCE: 3.92%
10,000 MASTERCARD INCORPORATED 1,983,600
30,000 VISA INCORPORATED CLASS A 2,069,400
4,053,000
-------------
INDUSTRIALS: 0.11%
CONSTRUCTION & ENGINEERING: 0.11%
9,000 AMERESCO INCORPORATED CLASS A 109,620
-------------
INFORMATION TECHNOLOGY: 0.15%
IT SERVICES: 0.15%
15,000 CONVERGYS CORPORATION 151,950
-------------
MATERIALS: 0.07%
CHEMICALS: 0.07%
1,997 LYONDELLBASELL CLASS A+ 40,939
1,829 LYONDELLBASELL CLASS B+ 37,476
78,415
-------------
12 Wells Fargo Advantage Utilities and High Income Fund
Portfolio of Investments--August 31, 2010
SHARES SECURITY NAME VALUE
----------- -------------------------------------------------- -------------
TELECOMMUNICATION SERVICES: 8.84%
DIVERSIFIED TELECOMMUNICATION SERVICES: 8.44%
16,000 BCE INCORPORATED $ 499,840
215,000 FRANCE TELECOM SA 4,370,240
53,000 SHENANDOAH TELECOMMUNICATIONS COMPANY(i) 895,170
100,034 TELE2 AB SERIES B 1,799,964
100,000 WINDSTREAM CORPORATION 1,153,500
8,718,714
-------------
WIRELESS TELECOMMUNICATION SERVICES: 0.40%
12,000 VIVO PARTICIPACOES SA ADR 288,000
5,000 VODAFONE GROUP PLC ADR 120,900
408,900
-------------
UTILITIES: 53.05%
ELECTRIC UTILITIES: 31.51%
600 AMERICAN ELECTRIC POWER COMPANY INCORPORATED 21,246
30,000 CENTERPOINT ENERGY INCORPORATED 443,700
500 CH ENERGY GROUP INCORPORATED 21,070
5,000 CHESAPEAKE MIDSTREAM PARTNER LP 117,750
200 CHESAPEAKE UTILITIES CORPORATION 6,888
10,000 CHINA HYDROELECTRIC COMPANY ADS+ 60,400
75,000 DPL INCORPORATED 1,899,000
500 DUKE ENERGY CORPORATION 8,595
2,000 EDISON INTERNATIONAL 67,500
450,000 ENEL SPA 2,144,188
1,000 ENTERGY CORPORATION 78,840
70,000 EXELON CORPORATION 2,850,400
25,000 FIRSTENERGY CORPORATION 913,250
75,000 FORTUM OYJ 1,726,946
150,000 GREAT PLAINS ENERGY INCORPORATED 2,773,500
100,000 HAWAIIAN ELECTRIC INDUSTRIES INCORPORATED 2,402,000
475,000 HERA SPA 864,993
36,000 ITC HOLDINGS CORPORATION 2,086,560
20,000 NEXTERA ENERGY INCORPORATED 1,074,600
150,000 NORTHEAST UTILITIES 4,345,500
1,000 NSTAR 38,030
100 PEPCO HOLDINGS INCORPORATED 1,795
75,000 PORTLAND GENERAL ELECTRIC COMPANY 1,498,500
400 PROGRESS ENERGY INCORPORATED 17,164
20,000 RED ELECTRICA DE ESPANA 824,220
190,000 SCOTTISH & SOUTHERN ENERGY PLC 3,336,457
200 SOUTH JERSEY INDUSTRIES INCORPORATED 9,398
175,000 TERNA SPA 703,562
60,000 THE SOUTHERN COMPANY 2,201,400
32,537,452
-------------
GAS UTILITIES: 7.76%
16,900 EQT CORPORATION 619,465
500 MDU RESOURCES GROUP INCORPORATED 9,405
50,000 NATIONAL FUEL GAS COMPANY 2,149,000
200 NEW JERSEY RESOURCES 7,442
100,000 NISKA GAS STORAGE PARTNERS+ 1,888,000
48,500 ONEOK INCORPORATED 3,336,800
8,010,112
-------------
Wells Fargo Advantage Utilities and High Income Fund 13
Portfolio of Investments--August 31, 2010
SHARES SECURITY NAME VALUE
----------- -------------------------------------------------- -------------
INDEPENDENT POWER PRODUCERS & ENERGY TRADERS: 2.84%
100,000 CONSTELLATION ENERGY GROUP INCORPORATED $ 2,933,000
-------------
MULTI-UTILITIES: 4.19%
300 DOMINION RESOURCES INCORPORATED 12,828
250,000 NATIONAL GRID PLC 2,104,935
1,000 PG&E CORPORATION 46,760
50,000 PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED 1,598,000
30,000 SUEZ ENVIRONNEMENT SA 482,822
1,500 WISCONSIN ENERGY CORPORATION 83,610
4,328,955
-------------
WATER UTILITIES: 6.92%
50,000 AMERICAN WATER WORKS COMPANY 1,129,000
25,000 MIDDLESEX WATER COMPANY 410,250
130,000 PENNICHUCK CORPORATION(i) 2,965,300
300,000 PENNON GROUP PLC 2,636,345
7,140,895
-------------
TOTAL COMMON STOCKS (COST $70,732,111) 73,370,263
-------------
PREFERRED STOCKS: 10.34%
UTILITIES: 10.34% YIELD
--------
ELECTRIC UTILITIES: 10.34%
50,000 GREAT PLAINS ENERGY INCORPORATED 4.62% 3,100,000
100,000 INTERSTATE POWER & LIGHT COMPANY 3.87 2,895,000
165,000 SCANA CORPORATION 3.21 4,681,050
TOTAL PREFERRED STOCKS (COST $10,183,545) 10,676,050
-------------
EXPIRATION
DATE
----------
WARRANTS: 0.00%
ELECTRIC UTILITIES: 0.00%
10,000 CHINA HYDROELECTRIC COMPANY ADS+ 01/25/2014 4,500
TOTAL WARRANTS (COST $12,000) 4,500
-------------
CLOSED END MUTUAL FUND SHARES: 0.16%
9,640 DREYFUS HIGH YIELD STRATEGIES FUND INCORPORATED 41,934
1,739 EATON VANCE LIMITED DURATION INCOME TRUST 28,485
1,677 LMP CORPORATE LOAN FUND INCORPORATED 18,665
7,858 NEW AMERICA HIGH INCOME FUND INCORPORATED 78,894
TOTAL CLOSED END MUTUAL FUND SHARES (COST $84,845) 167,978
-------------
INTEREST MATURITY
PRINCIPAL RATE DATE
----------- -------- ----------
TERM LOANS: 1.77%
CAPITAL MARKETS: 0.15%
$ 149,250 BLACKSTONE GROUP LP 7.75 11/02/2014 149,996
-------------
CONSUMER DISCRETIONARY: 0.46%
365,000 NEWSDAY LLC 10.50 08/01/2013 387,356
95,000 SUGARHOUSE HSP GAMING PROPERTIES LP 11.25 09/23/2014 91,319
478,675
-------------
14 Wells Fargo Advantage Utilities and High Income Fund
Portfolio of Investments--August 31, 2010
MATURITY
PRINCIPAL SECURITY NAME YIELD DATE VALUE
----------- -------------------------------------------------- -------- ---------- -------------
CONSUMER STAPLES: 0.12%
$ 135,917 MERISANT COMPANY(i) 7.50% 01/08/2014 $ 125,043
-------------
ENERGY: 0.29%
299,522 SEMGROUP ENERGY PARTNERS 8.25 06/30/2011 296,826
-------------
FINANCIALS: 0.33%
100,000 AMERICAN GENERAL FINANCE CORPORATION 5.40 12/01/2015 76,750
75,000 AMERICAN GENERAL FINANCE CORPORATION 6.90 12/15/2017 58,125
75,000 CAPITAL AUTOMOTIVE REIT< 7.50 12/14/2012 71,188
23,158 REALOGY CORPORATION 3.26 10/10/2013 19,870
135,093 REALOGY CORPORATION 3.30 10/10/2013 116,132
342,065
-------------
INDUSTRIALS: 0.28%
295,008 SWIFT TRANSPORTATION COMPANY INCORPORATED 8.25 05/10/2014 285,727
-------------
UTILITIES: 0.15%
200,000 TXU ENERGY COMPANY LLC< 8.24 10/10/2014 151,116
-------------
TOTAL TERM LOANS (COST $1,795,420) 1,829,448
-------------
SHARES
-----------
ESCROW SHARES: 0.00%
5,000,000 MIRANT CORPORATION ESCROW(i)(a)+ 0
TOTAL ESCROW SHARES (COST $0) 0
-------------
SHORT-TERM INVESTMENTS: 6.39%
INVESTMENT COMPANIES: 6.39%
6,591,838 WELLS FARGO ADVANTAGE MONEY MARKET TRUST (u)(l)## 0.29 6,591,838
TOTAL SHORT-TERM INVESTMENTS (COST $6,591,838) 6,591,838
-------------
TOTAL INVESTMENTS IN SECURITIES
(COST $121,783,522)* 122.84% 126,830,394
OTHER ASSETS AND LIABILITIES, NET (22.84) (23,585,810)
------ -------------
TOTAL NET ASSETS 100.00% $ 103,244,584
------ -------------
Wells Fargo Advantage Utilities and High Income Fund 15
Portfolio of Investments--August 31, 2010
++ Securities that may be resold to "qualified institutional buyers" under
rule 144A or securities offered pursuant to section 4(2) of the Securities
Act of 1933, as amended.
(i) Illiquid security, for which the designation as illiquid is unaudited.
(u) Rate shown is the 7-day annualized yield at period end.
(l) Investment in an affiliate.
@@ The rate shown is the stated rate at the current period end.
#### This security is currently in default with regards to scheduled interest
and/or principal payments.
(a) Security fair valued in accordance with the procedures approved by the
Board of Trustees.
+ Non-income earning securities.
## All or a portion of this security has been segregated for when-issued,
delayed delivery securities and/or unfunded loans.
< All or a portion of the position represents an unfunded loan commitment.
* Cost for federal income tax purposes is $122,866,668 and net unrealized
appreciation (depreciation) consists of:
Gross unrealized appreciation $ 9,112,181
Gross unrealized depreciation (5,148,455)
-----------
Net unrealized appreciation $ 3,963,726
The following table shows the percent of total long-term investments by
geographic location as of August 31, 2010:
United States 79.9%
United Kingdom 6.8%
France 4.0%
Italy 3.1%
Sweden 1.5%
Finland 1.4%
Mexico 0.8%
Spain 0.7%
Canada 0.6%
Bermuda 0.4%
Australia 0.2%
Brazil 0.2%
Cayman Islands 0.1%
Luxembourg 0.1%
Austria 0.1%
Netherlands 0.1%
-----
100.0%
-----
The following table shows the percent of total bonds by credit quality based on
Moody's and Standard & Poor's ratings as of August 31, 2010 (unaudited):
BBB 6.2%
BB 38.1%
B 48.0%
CCC 3.7%
CC 0.1%
NR 3.9%
-----
100.0%
-----
The following table shows the percent of total bonds based on effective maturity
as of August 31, 2010 (unaudited):
Less than 1 year 3.8%
1 to 3 year(s) 31.2%
3 to 5 years 27.5%
5 to 10 years 23.9%
10 to 20 years 10.5%
20 to 30 years 1.8%
Greater than 30 years 1.3%
-----
100.0%
-----
The accompanying notes are an integral part of these financial statements.
16 Wells Fargo Advantage Utilities and High Income Fund
Statement of Assets and Liabilities--August 31, 2010
ASSETS
Investments in unaffiliated securities, at value .................. $ 120,238,556
Investments in affiliated securities, at value .................... 6,591,838
-------------
Total investments, at value (see cost below) ...................... 126,830,394
Receivable for securities sold .................................... 872,068
Dividend and interest receivable .................................. 1,791,083
Other assets ...................................................... 41,874
-------------
Total assets ........................................................ 129,535,419
-------------
LIABILITIES
Dividends payable ................................................. 689,550
Payable for securities purchased .................................. 508,398
Payable to custodian (cost $2,722,720) ............................ 2,692,310
Secured borrowing payable ......................................... 22,002,647
Advisory fee payable .............................................. 68,460
Due to other related parties ...................................... 5,705
Accrued expenses and other liabilities ............................ 323,765
-------------
Total liabilities .................................................... 26,290,835
-------------
NET ASSETS ........................................................... $ 103,244,584
=============
NET ASSETS CONSIST OF
Paid-in capital ................................................... $ 150,984,046
Overdistributed net investment income ............................. (765,075)
Accumulated net realized losses on investments .................... (52,051,026)
Net unrealized gains on investments ............................... 5,076,639
-------------
NET ASSETS ........................................................... $ 103,244,584
=============
NET ASSET VALUE PER SHARE
Based on $103,244,584 divided by 9,193,994 common shares issued and
outstanding (unlimited number of common shares authorized) ...... $ 11.23
Total investments, at cost ........................................... $ 121,783,522
The accompanying notes are an integral part of these financial statements.
Wells Fargo Advantage Utilities and High Income Fund 17
Statement of Operations--For the Year Ended August 31, 2010
INVESTMENT INCOME
Dividends(1) .......................................... $ 3,798,052
Interest(2) ........................................... 3,130,826
Income from affiliated securities ..................... 8,862
-----------
Total investment income .................................. 6,937,740
-----------
EXPENSES
Advisory fee .......................................... 761,779
Administration fee .................................... 63,482
Transfer agent fees ................................... 31,938
Trustees' fees and expenses ........................... 4,285
Shareholder reports expenses .......................... 70,201
Custodian and accounting fees ......................... 80,802
Professional fees ..................................... 91,354
Secured borrowing fees ................................ 1,283,918
Interest expense ...................................... 195,003
Other fees and expenses ............................... 59,233
-----------
Total expenses ........................................... 2,641,995
LESS
Waived fees and expense reimbursements ................ (1,051,248)
-----------
Net expenses ............................................. 1,590,747
-----------
Net investment income .................................... 5,346,993
-----------
NET REALIZED AND UNREALIZED GAINS OR LOSSES ON INVESTMENTS
NET REALIZED GAINS OR LOSSES ON:
Unaffiliated securities ............................... 483,307
Foreign currency related transactions ................. 320,742
Credit default swap transactions ...................... (42,139)
-----------
Net realized gains on investments ........................ 761,910
-----------
NET CHANGE IN UNREALIZED GAINS OR LOSSES ON:
Unaffiliated securities ............................... 2,873,508
Foreign currency related transactions ................. (25,499)
Credit default swap transactions ...................... 29,752
-----------
Net change in unrealized gains or losses on investments .. 2,877,761
-----------
Net realized and unrealized gains or losses on
investments ........................................... 3,639,671
-----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS ..... $ 8,986,664
===========
(1.) Net of foreign withholding taxes of ................. $ 106,150
(2.) Net of foreign withholding taxes of ................. $ 1,336
The accompanying notes are an integral part of these financial statements.
18 Wells Fargo Advantage Utilities and High Income Fund
Statements of Changes in Net Assets
For the For the
Year Ended Year Ended
August 31, 2010 August 31, 2009
--------------- ---------------
OPERATIONS
Net investment income ......................................... $ 5,346,993 $ 8,780,431
Net realized gains or losses on investments ................... 761,910 (46,472,788)
Net change in unrealized gains or losses on investments ....... 2,877,761 (901,764)
------------ ------------
Net increase (decrease) in net assets resulting from operations .. 8,986,664 (38,594,121)
------------ ------------
DISTRIBUTIONS TO SHAREHOLDERS FROM
Net investment income ......................................... (4,848,035) (8,968,630)
Tax basis return of capital ................................... (5,644,957) (7,286,854)
------------ ------------
Total distributions to shareholders .............................. (10,492,992) (16,255,484)
------------ ------------
CAPITAL SHARE TRANSACTIONS
Net asset value of shares issued under the
Automatic Dividend Reinvestment Plan ....................... 1,064,214 2,152,562
------------ ------------
Total decrease in net assets applicable to shareholders .......... (442,114) (52,697,043)
------------ ------------
NET ASSETS
Beginning of period .............................................. 103,686,698 156,383,741
------------ ------------
END OF PERIOD .................................................... $103,244,584 $103,686,698
============ ============
Overdistributed net investment income ............................ $ (765,075) $ (1,656,707)
The accompanying notes are an integral part of these financial statements.
