PROSPECTUS April 29, 2004
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3,800 SHARES SERIES M
3,800 SHARES SERIES W
3,800 SHARES SERIES TH
3,800 SHARES SERIES F
[JHF LOGO]
John Hancock Tax-Advantaged
Dividend Income Fund
AUCTION PREFERRED SHARES
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John Hancock Tax-Advantaged Dividend Income Fund (the "Fund") is a recently
organized, diversified, closed-end management investment company. The Fund is
offering 3,800 shares of its Series M Auction Preferred Shares, 3,800 shares of
its Series W Auction Preferred Shares, 3,800 shares of its Series TH Auction
Preferred Shares, and 3,800 shares of its Series F Auction Preferred Shares
(collectively, the "Preferred Shares" or "APS").
INVESTMENT OBJECTIVE. The Fund's investment objective is to provide a high
level of after-tax total return from dividend income and capital appreciation.
There can be no assurance that the Fund will achieve its investment objective.
PORTFOLIO CONTENTS. Under normal market conditions, the Fund will invest at
least 80% of its assets (net assets plus borrowing for investment purposes) in
dividend-paying common and preferred securities that John Hancock Advisers, LLC
(the "Adviser") believes at the time of acquisition are eligible to pay
dividends which, for individual shareholders, qualify for U.S. federal income
taxation at rates applicable to long-term capital gains, which currently are
taxed at a maximum rate of 15% ("tax-advantaged dividends"). The Fund may invest
the remainder of its assets in other equity and fixed income securities the
income from which does not qualify for such tax treatment. In selecting
securities for the Fund's portfolio, the Adviser also considers the potential
for capital appreciation. The Fund intends to concentrate its investments in
securities issued by U.S. corporations in the related groups of industries
comprising each of the utilities sector and the financial services sector and
will be subject to certain risks due to such emphasis. The Fund allocates its
investments among various industries and issuers in such sectors based on the
Adviser's evaluation of market and economic conditions.
INVESTMENT ADVISER. John Hancock Advisers, LLC is the Fund's investment adviser
and administrator.
BEFORE BUYING ANY PREFERRED SHARES YOU SHOULD READ THE DISCUSSION OF THE
MATERIAL RISKS OF INVESTING IN THE FUND IN "RISK FACTORS" BEGINNING ON PAGE 28.
CERTAIN OF THESE RISKS ARE SUMMARIZED IN "PROSPECTUS SUMMARY--SPECIAL RISK
CONSIDERATIONS" BEGINNING ON PAGE 5.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
PROCEEDS TO
PRICE TO PUBLIC SALES LOAD FUND(1)
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Per share $ 25,000 $ 250 $ 24,750
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Total $380,000,000 $ 3,800,000 $376,200,000
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(1) Plus accumulated dividends, if any, from the date the APS are issued, but
before offering expenses payable by the Fund estimated to be $425,000.
The APS are being offered by the underwriters subject to certain conditions. The
underwriters reserve the right to withdraw, cancel or modify the offering in
whole or in part. It is expected that the APS will be delivered to the nominee
of The Depository Trust Company on or about May 3, 2004.
UBS INVESTMENT BANK
MERRILL LYNCH & CO.
WACHOVIA SECURITIES
A.G. EDWARDS & SONS, INC.
Investors in APS will be entitled to receive cash dividends at an annual rate
that may vary for successive Dividend Periods for such shares. The dividend rate
on the Series M APS for the initial period from and including the date of issue
to, but excluding, May 11, 2004 will be 1.15% per year. The dividend rate on the
Series W APS for the initial period from and including the date of issue to, but
excluding, May 13, 2004 will be 1.15% per year. The dividend rate on the Series
TH APS for the initial period from and including the date of issue to, but
excluding, October 29, 2004 will be 1.45% per year. The dividend rate on the
Series F APS for the initial period from and including the date of issue to, but
excluding, May 17, 2004 will be 1.15% per year. For each subsequent period, the
Auction Agent will determine the dividend rate for a particular period by an
Auction conducted in accordance with the procedures described in this Prospectus
and, in future detail, in Appendix D to the Statement of Additional Information.
The APS, which have no history of public trading, will not be listed on an
exchange or automated quotation system. Broker-Dealers may maintain a secondary
trading market in the APS outside of Auctions; however, they have no obligation
to do so, and there can be no assurance that a secondary market for the APS will
develop or, if it does develop, that it will provide holders with a liquid
trading market (i.e., trading will depend on the presence of willing buyers and
sellers and the trading price will be subject to variables to be determined at
the time of the trade by such Broker-Dealers). A general increase in the level
of interest rates may have an adverse effect on the secondary market price of
the APS, and a selling shareholder that sells APS between Auctions may receive a
price per share of less than $25,000. The Fund may redeem APS as described under
"Description of Preferred Shares--REDEMPTION."
The APS will be senior in liquidation and distribution rights to the Fund's
outstanding Common Shares. The Fund's Common Shares are trading on the New York
Stock Exchange under the symbol "HTD." This offering is conditioned upon the APS
receiving a rating of "Aaa" from Moody's Investors Service, Inc. and a rating of
"AAA" from Standard & Poor's Ratings Group.
You should read this Prospectus, which contains important information about the
Fund, before deciding whether to invest, and retain it for future reference. A
Statement of Additional Information, dated April 29, 2004, containing additional
information about the Fund, has been filed with the Securities and Exchange
Commission and is incorporated by reference in its entirety into this
Prospectus, which means that it is part of the Prospectus for legal purposes.
You can review the table of contents of the Statement of Additional Information
on page 68 of this Prospectus. You may request a free copy of the Statement of
Additional Information by calling (800) 225-6020 or by writing to the Fund, or
obtain a copy (and other information regarding the Fund) from the Securities and
Exchange Commission's web site (http://www.sec.gov).
The APS do not represent a deposit or obligation of, and are not guaranteed or
endorsed by, any bank or other insured depository institution, and are not
federally insured by the Federal Deposit Insurance Corporation, the Federal
Reserve Board or any other government agency.
You should rely only on the information contained or incorporated by reference
in this Prospectus. The Fund has not, and the underwriters have not, authorized
anyone to provide you with different information. If anyone provides you with
different or inconsistent information, you should not rely on it. The Fund is
not, and the underwriters are not, making an offer of these securities in any
state where the offer is not permitted. You should not assume that the
information contained in this Prospectus is accurate as of any date other than
the date on the front of this Prospectus. The Fund's business, financial
condition, results of operations and prospects may have changed since that date.
Certain capitalized terms used in this Prospectus are defined in the Glossary
that appears at the end of the Prospectus.
TABLE OF CONTENTS
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Prospectus summary............................. 1
Financial highlights (unaudited)............... 16
The Fund....................................... 17
Use of proceeds................................ 17
Capitalization (unaudited)..................... 18
Portfolio composition.......................... 18
Investment objective and principal investment
strategies................................... 19
Risk factors................................... 28
Description of Preferred Shares................ 39
The Auction.................................... 49
Management of the Fund......................... 56
Net asset value................................ 58
U.S. federal income tax matters................ 58
Description of shares.......................... 62
Certain provisions of the Agreement and
Declaration of Trust and By-laws............. 64
Underwriting................................... 66
Custodian, transfer agent, registrar and
dividend disbursing agent.................... 67
Legal matters.................................. 67
Table of contents for the Statement of
Additional Information....................... 68
Glossary....................................... 69
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ii
Prospectus summary
This is only a summary. This summary may not contain all of the information that
you should consider before investing in the APS, especially the information set
forth under the heading "Risk factors." You should review the more detailed
information contained in this Prospectus, the Statement of Additional
Information and the Fund's By-laws. Certain capitalized terms used in this
Prospectus are defined in the Glossary that appears at the end of this
Prospectus.
THE FUND
John Hancock Tax-Advantaged Dividend Income Fund (the "Fund") is a recently
organized, diversified, closed-end management investment company registered
under the Investment Company Act of 1940, as amended (the "the 1940 Act"). See
"The Fund." John Hancock Advisers, LLC (the "Adviser") acts as the Fund's
investment adviser and administrator. The Fund's common shares ("Common Shares")
are traded on the New York Stock Exchange under the symbol "HTD." As of March
31, 2004, the Fund had 41,007,487 Common Shares outstanding and net assets of
$779.2 million.
THE OFFERING
The Fund is offering an aggregate of 3,800 Series M APS, 3,800 Series W APS,
3,800 Series TH APS and 3,800 Series F APS, each at a purchase price of $25,000
per share plus accumulated dividends, if any, from the date of original issue.
The APS are being offered through a group of underwriters led by UBS Securities
LLC (collectively, the "Underwriters"). See "Underwriting."
The APS entitle their holders to receive cash dividends at an annual rate that
may vary for the successive Dividend Periods. In general, except as described
under "--DIVIDENDS AND DIVIDEND PERIODS" below and "Description of Preferred
Shares--DIVIDENDS AND DIVIDEND PERIODS," the Dividend Period for the APS will be
seven days. Deutsche Bank Trust Company Americas (the "Auction Agent") will
determine the Applicable Rate for a particular period by an Auction conducted on
the Business Day immediately prior to the start of that Dividend Period. See
"The Auction."
The APS are not listed on an exchange. Instead, investors may buy or sell APS in
an Auction that normally is held weekly by submitting orders to Broker-Dealers
that have entered into an agreement with the Auction Agent or to certain other
Broker-Dealers. The Auction Agent reviews orders from Broker-Dealers on behalf
of Existing Holders that wish to sell, or hold at the auction rate, or hold only
at a specified Applicable Rate, and on behalf of Potential Holders that wish to
buy, APS. The Auction Agent then determines the lowest Applicable Rate that will
result in all of the outstanding APS continuing to be held. The first Auction
Date for Series M APS will be May 10, 2004, for Series W APS will be May 12,
2004, for Series TH APS will be October 28, 2004, and for Series F APS will be
May 14, 2004, each (except in the case of Series TH APS) being the Business Day
before the Initial Dividend Payment Date for the Initial Dividend Period for the
relevant Series of APS, May 11, 2004 for Series M APS, May 13, 2004 for Series W
APS and May 17, 2004 for Series F APS. During the Initial Dividend Period of
Series TH APS, dividends will be payable monthly on the first Business Day of
each month, commencing on June 1, 2004, and the final dividend payment with
respect to the Initial Dividend Period will be made on October 29, 2004. After
the Initial Dividend Period, dividends on Series TH APS will be paid weekly
except during a Special Dividend Period. Unless the then-current Dividend Period
is a Special Dividend Period, or the day that normally would be the Auction Date
or the first day of the subsequent Dividend Period is not a Business Day, the
Auction Date for Series M APS generally will be Monday, for Series W APS
generally will be Wednesday, for Series TH APS generally will be Thursday and
for Series F APS generally will be Friday.