Wells Fargo Advantage Utilities and High Income Fund 19
Statement of Cash Flows--August 31, 2010
CASH FLOWS FROM OPERATING ACTIVITIES:
Net increase in net assets resulting from operations ... $ 8,986,664
ADJUSTMENTS TO RECONCILE NET INCREASE IN NET ASSETS FROM
OPERATIONS TO NET CASH PROVIDED BY OPERATING ACTIVITIES:
Purchase of investment securities ...................... (79,695,798)
Proceeds from sales of securities ...................... 78,099,528
Paydowns ............................................... 423,738
Amortization ........................................... (282,105)
Credit default swap payments made ...................... (42,139)
Purchase of short-term investment securities, net ...... (1,002,653)
Decrease in dividends and interest receivable .......... 827,442
Decrease in receivable for securities sold ............. 874,675
Decrease in premiums paid on credit default swaps ...... 15,939
Amortization of prepaid structuring fee ................ 456,623
Decrease in receivable from investment advisor ......... 1,200
Increase in prepaid expenses and other assets .......... (41,874)
Decrease in payable for securities purchased ........... (3,301,949)
Decrease in premiums received on credit default swaps .. (4,699)
Increase in advisory fee payable ....................... 68,460
Increase in due to other related parties ............... 5,532
Decrease in accrued expenses and other liabilities ..... (1,597)
Increase in payable to custodian bank .................. 2,692,310
Unrealized appreciation on investments ................. (2,877,761)
Net realized loss on credit default swaps .............. 42,139
Net realized gain on unaffiliated securities ........... (483,307)
------------
Net cash provided by operating activities ................. 4,760,368
------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash distributions paid on common shares ............... (9,741,243)
Payment to investment advisor for secured borrowing .... (444,444)
Decrease in secured borrowing .......................... (2,322)
------------
Net cash used in financing activities ..................... (10,188,009)
------------
Net decrease in cash ...................................... (5,427,641)
------------
CASH (INCLUDING FOREIGN CURRENCY):
Beginning of period ....................................... $ 5,427,641
------------
End of period ............................................. $ 0
------------
SUPPLEMENTAL CASH DISCLOSURE:
Cash paid for interest .................................... $ 195,003
------------
SUPPLEMENTAL NON-CASH FINANCING DISCLOSURE:
Reinvestment of dividends ................................. $ 1,064,214
Structuring fee waived by investment advisor .............. $ 456,623
------------
The accompanying notes are an integral part of these financial statements.
20 Wells Fargo Advantage Utilities and High Income Fund
Financial Highlights
(For a share outstanding throughout each period)
YEAR ENDED AUGUST 31,
----------------------------------------------------------------
2010 2009 2008 2007 2006
----------- -------- -------- -------- --------
NET ASSET VALUE, BEGINNING OF PERIOD $ 11.38 $ 17.50 $ 24.05 $ 23.16 $ 25.43
-------- -------- -------- -------- --------
INCOME FROM INVESTMENT OPERATIONS
Net investment income(1) 0.59 0.97 2.49 2.81 4.07
Net realized and unrealized gains or losses on
investments 0.41 (5.29) (4.18) 2.37 (0.51)
Distributions to preferred shareholders from
Net investment income 0.00 0.00 (0.33) (0.30) (0.39)
Net realized gains 0.00 0.00 0.00 (0.20) (0.02)
-------- -------- -------- -------- --------
Total from investment operations 1.00 (4.32) (2.02) 4.68 3.15
-------- -------- -------- -------- --------
DISTRIBUTIONS TO SHAREHOLDERS FROM
Net investment income (0.53)(1) (1.00)(1) (2.76) (3.79) (2.76)
Net realized gains 0.00 0.00 (1.77) 0.00 (2.67)
Tax basis return of capital (0.62)(1) (0.80)(1) 0.00 0.00 0.00
-------- -------- -------- -------- --------
Total distributions to common shareholders (1.15) (1.80) (4.53) (3.79) (5.43)
-------- -------- -------- -------- --------
OFFERING COSTS CHARGED TO CAPITAL FOR
Preferred shares 0.00 0.00 0.00 0.00 0.01(1, 2)
-------- -------- -------- -------- --------
NET ASSET VALUE, END OF PERIOD $ 11.23 $ 11.38 $ 17.50 $ 24.05 $ 23.16
-------- -------- -------- -------- --------
MARKET VALUE, END OF PERIOD $ 11.23 $ 12.49 $ 21.02 $ 27.30 $ 23.50
-------- -------- -------- -------- --------
TOTAL RETURN BASED ON MARKET VALUE(3) (1.24)% (30.46)% (7.86)% 34.05% 35.89%
-------- -------- -------- -------- --------
RATIOS AND SUPPLEMENTAL DATA
Net assets of common shareholders, end of period
(thousands) $103,245 $103,687 $156,384 $209,066 $195,955
Liquidation value of preferred shares, end of period
(thousands) NA NA NA $ 80,000 $ 80,000
Asset coverage ratio, end of period NA NA NA 360% 341%
RATIOS TO AVERAGE NET ASSETS
Expenses including waivers/reimbursements and
interest expense but excluding expense reductions 1.52% 2.25% 1.89% 1.42% 1.70%
Expenses including interest expense but excluding
waivers/reimbursements and expense reductions 2.52% 3.44% 1.92% 1.42% 1.70%
Expenses including waivers/reimbursements but
excluding expense reductions and interest expense 1.33% 1.55% 1.37% 1.20% 1.39%
Interest expense 0.19% 0.70% 0.52% 0.22% 0.31%
Net investment income 5.19% 8.75% 10.33%(4) 9.41%(4) 16.00%(4)
Portfolio turnover rate 59% 137% 153% 117% 122%
----------
(1.) Calculated based on average common shares outstanding during the period.
(2.) Amount represents a refund of certain preferred share offering expenses.
(3.) Total return is calculated assuming a purchase of common stock on the first
day and a sale on the last day of the period reporting. Dividends and
distributions are assumed for the 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.
(4.) The net investment income ratio reflects distributions paid to preferred
shareholders.
The accompanying notes are an integral part of these financial statements.
Wells Fargo Advantage Utilities and High Income Fund 21
Notes to Financial Statements
1. ORGANIZATION
Wells Fargo Advantage Utilities and High Income Fund (the "Fund") (formerly
Evergreen Utilities and High Income Fund) was organized as a statutory trust
under the laws of the state of Delaware on February 4, 2004 and is registered as
a non-diversified closed-end management investment company under the Investment
Company Act of 1940, as amended. The primary investment objective of the Fund 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 significant accounting policies, which are consistently followed
in the preparation of the financial statements of the Fund, are in conformity
with U.S. generally accepted accounting principles which require management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities at the date of the
financial statements, and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Management has considered the circumstances under which the Fund should
recognize or make disclosures regarding events or transactions occurring
subsequent to the balance sheet date through the date the financial statements
are issued. Adjustments or additional disclosures, if any, have been included in
these financial statements.
SECURITIES VALUATION
Investments in securities are valued each business day as of the close of
regular trading on the New York Stock Exchange, which is usually 4:00 p.m.
(Eastern Time). Securities which are traded on a national or foreign securities
exchange are valued at the last reported sales price. Securities listed on The
NASDAQ Stock Market, Inc. ("NASDAQ") are valued at the NASDAQ Official Closing
Price ("NOCP"), and if no NOCP is available, then at the last reported sales
price. If no sales price is shown on the NASDAQ, the bid price will be used. In
the absence of any sale of securities listed on the NASDAQ, and in the case of
other securities, including U.S. Government obligations, but excluding debt
securities maturing in 60 days or less, the price will be deemed "stale" and the
valuations will be determined in accordance with the Fund's Fair Valuation
Procedures.
Securities denominated in foreign currencies are translated into U.S. dollars
using the closing rates of exchange in effect on the day of valuation.
Many securities markets and exchanges outside the U.S. close prior to the close
of the New York Stock Exchange and therefore may not fully reflect trading or
events that occur after the close of the principal exchange in which the foreign
investments are traded but before the close of the New York Stock Exchange. If
such trading or events are expected to materially affect the value of the
investments, then those investments are fair valued following procedures
approved by the Board of Trustees. These procedures take into account multiple
factors including movements in U.S. securities markets after foreign exchanges
close. Depending on market activity, such fair valuations may be frequent. Such
fair value pricing may result in NAVs that are higher or lower than NAVs based
on the closing price or latest quoted bid price.
Certain fixed income securities with maturities exceeding 60 days are valued by
using a pricing service approved by the Board of Trustees. This service uses
market prices as quoted by an independent pricing service or by dealers in these
securities when, in the service's judgment, these prices are readily available
and are representative of the securities' fair values. For some securities, such
prices are not readily available. These securities will generally be fair valued
using methods which may include consideration of yields or prices of securities
of comparable quality, coupon rate, maturity and type of issue, indications as
to values from dealers in securities, trading characteristics and general market
conditions.
Debt securities of sufficient credit quality with original maturities of 60 days
or less generally are valued at amortized cost which approximates fair value.
The amortized cost method involves valuing a security at its cost, plus
accretion of discount or minus amortization of premium over the period until
maturity, which approximates fair value.
Investments in open-end mutual funds are valued at net asset value.
Investments which are not valued using any of the methods discussed above, are
valued at their fair value, as determined by procedures established in good
faith and approved by the Board of Trustees.
22 Wells Fargo Advantage Utilities and High Income Fund
Notes to Financial Statements
The valuation techniques used by the Fund to measure fair value are consistent
with the market approach, income approach and/or cost approach, where
applicable, for each security type.
FOREIGN CURRENCY TRANSLATION
The accounting records of the Fund are maintained in U.S. dollars. Assets,
including investment securities, and liabilities denominated in foreign currency
are translated into U.S. dollars at the prevailing rates of exchange at the date
of valuation. Purchases and sales of securities, and income and expenses are
translated at the prevailing rate of exchange on the respective dates of such
transactions. Reported net realized foreign exchange gains or losses arise from
sales of foreign currencies, currency gains or losses realized between the trade
and settlement dates on securities transactions, and the difference between the
amounts of dividends, interest and foreign withholding taxes recorded and the
U.S. dollar equivalent of the amounts actually paid or received. Net unrealized
foreign exchange gains and losses arise from changes in the fair value of assets
and liabilities other than investments in securities, at fiscal period-end,
resulting in changes in exchange rates.
The changes in net assets arising from changes in exchange rates and the changes
in net assets resulting from changes in market prices of securities at fiscal
period-end are not separately presented. Such changes are recorded with net
realized and unrealized gain from investments. Gains and loses from certain
foreign currency transactions are treated as ordinary income for U.S. federal
income tax purposes.
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.
SECURITY LOANS
The Fund may lend its securities from time to time in order to earn additional
income in the form of fees or interest on securities received as collateral or
the investment of any cash received as collateral. The Fund continues to receive
interest or dividends on the securities loaned. The Fund receives collateral in
the form of cash or securities with a value at least equal to the value of the
securities on loan. The value of the loaned securities is determined at the
close of each business day and any additional required collateral is delivered
to the Fund on the next business day. In the event of default or bankruptcy by
the borrower, the Fund could experience delays and costs in recovering the
loaned securities or in gaining access to the collateral. In addition, the
investment of any cash collateral received may lose all or part of its value.
The Fund has the right under the lending agreement to recover the securities
from the borrower on demand.
Effective July 25, 2010, the Fund may lend its securities through an
unaffiliated securities lending agent. Cash collateral received in connection
with their securities lending transactions is invested in Wells Fargo Securities
Lending Cash Investments, LLC (the "Cash Collateral Fund"). The Cash Collateral
Fund is exempt from registration under Section 3(c)(7) of the 1940 Act and is
managed by Wells Fargo Funds Management LLC ("Funds Management") and is
sub-advised by Wells Capital Management Incorporated ("Wells Capital
Management"). Funds Management receives an advisory fee starting at 0.05% and
declining to 0.01% as the average daily net assets of the Cash Collateral Fund
increase. All of the fees received by Funds Management are paid to Wells Capital
Management for its services as sub-advisor. The Cash Collateral Fund seeks to
provide a positive return compared to the daily Fed Funds Open rate by investing
in high-quality, U.S. dollar-denominated short-term money market instruments.
Cash Collateral Fund investments are fair valued based upon the amortized cost
valuation technique.
Prior to June 30, 2010, the Fund entered into securities lending transactions
through Wachovia Global Securities Lending as the securities lending agent.
WHEN-ISSUED TRANSACTIONS
The Fund may purchase securities on a forward commitment or 'when-issued'
basis. A Fund records a when-issued transaction on the trade date and
will segregate assets to cover its obligation by confirming the
availability of qualifying assets having a value sufficient to make
payment for the securities purchased. Securities purchased on a
when-issued
Wells Fargo Advantage Utilities and High Income Fund 23
Notes to Financial Statements
basis are marked-to-market daily and the Fund begins earning interest on the
settlement date. Losses may arise due to changes in the market value of the
underlying securities or if the counterparty does not perform under the
contract.
TERM LOANS
The Fund may invest in term loans. A Fund records an investment when the
borrower withdraws money and records interest as earned. These loans pay
interest at rates which are periodically reset by reference to a base lending
rate plus a spread. The Fund assumes the credit risk of the borrower. There
could be potential loss to the Fund in the event of default by the borrower.
OPTIONS
The Fund may be subject to equity price risk in the normal course of pursuing
its investment objectives. The Fund may write covered put or call options. When
a Fund writes an option, an amount equal to the premium received is recorded as
a liability and is subsequently adjusted to the current market value of the
written option. Premiums received from written options, which expire
unexercised, are recognized as realized gains from investments on the expiration
date. The difference between the premium received and the amount paid on
effecting a closing purchase transaction, including brokerage commissions, is
treated as a realized gain or loss. If a call option is exercised, the premium
is added to the proceeds from the sale of the underlying security in calculating
the realized gain or loss on the sale. If a put option is exercised, the premium
reduces the cost of the security purchased. The Fund, as a writer of an option,
bears the market risk of an unfavorable change in the price of the security
underlying the written option.
The Fund may also purchase call or put options. The premium is included in the
Statement of Assets and Liabilities as an investment which is subsequently
adjusted to the current market value of the option. Premiums paid for purchased
options which expire are recognized as realized losses from investments on the
expiration date. Premiums paid for purchased options which are exercised or
closed are added to the amount paid or offset against the proceeds on the
underlying security to determine the realized gain or loss. The risk of loss
associated with purchased options is limited to the premium paid.
Options traded on an exchange are regulated and terms of the options are
standardized. Options traded over the counter expose the Fund to counterparty
risk in the event the counterparty does not perform. This risk is mitigated by
having a master netting arrangement between the Fund and the counterparty and by
having the counterparty post collateral to cover the Fund's exposure to the
counterparty.
CREDIT DEFAULT SWAPS
The Fund may be subject to credit risk in the normal course of pursuing its
investment objectives. The Fund may enter into credit default swap contracts for
hedging or speculative purposes to provide or receive a measure of protection
against default on a referenced entity, obligation or index or for investment
gains. Credit default swaps involve an exchange of a stream of payments for
protection against the loss in value of an underlying security or index. Under
the terms of the swap, one party acts as a guarantor (referred to as the seller
of protection) and receives a periodic stream of payments, provided that there
is no credit event, from another party (referred to as the buyer of protection)
that is a fixed percentage applied to a notional principal amount over the term
of the swap. An index credit default swap references all the names in the index,
and if a credit event is triggered, the credit event is settled based on that
name's weight in the index. A credit event includes bankruptcy, failure to pay,
obligation default, obligation acceleration, repudiation/moratorium, and
restructuring. The Fund may enter into credit default swaps as either the seller
of protection or the buyer of protection. As the seller of protection, the Fund
is subject to investment exposure on the notional amount of the swap and has
assumed the risk of default of the underlying security or index. As the buyer of
protection, the Fund could be exposed to risks if the seller of the protection
defaults on its obligation to perform, or if there are unfavorable changes in
the fluctuation of interest rates. The maximum potential amount of future
payments (undiscounted) that the Fund as the seller of protection could be
required to make under the credit default swap contract would be an amount equal
to the notional amount of the swap contract. The Fund's maximum risk of loss
from counterparty risk, either as the protection seller or as the protection
buyer, is the fair value of the contract. This risk is mitigated by having a
master netting arrangement between the Fund and the counterparty and by having
the counterparty post collateral to cover the Fund's exposure to the
counterparty.
24 Wells Fargo Advantage Utilities and High Income Fund
Notes to Financial Statements
If the Fund is the seller of protection and a credit event occurs, as defined
under the terms of that particular swap agreement, the Fund will pay to the
buyer of protection the notional amount of the swap and take delivery of the
referenced obligation or underlying securities comprising the referenced index.
If the Fund is the buyer of protection and a credit event occurs, as defined
under the terms of that particular swap agreement, the Fund will receive from
the seller of protection the notional amount of the swap and deliver the
referenced obligation or underlying securities comprising the referenced index.
Any premiums paid or received on the transactions are recorded as an asset or
liability on the Statement of Assets and Liabilities and amortized. The value of
the swap contract is marked-to-market daily based on quotations from an
independent pricing service or market makers and any change in value is recorded
as an unrealized gain or loss. Periodic payments made or received are recorded
as realized gains or losses. In addition, payments received or made as a result
of a credit event or termination of the contract are recognized as realized
gains or losses.
Certain credit default swap contracts entered into by the Fund provide for
conditions that result in events of default or termination that enable the
counterparty to the agreement to cause an early termination of the transactions
under those agreements. Any election by the counterparty to terminate early may
impact the amounts reported on the financial statements.
SECURITY TRANSACTIONS AND INCOME RECOGNITION
Securities transactions are recorded on a trade date basis. Realized gains or
losses are reported on the basis of identified cost of securities delivered.
Interest income is accrued daily and bond discounts are accreted and premiums
are amortized daily based on the effective interest method. To the extent debt
obligations are placed on non-accrual status, any related interest income may be
reduced by writing off interest receivables when the collection of all or a
portion of interest has become doubtful based on consistently applied
procedures. If the issuer subsequently resumes interest payments or when the
collectability of interest is reasonably assured, the debt obligation is removed
from non-accrual status.
Dividend income is recognized on the ex-dividend date, except for certain
dividends from foreign securities, which are recorded as soon as the Fund is
informed of the ex-dividend date.
Dividend and interest income from foreign securities is recorded net of foreign
taxes withheld where recovery of such taxes is not assured.
DISTRIBUTIONS TO SHAREHOLDERS
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.
The timing and character of distributions made during the period from net
investment income or net realized gains may also differ from their ultimate
characterization for federal income tax purposes. To the extent that these
differences are permanent in nature, such amounts are reclassified within the
capital accounts based on their federal tax-basis treatment. Temporary
differences do not require reclassifications. At August 31, 2010, as a result of
permanent book-to-tax differences, the following reclassification adjustments
were made on the Statements of Assets and Liabilities:
Overdistributed Accumulated Net
Net Investment Realized Loss
Income on Investments
--------------- --------------
$392,674 $(392,674)
FEDERAL AND OTHER TAXES
The Fund is treated as a separate entity for federal income tax purposes. It is
the policy of the Fund to continue to qualify as a regulated investment company
by distributing substantially all of its investment company taxable income and
any net realized capital gains (after reduction for capital loss carryforwards)
sufficient to relieve it from all, or substantially all, federal income taxes.
Accordingly, no provision for federal income taxes was required.
The Fund's income and federal excise tax returns and all financial records
supporting those returns for the prior three fiscal years are subject to
examination by the federal and Delaware revenue authorities.
Wells Fargo Advantage Utilities and High Income Fund 25
Notes to Financial Statements
At August 31, 2010, estimated net capital loss carryforwards, which are
available to offset future net realized capital gains, were as follows:
Expiration
------------------------------------
2016 2017 2018
-------- ----------- -----------
$701,198 $22,831,103 $27,435,579
3. FAIR VALUATION MEASUREMENTS
Fair value measurements of investments are determined within a framework that
has established a fair value hierarchy based upon the various data inputs
utilized in determining the value of the Fund's investments. The three-level
hierarchy gives the highest priority to unadjusted quoted prices in active
markets for identical assets or liabilities (Level 1) and the lowest priority to
unobservable inputs (Level 3). The Fund's investments are classified within the
fair value hierarchy based on the lowest level of input that is significant to
the fair value measurement. The inputs are summarized into three broad levels as
follows:
- Level 1 - quoted prices in active markets for identical securities
- Level 2 - other significant observable inputs (including quoted prices for
similar securities, interest rates, prepayment speeds, credit risk, etc.)
- Level 3 - significant unobservable inputs (including the Fund's own
assumptions in determining the fair value of investments)
The inputs or methodologies used for valuing securities are not necessarily an
indication of the risk associated with investing in those securities.
As of August 31, 2010, the inputs used in valuing the Fund's assets, which are
carried at fair value, were as follows:
Significant Other Significant
Quoted Prices Observable Inputs Unobservable Inputs
INVESTMENTS IN SECURITIES (Level 1) (Level 2) (Level 3) Total
------------------------- ------------- ----------------- ------------------- ------------
EQUITY SECURITIES
COMMON STOCKS $73,370,263 $ 0 $0 $ 73,370,263
PREFERRED STOCKS 10,676,050 0 0 10,676,050
WARRANTS 4,500 0 0 4,500
CLOSED END MUTUAL FUND SHARES 167,978 0 0 167,978
CORPORATE BONDS AND NOTES 0 32,345,536 0 32,345,536
TERM LOANS 0 1,829,448 0 1,829,448
YANKEE OBLIGATIONS-CORPORATE 0 1,844,781 0 1,844,781
SHORT-TERM INVESTMENTS
INVESTMENT COMPANIES 6,591,838 0 0 6,591,838
----------- ----------- -- ------------
$90,810,629 $36,019,765 $0 $126,830,394
Further details on the major security types listed above can be found in the
Fund's Portfolio of Investments.
The following is a reconciliation of assets in which significant unobservable
inputs (Level 3) were used in determining fair value:
Warrants
--------
BALANCE AS OF AUGUST 31, 2009 $ 45,615
Realized gains or losses (6,521)
Change in unrealized gains or losses 21,521
Net purchases (sales) (60,615)
Transfers in and/or out of Level 3 0
BALANCE AS OF AUGUST 31, 2010 $ 0
Change in unrealized gains or losses
included in earnings relating to
securities still
held at August 31, 2010 $ 0
26 Wells Fargo Advantage Utilities and High Income Fund
Notes to Financial Statements
4. TRANSACTIONS WITH AFFILIATES AND OTHER EXPENSES
ADVISORY FEES
Funds Management, a wholly owned subsidiary of Wells Fargo & Company
("Wells Fargo"), is the investment advisor to the Fund and is paid an
annual fee of 0.60% of the Fund's average daily total assets. Total
assets consist of the net assets of the Fund plus borrowings or other
leverage for investment purposes. Prior to July 12, 2010 Evergreen
Investment Management Company, LLC ("EIMC"), a subsidiary of Wells
Fargo, was the investment advisor to the Fund and was paid an annual fee
at the same rate that is currently paid to Funds Management. For the
year ended August 31, 2010, the advisory fee was equivalent to an annual
rate of 0.73% of the Fund's average daily net assets.
Funds Management may retain the services of certain investment
sub-advisors to provide daily portfolio management. The fees related to
sub-advisory services are borne directly by the advisor and do not
increase the overall fees paid by the Fund to the investment advisor.
Wells Capital Management, an affiliate of Funds Management and indirect
wholly owned subsidiary of Wells Fargo, and Crow Point Partners, LLC are
each investment sub-advisors to the Fund and are each paid an annual fee
of 0.20% of the Fund's average daily total assets. Prior to July 12,
2010, Tattersall Advisory Group, Inc., an affiliate of EIMC and an
indirect, wholly-owned subsidiary of Wells Fargo, was an investment
sub-advisor to the predecessor fund and was paid an annual fee of 0.18%
of the Fund's average daily total assets by the advisor for its services
to the Fund.
Funds Management also serves as the administrator to the Fund
providing the Fund with facilities, equipment and personnel. Funds
Management is paid an annual administrative fee of 0.05% of the Fund's
average daily total assets. Prior to August 25, 2010, EIMC was the
administrator to the Fund and was paid an annual fee at the same rate
that is currently paid to Funds Management. For the year ended August
31, 2010, the administrative fee was equivalent to an annual rate of
0.06% of the Fund's average daily net assets.
Funds Management and/or EIMC contractually waived its advisory fee and
reimbursed other expenses in the amount of $1,051,248 for the year
ended August 31, 2010.
5. CAPITAL SHARE TRANSACTIONS
The Fund has authorized an unlimited number of common shares with no par
value. For the year ended August 31, 2010 and the year ended August 31,
2009, the Fund issued 84,763 and 170,961 common shares, respectively.
6. BORROWINGS
The Fund had secured debt financing in April 2008 from a multi-seller
commercial paper conduit administered by a major financial institution
(the "Facility") in order to redeem all of its outstanding Preferred
Shares. The Facility was refinanced on April 26, 2010 with a new
borrowing facility, administered by a different major financial
institution, with a commitment amount of $25 million and a 364 day term
("Refinancing Facility"). As of August 31, 2010, the Fund had borrowed $22
million under the Refinancing Facility. The Fund's borrowings under the
Refinancing Facility are generally charged interest at a rate determined
by the type of loan elected by the Fund. Under the Facility, the Fund had
been generally charged interest at a rate based on the rates of the
commercial paper notes issued or at LIBOR plus 9.5%. During the year
ended August 31, 2010, an effective interest rate of 0.89% was incurred
on the borrowings. Interest expense of $195,003, representing 0.19% of
the Fund's average daily net assets applicable to common shareholders,
was incurred during the year ended August 31, 2010. The Fund has pledged
its assets to secure the borrowings and pays a commitment fee at an
annual rate equal to (a) 0.30% as of any date upon which the loan balance
exceeds 50% of the facility amount and (b) 0.50% as of any other date
when the loan balance is less than 50% of the facility amount. Under the
Facility, the Fund paid, on a monthly basis, a liquidity fee at an annual
rate of 2.75% of the total commitment amount and a program fee at an
annual rate of 2.75% on the daily average outstanding principal amount of
borrowings. The secured borrowing fees on the Statement of Operations of
$1,283,918 represents amortization of structuring fees, liquidity fees
and program fees. Of this amount, $456,623 represents prepaid structuring
fees relating to the Facility, which were reimbursed to the Fund by the
investment advisor.
Wells Fargo Advantage Utilities and High Income Fund 27
Notes to Financial Statements
7. INVESTMENT PORTFOLIO TRANSACTIONS
Purchases and sales of investments, exclusive of short-term securities
(securities with maturities of one year or less at purchase date) were
$70,793,891 and $67,773,375, respectively, for the year ended August 31,
2010.
As of August 31, 2010, the Fund had unfunded loan commitments of $127,219.
8. DERIVATIVE TRANSACTIONS
During the year ended August 31, 2010, the Fund entered into credit
default swap contracts for speculative purposes. As of August 31,
2010, the Fund did not have any open credit default swap contacts but
had an average notional balance on credit default swaps of $112,863
during the year ended August 31, 2010.
The fair value, realized gains or losses and change in unrealized gains
or losses on derivative instruments are reflected in the appropriate
financial statements.
9. DISTRIBUTIONS TO SHAREHOLDERS
The tax character of distributions paid during the years ended August 31,
2010, and August 31, 2009, were as follows:
Year Ended August 31,
-----------------------
2010 2009
---------- ----------
Ordinary Income $4,848,035 $8,968,630
Return of Capital 5,644,957 7,286,854
As of August 31, 2010, the components of distributable earnings on a tax
basis are shown on the table below. The difference between book basis and
tax basis appreciation is attributable primarily to the tax deferral of
losses on wash sales.
Unrealized Capital Loss
Appreciation Carryforward
------------ ------------
$3,993,493 ($50,967,880)
10. CONCENTRATION RISK
The Fund may invest a substantial portion of its assets in an industry
and, therefore, may be more affected by changes in that industry than
would be a comparable fund whose investment are not heavily weighted in
any industry.
11. INDEMNIFICATION
Under the Fund's organizational documents, the officers and trustees are
indemnified against certain liabilities that may arise out of performance
of their duties to the Fund. Additionally, in the normal course of
business, the Fund may enter into contracts with service providers that
contain a variety of indemnification clauses. The Fund's maximum exposure
under these arrangements is dependent on future claims that may be made
against the Fund and, therefore, cannot be estimated.
12. SUBSEQUENT DISTRIBUTIONS
The Fund declared the following distributions to common shareholders:
Net Investment
Declaration Date Record Date Payable Date Income
------------------ ------------------ ---------------- --------------
August 20, 2010 September 15, 2010 October 1, 2010 $0.075
September 17, 2010 October 15, 2010 November 1, 2010 $0.075
October 15, 2010 November 15, 2010 December 1, 2010 $0.075
These distributions are not reflected in the accompanying financial
statements.
28 Wells Fargo Advantage Utilities and High Income Fund
Report of Independent Registered Public Accounting Firm
BOARD OF TRUSTEES AND SHAREHOLDERS
WELLS FARGO ADVANTAGE UTILITIES AND HIGH INCOME FUND:
We have audited the accompanying statement of assets and liabilities,
including the portfolio of investments, of the Wells Fargo Advantage
Utilities and High Income Fund (the "Fund"), as of August 31, 2010 and
the related statement of operations for the year then ended, statements
of changes in net assets for each of the years in the two-year period
then ended, statement of cash flows for the year then ended, and the
financial highlights for each of the years in the five-year period then
ended. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to
express an opinion on these financial statements and financial
highlights based on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included
confirmation of securities owned as of August 31, 2010 by correspondence
with the custodian and brokers, or by other appropriate auditing
procedures where replies from brokers were not received. An audit also
includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights
referred to above present fairly, in all material respects, the
financial position of the Wells Fargo Advantage Utilities and High
Income Fund as of August 31, 2010, the results of its operations,
changes in its net assets, its cash flows and financial highlights
for each of the years described above, in conformity with U.S.
generally accepted accounting principles.
(KPMG LLP)
Boston, Massachusetts
October 29, 2010
Wells Fargo Advantage Utilities and High Income Fund 29
Other Information (Unaudited)
PROXY VOTING INFORMATION
A description of the policies and procedures that the Fund uses to
determine how to vote proxies relating to portfolio securities is
available without charge, upon request, by calling 1-800-222-8222,
visiting our Web site at www.wellsfargo.com/advantagefunds, or visiting
the SEC Web site at www.sec.gov. Information regarding how the Fund
voted proxies relating to portfolio securities during the most recent
12-month period ended June 30 is available without charge on the Fund's
Web site at www.wellsfargo.com/advantagefunds or by visiting the SEC
Web site at www.sec.gov.
SPECIAL MEETING OF SHAREHOLDERS
On July 9, 2010, a Special Meeting of Shareholders was held to
consider a number of proposals. The results of the proposals are
indicated below.
PROPOSAL 1 - Election of Trustees:
Net Assets Voted "For" Dr. Leroy Keith, Jr. $64,347,808
Net Assets Voted "Withheld" $ 5,207,932
Net Assets Voted "For" Peter G. Gordon $64,355,138
Net Assets Voted "Withheld" $ 5,200,602
Net Assets Voted "For" Isaiah Harris, Jr. $64,303,129
Net Assets Voted "Withheld" $ 5,252,611
Net Assets Voted "For" Judith M. Johnson $64,318,298
Net Assets Voted "Withheld" $ 5,237,442
Net Assets Voted "For" David F. Larcker $64,397,620
Net Assets Voted "Withheld" $ 5,158,120
Net Assets Voted "For" Olivia S. Mitchell $64,340,091
Net Assets Voted "Withheld" $ 5,215,649
Net Assets Voted "For" Timothy J. Penny $64,381,502
Net Assets Voted "Withheld" $ 5,174,238
Net Assets Voted "For" Michael S. Scofield $64,344,209
Net Assets Voted "Withheld" $ 5,211,531
Net Assets Voted "For" Donald C. Willeke $64,261,033
Net Assets Voted "Withheld" $ 5,294,707
PROPOSAL 2A - To approve an investment advisory agreement with Wells
Fargo Funds Management, LLC.
Net Assets Voted "For" $50,210,911
Net Assets Voted "Against" $ 4,537,948
Net Assets Voted "Abstain" $ 1,302,665
PROPOSAL 2B - To approve a sub-advisory agreement with Crow Point
Partners, LLC.