Generally, investors in the APS will not receive certificates representing
ownership of their shares. The Securities Depository (The Depository Trust
Company or any successor) or its nominee for the account
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of the investor's Broker-Dealer will maintain record ownership of APS in
book-entry form. An investor's Broker-Dealer, in turn, will maintain records of
that investor's beneficial ownership of the APS.
INVESTMENT OBJECTIVE AND PRINCIPAL INVESTMENT STRATEGIES
INVESTMENT OBJECTIVE
The Fund's investment objective is to provide a high level of after-tax total
return from dividend income and capital appreciation. There can be no assurance
that the Fund will achieve its investment objective.
PORTFOLIO CONTENTS
Under normal market conditions, the Fund will invest at least 80% of its assets
(net assets plus borrowings for investment purposes) in dividend-paying common
and preferred securities that the Adviser believes at the time of acquisition
are eligible to pay dividends which, for individual shareholders, qualify for
U.S. federal income taxation at rates applicable to long-term capital gains,
which currently are taxed at a maximum rate of 15% ("tax-advantaged dividends").
Tax-advantaged dividends generally include dividends from domestic corporations
and dividends from foreign corporations that meet certain specified criteria.
The Fund generally can pass the tax treatment of tax-advantaged dividends it
receives through to its common shareholders. For the Fund to receive tax-
advantaged dividends, the Fund must, in addition to other requirements, hold the
otherwise qualified stock for more than 60 days during the 121-day period
beginning 60 days before the ex-dividend date (or, in the case of preferred
stock, more than 90 days during the 181-day period beginning 90 days before the
ex-dividend date). Although current law only provides a 120-day and 180-day
period for holding such stock, a proposed technical correction to the law would
extend such periods to 121 days and 181 days, respectively. The Treasury
Department and the Internal Revenue Service have announced that taxpayers may
apply the extended periods as if the legislation were already enacted in filing
their federal income tax returns. The "ex-dividend date" is the date which is
established by a stock exchange (usually two business days before the record
date) whereby the owner of a security at the commencement of such date is
entitled to receive the next issued dividend payment for such security, even if
the security is sold by such owner on the ex-dividend date or thereafter. In
addition, the Fund cannot be obligated to make payments (pursuant to a short
sale or otherwise) with respect to substantially similar or related property.
For an individual holder of APS to be taxed at long-term capital gain rates on
dividends received from the Fund which otherwise would be eligible for treatment
as tax-advantaged dividends, the shareholder must hold his or her APS for more
than 90 days during the 181-day period beginning 90 days before the ex-dividend
date. Consequently, short-term investors in the Fund will not realize the
benefits of tax-advantaged dividends. There can be no assurance as to the
portion of the Fund's dividends that will be tax-advantaged. The provisions of
the Internal Revenue Code of 1986, as amended (the "Code"), applicable to
tax-advantaged dividends are currently effective through December 31, 2008 but
may be changed at any time, possibly with retroactive effect. Thereafter, higher
tax rates will apply unless further legislative action is taken. The Fund may
invest its portfolio of equity securities in companies of any market
capitalization.
The Fund may invest the remainder of its assets in equity securities and in
investment grade and below investment grade fixed income securities, including
debt instruments and real estate investment trusts, that generate income taxable
at ordinary income rather than long-term capital gain rates. Under normal market
conditions, the Fund's investments in preferred stock and other fixed income
securities will primarily be rated investment grade. However, the Fund may, from
time to time, invest up to 20% of its total assets in preferred stocks and other
fixed income securities rated below investment grade at the time of acquisition.
For any year, so long as the Fund's ordinary income, tax-exempt income (if any)
and net realized short-term capital gains in excess of net long-term capital
losses are fully offset by expenses of the Fund, all of the Fund's income
distributions would be characterized as tax-advantaged dividends. Although the
Fund intends to invest at least 80% of its assets in equity securities that pay
tax-advantaged dividends and to satisfy the holding period and other
requirements,
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a portion of the Fund's income distributions may be taxable as ordinary income
(i.e., income other than tax-advantaged dividends).
TAX-MANAGEMENT STRATEGIES
The Fund also seeks to achieve favorable after-tax returns in part by seeking to
reduce the capital gains taxes incurred by shareholders in connection with the
Fund's portfolio investments. The Adviser attempts to minimize distributions of
long-term capital gains taxable to shareholders by seeking to avoid, to the
extent consistent with its investment objective, the sale of securities with
large accumulated capital gains. When a decision is made to sell a portion of
the Fund's holdings of a particular appreciated security, the Adviser generally
will seek to select for sale the share lots resulting in the most favorable tax
treatment for common shareholders, generally those with holding periods
sufficient to qualify for long-term capital gain treatment that have the highest
cost basis. The Adviser may also sell securities to realize capital losses that
can be used to offset realized gains. To protect against price declines in
securities holdings with large accumulated gains, the Fund may use various
hedging techniques (such as the purchase and sale of futures contracts on
securities and securities indices and options thereon, the purchase of put
options and the sale of call options on securities held, equity swaps, covered
short sales and forward sales of securities). By using these techniques rather
than selling appreciated securities, the Fund may, subject to certain
limitations, attempt to reduce its exposure to price declines in the securities
without realizing substantial capital gains under current tax law. There can be
no assurance that the Fund will use these strategies or that they will be
successful if used. Dividends received by the Fund on securities with respect to
which the Fund is obligated to make related payments with respect to positions
in substantially similar or related property (pursuant to short sales or
otherwise) will not be eligible for treatment as tax-advantaged dividends, and
the use of put and call options may reduce the Fund's holding period for the
underlying stock for purposes of determining whether dividends paid on such
stock are eligible to be passed through to shareholders as tax-advantaged
dividends.
In selecting securities for the Fund's portfolio, the Adviser focuses on
dividend-paying common and preferred stocks that produce an attractive level of
tax-advantaged income. The Adviser also considers a security's potential for
capital appreciation. The Adviser generally uses a value approach in selecting
the Fund's equity investments. Using this investment style, the Adviser seeks
securities selling at what the Adviser believes are substantial discounts to
their underlying values and then holds these securities until the market values
reflect their intrinsic values. The Adviser evaluates a security's potential
value, including the attractiveness of its market valuation, based on the
company's assets and prospects for earnings growth. Investment decisions are
made primarily on the basis of fundamental research. The Adviser relies upon
information provided by, and the expertise of, the Adviser's research staff in
making investment decisions. In selecting stocks, the Adviser considers (among
other factors) a company's earnings or cash flow capabilities, dividend
prospects and the federal income tax treatment of a company's dividends, the
strength of the company's business franchises and estimates of the company's net
value. In the case of the utilities sector, the Adviser focuses on factors such
as balance sheet strength, growth rates and valuation relative to peers and
changes in the regulatory environment. With respect to the financial services
sector, the Adviser generally emphasizes the strength of the management teams,
established market position and transparency of financial reporting.
INDUSTRY AND ISSUER CONCENTRATION
The Fund intends to concentrate its investments (i.e., invest at least 25% of
its net assets) in securities issued by U.S. corporations in the related groups
of industries comprising each of the utilities sector and the financial services
sector and will be subject to certain risks due to such emphasis. The utilities
sector includes companies engaged in the manufacture, production, generation,
transmission, sale or distribution of electric energy, water, sanitary services,
natural gas and pollution control services. Companies in the financial services
sector include commercial banks, savings and loan associations, brokerage and
investment companies, insurance companies and consumer and industrial finance
companies. The Adviser believes that these sectors currently offer attractive
investment opportunities for the Fund because issuers in these sectors tend to
offer tax-advantaged dividends and capital appreciation potential and,
3
historically, issuers in these sectors have had low correlation of returns
relative to each other and to traditional fixed income categories. The Fund will
allocate its investments among industries and issuers in such sectors based on
the Adviser's evaluation of market and economic conditions.
DIVIDEND CAPTURE TRADING
The Fund may seek to enhance the level of dividend income it receives by
engaging in dividend capture trading. In a dividend capture trade, the Fund
sells a security after having held the security long enough to satisfy the
holding period requirements for tax-advantaged dividends, but shortly after the
security's ex-dividend date. The Fund then uses the sale proceeds to purchase
one or more other securities that are expected to pay dividends before the next
dividend payment date on the security being sold. Through this practice, the
Fund may receive more dividend payments over a given period of time than if it
held a single security. Receipt of a greater number of dividend payments during
a given time period could augment the total amount of dividend income received
by the Fund. For example, during the course of a single year, it may be possible
through dividend capture trading for the Fund to receive five or more dividend
payments on different securities which have been held for the requisite holding
period to qualify as a tax-advantaged dividend, whereas it may only have
received four payments in a hold strategy. The use of dividend capture
strategies will expose the Fund to increased trading costs and the potential for
recognizing short-term capital gains or losses on the sale of security. Also,
any net short-term capital gains recognized by the Fund and distributed to
shareholders will be taxed to individual shareholders at ordinary federal income
tax rates, whereas if the Fund held the security for more than one year, any
gain recognized on the sale of the security and distributed to shareholders
would be taxable to individual shareholders at federal long-term capital gain
rates. Consequently, the Adviser intends to employ dividend capture trading as a
strategy only to the extent that the Adviser believes it will have a positive
net effect on the Fund's total after-tax return.
FOREIGN SECURITIES
Although the Fund will invest primarily in the securities of U.S. issuers, the
Fund may invest up to 20% of its total assets in securities of corporate and
governmental issuers located outside the United States that are traded or
denominated in U.S. dollars.
ILLIQUID SECURITIES
The Fund may invest up to 20% of its total assets in illiquid securities, which
are securities that cannot be disposed of by the Fund within seven days in the
ordinary course of business at approximately the amount at which the Fund values
the securities. The Fund may invest in securities that are sold in direct
private placement transactions and are neither listed on an exchange nor traded
in the over-the-counter market.
OTHER SECURITIES
Normally, the Fund will invest substantially all of its assets to meet its
investment objective. The Fund may invest the remainder of its assets in other
equity securities, fixed income securities and securities with remaining
maturities of less than one year or cash equivalents, or it may hold cash. For
temporary defensive purposes, the Fund may depart from its principal investment
strategies and invest part or all of its assets in securities with remaining
maturities of less than one year, cash or cash equivalents. During such periods,
the Fund may not be able to achieve its investment objective.