Net Assets Voted "For" $50,107,742
Net Assets Voted "Against" $ 4,280,749
Net Assets Voted "Abstain" $ 1,663,032
PROPOSAL 2C - To approve a sub-advisory agreement with Wells Capital
Management Incorporated.
Net Assets Voted "For" $50,000,003
Net Assets Voted "Against" $ 4,547,089
Net Assets Voted "Abstain" $ 1,504,432
30 Wells Fargo Advantage Utilities and High Income Fund
Additional Information (Unaudited)
FEDERAL TAX DISTRIBUTIONS
For corporate shareholders, 46.72% of ordinary income dividends paid
during the fiscal year ended August 31, 2010 qualified for the
dividends received deduction.
With respect to dividends paid from investment company taxable income
during the fiscal year ended August 31, 2010, the Fund designates 67.31%
of ordinary income and any short-term capital gain distributions as
Qualified Dividend Income in accordance with the Internal Revenue Code.
Complete 2010 year-end tax information will be reported on your 2010 Form
1099-DIV, which shall be provided to you in early 2011.
The Fund paid total distributions of $10,492,992 during the year ended
August 31, 2010 of which 46.20% was from ordinary taxable income and
53.80% was from a non-taxable return of capital. Shareholders of the Fund
will receive in early 2011 a Form 1099-DIV that will inform them of the
tax character of their distributions as made by the Fund in calendar year
2010.
Wells Fargo Advantage Utilities and High Income Fund 31
Additional Information (Unaudited)
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 Computershare 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 a capital gain dividend (collectively referred to as
"dividends") payable either in shares or in cash, nonparticipants 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 NYSE Amex 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 or by calling 1-800-730-6001.
32 Wells Fargo Advantage Utilities and High Income Fund
Other Information (Unaudited)
PORTFOLIO HOLDINGS INFORMATION
The complete portfolio holdings for the Fund is publicly available on the Fund's
Web site (www.wellsfargo.com/advantagefunds) on a monthly, 30-day or more
delayed basis. The Fund files its complete schedule of portfolio holdings with
the SEC for the first and third quarters of each fiscal year on Form N-Q, which
is available without charge by visiting the SEC Web site at www.sec.gov. In
addition, the Fund's Form N-Q may be reviewed and copied at the SEC's Public
Reference Room in Washington, DC, and at regional offices in New York City, at
233 Broadway, and in Chicago, at 175 West Jackson Boulevard, Suite 900.
Information about the Public Reference Room may be obtained by calling
1-800-SEC-0330.
BOARD OF TRUSTEES
The following table provides basic information about the Board of Trustees (the
"Trustees") and Officers of the Fund. Each of the Trustees and Officers listed
below acts in identical capacities for the Wells Fargo Advantage family of
funds, which consists of 155 funds comprising the Wells Fargo Funds Trust, Wells
Fargo Variable Trust, Wells Fargo Master Trust, and four closed-end funds,
including the Fund (collectively the "Fund Complex"). All of the Trustees are
also Members of the Audit and Governance Committees of each Trust in the Fund
Complex. The mailing address of each Trustee and Officer is 525 Market Street,
12th Floor, San Francisco, CA 94105. The Board of Trustees is classified into
three classes of which one is elected annually. Each Trustee serves a three-year
term concurrent with the class from which the Trustee is elected. Each Officer
serves an indefinite term.
INDEPENDENT TRUSTEES
Position Held and
Name and Age Length of Service Principal Occupations During Past Five Years Other Directorships
------------ ------------------- -------------------------------------------- -------------------
Peter G. Gordon(1) Trustee, since Co-Founder, Chairman, President and CEO of None
67 2010; Chairman, Crystal Geyser Water Company.
since 2010
Isaiah Harris, Jr.(1) Trustee, since 2010 Retired. Prior thereto, President and CEO of CIGNA
57 BellSouth Advertising and Publishing Corp Corporation;
from 2005 to 2007, President and CEO of Deluxe Corporation
BellSouth Enterprises from 2004 to 2005 and
President of BellSouth Consumer Services
from 2000 to 2003. Currently a member of the
Iowa State University Foundation Board of
Governors and a member of the Advisory Board
of Iowa State University School of Business.
Judith M. Johnson(1) Trustee, since 2010 Retired. Prior thereto, Chief Executive None
61 Officer and Chief Investment Officer of
Minneapolis Employees Retirement Fund from
1996 to 2008. Ms. Johnson is an attorney,
certified public accountant and a certified
managerial accountant.
Leroy Keith, Jr. Trustee, since 2004 Chairman, Bloc Global Services (development Trustee, Phoenix
71 and construction). Trustee of the Evergreen Fund Complex
Funds from 1983 to2010. Former Managing (consisting
Director, Almanac Capital Management of 46 portfolios as
(commodities firm), former Partner, of 12/31/09);
Stonington Partners, Inc. (private equity Director,
fund), former Director, Obagi Medical Diversapack Co.
Products Co. and former Director, Lincoln (packaging
Educational Services. company)
David F. Larcker(1) Trustee, since 2010 James Irvin Miller Professor of Accounting None
59 at the Graduate School of Business, Stanford
University, Director of Corporate Governance
Research Program and Co-Director of The Rock
Center for Corporate Governance since 2006.
From 2005 to 2008, Professor of Accounting
at the Graduate School of Business, Stanford
University. Prior thereto, Ernst & Young
Professor of Accounting at The Wharton
School, University of Pennsylvania from 1985
to 2005.
Olivia S. Mitchell(1) Trustee, since 2010 International Foundation of Employee Benefit None
57 Plans Professor and Chair of the Department
of Insurance and Risk Management, Wharton
School of the University of Pennsylvania.
Director of Wharton's Pension Research
Council and Boettner Center on Pensions &
Retirement Research, and Research Associate
at the National Bureau of Economic Research.
Previously, Cornell University Professor
from 1978 to 1993.
Wells Fargo Advantage Utilities and High Income Fund 33
Other Information (Unaudited)
Position Held and
Name and Age Length of Service Principal Occupations During Past Five Years Other Directorships
------------ ------------------- -------------------------------------------- -------------------
Timothy J. Penny(1) Trustee, since 2010 President and CEO of Southern Minnesota None
58 Initiative Foundation, a non-profit
organization, since 2007 and Senior Fellow
at the Humphrey Institute Policy Forum at
the University of Minnesota since 1995.
Member of the Board of Trustees of NorthStar
Education Finance, Inc., a non-profit
organization, since 2007.
Michael S. Scofield Trustee, since 2004 Currently serves on the Investment Company None
67 Institute's Board of Governors and Executive
Committee. Former Chairman of the
Independent Directors Counsel. Trustee of
the Evergreen Funds from 1984 to 2010.
Retired Attorney, Law Offices of Michael S.
Scofield and former Director and Chairman,
Branded Media Corporation (multi-media
branding company).
Donald C. Willeke(1) Trustee, since 2010 Principal of the law firm of Willeke & None
70 Daniels. General Counsel of the Minneapolis
Employees Retirement Fund from 1984 until
its consolidation into the Minnesota Public
Employees Retirement Association on June 30,
2010.
OFFICERS
Position Held and
Name and Age Length of Service Principal Occupations During Past Five Years Other Directorships
------------ ------------------- -------------------------------------------- -------------------
Karla M. Rabusch President, since Executive Vice President of Wells Fargo None
51 2010 Bank, N.A. and President of Wells Fargo
Funds Management, LLC since 2003. Senior
Vice President and Chief Administrative
Officer of Wells Fargo Funds Management, LLC
from 2001 to 2003.
C. David Messman Secretary, since Senior Vice President and Secretary of Wells None
49 2010; Chief Legal Fargo Funds Management, LLC since 2001. Vice
Counsel, since 2010 President and Managing Counsel of Wells
Fargo Bank, N.A. since 1996.
Kasey Phillips Treasurer, since Senior Vice President of Wells Fargo Funds None
39 2005 Management, LLC since 2009. Senior Vice
President of Evergreen Investment Management
Company, LLC from 2006 to 2010. Treasurer of
the Evergreen Funds from 2005 to 2010. Vice
President and Assistant Vice President of
Evergreen Investment Services, Inc. from
1999 to 2006.
David Berardi(2) Assistant Treasurer, Vice President of Wells Fargo Funds None
34 since 2009 Management, LLC since 2009. Vice President
of Evergreen Investment Management Company,
LLC from 2008 to 2010. Assistant Vice
President of Evergreen Investment Services,
Inc. from 2004 to 2008. Manager of Fund
Reporting and Control for Evergreen
Investment Management Company, LLC from 2004
to 2010.
Jeremy DePalma Assistant Treasurer, Senior Vice President of Wells Fargo Funds None
36 since 2005 Management, LLC since 2009. Senior Vice
President of Evergreen Investment Management
Company, LLC from 2008 to 2010. Vice
President, Evergreen Investment Services,
Inc. from 2004 to 2007. Assistant Vice
President, Evergreen Investment Services,
Inc. from 2000 to 2004 and the head of the
Fund Reporting and Control Team within Fund
Administration form 2005 to 2010.
Debra Ann Early Chief Compliance Chief Compliance Officer of Wells Fargo None
45 Officer, Funds Management, LLC since 2007. Chief
since 2010 Compliance Officer of Parnassus Investments
from 2005 to 2007. Chief Financial Officer
of Parnassus Investments from 2004 to 2007
and Senior Audit Manager of
PricewaterhouseCoopers LLP from 1998 to
2004.
----------
(1.) Effective July 9, 2010.
(2.) Effective November 1, 2009.
34 Wells Fargo Advantage Utilities and High Income Fund
Other Information (Unaudited)
BOARD CONSIDERATION OF INVESTMENT ADVISORY AND SUB-ADVISORY AGREEMENTS:
At their telephonic meeting on May 11, 2010, the Trustees of the Fund, including
each Trustee who is not an "interested person" of the Fund (the "Independent
Trustees"), as such term is defined by the Investment Company Act of 1940, as
amended (the "1940 Act"), approved an advisory agreement for the Fund with Wells
Fargo Funds Management, LLC ("Funds Management") as well as sub-advisory
agreements with Crow Point Partners, LLC ("Crow Point") and Wells Capital
Management Incorporated ("Wells Capital"). Because the 1940 Act requires trustee
approval of definitive advisory agreements to occur at an in-person meeting, the
Trustees, including the Independent Trustees, considered and approved each of
these agreements again at their in-person meeting held on June 9-10, 2010
(together with the May 11, 2010 telephonic meeting, the "Meetings").
In considering at the Meetings whether to approve the advisory agreement with
Funds Management and the sub-advisory agreements with Crow Point and Wells
Capital, the Trustees took into account that they had most recently approved the
annual continuation of the Fund's prior investment advisory agreement with
Evergreen Investment Management Company, LLC ("EIMC") and sub-advisory
agreements with Crow Point and Tattersall Advisory Group, Inc. ("TAG") in
September 2009. That approval followed a lengthy process during which the
Trustees considered a variety of factors, including, for example, the nature and
quality of services that the Fund receives, the fees that the Fund pays under
the agreements, and the Fund's investment performance, as well as a wide range
of other matters that the Trustees considered to have a bearing upon the
agreements.
The Trustees also considered that the advisory agreement with Funds Management
and the sub-advisory agreements with Crow Point and Wells Capital were proposed
in the context of the combination of the Evergreen and Wells Fargo mutual fund
families. After the December 31, 2008 merger of the Wells Fargo and Wachovia
organizations, representatives of the combined Wells Fargo asset management
organization approached the Trustees of the Evergreen funds with a proposal to
combine the Evergreen and Wells Fargo Advantage Fund families. Funds
Management's representatives cited a number of important considerations favoring
an eventual combination of the fund families, including, among others, the
integration of the Evergreen and Wells Fargo investment management
organizations; possible economies of scale through the increased size of the
combined fund family; contractual savings from service providers to the combined
funds; the ability to select the best funds from each family to continue as part
of the combined fund family; and more seamless integration of the Evergreen
funds into the combined Wells Fargo investment and shareholder servicing
platforms and programs.
Over the course of 2009 and early 2010, the Board of Trustees of the Evergreen
funds met repeatedly with the management teams of Funds Management and EIMC and
worked to refine the proposed combination of the fund families. For the
closed-end Evergreen funds, the proposed combination involved the approval of
new investment advisory and sub-advisory agreements with Funds Management and
affiliated (and un-affiliated) entities, name changes, and the election of new
trustees.
Throughout their consideration of the proposed combination of the fund families,
the Trustees requested additional information from representatives of EIMC and
Funds Management as they considered appropriate. The Trustees retained an
independent industry consultant to assist them in evaluating the combination of
the fund families and related information. They also met separately on numerous
occasions with independent legal counsel to the Independent Trustees.
The Trustees' determinations to approve the advisory agreement with Funds
Management and the sub-advisory agreements with Crow Point and Wells Capital
were based on a comprehensive evaluation of the information provided to them.
During their review, the Trustees did not identify any particular information or
consideration that was all-important or controlling, and each Trustee attributed
different weights to various factors. In their discussions, the Board made clear
that, although the Fund's new agreements were proposed as part of a combination
of the fund families that may well benefit the shareholders of the Evergreen
funds as a whole, the Board would consider carefully the impact of the proposed
combination on each Evergreen fund and its shareholders individually, and would
thus evaluate the proposed advisory agreement with Funds Management and
sub-advisory agreements with Crow Point and Wells Capital for the Fund
independently.
Wells Fargo Advantage Utilities and High Income Fund 35
Other Information (Unaudited)
The Trustees reviewed differences in the terms of the prior advisory agreement
with EIMC and the proposed advisory agreement with Funds Management, and between
the prior sub-advisory agreements with Crow Point and TAG and the proposed
sub-advisory agreements with Crow Point and Wells Capital. The Trustees
considered whether any change to the nature and quality of the comprehensive
investment management services provided to the Fund would reasonably be expected
as a result of adopting the proposed advisory agreement with Funds Management
and sub-advisory agreements with Crow Point and Wells Capital. In this regard,
they noted that the same investment management personnel presently responsible
for providing investment advisory and sub-advisory services to the Fund would
continue to do so under the new agreements, with the exception that portfolio
managers at Wells Capital would take over providing sub-advisory services for
the Fund's portfolio from TAG. The Trustees considered the research and other
capabilities and resources available to the proposed portfolio managers, as well
as the investment performance record of these portfolio managers in managing the
Fund or, in the case of the proposed Wells Capital portfolio managers,
portfolios similar to the Fund's.
The Trustees observed that the proposed fee rate under the advisory agreement
with Funds Management was identical to the fee rate under the prior advisory
agreement with EIMC. They noted that there were certain changes proposed to the
fee rates under the sub-advisory agreements with Crow Point and Wells Capital,
which would have no impact on the aggregate fees paid by the Fund for advisory
services. Funds Management asserted, and the Trustees took into account, that
these changes were not expected to have any impact on the quality of services
provided to the Funds or on the profitability of the advisory and sub-advisory
arrangements to Funds Management and its affiliates (which includes Wells
Capital). The Trustees reviewed information prepared by an independent data
provider regarding the Fund's management fee and other expenses relative to the
fees and expenses of other peer funds. They noted that the Fund's management
fees were lower than the fees of its peer funds, and determined on the basis of
the information presented that the Fund's fees did not appear excessive. During
the course of their consideration of fees, the Trustees noted that in certain
cases, Funds Management and/or its affiliates provide to other clients
(including principally other existing Evergreen funds) advisory services that
are comparable in some degree to the advisory services that they would provide
to the Fund, and considered comparative fee information, as well as information
regarding similarities and differences in the services provided, in this regard.
In light, in part, of the fact that there were material differences between the
Fund's investment program and the investment programs of these other clients,
the Trustees did not consider the comparative fee information to be particularly
useful in their consideration of the Fund's proposed agreements.
The Trustees considered that, although the Fund was not making a continuous
offering of its shares so that the likelihood of achieving economies of scale
following the Fund's initial offering was relatively low, the Fund may
potentially benefit to the extent that contractual arrangements with service
providers to the combined fund family could be negotiated on a more favorable
basis as a result of the increased scale of the combined fund family. They also
considered information provided to them regarding the profitability of the
advisory fees paid under the prior advisory agreement to EIMC, and regarding the
anticipated profitability of such fees to Funds Management under the proposed
advisory agreement, and determined that the profitability of these arrangements
was not so high as to prevent their approving the new agreements.