HEDGING AND INTEREST RATE TRANSACTIONS
The Fund may, but is not required to, use various hedging and interest rate
transactions to earn income, facilitate portfolio management and mitigate risks.
The Fund may purchase and sell derivative instruments such as exchange-listed
and over-the-counter put and call options on securities, equity, fixed income
and interest rate indices, and other financial instruments, purchase and sell
financial futures contracts and options thereon, and enter into various interest
rate transactions such as swaps, caps, floors or collars or credit transactions
and credit default swaps. The Fund also may purchase derivative instruments that
combine features of these instruments. The Fund generally seeks to use these
instruments and transactions as a portfolio management or hedging technique to
seek to protect
4
against possible adverse changes in the market value of securities held in or to
be purchased for the Fund's portfolio, protect the value of the Fund's
portfolio, facilitate the sale of certain securities for investment purposes,
manage the effective interest rate exposure of the Fund, manage the effective
maturity or duration of the Fund's portfolio, or establish positions in the
derivatives markets as a temporary substitute for purchasing or selling
particular securities. As a general matter, dividends received on hedged stock
positions are characterized as ordinary income and not eligible for treatment as
tax-advantaged dividends.
THE INVESTMENT ADVISER AND ADMINISTRATOR
John Hancock Advisers, LLC is the Fund's investment adviser and administrator.
The Adviser is responsible on a day-to-day basis for investment of the Fund's
portfolio in accordance with its investment objective and principal investment
strategies. The Adviser makes all investment decisions for the Fund and places
purchase and sale orders for the Fund's portfolio securities. The Adviser also
provides office space to the Fund and administrative and clerical services
relating to the Fund's books and records and preparation of reports.
The Adviser was organized in 1968 and had, as of December 31, 2003,
approximately $29 billion in assets under management, of which approximately $16
billion was invested in common and preferred securities. The Adviser currently
serves as investment adviser to 10 leveraged, closed-end funds with total assets
as of December 31, 2003 of over $4.3 billion. The Adviser is an indirect
wholly-owned subsidiary of John Hancock Financial Services, Inc., a financial
services company. On April 28, 2004, Manulife Financial Corporation announced
the completion of its merger with John Hancock Financial Services, Inc.
LEVERAGE
The Fund expects to utilize financial leverage on an ongoing basis for
investment purposes. After completion of the offering of the APS, the Fund
anticipates its total leverage from the issuance of APS will be approximately
34% of the Fund's total capital. This amount may change, but total leverage will
not exceed 50% of the Fund's total capital. Although the Fund may in the future
offer other preferred shares, the Fund does not currently intend to do so.
The Fund generally will not utilize leverage if it anticipates that it would
result in a lower return to common shareholders over time. Use of financial
leverage creates an opportunity for increased income for common shareholders
but, at the same time, creates the possibility for greater loss (including the
likelihood of greater volatility of net asset value and market price of the
shares and of dividends). There can be no assurance that a leveraging strategy
will be successful during any period in which it is employed. Because the fees
paid to the Adviser will be calculated on the basis of the Fund's managed
assets, the fees will be higher when leverage (including the APS) is utilized,
giving the Adviser an incentive to utilize leverage. See "Risks factors--RISKS
OF INVESTMENT IN PREFERRED SHARES--Leverage risk."
SPECIAL RISK CONSIDERATIONS
Risks of investing in the Preferred Shares include:
THE PRIMARY RISKS
+ If an Auction fails you may not be able to sell some or all of your APS and
the Fund is not obligated to redeem your APS if the Auction fails
+ Because of the nature of the market for APS, you may receive less than the
price you paid for your shares if you sell them outside of the Auction,
especially when market interest rates are rising
+ A rating agency could downgrade the rating assigned to the APS, which could
affect liquidity
+ The Fund may be forced to redeem APS to meet regulatory or rating agency
requirements or may voluntarily redeem the APS in certain circumstances
5
+ In certain circumstances, the Fund may not earn sufficient income from its
investments to pay dividends on the APS
+ If interest rates rise, the value of the Fund's investment portfolio
generally will decline, reducing the asset coverage for the APS
LEVERAGE RISK
The Fund's leveraged capital structure creates special risks not associated with
unleveraged funds having a similar investment objective and policies. These
include the possibility of higher volatility of the net asset value of the Fund
and the APS asset coverage.
INTEREST RATE RISK
The APS pay dividends based on shorter-term interest rates. The Fund may invest
the proceeds from the issuance of the APS in dividend-paying common and
preferred securities which bear intermediate to longer-term dividend or interest
rates. The interest or dividend rates on equity securities are typically,
although not always, higher than shorter-term interest rates. Both shorter-term
and intermediate- to long-term interest rates may fluctuate. The dividend yield
on the equity securities in the Fund's portfolio will be influenced by a number
of factors. If shorter-term interest rates rise, the amount of dividends to be
paid to holders of APS may exceed the income from the equity securities and
other investments purchased by the Fund with the proceeds from the sale of the
APS. Because income from the Fund's entire investment portfolio (not just the
portion of the portfolio purchased with the proceeds of the APS offering) is
available to pay dividends on the APS, however, dividend rates on the APS would
need to exceed the rate of return on the Fund's investment portfolio by a wide
margin before the Fund's ability to pay dividends on the APS would be
jeopardized. If intermediate- to longer-term interest rates rise or if the
market value of the equity securities in the Fund's portfolio declines, this
could negatively impact the value of the Fund's investment portfolio, reducing
the amount of assets serving as asset coverage for the APS.
AUCTION RISK
The dividend rate for the APS normally is set through an Auction process. In the
Auction, Existing Holders of APS may indicate the dividend rate at which the
Existing Holders would be willing to hold or sell their APS or purchase
additional APS. The Auction also provides liquidity for the sale of APS. An
Auction fails if there are more APS offered for sale than there are buyers. You
may not be able to sell your APS at an Auction if the Auction fails. Also, if
you place Bid Orders, orders to retain shares at an Auction only at a specified
dividend rate and that rate exceeds the rate set at the Auction, you will not
retain your APS. Additionally, if you buy APS or elect to retain APS without
specifying a dividend rate below which you would not wish to buy or continue to
hold those APS, you could receive a lower rate of return on your shares than the
market rate. Finally, the Dividend Period for the APS may be changed by the
Fund, subject to certain conditions with notice to the holders of APS, which
could also affect the liquidity of your investment.
SECONDARY MARKET RISK
If you try to sell your APS between Auctions, you may not be able to sell any or
all of your APS, or you may not be able to sell them for $25,000 per share or
$25,000 per share plus accumulated dividends. If the Fund has designated a
Special Dividend Period, changes in interest rates could affect the price you
would receive if you sold your APS in the secondary market.
You may transfer APS outside of Auctions only to or through a Broker-Dealer that
has entered into an agreement with the Auction Agent or other person as the Fund
permits.
RATINGS AND ASSET COVERAGE RISK
While it is expected that Moody's Investor Service, Inc. ("Moody's") will assign
a rating of "Aaa" to the APS and Standard & Poor's Ratings Group ("S&P") will
assign a rating of "AAA" to the APS, such rating does not eliminate or
necessarily mitigate the risks of investing in APS.
6
RESTRICTIONS ON DIVIDENDS AND OTHER DISTRIBUTIONS
Restrictions imposed on the declaration and payment of dividends or other
distributions to the holders of the Fund's Common Shares and the APS, both by
the 1940 Act and by requirements imposed by rating agencies, might impair the
Fund's ability to comply with minimum distribution requirements that it must
satisfy to maintain its favorable tax treatment as a regulated investment
company for U.S. federal income tax purposes.
General risks of investing in the Fund include:
LIMITED OPERATING HISTORY
The Fund is a recently organized closed-end management investment company which
has been operational for approximately two months.
TAX RISK
The value of the Fund's investments and its net asset value may be adversely
affected by changes in tax rates and policies. Because the Fund's investment
objective is to provide a high level of after-tax total return, the
attractiveness of investing in common and preferred securities that pay
tax-advantaged dividends in relation to other investment alternatives is
affected by changes in federal income tax laws and regulations, including
changes in the tax-advantaged dividend provisions. Absent further legislation,
higher tax rates will apply to taxable years beginning after December 31, 2008.
Any proposed or actual changes in such rates, therefore, can significantly
affect the after-tax returns of the Fund's investments in equity securities.
This could in turn affect the Fund's net asset value and ability to acquire and
dispose of equity securities at desirable returns and price levels. There can be
no assurance as to the portion of the Fund's dividends that will be
tax-advantaged. Additionally, the Fund is not a suitable investment for IRAs,
for other tax-exempt or tax-deferred accounts or for investors who are not
sensitive to the federal income tax consequences of their investments.
COMMON STOCK RISK
The common stocks and other equity securities in which the Fund invests may
experience substantial volatility in their market value. Common stocks are
susceptible to adverse changes in market value due to issuer-specific events.
The market values of common stocks are also sensitive to changes in investor
perceptions as well as to general movements in the equities markets. Common
stockholders are also subordinate to debt holders and other senior security
holders in an issuer's capital structure, and common stock may not have any
value in the event the issuer declares bankruptcy or is subject to the claims of
creditors if the value of the issuer's assets does not exceed the issuer's
liabilities. Common stock prices may be sensitive to rising interest rates, as
the costs of capital or borrowing increase. Common stocks are also subject to
the general risks of the issuer's industry, sector, geographic region and market
capitalization.
The Fund may invest its portfolio of equity securities in companies of any
market capitalization. Small-capitalization companies and their equity
securities are likely to be more sensitive to changes in the economy, earnings
results and investor perceptions, have limited product lines and capital
resources, experience sharper swings in market values, and may be more difficult
to sell than those of larger-capitalization companies.
PREFERRED SECURITIES RISK
There are special risks associated with investing in preferred securities:
+ LIMITED VOTING RIGHTS. Generally, holders of preferred securities (such as
the Fund) have no voting rights with respect to the issuing company unless
preferred dividends have been in arrears for a specified number of periods,
at which time the preferred security holders may elect a number of trustees
to the issuer's board. Generally, once the issuer pays all the arrearages,
the preferred security holders no longer have voting rights.