36 Wells Fargo Advantage Utilities and High Income Fund
List of Abbreviations
THE FOLLOWING IS A LIST OF COMMON ABBREVIATIONS FOR TERMS AND ENTITIES WHICH MAY
HAVE APPEARED IN THIS REPORT.
ABAG -- Association of Bay Area Governments
ADR -- American Depositary Receipt
ADS -- American Depository Shares
AMBAC -- American Municipal Bond Assurance Corporation
AMT -- Alternative Minimum Tax
ARM -- Adjustable Rate Mortgages
BART -- Bay Area Rapid Transit
CDA -- Community Development Authority
CDO -- Collateralized Debt Obligation
CDSC -- Contingent Deferred Sales Charge
CGIC -- Capital Guaranty Insurance Company
CGY -- Capital Guaranty Corporation
CIFG -- CDC (Caisse des Depots et Consignations) IXIS Financial Guarantee
COP -- Certificate of Participation
CP -- Commercial Paper
CTF -- Common Trust Fund
DW&P -- Department of Water & Power
DWR -- Department of Water Resources
ECFA -- Educational & Cultural Facilities Authority
EDFA -- Economic Development Finance Authority
ETET -- Eagle Tax-Exempt Trust
ETF -- Exchange-Traded Fund
FFCB -- Federal Farm Credit Bank
FGIC -- Financial Guaranty Insurance Corporation
FHA -- Federal Housing Authority
FHAG -- Federal Housing Agency
FHLB -- Federal Home Loan Bank
FHLMC -- Federal Home Loan Mortgage Corporation
FNMA -- Federal National Mortgage Association
FSA -- Farm Service Agency
GDR -- Global Depositary Receipt
GNMA -- Government National Mortgage Association
GO -- General Obligation
HCFR -- Healthcare Facilities Revenue
HEFA -- Health & Educational Facilities Authority
HEFAR -- Higher Education Facilities Authority Revenue
HFA -- Housing Finance AuthoritY
HFFA -- Health Facilities Financing Authority
HUD -- Housing & Urban Development
IDA -- Industrial Development Authority
IDAG -- Industrial Development Agency
IDR -- Industrial Development Revenue
LIBOR -- London Interbank Offered Rate
LLC -- Limited Liability Company
LOC -- Letter of Credit
LP -- Limited Partnership
MBIA -- Municipal Bond Insurance Association
MFHR -- Multi-Family Housing Revenue
MFMR -- Multi-Family Mortgage Revenue
MMD -- Municipal Market Data
MTN -- Medium Term Note
MUD -- Municipal Utility District
NATL-RE -- National Public Finance Guarantee Corporation
PCFA -- Pollution Control Finance Authority
PCR -- Pollution Control Revenue
PFA -- Public Finance Authority
PFFA -- Public Facilities Financing Authority
plc -- Public Limited Company
PSFG -- Public School Fund Guaranty
R&D -- Research & Development
RDA -- Redevelopment Authority
RDFA -- Redevelopment Finance Authority
REIT -- Real Estate Investment Trust
SFHR -- Single Family Housing Revenue
SFMR -- Single Family Mortgage Revenue
SLMA -- Student Loan Marketing Association
SPDR -- Standard & Poor's Depositary Receipts
STIT -- Short-Term Investment Trust
TBA -- To Be Announced
TRAN -- Tax Revenue Anticipation Notes
USD -- Unified School District
XLCA -- XL Capital Assurance
(LOGO) Reduce clutter. Save trees.
(WELLS FARGO ADVANTAGE FUNDS LOGO)
Transfer Agent, Registrar, Shareholder Servicing Agent
& Dividend Disbursing Agent:
Computershare Trust Company, N.A.
P.O. Box 43010
Providence, RI 02940-3010
1-800-730-6001
Wells Fargo Funds Management, LLC, is a subsidiary of Wells Fargo & Company and
is an affiliate of Wells Fargo & Company's broker/dealer subsidiaries.
(GRAPHIC)
Printed on Recycled paper
NOT FDIC INSURED - NO BANK GUARANTEE - MAY LOSE VALUE
(C) 2010 Wells Fargo Funds Management, LLC. All rights reserved.
www.wellsfargo.com/advantagefunds
125778 10-10
AUHIF/AR134 08-10
ITEM 2. CODE OF ETHICS
As of the end of the period, August 31, 2010, Wells Fargo Advantage Utilities &
High Income Fund has adopted a code of ethics, as defined in Item 2 of Form
N-CSR, that applies to its President and Treasurer. A copy of the code of ethics
is filed as an exhibit to this Form N-CSR.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT
The Board of Trustees of Wells Fargo Advantage Utilities & High Income Fund has
determined that Judith Johnson is an audit committee financial expert, as
defined in Item 3 of Form N-CSR. Mrs. Johnson is independent for purposes of
Item 3 of Form N-CSR.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES
(a) AUDIT FEES - Provided below are the aggregate fees billed for the fiscal
years ended August 31, 2009 and August 31, 2010 for professional services
rendered by the principal accountant for the audit of the Registrant's annual
financial
statements or services that are normally provided by the accountant in
connection with statutory and regulatory filings or engagements.
For the fiscal years ended August 31, 2009 and August 31, 2010, the Audit
Fees were $60,400 and $44,500, respectively.
(b) AUDIT-RELATED FEES - There were no audit-related fees incurred for the
fiscal years ended August 31, 2009 and August 31, 2010 for assurance and related
services by the principal accountant for the Registrant.
(c) TAX FEES - Provided below are the aggregate fees billed for the fiscal years
ended August 31, 2009 and August 31, 2010 for professional services rendered by
the principal accountant for the Registrant for tax compliance, tax advice, and
tax planning.
For the fiscal years ended August 31, 2009 and August 31, 2010, the Tax
Fees were $0 and $189,320, respectively. The incurred Tax Fees are
comprised of excise tax review services.
For the fiscal years ended August 31, 2009 and August 31, 2010, the Tax
Fees were $0 and $236,650, respectively. The incurred Tax Fees are
comprised of tax preparation and consulting services.
(d) ALL OTHER FEES - There were no other fees incurred for the fiscal years
ended August 31, 2009 and August 31, 2010.
(e)(1) The Chairman of the Audit Committees is authorized to pre-approve: (1)
audit services to the mutual funds of Wells Fargo Advantage Utilities & High
Income Fund, Wells Fargo Variable Trust and Wells Fargo Master Trust (the
"Funds"); (2) non-audit tax or compliance consulting or training services
provided to the Funds by the independent auditors ("Auditors") if the fees for
any particular engagement are not anticipated to exceed $50,000; and (3)
non-audit tax or compliance consulting or training services provided by the
Auditors to a Fund's investment adviser and its controlling entities (where
pre-approval is required because the engagement relates directly to the
operations and financial reporting of the Fund) if the fee to the Auditors for
any particular engagement is not anticipated to exceed $50,000. For any such
pre-approval sought from the Chairman, Management shall prepare a brief
description of the proposed services. If the Chairman approves of such service,
he or she shall sign the statement prepared by Management. Such written
statement shall be presented to the full Committees at their next regularly
scheduled meetings.
(e)(2) Not Applicable.
(f) Not Applicable.
(g) Provided below are the aggregate non-audit fees billed for the fiscal years
ended August 31, 2009 and August 31, 2010, by the principal accountant for
services rendered to the Registrant, and rendered to the Registrant's investment
adviser, and any entity controlling, controlled by, or under common control with
the adviser that provides ongoing services to the Registrant.
For the fiscal year ended August 31, 2010, the Registrant incurred
non-audit fees in the amount of $103,000. The non-audit fees consist of
SAS70 control reviews of Wells Fargo Bank, N.A.
For the fiscal year ended August 31, 2010, the Registrant's investment
adviser incurred non-audit fees in the amount of $45,000. The non-audit
fees for the year-ended August 31, 2010 relates to examination of
securities pursuant to rule 206 (4)-2 under the Investment Advisors Act of
1940.
For the fiscal year ended August 31, 2010, the Registrant's investment
adviser incurred non-audit fees in the amount of $135,000. The non-audit
fees for the year ended August 31, 2010 consist of procedure reviews for
pending mergers associated with fund reorganizations.
For the fiscal year ended and August 31, 2010, the Registrant's investment
adviser incurred non-audit fees in the amount of $572,300. The non-audit
fees for the year ended August 31, 2010 relates to mergers and review of
registration statements.
For the fiscal year ended August 31, 2009, the Registrant's investment
adviser incurred non-audit fees in the amount of $570,000. The non-audit
fees for the year ended August 31, 2009 consisted of the aggregate fees for
non-audit services rendered to the Fund and the investment advisor.
(h) The Registrant's audit committee of the board of directors has determined
that non-audit services rendered to the registrant's investment adviser, that
were not pre-approved pursuant to paragraph (c)(7)(ii) of Rule 2-01 of the
Regulation S-X, does not compromise the independence of the principal
accountant.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS
Not applicable.
ITEMS 6. SCHEDULE OF INVESTMENTS
The Schedule of Investments is included as part of the report to shareholders
filed under Item 1 of this Form.
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES
PROXY VOTING POLICIES AND PROCEDURES
REVISED AS OF AUGUST 25, 2010
1. Scope of Policies and Procedures. These Policies and Procedures
("Procedures") are used to determine how to vote proxies relating to portfolio
securities held by the series of Wells Fargo Funds Trust, Wells Fargo Master
Trust, Wells Fargo Variable Trust, Asset Allocation Trust, Wells Fargo Advantage
Global Dividend Opportunity Fund, Wells Fargo Advantage Income Opportunities
Fund, Wells Fargo Advantage Multi-Sector Income Fund, and Wells Fargo Advantage
Utilities & High Income Fund (the "Trusts") except for those series that
exclusively hold non-voting securities (hereafter, all such series, and all such
Trusts not having separate series, holding voting securities are referred to as
the "Funds").
2. Voting Philosophy. The Funds and Wells Fargo Funds Management, LLC ("Funds
Management") have adopted these Procedures to ensure that proxies are voted in
the best interests of Fund shareholders, without regard to any relationship that
any affiliated person of the Fund (or an affiliated person of such affiliated
person) may have with the issuer. Funds Management exercises its voting
responsibility, as a fiduciary, with the goal of maximizing value to
shareholders consistent with governing laws and the investment policies of each
Fund. While securities are not purchased to exercise control or to seek to
effect corporate change through share ownership, the Funds support sound
corporate governance practices within companies in which they invest.
3. Responsibilities
(a) Board of Trustees. The Board of Trustees of each Trust (the "Board") has
delegated the responsibility for voting proxies relating to the Funds' portfolio
securities to Funds Management. The Board retains the authority to make or
ratify any voting decisions or approve any changes to these Procedures as the
Board deems appropriate. Funds
Management will provide reports to the Board regarding voting matters when and
as reasonably requested by the Board. The Board shall review these Procedures as
often as it deems appropriate to consider whether any revisions are warranted.
On an annual basis, the Board shall receive and review a report from Funds
Management on the proxy voting process.
(b) Funds Management Proxy Committee
(i) Responsibilities. The Funds Management Proxy Voting Committee (the "Proxy
Committee") shall be responsible for overseeing the proxy voting process to
ensure its implementation in conformance with these Procedures. The Proxy
Committee shall monitor Risk Metrics Group ("Risk Metrics"), the proxy voting
agent for Funds Management, to determine that Risk Metrics is accurately
applying the Procedures as set forth herein. The Proxy Committee shall review
the continuing appropriateness of the Procedures set forth herein, recommend
revisions to the Board as necessary and provide an annual update to the Board on
the proxy voting process.
(ii) Voting Guidelines. Appendix A hereto sets forth guidelines regarding how
proxies will be voted on the issues specified. Risk Metrics will vote proxies
for or against as directed by the guidelines. Where the guidelines specify a
"case by case" determination for a particular issue, Risk Metrics will forward
the proxy to the Proxy Committee for a vote determination by the Proxy
Committee. Finally, with respect to issues for which a vote for or against is
specified by the Procedures, the Proxy Committee shall have the authority to
direct Risk Metrics to forward the proxy to the Proxy Committee for a
discretionary vote by the Proxy Committee if the Proxy Committee determines that
a case-by-case review of such matter is warranted. The Proxy Committee may also
consult Fund sub-advisers on certain proxy voting issues on a case-by-case basis
as the Proxy Committee deems appropriate or to the extent that a sub-adviser of
a Fund makes a recommendation regarding a proxy voting issue. As a general
matter, however, proxies are voted consistently on the same matter when
securities of an issuer are held by multiple Funds.
(iii) Proxy Committee. In all cases, the Proxy Committee will exercise its
voting discretion in accordance with the voting philosophy of the Funds. In
cases where a proxy is forwarded by Risk Metrics to the Proxy Committee, the
Proxy Committee may be assisted in its voting decision through receipt of: (i)
independent research and voting recommendations provided by Risk Metrics or
other independent sources; (ii) input from the investment sub-adviser
responsible for purchasing the security; and (iii) information provided by
company management and shareholder groups.
Voting decisions made by the Proxy Committee will be reported to Risk Metrics to
ensure that the vote is registered in a timely manner and included in Form N-PX
reporting.
(iv) Securities on Loan. As a general matter, securities on loan will not be
recalled to facilitate proxy voting (in which case the borrower of the security
shall be entitled to vote the proxy). However, if the Proxy Committee is aware
of an item in time to recall the security and has determined in good faith that
the importance of the matter to be voted upon outweighs the loss in lending
revenue that would result from recalling the security (i.e., if there is a
controversial upcoming merger or acquisition, or some other significant matter),
the security will be recalled for voting.
(v) Practical Limitations to Proxy Voting. While Funds Management uses its best
efforts to vote proxies, in certain circumstances it may be impractical or
impossible for Funds Management to vote proxies (e.g., limited value or
unjustifiable costs). For example, in accordance with local law or business
practices, many foreign companies prevent the sales of shares that have been
voted for a certain period beginning prior to the shareholder meeting and ending
on the day following the meeting ("share blocking"). Due to these restrictions,
Funds Management must balance the benefits to its clients of voting proxies
against the potentially serious portfolio management consequences of a reduced
flexibility to sell the underlying shares at the most advantageous time. As a
result, Funds Management will generally not vote those proxies in the absence of
an unusual, significant vote or compelling economic importance. Additionally,
Funds Management may not be able to vote proxies for certain foreign securities
if Funds Management does not receive the proxy statement in time to vote the
proxies due to custodial processing delays.
(vi) Conflicts of Interest. Funds Management may have a conflict of interest
regarding a proxy to be voted upon if, for example, Funds Management or its
affiliates have other relationships with the issuer of the proxy. In most
instances, conflicts of interest are avoided through a strict and objective
application of the voting guidelines attached hereto. However, when the Proxy
Committee is aware of a material conflict of interest regarding a matter that
would otherwise require a vote by the Proxy Committee, the Proxy Committee shall
address the material conflict by using any of the following methods: (1)
instructing Risk Metrics to vote in accordance with the recommendation Risk
Metrics makes to its clients; (2) disclosing the conflict to the Board and
obtaining their consent before voting; (3) submitting the matter to the Board to
exercise its authority to vote on such matter; (4) engaging an independent
fiduciary who will direct the Proxy Committee on voting instructions for the
proxy; (5) consulting with outside legal counsel for guidance on resolution of
the conflict of interest; (6) erecting information barriers around the person or
persons making voting decisions; (7) voting in proportion to other shareholders
("mirror voting"); or (8) voting in other ways that are consistent with each
Fund's obligation to vote in the best interests of its shareholders.
Additionally, the Proxy Committee will not permit its votes to be influenced by
any conflict of interest that exists for any other affiliated person of the Fund
(such as a sub-adviser or principal underwriter) or any affiliated persons of
such affiliated persons and the Proxy Committee will vote all such matters
without regard to the conflict.
(vii) Meetings. The Proxy Committee shall convene as needed and when
discretionary voting determinations need to be considered, and shall have the
authority to act by vote of a majority of the Proxy Committee members available
at that time. The Proxy Committee shall also meet at least semi-annually to
review the Procedures and the performance of Risk Metrics in exercising its
proxy voting responsibilities.
(viii) Membership. The voting members of the Proxy Committee shall be Tom Biwer,
Travis Keshemberg, Patrick McGuinnis and Erik Sens. Andrew Owen shall be a
non-voting member and serve in an advisory capacity on the Proxy Committee.