+ SPECIAL REDEMPTION RIGHTS. In certain varying circumstances, an issuer of
preferred securities may redeem the securities prior to a specified date. For
instance, for certain types of preferred securities,
7
a redemption may be triggered by a change in federal income tax or securities
laws. As with call provisions, a special redemption by the issuer may
negatively impact the return of the security held by the Fund.
+ DEFERRAL. Preferred securities may include provisions that permit the
issuer, at its discretion, to defer distributions for a stated period without
any adverse consequences to the issuer. If the Fund owns a preferred security
that is deferring its distributions, the Fund may be required to report
income for tax purposes although it has not yet received such income.
+ SUBORDINATION. Preferred securities are subordinated to bonds and other debt
instruments in a company's capital structure in terms of priority to
corporate income and liquidation payments, and therefore will be subject to
greater credit risk than more senior debt instruments.
+ LIQUIDITY. Preferred securities may be substantially less liquid than many
other securities, such as common stocks or U.S. government securities.
INTEREST RATE RISK
Interest rate risk is the risk that fixed income securities will decline in
value because of changes in market interest rates. When market interest rates
rise, the market value of such securities generally will fall. To the extent the
Fund invests in securities that primarily trade on the basis of yield, the net
asset value and market price of the common shares will tend to decline if market
interest rates rise. Interest rates are currently low relative to historical
levels, and interest rates may rise in the short- to intermediate-term if the
economy continues to show strength. Fixed income securities with longer
maturities are generally more sensitive to changes in interest rates than those
with shorter maturities.
During periods of declining interest rates, an issuer may exercise its option to
redeem preferred securities or prepay principal of debt securities earlier than
scheduled, forcing the Fund to reinvest in lower yielding securities. This is
known as call or prepayment risk. During periods of rising interest rates, the
average life of certain types of securities may be extended because of slower
than expected principal payments. This may lock in a below market interest rate,
increase the security's duration and reduce the value of the security. This is
known as extension risk.
INDUSTRY CONCENTRATION RISK
Under normal market conditions, the Fund will concentrate its investments (i.e.,
invests at least 25% of its net assets) in securities issued by U.S.
corporations in the related groups of industries comprising each of the
utilities sector and the financial services sector.
The utilities industries in which the Fund may invest include companies engaged
in:
+ the generation, transmission, sale or distribution of electric energy
+ the distribution, purification and treatment of water
+ the provision of sewage management, treatment or other sanitary services
+ the production, transmission or distribution of natural gas
+ the provision of pollution control or abatement services
The Fund's emphasis on securities of utilities issuers makes it more susceptible
to adverse conditions affecting that sector than a fund that does not have its
assets invested to a similar degree in such issuers. Issuers in the utilities
sector are subject to a variety of factors that may adversely affect their
business or operations, including:
+ high interest costs in connection with capital construction programs
+ governmental regulation of rates charged to customers
+ costs associated with environmental and other regulations
+ the effects of economic slowdowns and surplus capacity
+ increased competition from other providers of utility services
+ uncertainties concerning the availability of fuel at reasonable prices
8
+ the effects of energy conservation policies
+ inexperience with and potential losses resulting from a developing
deregulatory environment, including losses and regulatory issues in
connection with energy trading
Issuers in the utilities sector may be subject to regulation by various
governmental authorities and may be affected by the imposition of special
tariffs and changes in tax laws, regulatory policies and accounting standards.
Generally, prices charged by utilities are regulated in the United States with
the intention of protecting the public while ensuring that the rate of return
earned by such companies is sufficient to allow them to attract capital in order
to grow and continue to provide appropriate services. There can be no assurance
that such pricing policies or rates of return will continue in the future. The
nature of regulation of industries in the utilities sector is evolving. Changes
in regulation increasingly allow participants in the utilities sector to provide
services and products outside their traditional geographic areas and lines of
business, creating new areas of competition within such industries. The
emergence of competition may result in certain companies being forced to defend
their core businesses, which may cause such companies to be less profitable.
The Fund will also concentrate its investments in the related group of
industries comprising the financial services sector. Industries in the financial
services sector include:
+ bank holding companies
+ commercial banks
+ savings and loans associations
+ brokerage and investment companies
+ life, property, casualty and multi-line insurance companies
+ consumer and industrial finance companies
These industries are subject to extensive regulation at the federal and/or state
level and, to the extent that they operate internationally, in other countries.
These regulations have undergone substantial change in the past two decades and
are likely to continue to experience change in the coming years. Significant
developments in the financial services sector have included deregulation of
interest rates, increased competition with other types of financial
institutions, regional expansion, increased numbers of mergers and acquisitions,
and increases in capital requirements. Governmental regulation may limit a
financial service business's activities, as well as the ability to earn a
profit. Each of these industries may also be significantly affected by intense
competitive pressures, including market share and price competition, and by
changes in prevailing interest rates, general economic conditions and industry
specific risks. The earnings of issuers in the financial services sector, and
particularly the banking industry, may be sensitive to certain economic factors,
such as interest rate changes or depressed market conditions both nationally and
in regions or in industries serviced by institutions in this sector. The
companies in which the Fund may invest also may be exposed to risks from
creating, dealing or holding derivative instruments. The revenue and income from
brokerage and investment management companies can be significantly affected by
changes in the equity and fixed income markets. The insurance industry can be
significantly affected by interest rates, general economic conditions, and price
and marketing competition. Property and casualty insurance profits can be
affected by weather catastrophes and other natural disasters. Life and health
insurance profits can be affected by mortality and morbidity rates. Insurance
companies can be adversely affected by inadequacy of cash reserves, the
inability to collect from reinsurance carriers, as well as other anticipated and
unanticipated liabilities. Insurance companies are also subject to extensive
government regulation, including the imposition of maximum rate levels, and may
be adversely affected by potential tax law changes.
The enactment of new legislation and regulation, as well as changes in the
interpretation and enforcement of existing laws and regulations, may directly
affect the manner of operations and profitability of participants in the
financial services sector. From time to time, changes in law and regulation have
permitted greater diversification of their financial products, but their ability
to expand by acquisition or branching across state lines and to engage in
non-banking activities continues to be
9
limited. Federal or state law and regulations require banks, bank holding
companies, broker-dealers and insurance companies to maintain minimum levels of
capital and liquidity. Bank regulators have broad authority and can impose
sanctions, including conservatorship or receivership, on non-complying banks
even when these banks continue to be solvent, thereby possibly resulting in the
elimination of stockholders' equity.
Fiscal and monetary policies and general economic and political conditions can
affect the availability and cost of funds to the industries within the financial
services sector, loan demand and asset quality, thereby impacting the earnings
and financial condition of such institutions in those industries. Downturns in a
regional or local economy or in a general business cycle or depressed conditions
in an industry, for example, may adversely affect the quality or volume of a
financial services business's loan portfolio and the value of the collateral,
including real estate, held with respect to such loans, particularly if the loan
portfolio is concentrated in the affected region or industry.
CREDIT RISK
Credit risk is the risk that fixed income securities, including preferred
securities, in the Fund's portfolio will decline in price or fail to make
dividend payments when due because the issuer of the security experiences a
decline in its financial status. Under normal market conditions, the Fund's
investments in preferred stock and other fixed income securities will generally
be rated at the time of investment at least investment grade (that is, rated at
least BBB- as determined by S&P or Fitch Ratings ("Fitch") or Baa3 by Moody's)
or, if unrated, determined to be of comparable credit quality by the Adviser.
However, the Fund may, from time to time, invest up to 20% of its total assets
in preferred stocks and other fixed income securities rated below investment
grade at the time of acquisition (that is, rated BB, Ba or lower, as determined
by S&P, Fitch or Moody's) or, if unrated, determined to be of comparable credit
quality by the Adviser. These securities may be rated as low as Ca by Moody's
and CC by S&P or Fitch, provided that the Fund will not invest more than 5% of
its total assets in securities rated below B at the time of investment.
Securities rated Baa by Moody's are considered by Moody's as medium to
lower-medium grade securities; they are neither highly protected nor poorly
secured; dividend or interest payments and capital or principal security, as the
case may be, appear to Moody's to be adequate for the present, but certain
protective elements may be lacking or may be characteristically unreliable over
time; and, in the opinion of Moody's, securities in this rating category lack
outstanding investment characteristics and in fact have speculative
characteristics as well. Securities rated BBB by S&P are regarded by S&P as
having an adequate capacity to pay dividends or interest and repay capital or
principal, as the case may be; whereas such securities normally exhibit adequate
protection parameters, adverse economic conditions or changing circumstances are
more likely, in the opinion of S&P, to lead to a weakened capacity to pay
dividends or interest and repay capital or principal for securities in this
category than in higher rating categories. A rating of Ca by Moody's means the
securities are speculative in a high degree and may be in default. A rating of
CC by S&P means there is a currently identifiable vulnerability to default.
Below investment grade securities and comparable unrated securities involve
substantial risk of loss, are considered highly speculative with respect to the
issuer's ability to pay interest and any required redemption or principal
payments and are susceptible to default or decline in market value due to
adverse economic and business developments. The ratings of Moody's, S&P and
Fitch represent their opinions as to the quality of those securities that they
rate; ratings are relative and subjective and are not absolute standards of
quality.
CONVERTIBLE SECURITIES
The preferred stocks and other fixed income securities in which the Fund invests
may be convertible into the issuer's or a related party's common shares.
Convertible securities generally offer lower dividend yields or interest rates
than non-convertible securities of similar quality. As with all fixed income
securities, the market values of convertible securities tend to decline as
interest rates increase and, conversely, to increase as interest rates decline.
However, when the market price of the common stock underlying a convertible
security exceeds the conversion price, the convertible security tends to reflect
the market price of the underlying common stock. As the market price of the
underlying
10
common stock declines, the convertible security tends to trade increasingly on a
yield basis and thus may not decline in price to the same extent as the
underlying common stock. Income payments received by the Fund on convertible
fixed income obligations will not be eligible for treatment as tax-advantaged
dividends; dividend payments received by the Fund on convertible preferred
stocks may be eligible for treatment as tax-advantaged dividends.
ILLIQUID SECURITIES
The Fund may invest up to 20% of its total assets in illiquid securities.
Illiquid securities may be difficult to dispose of at a fair price at the times
when the Adviser believes it is desirable to do so. The market price of illiquid
securities generally is more volatile than that of more liquid securities, which
may adversely affect the price that the Fund pays for or recovers upon the sale
of illiquid securities. Illiquid securities are also more difficult to value,
and the Adviser's judgment may play a greater role in the valuation process.
Investment of the Fund's assets in illiquid securities may restrict the Fund's
ability to take advantage of market opportunities. The risks associated with
illiquid securities may be particularly acute in situations in which the Fund's
operations require cash and could result in the Fund borrowing to meet its
short-term needs or incurring losses on the sale of illiquid securities.
FOREIGN SECURITIES
Although the Fund will only invest in securities of non-U.S. issuers that are
traded or denominated in U.S. dollars, the Fund's investments in non-U.S.
issuers may involve unique risks compared to investing in securities of U.S.
issuers. These risks are more pronounced to the extent that the Fund invests a
significant portion of its non-U.S. investments in one region or in the
securities of emerging market issuers. These risks may include:
+ less information about non-U.S. issuers or markets may be available due to
less rigorous disclosure, accounting standards or regulatory practices
+ many non-U.S. markets are smaller, less liquid and more volatile, and in a
changing market, the Adviser may not be able to sell the Fund's portfolio
securities at times, in amounts and at prices it considers reasonable
+ currency exchange rates or controls may adversely affect the value of the
Fund's investments
+ the economies of non-U.S. countries may grow at slower rates than expected or
may experience a downturn or recession
+ economic, political and social developments may adversely affect the
securities markets
+ withholdings and other non-U.S. taxes may decrease the Fund's return
DERIVATIVES
The Fund's hedging and interest rate transactions have risks, including the
imperfect correlation between the value of such instruments and the underlying
assets of the Fund, the possible default of the other party to the transaction
or illiquidity of the derivative instruments. Furthermore, the ability to
successfully use hedging and interest rate transactions depends on the Adviser's
ability to predict pertinent market movements, which cannot be assured. Thus,
the use of derivatives for hedging and interest rate management purposes may
result in losses greater than if they had not been used, may require the Fund to
sell or purchase portfolio securities at inopportune times or for prices other
than current market values, may limit the amount of appreciation the Fund can
realize on an investment, or may cause the Fund to hold a security that it might
otherwise sell. Additionally, amounts paid by the Fund as premiums and cash or
other assets held in margin accounts with respect to hedging and interest rate
transactions are not otherwise available to the Fund for investment purposes.
MARKET DISRUPTION AND GEOPOLITICAL RISK
The war with, and the continuing occupation of, Iraq may have a substantial
impact on the U.S. and world economies and securities markets. The nature, scope
and duration of such impact cannot be predicted with any certainty. Terrorist
attacks on the World Trade Center and the Pentagon on September 11, 2001 closed
some of the U.S. securities markets for a four-day period. Similar events and
market disruptions may occur in the future. Geopolitical risks have, and may in
the future,
11
contribute to increased short-term market volatility and may have adverse
long-term effects on U.S. and world economies and markets generally. Those
events could also have an acute effect on individual issuers or related groups
of issuers.
FEDERAL INCOME TAXATION
The Fund intends to take the position that under present law, the APS will
constitute stock of the Fund. Distributions with respect to the APS (other than
distributions in redemption of the APS that are treated as exchanges of stock
under Section 302(b) of the Code) will constitute dividends to the extent of the
Fund's current or accumulated earnings and profits as calculated for U.S.
federal income tax purposes. Most of such dividends generally are expected to
qualify as tax-advantaged dividends. There can be no assurance, however, as to
the portion of the Fund's dividends that will be tax-advantaged. To the extent
such dividends are not attributable to tax-advantaged dividends received by the
Fund, the dividends generally will be taxable to shareholders as ordinary income
at ordinary federal income tax rates. Distributions of net capital gain that are
designated by the Fund as capital gain dividends, if any, will be treated as
long-term capital gains without regard to the length of time the shareholder has
held shares of the Fund.
TRADING MARKET
The APS will not be listed on an exchange. Instead, you may buy or sell APS at
an Auction that normally is held every seven days by submitting orders to a
Broker-Dealer that has entered into an agreement with the Auction Agent, or to a
broker-dealer that has entered into a separate agreement with a Broker-Dealer.
In addition to the Auctions, Broker-Dealers and other broker-dealers may
maintain a secondary trading market in APS outside of Auctions, but may
discontinue this activity at any time. There is no assurance that a secondary
market will provide shareholders with liquidity. You may transfer APS outside of
Auctions only to or through a Broker-Dealer or a broker-dealer that has entered
into a separate agreement with a Broker-Dealer.
DIVIDENDS AND DIVIDEND PERIODS
The APS will entitle their holders to receive cash dividends at a rate per annum
that may vary for the successive Dividend Periods for such shares. In general,
except as described below, each Dividend Period for each series of APS
subsequent to the Initial Dividend Period will be seven days in length. The
Applicable Rate for a particular Dividend Period will be determined by an
Auction conducted on the Business Day immediately preceding the start of such
Dividend Period.
The table below shows the initial dividend rate, the Dividend Payment Date and
the number of days for the Initial Dividend Period on each series of the APS
offered in this Prospectus. For subsequent Dividend Periods, the APS will pay
dividends based on a rate set at Auctions, normally held every seven days. In
most instances, dividends are payable on the first Business Day following the
end of the Dividend Period. The rate set at Auction will not exceed the Maximum
Applicable Rate. See "Description of Preferred Shares--DIVIDENDS AND DIVIDEND
PERIODS." Dividends on the APS will be cumulative from the date the APS are
first issued and will be paid out of legally available funds.
INITIAL ENDING DATE OF NUMBER OF DAYS OF
DIVIDEND INITIAL DIVIDEND INITIAL DIVIDEND SUBSEQUENT DIVIDEND INITIAL DIVIDEND
RATE PERIOD PAYMENT DATE PAYMENT DATES PERIOD
---------------------------------------------------------------------------------------------------------------------------
Series M............. 1.15% May 10, 2004 May 11, 2004 Normally every 7 days 8
Series W............. 1.15% May 12, 2004 May 13, 2004 Normally every 7 days 10
Series TH............ 1.45% October 28, 2004 June 1, 2004 Monthly for Initial 179
Dividend Period;
normally every 7 days
thereafter(1)
Series F............. 1.15% May 16, 2004 May 17, 2004 Normally every 7 days 14
(1) During the Initial Dividend Period of Series TH APS, dividends will be
payable monthly on the first Business Day of each month, commencing on June
1, 2004, and the final dividend payment with respect to the Initial
Dividend Period will be made on October 29, 2004. After the Initial
Dividend Period, dividends on Series TH APS will be paid weekly except
during a Special Dividend Period
12
After the Initial Dividend Period, each subsequent Dividend Period will
generally consist of seven days for each series; provided, however, that prior
to any Auction, the Fund may elect, subject to certain limitations described
herein, after giving notice to the holders of one or more series of APS, to
declare a Special Dividend Period with respect to such series. A "Special
Dividend Period" is a Dividend Period consisting of a specified number of days,
evenly divisible by seven and not fewer than 14 nor more than 364 (a "Short-Term
Dividend Period") or a Dividend Period of one year or more but not greater than
five years (a "Long-Term Dividend Period"). A requested Special Dividend Period
will not be effective unless Sufficient Clearing Bids were made in the Auction
immediately preceding the Special Dividend Period. In addition, full cumulative
dividends, any amounts due with respect to mandatory redemptions and any
additional dividends payable prior to such date must be paid in full. See
"Description of Preferred Shares--DIVIDENDS AND DIVIDEND PERIODS--Designation of
Special Dividend Periods" and "The Auction."
Dividends for the APS will be paid through the Securities Depository on each
Dividend Payment Date. The Securities Depository's normal procedures provide for
it to distribute dividends in same-day funds to Agent Members, who are in turn
expected to distribute such dividends to the person for whom they are acting as
agent in accordance with the instructions of such person. See "Description of
Preferred Shares--DIVIDENDS AND DIVIDEND PERIODS."
MAXIMUM APPLICABLE RATE
Except during a Non-Payment Period, the Applicable Rate for any Dividend Period
for APS will not be more than the Maximum Applicable Rate applicable to such
shares. The Maximum Applicable Rate for each series of APS will depend on the
credit rating assigned to such series and on the duration of the Dividend
Period. The Maximum Applicable Rate will be the higher of the Applicable
Percentage of the Reference Rate or the Reference Rate plus the Applicable
Spread. The Reference Rate is (i) with respect to any seven day Dividend Period
or any Short-Term Dividend Period having 182 or fewer days, the applicable "AA"
Financial Composite Commercial Paper Rate, (ii) with respect to any Short-Term
Dividend Period having 183 or more but fewer than 364 days, the applicable U.S.
Treasury Bill Rate and (iii) with respect to any Long-Term Dividend Period, the
applicable U.S. Treasury Note Rate. The Applicable Percentage and the Applicable
Spread will be determined based on the credit rating assigned on such date to
the APS by Moody's and S&P (or, if either Moody's or S&P shall not make such
rating available, the equivalent of such rating by a Substitute Rating Agency)
as follows:
CREDIT RATINGS
----------------------------------------
MOODY'S S&P APPLICABLE PERCENTAGE APPLICABLE SPREAD
------------------------------------------------------------------------------------------------
Aaa AAA 125% 125 bps
Aa3 to Aa1 AA- to AA+ 150% 150 bps
A3 to A1 A- to A+ 200% 200 bps
Baa3 to Baa1 BBB- to BBB+ 250% 250 bps
Ba1 and lower BB+ and lower 300% 300 bps
RATINGS
The APS are expected to receive a rating of "Aaa" from Moody's and a rating of
"AAA" from S&P. This rating is an assessment of the capacity and willingness of
an issuer to pay preferred stock obligations. The ratings are not a
recommendation to purchase, hold or sell APS inasmuch as the rating does not
comment as to market price or suitability for a particular investor. The rating
also does not address the likelihood that an owner of APS will be able to sell
such APS in an Auction or otherwise. The rating is based on information obtained
from the Fund and other sources. The rating may be changed, suspended or
withdrawn in Moody's or S&P's discretion as a result of changes in, or the
unavailability of, such information. See "Description of Preferred
Shares--RATING AGENCY GUIDELINES AND ASSET COVERAGE."
13
REDEMPTION
The Fund is required to redeem APS if the Fund does not meet an asset coverage
ratio required by the 1940 Act or the rating agency guideline in a timely
manner. The Fund may voluntarily redeem APS, in whole or in part, under certain
conditions. Unless otherwise established in connection with a Special Dividend
Period, the redemption price per Preferred Share will be $25,000 plus
accumulated and unpaid dividends through the date of redemption. See
"Description of Preferred Shares--REDEMPTION" and "Description of Preferred
Shares--RATING AGENCY GUIDELINES AND ASSET COVERAGE."