Changes to the membership of the Proxy Committee will be made only with Board
approval. Upon departure from Funds Management, a member's position on the Proxy
Committee will automatically terminate.
4. Disclosure of Policies and Procedures. Each Fund shall disclose in its
statement of additional information a description of the policies and procedures
it uses to determine how to vote proxies relating to securities held in its
portfolio. In addition, each Fund shall disclose in its semi- and annual reports
that a description of its proxy voting policies and procedures is available
without charge, upon request, by calling 1-800-222-8222, on the Fund's web site
at www.wellsfargo.com/advantagefunds and on the Securities and Exchange
Commission's website at http://www.sec.gov.
5. Disclosure of Proxy Voting Record. Each Trust shall file with the Commission
an annual report on Form N-PX not later than August 31 of each year (beginning
August 31, 2004), containing the Trust's proxy voting record for the most recent
twelve-month period ended June 30.
Each Fund shall disclose in its statement of additional information and semi-
and annual reports that information regarding how the Fund voted proxies
relating to portfolio securities during the most recent 12-month period ended
June 30 is available without charge on the Funds' web site at
www.wellsfargo.com/advantagefunds or by accessing the Commission's web site at
www.sec.gov.
Each Fund shall disclose the following information on Form N-PX for each matter
relating to a portfolio security considered at any shareholder meeting held
during the period covered by the report and with respect to which the Fund was
entitled to vote:
- The name of the issuer of the portfolio security;
- The exchange ticker symbol of the portfolio security;
- The Council of Uniform Securities Identification Procedures ("CUSIP")
number for the portfolio security (unless the CUSIP is not available
through reasonably practicable means, in which case it will be omitted);
- The shareholder meeting date;
- A brief identification of the matter voted on;
- Whether the matter was proposed by the issuer or by a security holder;
- Whether the Fund cast its vote on the matter;
- How the Fund cast its vote (e.g. for or against a proposal, or abstain; for
or withhold regarding election of directors); and
- Whether the Fund cast its vote for or against management.
Form N-PX shall be made available to Fund shareholders through the SEC web site.
APPENDIX A
TO
PROXY VOTING POLICIES AND PROCEDURES
Funds Management will vote proxies relating to portfolio securities held by the
Trusts in accordance with the following proxy voting guidelines. To the extent
the specific guidelines below do not address a proxy voting proposal, Funds
Management will vote pursuant to Risk Metrics' current U.S. and International
proxy voting guidelines. Proxies for securities held by the Wells Fargo
Advantage Social Awareness Fund related to social and environmental proposals
will be voted pursuant to Risk Metrics' current SRI Proxy Voting Guidelines. In
addition, proxies related to issues not addressed by the specific guidelines
below or by Risk Metrics' current U.S. and International proxy voting guidelines
will be forwarded to the Proxy Committee for a vote determination by the Proxy
Committee.
UNCONTESTED ELECTION OF DIRECTORS OR TRUSTEES
THE FUNDS will generally vote for all uncontested director FOR
or trustee nominees. The Nominating Committee is in the best
position to select nominees who are available and capable of
working well together to oversee management of the company.
THE FUNDS will not require a performance test for directors.
THE FUNDS will generally vote for reasonably crafted FOR
shareholder proposals calling for directors to be elected
with an affirmative majority of votes cast and/or the
elimination of the plurality standard for electing
directors, unless the company has adopted formal corporate
governance principles that present a meaningful alternative
to the majority voting standard.
THE FUNDS will withhold votes for a director if the nominee WITHHOLD
fails to attend at least 75% of the board and committee
meetings without a valid excuse.
THE FUNDS will vote against routine election of directors if AGAINST
any of the following apply: company fails to disclose
adequate information in a timely manner, serious issues with
the finances, questionable transactions, conflicts of
interest, record of abuses against minority shareholder
interests, bundling of director elections, and/or egregious
governance practices.
THE FUNDS will withhold votes from the entire board (except WITHHOLD
for new nominees) where the director(s) receive more than
50% withhold votes out of those cast and the issue that was
the underlying cause of the high level of withhold votes has
not been addressed.
THE FUNDS will withhold votes from members of the Audit WITHHOLD
Committee and/or the full board if poor accounting
practices, which rise to a level of serious concern, such
as: fraud; misapplication of GAAP; and material weaknesses
identified in Section 404 disclosures, are identified.
THE FUNDS will withhold votes from members of the Audit WITHHOLD
Committee if the company receives an adverse opinion on the
company's financial statements from its auditor.
THE FUNDS will withhold votes from members of the Audit WITHHOLD
Committee if there is persuasive evidence that the audit
committee entered into an inappropriate indemnification
agreement with its auditor that limits the ability of the
company, or its shareholders, to pursue legitimate legal
recourse against the audit firm.
RATIFICATION OF AUDITORS
THE FUNDS will vote against auditors and withhold votes from AGAINST/ WITHHOLD
audit committee members if non-audit fees are greater than
audit fees, audit-related fees, and permitted tax fees,
combined. THE FUNDS will follow the disclosure categories
being proposed by the SEC in applying the above formula.
With the above exception, THE FUNDS will generally vote for FOR
proposals to ratify auditors unless:
- an auditor has a financial interest in or association AGAINST
with the company, and is therefore not independent, or
- there is reason to believe that the independent auditor AGAINST
has rendered an opinion that is neither accurate nor
indicative of the company's financial position.
THE FUNDS will vote against proposals that require auditors AGAINST
to attend annual meetings as auditors are regularly reviewed
by the board audit committee, and such attendance is
unnecessary.
THE FUNDS will consider shareholder proposals requiring CASE-BY-CASE
companies to prohibit their auditors from engaging in
non-audit services on a case-by-case basis (or
cap level of non-audit services).
THE FUNDS will vote for shareholder proposals requesting a FOR
shareholder vote for audit firm ratification.
THE FUNDS will vote against shareholder proposals asking for AGAINST
audit firm rotation. This practice is viewed as too
disruptive and too costly to implement for the benefit
achieved.
COMPANY NAME CHANGE/PURPOSE
THE FUNDS will vote for proposals to change the company name FOR
as management and the board is best suited to determine if
such change in company name is necessary.
However, where the name change is requested in connection CASE-BY-CASE
with a reorganization of the company, the vote will be based
on the merits of the reorganization.
In addition, THE FUNDS will generally vote for proposals to FOR
amend the purpose of the company. Management is in the best
position to know whether the description of what the company
does is accurate, or whether it needs to be updated by
deleting, adding or revising language.
EMPLOYEE STOCK PURCHASE PLANS/401(K) EMPLOYEE BENEFIT PLANS
THE FUNDS will vote for proposals to adopt, amend or FOR
increase authorized shares for employee stock purchase plans
and 401(k) plans for employees as properly structured plans
enable employees to purchase common stock at a slight
discount and thus own a beneficial interest in the company,
provided that the total cost of the company's plan is not
above the allowable cap for the company.
Similarly, THE FUNDS will generally vote for proposals to FOR
adopt or amend thrift and savings plans, retirement plans,
pension plans and profit plans.
APPROVE OTHER BUSINESS
THE FUNDS will generally vote for proposals to approve other FOR
business. This transfer of authority allows the corporation
to take certain ministerial steps that may arise at the
annual or special meeting.
However, THE FUNDS retains the discretion to vote against AGAINST
such proposals if adequate information is not provided in
the proxy statement, or the measures are significant and no
further approval from shareholders is sought.
INDEPENDENT BOARD OF DIRECTORS/BOARD COMMITTEES
THE FUNDS will vote for proposals requiring that two-thirds FOR
of the board be independent directors. An independent board
faces fewer conflicts and is best prepared to protect
stockholders' interests.
THE FUNDS will withhold votes from insiders and affiliated WITHHOLD
outsiders on boards that are not at least majority
independent.
THE FUNDS will withhold votes from compensation committee WITHHOLD
members where there is a pay-for-performance disconnect (for
Russell 3000 companies).
THE FUNDS will vote for proposals requesting that the board FOR
audit, compensation and/or nominating committees be composed
of independent directors, only. Committees should be
composed entirely of independent directors in order to avoid
conflicts of interest.
THE FUNDS will withhold votes from any insiders or WITHHOLD
affiliated outsiders on audit, compensation or nominating
committees. THE FUNDS will withhold votes from any insiders
or affiliated outsiders on the board if any of these key
committees has not been established.
THE FUNDS will vote against proposals from shareholders AGAINST
requesting an independent compensation consultant.
MINIMUM STOCK REQUIREMENTS BY DIRECTORS
THE FUNDS will vote against proposals requiring directors to AGAINST
own a minimum number of shares of company stock in order to
qualify as a director, or to remain on the board. Minimum
stock ownership requirements can impose an across-the-board
requirement that could prevent qualified individuals from
serving as directors.
INDEMNIFICATION AND LIABILITY PROVISIONS FOR DIRECTORS AND
OFFICERS
THE FUNDS will vote for proposals to allow indemnification FOR
of directors and officers, when the actions taken were on
behalf of the company and no criminal violations occurred.
THE FUNDS will also vote in favor of proposals to purchase
liability insurance covering liability in connection with
those actions. Not allowing companies to indemnify directors
and officers to the degree possible under the law would
limit the ability of the company to attract qualified
individuals.
Alternatively, THE FUNDS will vote against indemnity AGAINST
proposals that are overly broad. For example, THE FUNDS will
oppose proposals to indemnify directors for acts going
beyond mere carelessness, such as gross negligence, acts
taken in bad faith, acts not otherwise allowed by state law
or more serious violations of fiduciary obligations.
NOMINEE STATEMENT IN THE PROXY
THE FUNDS will vote against proposals that require board AGAINST
nominees to have a statement of candidacy in the proxy,
since the proxy statement already provides adequate
information pertaining to the election of directors.
LIMITATION ON NUMBER OF BOARDS A DIRECTOR MAY SIT ON
THE FUNDS will withhold votes from directors who sit on more WITHHOLD
than six boards.
THE FUNDS will withhold votes from CEO directors who sit on WITHHOLD
more than two outside boards besides their own.
DIRECTOR TENURE/RETIREMENT AGE
THE FUNDS will vote against proposals to limit the tenure of AGAINST
directors as such limitations based on an arbitrary number
could prevent qualified individuals from serving as
directors. However, THE FUNDS is in favor of inserting
cautionary language when the average director tenure on the
board exceeds 15 years for the entire board.
The Funds will vote for proposals to establish a mandatory FOR
retirement age for directors provided that such retirement
age is not less than 65.
BOARD POWERS/PROCEDURES/QUALIFICATIONS
THE FUNDS will consider on a case-by-case basis proposals to CASE-BY-CASE
amend the corporation's By-laws so that the Board of
Directors shall have the power, without the assent or vote
of the shareholders, to make, alter, amend, or rescind the
By-laws, fix the amount to be reserved as working capital,
and fix the number of directors and what number shall
constitute a quorum of the Board. In determining these
issues, THE FUNDS will rely on the proxy voting Guidelines.
LOANS TO OFFICERS
THE FUNDS will consider on a case-by-case basis proposals to CASE-BY-CASE
authorize the corporation to make loans or to guarantee the
obligations of officers of the corporation or any of its
affiliates.
ADJOURN MEETING TO SOLICIT ADDITIONAL VOTES
THE FUNDS will examine proposals to adjourn the meeting to CASE-BY-CASE
solicit additional votes on a case-by-case basis. As
additional solicitation may be costly and could result in
coercive pressure on shareholders, THE FUNDS will consider
the nature of the proposal and its vote recommendations for
the scheduled meeting.
THE FUNDS will vote for this item when:
THE FUNDS is supportive of the underlying merger proposal; FOR
the company provides a sufficient, compelling reason to
support the adjournment proposal; and the authority is
limited to adjournment proposals requesting the authority to
adjourn solely to solicit proxies to approve a transaction
THE FUNDS supports.
CONTESTED ELECTION OF DIRECTORS OR TRUSTEES
REIMBURSEMENT OF SOLICITATION EXPENSES
THE FUNDS will consider contested elections on a CASE-BY-CASE
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 of the proxy contest; qualifications of director
or trustee 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.
In addition, decisions to provide reimbursement for CASE-BY-CASE
dissidents waging a proxy contest are made on a case-by-case
basis as proxy contests are governed by a mix of federal
regulation, state law, and corporate charter and bylaw
provisions.
BOARD STRUCTURE: STAGGERED VS. ANNUAL ELECTIONS
THE FUNDS will consider the issue of classified boards on a CASE-BY-CASE
case-by-case basis. In some cases, the division of the board
into classes, elected for staggered terms, can entrench the
incumbent management and make them less responsive to
shareholder concerns. On the other hand, in some cases,
staggered elections may provide for the continuity of
experienced directors on the Board.
REMOVAL OF DIRECTORS
THE FUNDS will consider on a case-by-case basis proposals to CASE-BY-CASE
eliminate shareholders' rights to remove directors with or
without cause or only with approval of two-thirds or more of
the shares entitled to vote.
However, a requirement that a 75% or greater vote be AGAINST
obtained for removal of directors is abusive and will
warrant a vote against the proposal.
BOARD VACANCIES
THE FUNDS will vote against proposals that allow the board AGAINST
to fill vacancies without shareholder approval as these
authorizations run contrary to basic shareholders' rights.
Alternatively, THE FUNDS will vote for proposals that permit FOR
shareholders to elect directors to fill board vacancies.
CUMULATIVE VOTING
THE FUNDS will vote on proposals to permit or eliminate CASE-BY-CASE
cumulative voting on a case-by-case basis based upon the
existence of a counter balancing governance structure and
company performance, in accordance with its proxy voting
guideline philosophy. However, if the board is elected
annually we will NOT support cumulative voting.
SHAREHOLDERS' RIGHT TO CALL A SPECIAL MEETING
SHAREHOLDER ABILITY TO ACT BY WRITTEN CONSENT
Proposals providing that stockholder action may be taken CASE-BY-CASE
only at an annual or special meeting of stockholder and not
by written consent, or increasing the shareholder vote
necessary to call a special meeting, will be voted on a case
by case basis in accordance with the proxy voting
guidelines.
BOARD SIZE
THE FUNDS will vote for proposals that seek to fix the size FOR
of the board, as the ability for management to increase or
decrease the size of the board in the face of a proxy
contest may be used as a takeover defense.
However, if the company has cumulative voting, downsizing
the board may decrease a minority shareholder's chances of
electing a director.
By increasing the size of the board, management can make it
more difficult for dissidents to gain control of the board.
Fixing the size of the board also prevents a reduction in
the board size as a means to oust independent directors or
those who cause friction within an otherwise homogenous
board.
SHAREHOLDER RIGHTS PLAN (POISON PILLS)
THE FUNDS will generally vote for proposals that request a FOR
company to submit its poison pill for shareholder
ratification.
THE FUNDS will withhold votes from all directors (except for WITHHOLD
new nominees) if the company has adopted or renewed a poison
pill without shareholder approval since the company's last
annual meeting, does not put the pill to a vote at the
current annual meeting, and does not have a requirement or
does not commit to put the pill to shareholder vote within
12 months. In addition, THE FUNDS will withhold votes on all
directors at any company that responds to the majority of
the shareholders voting by putting the poison pill to a
shareholder vote with a recommendation other than to
eliminate the pill.
Alternatively, THE FUNDS will analyze proposals to redeem a CASE-BY-CASE
company's poison pill, or requesting the ratification of a
poison pill on a case-by-case basis.
Poison pills are one of the most potent anti-takeover
measures and are generally adopted by boards without
shareholder approval. These plans harm shareholder value and
entrench management by deterring stock acquisition offers
that are not favored by the board.
FAIR PRICE PROVISIONS
THE FUNDS will consider fair price provisions on a CASE-BY-CASE
case-by-case basis, evaluating factors such as the vote
required to approve the proposed mechanism, 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.
THE FUNDS will vote against fair price provisions with AGAINST
shareholder vote requirements of 75% or more of
disinterested shares.
GREENMAIL
THE FUNDS will generally vote in favor of proposals limiting FOR
the corporation's authority to purchase shares of common
stock (or other outstanding securities) from a holder of a
stated interest (5% or more) at a premium unless the same
offer is made to all shareholders. These are known as
"anti-greenmail" provisions. Greenmail discriminates against
rank-and-file shareholders and may have an adverse effect on
corporate image.