ASSET MAINTENANCE
Under the By-laws which establish and fix the rights and preferences of the APS,
the Fund must maintain:
+ asset coverage of the APS as required by the rating agency or agencies rating
the APS
+ asset coverage of at least 200% with respect to senior securities of the Fund
that are stock, including the APS
In the event that the Fund does not maintain or cure these coverage tests, some
or all of the APS will be subject to mandatory redemption. See "Description of
Preferred Shares--REDEMPTION." Based on the composition of the Fund's portfolio
as of March 31, 2004, adjusted for the exercise of the over-allotment option on
April 13, 2004, the asset coverage of the APS as measured pursuant to the 1940
Act would be approximately 309% if the Fund were to issue the APS offered
hereby.
LIQUIDATION PREFERENCE
The liquidation preference for shares of each series of APS will be $25,000 per
share plus accumulated but unpaid dividends, if any, whether or not earned or
declared. See "Description of Preferred Shares--LIQUIDATION."
VOTING RIGHTS
The holders of preferred shares, including the APS, voting as a separate class,
have the right to elect at least two Trustees of the Fund at all times. Such
holders also have the right to elect a majority of the Trustees in the event
that two years' dividends on the preferred shares are unpaid. In each case, the
remaining Trustees will be elected by holders of Common Shares. The holders of
preferred shares, including the APS, will vote as a separate class or classes on
certain other matters required under the Agreement and Declaration of Trust, the
By-laws, the 1940 Act and Massachusetts law. See "Description of Preferred
Shares--VOTING RIGHTS," and "Certain provisions of the Agreement and Declaration
of Trust and By-laws."
AUCTION PROCEDURES
Unless otherwise permitted by the Fund, Beneficial Owners and Potential
Beneficial Owners of APS may only participate in Auctions through their
Broker-Dealers. Broker-Dealers will submit the Orders of their respective
customers who are Beneficial Owners and Potential Beneficial Owners to the
Auction Agent, designating themselves as Existing Holders in respect of APS
subject to Orders submitted or deemed submitted to them by Beneficial Owners and
as Potential Holders in respect of APS subject to Orders submitted to them by
Potential Beneficial Owners. On or prior to each Auction Date for the APS of a
series (the Business Day immediately preceding the first day of each Dividend
Period), each Beneficial Owner may submit Orders to its Broker-Dealer as
follows:
+ Hold Order--indicating its desire to hold the APS of such series without
regard to the Applicable Rate for the next Dividend Period for such APS.
+ Bid--indicating its desire to hold the APS of such series, provided that the
Applicable Rate for the next Dividend Period for such APS is not less than
the rate per annum specified in such Bid.
14
+ Sell Order--indicating its desire to sell the APS of such series without
regard to the Applicable Rate for the next Dividend Period for such APS.
A Beneficial Owner may submit different types of Orders to its Broker-Dealer
with respect to the APS of a series then held by such Beneficial Owner, provided
that the total number of APS covered by such Orders does not exceed the number
of APS of such series held by such Beneficial Owner. If, however, a Beneficial
Owner offers through its Broker-Dealer to purchase additional APS of a series in
such Auction, such Beneficial Owner, for purposes of such offer to purchase
additional shares, will be treated as a Potential Beneficial Owner as described
below. Bids by Beneficial Owners through their Broker-Dealers with rates per
annum higher than the Maximum Applicable Rate will be treated as Sell Orders. A
Hold Order (in the case of an Auction relating to a Dividend Period of 91 days
or less) or a Sell Order (in the case of an Auction relating to a Special
Dividend Period of longer than 91 days) shall be deemed to have been submitted
on behalf of a Beneficial Owner if an Order with respect to the APS then held by
such Beneficial Owner is not submitted on behalf of such Beneficial Owner for
any reason, including the failure of a Broker-Dealer to submit such Beneficial
Owner's Order to the Auction Agent.
Potential Beneficial Owners of APS may submit Bids through their Broker-Dealers
in which they offer to purchase APS, provided that the Applicable Rate for the
next Dividend Period for such APS is not less than the rate per annum specified
in such Bid. A Bid by a Potential Beneficial Owner with a rate per annum higher
than the Maximum Applicable Rate will not be considered.
Neither the Fund nor the Auction Agent will be responsible for a Broker-Dealer's
failure to act in accordance with the instructions of Beneficial Owners or
Potential Beneficial Owners or failure to comply with any of the foregoing.
If Sufficient Clearing Bids exist in an Auction for the APS of a series (that
is, in general, the number of APS subject to Bids by Potential Holders with
rates equal to or lower than the Maximum Applicable Rate is at least equal to
the number of APS subject to Sell Orders by Existing Holders), the Applicable
Rate will be the lowest rate per annum specified in the Submitted Bids which,
taking into account such rate per annum and all lower rates per annum bid by
Existing Holders and Potential Holders, would result in Existing Holders and
Potential Holders owning all of the APS available for purchase in the Auction.
If Sufficient Clearing Bids do not exist, the Applicable Rate will be the
Maximum Applicable Rate, and in such event, Existing Holders who have submitted
Sell Orders will not be able to sell in the Auction all, and may not be able to
sell any, APS subject to such Sell Orders. Thus, in certain circumstances,
Existing Holders and the Beneficial Owners they represent may not have liquidity
of investment. If all of the applicable outstanding APS are subject to submitted
Hold Orders (or Hold Orders deemed to have been submitted), then the Dividend
Period will be a seven day Dividend Period and the Applicable Rate for the next
Dividend Period will be the "AA" Financial Composite Commercial Paper Rate for a
seven day Dividend Period.
A Sell Order by an Existing Holder will constitute an irrevocable offer to sell
the APS subject thereto, and a Bid placed by an Existing Holder also will
constitute an irrevocable offer to sell the APS subject thereto, if the rate per
annum specified in the Bid is higher than the Applicable Rate determined in the
Auction, in each case at a price per Preferred Share equal to $25,000. A Bid
placed by a Potential Holder will constitute an irrevocable offer to purchase
the APS subject thereto at a price per share equal to $25,000 if the rate per
annum specified in such Bid is less than or equal to the Applicable Rate
determined in the Auction. Settlement of purchases and sales will be made on the
next Business Day (also a Dividend Payment Date) after the Auction Date through
the Securities Depository. Purchasers will make payment through their Agent
Members in same-day funds to the Securities Depository against delivery by
book-entry to their Agent Members. The Securities Depository will make payment
to the sellers' Agent Members in accordance with the Securities Depository's
normal procedures, which now provide for payment in same-day funds. See "The
Auction."
15
--------------------------------------------------------------------------------
Financial highlights (unaudited)
Information contained in the table below shows the unaudited operating
performance of the Fund from the commencement of the Fund's investment
operations on February 27, 2004 through March 31, 2004. Since the Fund was
recently organized and commenced investment operations on February 27, 2004, the
table covers approximately one month of operations, during which a substantial
portion of the Fund's portfolio was held in temporary investments, pending
investment in equity securities that meet the Fund's investment objective and
policies. Accordingly, the information presented does not provide a meaningful
picture of the Fund's future operating performance.
FOR THE PERIOD
FEBRUARY 27, 2004(1)
THROUGH MARCH 31, 2004
(UNAUDITED)
----------------------------------------------------------------------
Per Common Share operating performance:
Net asset value, beginning of period........................ $ 19.10
--------
Increase/(decrease) from investment operations:
Net investment income..................................... 0.08
Net realized and unrealized gain/(loss) on investments.... (0.16)
Dividends to preferred shareholders....................... --
--------
Net increase/(decrease) from investment operations.......... (0.08)
--------
Offering costs charged to capital........................... (0.02)
--------
Net asset value, end of period(2)........................... $ 19.00
========
Market value, end of period(2).............................. $ 20.01
========
Total investment return(3)............................. 0.00%(4)
========
Ratios to average net assets applicable to common
shareholders:
Ratio of expenses to average net assets..................... 0.78%(5)
Ratio of adjusted expenses to average net assets............ 0.98%(5)(6)
Net investment income before preferred share dividends...... 4.40%(5)
Preferred share dividends................................... --%
Net investment income applicable to common shareholders..... 4.40%(5)
Supplemental data:
Average net assets of common shareholders (000)............. $756,788
Portfolio turnover.......................................... 0%
Net assets applicable to common shareholders, end of period
(000)..................................................... $779,243
Preferred shares outstanding (000).......................... --
(1) Commencement of investment operations
(2) Net asset value and market value are published in Barron's on Saturday, The
Wall Street Journal on Monday and The New York Times on Monday and Saturday
(3) Total investment return is calculated assuming a purchase of Common Shares
at the current market value on the first day and a sale at the current
market value on the last day of the period reported. Dividends and
distributions, if any, are assumed for purposes of this calculation to be
reinvested at prices obtained under the Fund's dividend reinvestment plan.
Total investment returns of less than a full period are not annualized.
Past performance is not a guarantee of future results
(4) Not annualized
(5) Annualized
(6) Does not take into consideration expense reductions during the period
The information above represents the unaudited operating performance for a
Common Share outstanding, total investment return, ratios to average net assets
and other supplemental data for the periods indicated. This information has been
determined based upon financial information provided in the financial statements
and market value data for the Fund's Common Shares.
--------------------------------------------------------------------------------
16
--------------------------------------------------------------------------------
The Fund
John Hancock Tax-Advantaged Dividend Income Fund is a recently organized,
diversified, closed-end management investment company. The Fund was organized
under the laws of the Commonwealth of Massachusetts on August 7, 2003, and is
registered under the 1940 Act. The Fund's principal office is located at 101
Huntington Avenue, Boston, Massachusetts 02199, and its telephone number is
(800) 225-6020.
On February 27, 2004, the Fund issued an aggregate of 38,000,000 Common Shares
of beneficial interest, no par value, pursuant to an initial public offering.
The Fund issued 3,000,000 Common Shares on March 11, 2004 and 1,070,000 Common
Shares on April 13, 2004 pursuant to an over-allotment option. The Fund's Common
Shares are traded on the NYSE under the symbol "HTD."
The following provides information about the Fund's outstanding shares as of
April 13, 2004.