If the proposal is bundled with other charter or bylaw CASE-BY-CASE
amendments, THE FUNDS will analyze such proposals on a
case-by-case basis. In addition, THE FUNDS will analyze
restructurings that involve the payment of pale greenmail on
a case-by-case basis.
VOTING RIGHTS
THE FUNDS will vote for proposals that seek to maintain or FOR
convert to a one-share, one-vote capital structure as such a
principle ensures that management is accountable to all the
company's owners.
Alternatively, THE FUNDS will vote against any proposals to AGAINST
cap the number of votes a shareholder is entitled to. Any
measure that places a ceiling on voting may entrench
management and lessen its interest in maximizing shareholder
value.
DUAL CLASS/MULTIPLE-VOTING STOCK
THE FUNDS will vote against proposals that authorize, amend AGAINST
or increase dual class or multiple-voting stock which may be
used in exchanges or recapitalizations. Dual class or
multiple-voting stock carry unequal voting rights, which
differ from those of the broadly traded class of common
stock.
Alternatively, THE FUNDS will vote for the elimination of FOR
dual class or multiple-voting stock, which carry different
rights than the common stock.
SUPERMAJORITY VOTE PROVISIONS
THE FUNDS will generally consider on a case-by-case basis CASE-BY-CASE
proposals to increase the shareholder vote necessary to
approve mergers, acquisitions, sales of assets etc. and to
amend the corporation's charter or by-laws. The factors
considered are those specified in the proxy guidelines.
However, a supermajority requirement of 75% or more is AGAINST
abusive and THE FUNDS will vote against proposals that
provide for them.
Supermajority vote provisions require voting approval in
excess of a simple majority of the outstanding shares for a
proposal. Companies may include supermajority lock-in
provisions, which occur when changes are made to a
corporation's governing documents, and once approved, a
supermajority vote is required to amend or repeal the
changes.
CONFIDENTIAL VOTING
THE FUNDS will vote for proposals to adopt confidential FOR
voting.
VOTE TABULATIONS
THE FUNDS will vote against proposals asking corporations to AGAINST
refrain from counting abstentions and broker non-votes in
their vote tabulations and to eliminate the company's
discretion to vote unmarked proxy ballots. Vote counting
procedures are determined by a number of different
standards, including state law, the federal proxy rules,
internal corporate policies, and mandates of the various
stock exchanges.
EQUAL ACCESS TO THE PROXY
THE FUNDS will evaluate Shareholder proposals requiring CASE-BY-CASE
companies to give shareholders access to the proxy ballot
for the purpose of nominating board members, on a
case-by-case basis taking into account the ownership
threshold proposed in the resolution and the proponent's
rationale for the proposal at the targeted company in terms
of board and director conduct.
DISCLOSURE OF INFORMATION
THE FUNDS will vote against shareholder proposals requesting AGAINST
fuller disclosure of company policies, plans, or business
practices. Such proposals rarely enhance shareholder return
and in many cases would require disclosure of confidential
business information.
ANNUAL MEETINGS
THE FUNDS will vote for proposals to amend procedures or FOR
change date or location of the annual meeting. Decisions as
to procedures, dates or locations of meetings are best
placed with management.
Alternatively, THE FUNDS will vote against proposals from AGAINST
shareholders calling for a change in the location or date of
annual meetings as no date or location proposed will be
acceptable to all shareholders.
THE FUNDS will generally vote in favor of proposals to FOR
reduce the quorum necessary for shareholders' meetings,
subject to a minimum of a simple majority of the company's
outstanding voting shares.
SHAREHOLDER ADVISORY COMMITTEES/INDEPENDENT INSPECTORS
THE FUNDS will vote against proposals seeking to establish AGAINST
shareholder advisory committees or independent inspectors.
The existence of such bodies dilutes the responsibility of
the board for managing the affairs of the corporation.
TECHNICAL AMENDMENTS TO THE CHARTER OF BYLAWS
THE FUNDS will generally vote in favor of charter and bylaw FOR
amendments proposed solely to conform to modern business
practices, for simplification, or to comply with what
management's counsel interprets as applicable law.
However, amendments that have a material effect on CASE-BY-CASE
shareholder's rights will be considered on a case-by-case
basis.
BUNDLED PROPOSALS
THE FUNDS will vote for bundled or "conditional" proxy CASE-BY-CASE
proposals on a case-by-case basis, as THE FUNDS will examine
the benefits and costs of the packaged items, and determine
if the effect of the conditioned items are in the best
interests of shareholders.
COMMON STOCK AUTHORIZATIONS/REVERSE STOCK SPLITS/FORWARD
STOCK SPLITS
THE FUNDS will follow the Risk Metrics capital structure CASE-BY-CASE
model in evaluating requested increases in authorized common
stock. In addition, even if capital requests of less than or
equal to 300% of outstanding shares fail the calculated
allowable cap, THE FUNDS will evaluate the request on a
case-by-case basis, potentially voting for the proposal
based on the company's performance and whether the company's
ongoing use of shares has shown prudence. Further, the
company should identify what the stock increases are to be
used for, i.e. a proposed stock split, issuance of shares
for acquisitions, or for general business purposes.
Also to be considered is whether the purpose of the proposed AGAINST
increase is to strengthen takeover defenses, in which case
THE FUNDS will vote against the proposal. Such increases
give management too much power and are beyond what a company
would normally need during the course of a year. They may
also allow management to freely place the shares with an
allied institution or set the terms and prices of the new
shares.
For reverse stock splits, THE FUNDS will generally vote for FOR
proposals to implement the split provided the number of
authorized common shares is reduced to a level that does not
represent an unreasonably large increase in authorized but
unissued shares. The failure to reduce authorized shares
proportionally to any reverse split has potential adverse
anti-takeover consequences. However, such circumstances may
be warranted if delisting of the company's stock is imminent
and would result in greater harm to shareholders than the
excessive share authorization.
THE FUNDS will evaluate "Going Dark" transactions, which CASE-BY-CASE
allow listed companies to de-list and terminate the
registration of their common stock on a case-by-case basis,
determining whether the transaction enhances shareholder
value.
THE FUNDS will generally vote in favor of forward stock FOR
splits.
DIVIDENDS
THE FUNDS will vote for proposals to allocate income and set FOR
dividends.
THE FUNDS will also vote for proposals that authorize a FOR
dividend reinvestment program as it allows investors to
receive additional stock in lieu of a cash dividend.
However, if a proposal for a special bonus dividend is made AGAINST
that specifically rewards a certain class of shareholders
over another, THE FUNDS will vote against the proposal.
THE FUNDS will also vote against proposals from shareholders AGAINST
requesting management to redistribute profits or restructure
investments. Management is best placed to determine how to
allocate corporate earnings or set dividends.
In addition, THE FUNDS will vote for proposals to set FOR
director fees.
REDUCE THE PAR VALUE OF THE COMMON STOCK
THE FUNDS will vote for proposals to reduce the par value of FOR
common stock.
PREFERRED STOCK AUTHORIZATION
THE FUNDS will generally vote for proposals to create FOR
preferred stock in cases where the company expressly states
that the stock will not be used as a takeover defense or
carry superior voting rights, or where the stock may be used
to consummate beneficial acquisitions, combinations or
financings.
Alternatively, THE FUNDS will vote against proposals to AGAINST
authorize or issue preferred stock if the board has asked
for the unlimited right to set the terms and conditions for
the stock and may issue it for anti-takeover purposes
without shareholder approval (blank check preferred stock).
In addition, THE FUNDS will vote against proposals to issue AGAINST
preferred stock if the shares to be used have voting rights
greater than those available to other shareholders.
THE FUNDS will vote for proposals to require shareholder FOR
approval of blank check preferred stock issues for other
than general corporate purposes (white squire placements).
Finally, THE FUNDS will consider on a case-by-case basis CASE-BY-CASE
proposals to modify the rights of preferred shareholders and
to increase or decrease the dividend rate of preferred
stock.
RECLASSIFICATION OF SHARES
THE FUNDS will consider proposals to reclassify a specified CASE-BY-CASE
class or series of shares on a case-by-case basis.
PREEMPTIVE RIGHTS
THE FUNDS will generally vote for proposals to eliminate FOR
preemptive rights. Preemptive rights are unnecessary to
protect shareholder interests due to the size of most modern
companies, the number of investors and the liquidity of
trading.
SHARE REPURCHASE PLANS
THE FUNDS will vote for share repurchase plans, unless: FOR
- there is clear evidence of past abuse of the authority; AGAINST
or
- the plan contains no safeguards against selective AGAINST
buy-backs.
Corporate stock repurchases are a legitimate use of
corporate funds and can add to long-term shareholder
returns.
EXECUTIVE AND DIRECTOR COMPENSATION PLANS
THE FUNDS will analyze on a case-by-case basis proposals on CASE-BY-CASE
executive or director compensation plans, with the view that
viable compensation programs reward the creation of
stockholder wealth by having high payout sensitivity to
increases in shareholder value. Such proposals may seek
shareholder approval to adopt a new plan, or to increase
shares reserved for an existing plan.
THE FUNDS will review the potential cost and dilutive effect FOR
of the plan. After determining how much the plan will cost,
Risk Metrics evaluates whether the cost is reasonable by
comparing the cost to an allowable cap. The allowable cap is
industry-specific, market cap-base, and pegged to the
average amount paid by companies performing in the top
quartile of their peer groups. If the proposed cost is below
the allowable cap, THE FUNDS will vote for the plan. Risk
Metrics will also apply a pay for performance overlay in
assessing equity-based compensation plans for Russell 3000
companies.
If the proposed cost is above the allowable cap, THE FUNDS AGAINST
will vote against the plan.
Among the plan features that may result in a vote against AGAINST
the plan are:
- plan administrators are given the authority to reprice
or replace underwater options; repricing guidelines
will conform to changes in the NYSE and NASDAQ listing
rules.
THE FUNDS will vote against equity plans that have high AGAINST
average three-year burn rate. (The burn rate is calculated
as the total number of stock awards and stock options
granted any given year divided by the number of common
shares outstanding.) THE FUNDS will define a high average
three-year burn rate as the following: The company's most
recent three-year burn rate exceeds one standard deviation
of its four-digit GICS peer group segmented by Russell 3000
index and non-Russell 3000 index; and the company's most
recent three-year burn rate exceeds 2% of common shares
outstanding. For companies that grant both full value awards
and stock options to their employees, THE FUNDS shall apply
a premium on full value awards for the past three fiscal
years.
Even if the equity plan fails the above burn rate, THE FUNDS FOR
will vote for the plan if the company commits in a public
filing to a three-year average burn rate equal to its GICS
group burn rate mean plus one standard deviation. If the
company fails to fulfill its burn rate commitment, THE FUNDS
will consider withholding from the members of the
compensation committee.
THE FUNDS will calculate a higher award value for awards CASE-BY-CASE
that have Dividend Equivalent Rights (DER's) associated with
them.
THE FUNDS will generally vote for shareholder proposals FOR
requiring performance-based stock options unless the
proposal is overly restrictive or the company demonstrates
that it is using a substantial portion of performance-based
awards for its top executives.
THE FUNDS will vote for shareholder proposals asking the FOR
company to expense stock options, as a result of the FASB
final rule on expensing stock options.
THE FUNDS will generally vote for shareholder proposals to FOR
exclude pension fund income in the calculation of earnings
used in determining executive bonuses/compensation.
THE FUNDS will withhold votes from compensation committee WITHHOLD
members if they fail to submit one-time transferable stock
options (TSO's) to shareholders for approval.
THE FUNDS will generally vote for TSO awards within a new FOR
equity plan if the total cost of the equity plan is less
than the company's allowable cap.
THE FUNDS will generally vote against shareholder proposals AGAINST
to ban future stock option grants to executives. This may be
supportable in extreme cases where a company is a serial
repricer, has a huge overhang, or has highly dilutive,
broad-based (non-approved) plans and is not acting to
correct the situation.
THE FUNDS will evaluate shareholder proposals asking CASE-BY-CASE
companies to adopt holding periods for their executives on a
case-by-case basis taking into consideration the company's
current holding period or officer share ownership
requirements, as well as actual officer stock ownership in
the company.
For certain OBRA-related proposals, THE FUNDS will vote for FOR
plan provisions that (a) place a cap on annual grants or
amend administrative features, and (b) add performance
criteria to existing compensation plans to comply with the
provisions of Section 162(m) of the Internal Revenue Code.
In addition, director compensation plans may also include CASE-BY-CASE
stock plans that provide directors with the option of taking
all or a portion of their cash compensation in the form of
stock. THE FUNDS will consider these plans based on their
voting power dilution.
THE FUNDS will generally vote for retirement plans for FOR
directors.
THE FUNDS will evaluate compensation proposals (Tax Havens) CASE-BY-CASE
requesting share option schemes or amending an existing
share option scheme on a case-by-case basis.
Stock options align management interests with those of
shareholders by motivating executives to maintain stock
price appreciation. Stock options, however, may harm
shareholders by diluting each owner's interest. In addition,
exercising options can shift the balance of voting power by
increasing executive ownership.
BONUS PLANS
THE FUNDS will vote for proposals to adopt annual or CASE-BY-CASE
long-term cash or cash-and-stock bonus plans on a
case-by-case basis. These plans enable companies qualify for
a tax deduction under the provisions of Section 162(m) of
the IRC. Payouts under these plans may either be in cash or
stock and are usually tied to the attainment of certain
financial or other performance goals. THE FUNDS will
consider whether the plan is comparable to plans adopted by
companies of similar size in the company's industry and
whether it is justified by the company's performance.
DEFERRED COMPENSATION PLANS
THE FUNDS will generally vote for proposals to adopt or FOR
amend deferred compensation plans as they allow the
compensation committee to tailor the plan to the needs of
the executives or board of directors, unless
- the proposal is embedded in an executive or director AGAINST
compensation plan that is contrary to guidelines
DISCLOSURE ON EXECUTIVE OR DIRECTOR COMPENSATION
CAP OR RESTRICT EXECUTIVE OR DIRECTOR COMPENSATION
THE FUNDS will generally vote for shareholder proposals FOR
requiring companies to report on their executive retirement
benefits (deferred compensation, split-dollar life
insurance, SERPs, and pension benefits.
THE FUNDS will generally vote for shareholder proposals
requesting to put extraordinary benefits contained in FOR
SERP agreements to a shareholder vote, unless the company's
executive pension plans do not contain excessive benefits
beyond what is offered under employee-wide plans.
THE FUNDS will generally vote against proposals that seek to AGAINST
limit executive and director pay.
GOLDEN AND TIN PARACHUTES
THE FUNDS will vote for proposals that seek shareholder FOR
ratification of golden or tin parachutes as shareholders
should have the opportunity to approve or disapprove of
these severance agreements.
Alternatively, THE FUNDS will examine on a case-by-case CASE-BY-CASE
basis proposals that seek to ratify or cancel golden or tin
parachutes. Effective parachutes may encourage management to
consider takeover bids more fully and may also enhance
employee morale and productivity. Among the arrangements
that will be considered on their merits are:
- arrangements guaranteeing key employees continuation of
base salary for more than three years or lump sum
payment of more than three times base salary plus
retirement benefits;
- guarantees of benefits if a key employee voluntarily
terminates;
- guarantees of benefits to employees lower than very
senior management; and
- indemnification of liability for excise taxes.
By contrast, THE FUNDS will vote against proposals that AGAINST
would guarantee benefits in a management-led buyout.
REINCORPORATION
THE FUNDS will evaluate a change in a company's state of CASE-BY-CASE
incorporation on a case-by-case basis. THE FUNDS will
analyze the valid reasons for the proposed move, including
restructuring efforts, merger agreements, and tax or
incorporation fee savings. THE FUNDS will also analyze
proposed changes to the company charter and differences
between the states' corporate governance laws.
States have adopted various statutes intended to encourage CASE-BY-CASE
companies to incorporate in the state. These may include
state takeover statutes, control share acquisition statutes,
control share cash-out statutes, freezeout provisions, fair
price provisions, and disgorgement provisions. THE FUNDS
will examine reincorporations on a case-by-case in light of
these statutes and in light of the corporate governance
features the company has adopted to determine whether the
reincorporation is in shareholders' best interests.
In addition, THE FUNDS will also examine poison pill CASE-BY-CASE
endorsements, severance pay and labor contract provisions,
and anti-greenmail provisions in the context of a state's
corporate governance laws on a case-by-case basis.
THE FUNDS will evaluate shareholder proposals requiring CASE-BY-CASE
offshore companies to reincorporate into the United States
on a case-by-case basis.