AMOUNT HELD
AMOUNT BY THE FUND OR AMOUNT
TITLE OF CLASS AUTHORIZED FOR ITS ACCOUNT OUTSTANDING
-------------------------------------------------------------------------------------------------
Common Shares....................................... Unlimited 0 42,077,487
Unlimited
for each
Auction Preferred Shares............................ series 0 0
Series M
Series W
Series TH
Series F
Use of proceeds
The net proceeds of this offering of APS will be approximately $375,775,000
after payment of offering costs (including sales load) estimated to be
approximately $4,225,000. The Fund will invest the net proceeds of the offering
in accordance with its investment objective and policies as stated below under
"Investment objective and principal investment strategies." The Fund expects
that there will be an initial investment period of up to three months following
the completion of this offering before all of the proceeds from the sale of the
APS are invested in accordance with its investment objective and policies.
Pending such investment, the Fund anticipates that all or a portion of the
proceeds will be invested in U.S. government securities or high-grade,
short-term money market instruments. See "Investment objective and principal
investment strategies."
--------------------------------------------------------------------------------
17
--------------------------------------------------------------------------------
Capitalization (unaudited)
The following table sets forth the capitalization of the Fund as of March 31,
2004, and as adjusted to give effect to (i) the issuance of the APS offered
hereby (including estimated offering expenses and a sales load of $250 per APS)
and (ii) the common shares issued on April 13, 2004.
ACTUAL AS ADJUSTED
-----------------------------------------------------------------------------------------
Auction Preferred Shares, no par value per share (no shares
issued; 15,200 shares issued, as adjusted at $25,000 per
share liquidation preference)............................. $ -- $380,000,000
============ ============
Shareholder's equity:
Common Shares, no par value per share 41,007,487 shares
outstanding; 42,077,487 shares outstanding as
adjusted)(1)............................................ 782,376,002 798,588,002
------------ ------------
Paid-in surplus
Balance of undistributed net investment income............ 3,092,670 3,092,670
------------ ------------
Accumulated net realized gain/(loss) from investment
transactions............................................ -- --
------------ ------------
Net unrealized appreciation/(depreciation) of
investments............................................. (6,226,141) (6,226,141)
------------ ------------
Net assets attributable to Common Shares.................. 779,242,531 795,454,531
============ ============
(1) None of these outstanding shares are held by or for the account of the Fund
Portfolio composition
As of March 31, 2004, approximately 92% of the market value of the Fund's
portfolio was invested in equity securities and approximately 8% of the market
value of the Fund's portfolio was invested in other securities and short-term
instruments. The following table sets forth certain information with respect to
the composition of the Fund's investment portfolio as of March 31, 2004, based
on the highest rating assigned to each investment.
CREDIT RATING (MOODY'S/S&P) NUMBER OF ISSUES VALUE (000) PERCENT
--------------------------------------------------------------------------------------------------
Common stock.......................................... 58 $ 545,304 69%
Preferred securities and other securities.............
Aa/AA.............................................. 4 12,336 2
A/A................................................ 8 69,931 9
Baa/BBB............................................ 15 53,348 7
Ba/BB.............................................. 11 27,243 3
B/B................................................ 1 1,223 0
Caa/CCC............................................ 1 13,781 2
Short-Term......................................... 1 63,900 8
---------------- ----------- -------
Total............................................ 99 787,066 100
================ =========== =======
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18
--------------------------------------------------------------------------------
Investment objective and principal investment strategies
INVESTMENT OBJECTIVE
The Fund's investment objective is to provide a high level of after-tax total
return from dividend income and capital appreciation. The Fund's investment
objective is a non-fundamental policy and may be changed without the approval of
a majority of the outstanding voting securities (as defined in the 1940 Act) of
the Fund. The Fund makes no assurance that it will realize its objective.
PRINCIPAL INVESTMENT FOCUS AND PHILOSOPHY
The Fund invests at least 80% of its assets (net assets plus borrowing for
investment purposes) in dividend-paying common and preferred securities that the
Adviser believes at the time of acquisition are eligible to pay tax-advantaged
dividends. This is a non-fundamental policy and may be changed by the Board of
Trustees of the Fund. Shareholders will be provided with at least 60 days prior
written notice of any change in this policy, as required by the rules under the
1940 Act. Tax-advantaged dividends generally include dividends from domestic
corporations and dividends from foreign corporations that meet certain specified
criteria. The Fund generally can pass the tax treatment of tax-advantaged
dividends it receives through to its holders of APS, provided certain holding
period and other requirements are satisfied by the shareholders. For the Fund to
receive tax-advantaged dividends, the Fund must hold the otherwise qualified
stock for more than 60 days during the 121-day period beginning 60 days before
the ex-dividend date (or, in the case of preferred stocks, more than 90 days
during the 181-day period beginning 90 days before the ex-dividend date).
Although current law only provides a 120-day and 180-day period for holding such
stock, a proposed technical correction to the law would extend such periods to
121 days and 181 days, respectively. The Treasury Department and the Internal
Revenue Service have announced that taxpayers may apply the extended periods as
if the legislation were already enacted in filing their federal income tax
returns. The "ex-dividend date" is the date which is established by a stock
exchange (usually two business days before the record date) whereby the owner of
a security at the commencement of such date is entitled to receive the next
issued dividend payment for such security, even if the security is sold by such
owner on the ex-dividend date or thereafter. In addition, the Fund cannot be
obligated to make payments (pursuant to a short sale or otherwise) with respect
to substantially similar or related property. There can be no assurance as to
the portion of the Fund's dividends that will be tax-advantaged. For an
individual holder of APS to be taxed at long-term capital gain rates on
dividends received from the Fund which otherwise would be eligible for treatment
as tax-advantaged dividends, the shareholder must hold his or her APS for more
than 90 days during the 181-day period beginning 90 days before the ex-dividend
date. For example, assume that the ex-dividend date established for a dividend
paid with respect to the common stock of a corporation held by the Fund is July
1. The Fund must hold the common stock on the record date and must have held it
for at least 61 days (including the record date) during the 121-day period from
May 2 to and including August 30. Similarly, assuming that the ex-dividend date
established for a dividend paid with respect to APS of the Fund is August 1, a
holder of the APS must have held the APS on the record date and have held the
APS for at least 91 days during the period from May 3 to and including October
30 for the shareholder to receive tax-advantaged dividends from the Fund.
Consequently, short-term investors in the Fund will not realize the benefits of
tax-advantaged dividends. The provisions of the Code applicable to
tax-advantaged dividends are currently effective through December 31, 2008.
Thereafter, higher tax rates will apply unless further legislative action is
taken.
The Fund may invest the remainder of its assets in equity securities and in
investment grade and below investment grade fixed income securities, including
debt instruments and real estate investment trusts, that generate income taxed
at ordinary income rather than long-term capital gain rates. For any year, so
long as the Fund's ordinary income, tax-exempt income (if any), and net realized
short-term capital
--------------------------------------------------------------------------------
19
INVESTMENT OBJECTIVE AND PRINCIPAL INVESTMENT STRATEGIES
--------------------------------------------------------------------------------
gains in excess of net long-term capital losses are fully offset by expenses of
the Fund, all of the Fund's income distributions would be characterized as
tax-advantaged dividends. Although the Fund intends to invest at least 80% of
its assets in equity securities that pay tax-advantaged dividends and to satisfy
the holding period and other requirements, a portion of the Fund's income
distributions may be taxable at higher federal income tax rates applicable to
ordinary income.
The Fund may invest its portfolio of equity securities in companies of any
market capitalization. In selecting securities for the Fund's portfolio, the
Adviser focuses on dividend-paying common and preferred securities that produce
an attractive level of tax-advantaged income. The Adviser also considers a
security's potential for capital appreciation. The Adviser generally uses a
value approach in selecting the Fund's equity investments. Using this investment
style, the Adviser seeks securities selling at what the Adviser believes are
substantial discounts to their underlying values and then holds these securities
until the market values reflect their intrinsic values. The Adviser evaluates a
security's potential value, including the attractiveness of its market
valuation, based on the company's assets and prospects for earnings growth.
Investment decisions are made primarily on the basis of fundamental research.
The Adviser relies upon information provided by, and the expertise of, the
Adviser's research staff in making investment decisions. In selecting stocks,
the Adviser considers (among other factors) a company's earnings or cash flow
capabilities, dividend prospects and federal income tax treatment of a company's
dividends, the strength of the company's business franchises and estimates of
the company's net value. In the case of the utilities sector, the Adviser
focuses on factors such as balance sheet strength, growth rates and valuation
relative to peers and changes in the regulatory environment. With respect to the
financial services sector, the Adviser generally emphasizes the strength of the
management teams, established market position and transparency of financial
reporting.
TAX-MANAGEMENT STRATEGIES
Taxes have a major influence on the net returns that investors receive on their
taxable investments. Distributions of income, other than tax-advantaged
dividends, and distributions of net realized short-term gains (on securities
held by the Fund for one year or less) to individual shareholders of the Fund
are taxable as ordinary income at federal income tax rates as high as 35%,
whereas distributions of tax-advantaged dividends and net capital gain (on
securities held by the Fund for more than one year) are taxable at a maximum
federal income tax rate of 15%. As described above, the Fund seeks to provide a
high level of total after-tax return in part by minimizing the taxes incurred by
shareholders in connection with the Fund's net investment income and net
realized gains.
The Fund seeks to achieve favorable after-tax returns in part by seeking to
reduce the capital gains taxes incurred by shareholders in connection with the
Fund's portfolio investments. The Adviser attempts to minimize distributions of
long-term capital gains taxable to shareholders by seeking to avoid, to the
extent consistent with its investment objective, the sale of securities with
large accumulated capital gains. When a decision is made to sell a portion of
the Fund's holdings of a particular appreciated security, the Adviser generally
will seek to select for sale the share lots resulting in the most favorable tax
treatment for shareholders, generally those with holding periods sufficient to
qualify for long-term capital gain treatment that have the highest cost basis.
The Adviser may also sell securities to realize capital losses that can be used
to offset realized gains. To protect against price declines in securities
holdings with large accumulated gains, the Fund may use various hedging
techniques (such as purchase and sale of futures contracts on securities and
securities indices and options thereon, the purchase of put options and the sale
of call options on securities held, equity swaps, covered short sales and
forward sales of securities). By using these techniques rather than selling
appreciated securities, the Fund may, subject to certain limitations, attempt to
reduce its exposure to price declines in the securities without realizing
substantial capital gains under current tax law. There is no assurance that the
Fund will use these strategies or that they will be successful if used.