Reincorporation proposals may have considerable implications
for shareholders, affecting the company's takeover defenses
and possibly its corporate structure and rules of
governance.
STAKEHOLDER LAWS
THE FUNDS will vote against resolutions that would allow the AGAINST
Board to consider stakeholder interests (local communities,
employees, suppliers, creditors, etc.) when faced with a
takeover offer.
Similarly, THE FUNDS will vote for proposals to opt out of FOR
stakeholder laws, which permit directors, when taking
action, to weight the interests of constituencies other than
shareholders in the process of corporate decision-making.
Such laws allow directors to consider nearly any factor they
deem relevant in discharging their duties.
MERGERS/ACQUISITIONS AND CORPORATE RESTRUCTURINGS
THE FUNDS will consider proposals on mergers and CASE-BY-CASE
acquisitions on a case-by-case basis. THE FUNDS will
determine if the transaction is in the best economic
interests of the shareholders. THE FUNDS will take into
account the following factors:
- anticipated financial and operating benefits;
- offer price (cost versus premium);
- prospects for the combined companies;
- how the deal was negotiated;
- changes in corporate governance and their impact on
shareholder rights.
In addition, THE FUNDS will also consider whether current CASE-BY-CASE
shareholders would control a minority of the combined
company's outstanding voting power, and whether a reputable
financial advisor was retained in order to ensure the
protection of shareholders' interests.
On all other business transactions, i.e. corporate CASE-BY-CASE
restructuring, spin-offs, asset sales, liquidations, and
restructurings, THE FUNDS will analyze such proposals on a
case-by-case basis and utilize the majority of the above
factors in determining what is in the best interests of
shareholders. Specifically, for liquidations, the cost
versus premium factor may not be applicable, but THE FUNDS
may also review the compensation plan for executives
managing the liquidation,
APPRAISAL RIGHTS
THE FUNDS will vote for proposals to restore, or provide FOR
shareholders with rights of appraisal.
Rights of appraisal provide shareholders who are not
satisfied with the terms of certain corporate transactions
(such as mergers) the right to demand a judicial review in
order to determine the fair value of their shares.
MUTUAL FUND PROXIES
THE FUNDS will vote mutual fund proxies on a case-by-case CASE-BY-CASE
basis.
Proposals may include, and are not limited to, the following
issues:
- eliminating the need for annual meetings of mutual fund
shareholders;
- entering into or extending investment advisory
agreements and management contracts;
- permitting securities lending and participation in
repurchase agreements;
- changing fees and expenses; and
- changing investment policies.
An investment advisory agreement is an agreement between a
mutual fund and its financial advisor under which the
financial advisor provides investment advice to the fund in
return for a fee based on the fund's net asset size. Most
agreements require that the particular fund pay the advisor
a fee constituting a small percentage of the fund's average
net daily assets. In exchange for this consideration, the
investment advisor manages the fund's account, furnishes
investment advice, and provides office space and facilities
to the fund. A new investment advisory agreement may be
necessitated by the merger of the advisor or the advisor's
corporate parent.
Fundamental investment restrictions are limitations within a
fund's articles of incorporation that limit the investment
practices of the particular fund. As fundamental, such
restrictions may only be amended or eliminated with
shareholder approval. Non-fundamental investment
restrictions may be altered by action of the board of
trustees.
Distribution agreements are agreements authorized by
guidelines established under the Investment Company Act of
1940 and, in particular, Rule 12b-1 thereunder, between a
fund and its distributor, which provide that the distributor
is paid a monthly fee to promote the sale of the fund's
shares.
Reorganizations of funds may include the issuance of shares
for an acquisition of a fund, or the merger of one fund into
another for purposes of consolidation.
The mutual fund industry is one of the most highly regulated
industries, as it is subject to: individual state law under
which the company is formed; the federal Securities Act of
1933; the federal Securities Exchange Act of 1934; and the
federal Investment Company Act of 1940.
ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES
PORTFOLIO MANAGERS
TIMOTHY O'BRIEN, CFA is a co-founder and principal at Crow Point Partners, LLC
("Crow Point") since 2006. Prior to founding Crow Point, he was a Senior
Portfolio Manager and Managing Director at EIMC.
PHIL SUSSER has been a portfolio manager of Wells Fargo Advantage Utilities and
High Income since 2010. Mr. Susser is a Senior Portfolio Manager at Wells
Capital Management and has been with Wells Capital Management or an affiliate
since 2001. Education: B.A., Economics, University of Pennsylvania; J.D.
University of Michigan
NIKLAS NORDENFELT, CFA has been a portfolio manager of Wells Fargo Advantage
Utilities and High Income since 2010. Mr. Nordenfelt is a Senior Portfolio
Manager at Wells Capital Management and has been with Wells Capital Management
or an affiliate since 2003. Education: B.A., Economics, University of
California, Berkeley
OTHER FUNDS AND ACCOUNTS MANAGED
The following table provides information about the registered investment
companies and other pooled investment vehicles and accounts managed by the
portfolio manager of the Fund as of the Fund's most recent period ended August
31, 2009.
NOTE: Wells Fargo Advantage Utilities and High Income Fund is not included in
the numbers below except to list it at the top.
Other Accounts # $ mil 8/31/2010
----------------------------------- ---- ----- ---------
Wells Fargo Advantage Utilities and 1 $37.3
High Income Fund - High Income
NIKLAS NORDENFELT
I manage the following types of Other Registered Other Pooled Investment
accounts: Investment Companies Vehicles Other Accounts
----------------------------------- -------------------- ----------------------- --------------
Number of above accounts 6 4 18
Total assets of above accounts $2,849.2 $498.0 $1,377.3
(millions)
performance based fee accounts:
I manage the following types of Other Registered Other Pooled Investment
accounts: Investment Companies Vehicles Other Accounts
----------------------------------- -------------------- ----------------------- --------------
Number of above accounts 0 1 0
Total assets of above accounts $0.0 $278.2 $0.0
(millions)
PHIL SUSSER
I manage the following types of Other Registered Other Pooled Investment
accounts: Investment Companies Vehicles Other Accounts
----------------------------------- -------------------- ----------------------- --------------
Number of above accounts 6 4 21
Total assets of above accounts $2,849.2 $498.0 $1,377.3
(millions)
performance based fee accounts:
I manage the following types of Other Registered Other Pooled Investment
accounts: Investment Companies Vehicles Other Accounts
----------------------------------- -------------------- ----------------------- --------------
Number of above accounts 0 1 0
Total assets of above accounts $0.0 $278.2 $0.0
(millions)
MATERIAL CONFLICTS OF INTEREST
The Portfolio Managers face inherent conflicts of interest in their day-to-day
management of the Funds and other accounts because the Funds may have different
investment objectives, strategies and risk profiles than the other accounts
managed by the Portfolio Managers. For instance, to the extent that the
Portfolio Managers manage accounts with different investment strategies than the
Funds, they may from time to time be inclined to purchase securities, including
initial public offerings, for one account but not for a Fund. Additionally, some
of the accounts managed by the Portfolio Managers may have different fee
structures, including performance fees, which are or have the potential to be
higher or lower, in some cases significantly higher or lower, than the fees paid
by the Funds. The differences in fee structures may provide an incentive to the
Portfolio Managers to allocate more favorable trades to the higher-paying
accounts.
To minimize the effects of these inherent conflicts of interest, the Sub-Adviser
has adopted and implemented policies and procedures, including brokerage and
trade allocation policies and procedures, that it believes address the potential
conflicts associated with managing portfolios for multiple clients and ensure
that all clients are treated fairly and equitably. Additionally, the Sub-Adviser
minimizes inherent conflicts of interest by assigning the Portfolio Managers to
accounts having similar objectives. Accordingly, security block purchases are
allocated to all accounts with similar objectives in proportionate
weightings. Furthermore, the Sub-Adviser has adopted a Code of Ethics under Rule
17j-1 of the 1940 Act and Rule 204A-1 under the Investment Advisers Act of 1940
(the "Advisers Act") to address potential conflicts associated with managing the
Funds and any personal accounts the Portfolio Managers may maintain.
WELLS CAPITAL MANAGEMENT
Wells Capital Management's Portfolio Managers often provide investment
management for separate accounts advised in the same or similar investment style
as that provided to mutual funds. While management of multiple accounts could
potentially lead to conflicts of interest over various issues such as trade
allocation, fee disparities and research acquisition, Wells Capital Management
has implemented policies and procedures for the express purpose of ensuring that
clients are treated fairly and that potential conflicts of interest are
minimized.
CROW POINT.
Crow Point manages other investment vehicles, including some that may have
investment objectives and strategies similar to the Fund's. The management of
multiple funds and other accounts may require the portfolio manager to devote
less than all of his or her time to the Fund, particularly if the other funds
and accounts have different objectives, benchmarks and time horizons. The
portfolio manager may also be required to allocate his or her investment ideas
across multiple funds and accounts. In addition, if a portfolio manager
identifies a limited investment opportunity, such as an initial public offering,
that may be suitable for more than one fund or other account, the Fund may not
be able to take full advantage of that opportunity due to, for example, an
allocation of that investment across all eligible funds and accounts. Further,
security purchase and sale orders for multiple accounts often are aggregated for
purpose of execution. Although such aggregation generally benefits clients, it
may cause the price or brokerage costs to be less favorable to a particular
client than if similar transactions were not being executed concurrently for
other accounts. It may also happen that the Fund's advisor or subadvisor will
determine that it would be in the best interest, and consistent with the
investment policies, of another account to sell a security (including by means
of a short sale) that the Fund holds long, potentially resulting in a decrease
in the market value of the security held by the Fund.
The structure of a portfolio manager's or an investment advisor's compensation
may create an incentive for the portfolio manager or investment advisor to favor
accounts whose performance has a greater impact on such compensation. The
portfolio manager may, for example, have an incentive to allocate favorable or
limited opportunity investments or structure the timing of investments to favor
such accounts. Similarly, if a portfolio manager holds a larger personal
investment in one fund than he or she does in another, the portfolio manager may
have an incentive to favor the fund in which he or she holds a larger stake.
In general, Crow Point has policies and procedures that attempt to address the
various potential conflicts of interest described above. However, there is no
guarantee that such procedures will detect or address each and every situation
where a conflict arises.
All employees of Crow Point are bound by the company's Code of Ethics and
compliance policies and procedures. Crow Point's chief compliance officer
monitors and reviews compliance regularly. Crow Point's Code of Ethics and
compliance procedures have been reviewed and accepted by EIMC. In addition,
side-by-side trading rules have been agreed between EIMC and Crow Point as part
of existing sub-advisory arrangements which are intended to ensure that
shareholders of the sub-advised Evergreen funds are treated equitably by Crow
Point with respect to investments, trading and allocations.
COMPENSATION
The Portfolio Managers were compensated by their employing sub-adviser from the
fees the Adviser paid the Sub-Adviser using the following compensation
structure:
WELLS CAPITAL MANAGEMENT COMPENSATION. The compensation structure for Wells
Capital Management's Portfolio Managers includes a competitive fixed base salary
plus variable incentives (Wells Capital Management utilizes investment
management compensation surveys as confirmation). Incentive bonuses are
typically tied to pretax relative investment performance of all accounts under
his or her management within acceptable risk parameters. Relative investment
performance is generally evaluated for 1, 3, and 5 year performance results,
with a predominant weighting on the 3- and 5- year time periods, versus the
relevant benchmarks and/or peer groups consistent with the investment style.
This evaluation takes into account relative performance of the accounts to each
account's individual benchmark and/or the relative composite performance of all
accounts to one or more relevant benchmarks consistent with the overall
investment style. In the case of each Fund, the benchmark(s) against which the
performance of the Fund's portfolio may be compared for these purposes generally
are indicated in the Performance" sections of the Prospectuses.
CROW POINT. Portfolio managers at Crow Point are paid a fixed salary and
participate in the profits of the firm in proportion to their equity ownership
in the firm.
BENEFICIAL OWNERSHIP OF THE FUND
The following table shows for each Portfolio Manager the dollar value of the
Fund beneficially owned by the Portfolio Manager as of August 31, 2010:
WELLS FARGO ADVANTAGE UTILITIES AND HIGH INCOME FUND
Timothy O'Brien $10,001-$50,000
Phil Susser none
Niklas Nordenfelt none
ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASES
Not applicable.
ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Governance Committee (the "Committee") of the Board of Trustees of the
registrant (the "Trust") has adopted procedures by which a shareholder of any
series of the Trust may submit properly a nominee recommendation for the
Committee's consideration.
The shareholder must submit any such recommendation (a "Shareholder
Recommendation") in writing to the Trust, to the attention of the Trust's
Secretary, at the address of the principal executive offices of the Trust.
The Shareholder Recommendation must be delivered to, or mailed and received at,
the principal executive offices of the Trust not less than forty-five (45)
calendar days nor more than seventy-five (75) calendar days prior to the date of
the Committee meeting at which the nominee would be considered.
The Shareholder Recommendation must include: (i) a statement in writing setting
forth (A) the name, age, date of birth, business address, residence address and
nationality of the person recommended by the shareholder (the "candidate"); (B)
the series (and, if applicable, class) and number of all shares of the Trust
owned of record or beneficially by the candidate, as reported to such
shareholder by the candidate; (C) any other information regarding the candidate
called for with respect to director nominees by paragraphs (a), (d), (e) and (f)
of Item 401 of Regulation S-K or paragraph (b) of Item 22 of Rule 14a-101
(Schedule 14A) under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), adopted by the Securities and Exchange Commission (or the
corresponding provisions of any regulation or rule subsequently adopted by the
Securities and Exchange Commission or any successor agency applicable to the
Trust); (D) any other information regarding the candidate that would be required
to be disclosed if the candidate were a nominee in a proxy statement or other
filing required to be made in connection with solicitation of proxies for
election of directors pursuant to Section 14 of the Exchange Act and the rules
and regulations promulgated thereunder; and (E) whether the recommending
shareholder believes that the candidate is or will be an "interested person" of
the Trust (as defined in the Investment Company Act of 1940, as amended) and, if
not an "interested person," information regarding the candidate that will be
sufficient for the Trust to make such determination; (ii) the written and signed
consent of the candidate to be named as a nominee and to serve as a Trustee if
elected; (iii) the recommending shareholder's name as it appears on the Trust's
books; (iv) the series (and, if applicable, class) and number of all shares of
the Trust owned beneficially and of record by the recommending shareholder; and
(v) a description of all arrangements or understandings between the recommending
shareholder and the candidate and any other person or persons (including their
names) pursuant to which the recommendation is being made by the recommending
shareholder. In addition, the Committee may require the candidate to interview
in person and furnish such other information as it may reasonably require or
deem necessary to determine the eligibility of such candidate to serve as a
Trustee of the Trust.
ITEM 11. CONTROLS AND PROCEDURES
(a) The President and Treasurer have concluded that the Wells Fargo Advantage
Utilities & High Income Fund (the "Trust") disclosure controls and procedures
(as defined in Rule 30a-3(c) under the Investment Company Act of 1940) provide
reasonable assurances that material information relating to the Trust is made
known to them by the appropriate persons based on their evaluation of these
controls and procedures as of a date within 90 days of the filing of this
report.
(b) There were no significant changes in the Trust's internal controls over
financial reporting (as defined in Rule 30a-3(d) under the Investment Company
Act of 1940) that occurred during the second quarter of the period covered by
this report that materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial reporting.
ITEM 12. EXHIBITS
(a)(1) Code of Ethics pursuant to Item 2 of Form N-CSR is filed and attached
hereto as Exhibit 10a.
(a)(2) Certification pursuant to Rule 30a-2(a) under the Investment Company Act
of 1940 (17 CFR 270.30a-2(a)) is filed and attached hereto as Exhibit 99.CERT.
(a)(3) Not applicable.
(b) Certification pursuant to Rule 30a-2(b) under the Investment Company Act of
1940 (17 CFR 270.30a-2(b)) is filed and attached hereto as Exhibit 99.906CERT.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
Wells Fargo Advantage Utilities & High
Income Fund
By: /s/ Karla M. Rabusch
Karla M. Rabusch
President
Date: October 29, 2010
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
date indicated.
By: /s/ Karla M. Rabusch
Karla M. Rabusch
President
Date: October 29, 2010
By: /s/ Kasey L. Phillips
Kasey L. Phillips
Treasurer
Date: October 29, 2010