Dividends received by the Fund on securities with respect to which the Fund is
obligated to make
--------------------------------------------------------------------------------
20
INVESTMENT OBJECTIVE AND PRINCIPAL INVESTMENT STRATEGIES
--------------------------------------------------------------------------------
related payments with respect to positions in substantially similar or related
property (pursuant to short sales or otherwise) will not be eligible for
treatment as tax-advantaged dividends, and the use of put and call options may
reduce the Fund's holding period for the underlying stock for purposes of
determining whether dividends paid on such stock are eligible to be passed
through to shareholders as tax-advantaged dividends.
DIVIDEND CAPTURE TRADING
The Fund may seek to enhance the level of dividend income it receives by
engaging in dividend capture trading. In a dividend capture trade, the Fund
sells a security after having held the security long enough to satisfy the
holding period requirements for tax-advantaged dividends, but shortly after the
security's ex-dividend date. The Fund then uses the sale proceeds to purchase
one or more other securities that are expected to pay dividends before the next
dividend payment date on the security being sold. Through this practice, the
Fund may receive more dividend payments over a given period of time than if it
held a single security. Receipt of a greater number of dividend payments during
a given time period could augment the total amount of dividend income received
by the Fund. For example, during the course of a single year, it may be possible
through dividend capture trading for the Fund to receive five or more dividend
payments on different securities which have been held for the requisite holding
period to qualify as a tax-advantaged dividend, whereas it may only have
received four payments in a hold strategy. The use of dividend capture
strategies will expose the Fund to increased trading costs and the potential for
recognizing short-term capital gains or losses on the sale of a security. Also,
any net short-term capital gains recognized by the Fund and distributed to
shareholders will be taxed to individual shareholders at ordinary federal income
tax rates, whereas if the Fund held the stock for more than one year, any gain
recognized on the sale of the security and distributed to shareholders would be
taxable to individual shareholders at federal long-term capital gain rates.
Consequently, the Adviser intends to employ dividend capture trading as a
strategy only to the extent that the Adviser believes it will have a positive
net effect on the Fund's total after-tax return.
PORTFOLIO CONTENTS AND PRINCIPAL INVESTMENT STRATEGIES
COMMON STOCKS
The Fund will invest a substantial portion of its assets in common stocks.
Common stocks are shares of a corporation or other entity that entitle the
holder to a pro rata share of the profits, if any, of the corporation without
preference over any other shareholder or class of shareholders, including
holders of such entity's preferred stock and other senior equity securities.
Common stock usually carries with it the right to vote and frequently an
exclusive right to do so. In selecting common stocks for investment, the Fund
generally expects to focus on the security's dividend paying capacity as well as
its potential for capital appreciation.
INDUSTRY AND ISSUER CONCENTRATION
The Fund intends to concentrate its investments (i.e., invest at least 25% of
its net assets) in securities issued by U.S. corporations in the related groups
of industries comprising each of the utilities sector and the financial services
sector and will be subject to certain risks due to such emphasis. The utilities
sector includes companies engaged in the manufacture, production, generation,
transmission, sale or distribution of electric energy, water, sanitary services,
natural gas and pollution control services. Companies in the financial services
sector include commercial banks, savings and loan associations, brokerage and
investment companies, insurance companies and consumer and industrial finance
companies. The Adviser believes that these sectors currently offer attractive
investment opportunities for the Fund because issuers in these sectors tend to
offer tax-advantaged dividends and capital appreciation potential and,
historically, issuers in these sectors have had low correlation of returns
relative to each other and to traditional fixed income categories. The Fund will
allocate its investments
--------------------------------------------------------------------------------
21
INVESTMENT OBJECTIVE AND PRINCIPAL INVESTMENT STRATEGIES
--------------------------------------------------------------------------------
from time to time among industries and issuers in such sectors based on the
Adviser's evaluation of market and economic conditions.
TRADITIONAL PREFERRED SECURITIES
Fixed rate preferred stocks have fixed dividend rates. They can be perpetual,
with no mandatory redemption date, or issued with a fixed mandatory redemption
date. Certain issues of preferred stock are convertible into other equity
securities. Perpetual preferred stocks provide a fixed dividend throughout the
life of the issue, with no mandatory retirement provisions, but may be callable.
Sinking fund preferred stocks provide for the redemption of a portion of the
issue on a regularly scheduled basis with, in most cases, the entire issue being
retired at a future date. The value of fixed rate preferred stocks can be
expected to vary inversely with interest rates.
Adjustable rate preferred stocks have a variable dividend rate which is
determined periodically, typically quarterly, according to a formula based on a
specified premium or discount to the yield on particular U.S. Treasury
securities, typically the highest base-rate yield of one of three U.S. Treasury
securities: the 90-day Treasury bill; the 10-year Treasury note; and either the
20-year or 30-year Treasury bond or other index. The premium or discount to be
added to or subtracted from this base-rate yield is fixed at the time of
issuance and cannot be changed without the approval of the holders of the
adjustable rate preferred stock. Some adjustable rate preferred stocks have a
maximum and a minimum rate and in some cases are convertible into common stock.
Auction rate preferred stocks pay dividends that adjust based upon periodic
auctions. Such preferred stocks are similar to short-term corporate money market
instruments in that an auction rate preferred stockholder has the opportunity to
sell the preferred stock at par in an auction, normally conducted at least every
49 days, through which buyers set the dividend rate in a bidding process for the
next period. The dividend rate set in the auction depends upon market conditions
and the credit quality of the particular issuer. Typically, the auction rate
preferred stock's dividend rate is limited to a specified maximum percentage of
an external commercial paper index as of the auction date. Further, the terms of
auction rate preferred stocks generally provide that they are redeemable by the
issuer at certain times or under certain conditions.
DEBT SECURITIES
Debt securities in which the Fund may invest include: securities issued or
guaranteed by the U.S. government, its agencies or instrumentalities and
custodial receipts therefor; securities issued or guaranteed by a foreign
government or any of its political subdivisions, authorities, agencies or
instrumentalities or by international or supranational entities; corporate debt
securities including notes, bonds and debentures; certificates of deposit and
bankers' acceptances issued or guaranteed by, or time deposits maintained at,
banks (including U.S. or foreign branches of U.S. banks or U.S. or foreign
branches of foreign banks) having total assets of more than $1 billion;
commercial paper; and mortgage related securities. These securities may be of
any maturity. The value of debt securities can be expected to vary inversely
with interest rates. Income payments received by the Fund on debt securities
will not be eligible for treatment as tax-advantaged dividends.
TAXABLE PREFERRED SECURITIES
Taxable preferred securities are typically issued by corporations. Taxable
preferred securities may also be issued by an affiliated business trust of a
corporation, generally in the form of beneficial interests in subordinated
debentures or similarly structured securities. The taxable preferred securities
market consists of both fixed and adjustable coupon rate securities that are
either perpetual in nature or have stated maturity dates. The taxable preferred
securities market is divided into the "$25 par" and the "institutional"
segments. The $25 par segment is typified by securities that are listed on the
New York Stock Exchange, which trade and are quoted "flat" (i.e., without
accrued dividend income) and which are typically callable at par value five
years after their original issuance date. The institutional segment
--------------------------------------------------------------------------------
22
INVESTMENT OBJECTIVE AND PRINCIPAL INVESTMENT STRATEGIES
--------------------------------------------------------------------------------
is typified by $1,000 par value securities that are not exchange-listed, which
trade and are quoted on an "accrued income" basis, and which typically have a
minimum of 10 years of call protection (at premium prices) from the date of
their original issuance.
Taxable preferred securities normally constitute junior and fully subordinated
liabilities of an issuer or the beneficiary of a guarantee that is junior and
fully subordinated to the other liabilities of the guarantor. In addition,
taxable preferred securities typically permit the issuer to defer the payment of
income for a specified period, which may be eighteen months or more, without
triggering an event of default. Because of their subordinated position in the
capital structure of an issuer, the ability to defer payments for extended
periods of time without adverse consequence to the issuer, and certain other
features (such as restrictions on common dividend payments by the issuer or
ultimate guarantor when cumulative payments on the taxable preferred securities
have not been made), issuers and investors generally treat taxable preferred
securities as close substitutes for traditional preferred securities. Taxable
preferred securities have many of the key characteristics of equity due to their
subordinated position in an issuer's capital structure and because their quality
and value are heavily dependent on the profitability of the issuer rather than
on any legal claims to specific assets or cash flows.
Taxable preferred securities are typically issued with a final maturity date,
although some are perpetual in nature. In certain instances, the final maturity
date may be extended and/or the final payment of principal may be deferred at
the issuer's option for a specified time without any adverse consequence to the
issuer. No redemption can typically take place unless all cumulative payment
obligations have been met, although issuers may be able to engage in open-market
repurchases without regard to any cumulative dividends payable. A portion of the
portfolio may include investments in non-cumulative preferred securities,
whereby the issuer does not have an obligation to make up any arrearages to its
shareholders. Should an issuer default on its obligations under such a security,
the amount of dividends the Fund pays may be adversely affected. Income payments
received by the Fund on taxable preferred securities will not be eligible for
treatment as tax-advantaged dividends.
FOREIGN SECURITIES
While the Fund primarily invests in the securities of U.S. issuers, the Fund may
invest up to 20% of its total assets in securities of corporate and governmental
issuers located outside the United States. The Fund will only invest in
securities of foreign issuers that are traded or denominated in U.S. dollars.
ILLIQUID SECURITIES
The Fund may invest up to 20% of its total assets in illiquid securities (i.e.,
securities that are not readily marketable). Illiquid securities include, but
are not limited to, restricted securities (securities for which the disposition
is restricted under the federal securities laws), securities that may be resold
pursuant to Rule 144A under the Securities Act of 1933, as amended (the
"Securities Act") but that are deemed to be illiquid, and repurchase agreements
with maturities in excess of seven days. The Board of Trustees or its delegate
has the ultimate authority to determine, to the extent permissible under the
federal securities laws, which securities are liquid or illiquid. Restricted
securities may be sold only in privately negotiated transactions or in a public
offering with respect to which a registration statement is in effect under the
Securities Act. Where registration is required, the Fund may be obligated to pay
all or part of the registration expenses and a considerable period may elapse
between the time of the decision to sell and the time the Fund may be permitted
to sell a security under an effective registration statement. If, during such a
period, adverse market conditions were to develop, the Fund might obtain a less
favorable price than that which prevailed when it decided to sell. Illiquid
securities will be priced at fair value as determined in good faith by the Board
of Trustees or its delegate.
MONEY MARKET INSTRUMENTS
Money market instruments include short-term U.S. government securities, U.S.
dollar denominated, high quality commercial paper (unsecured promissory notes
issued by corporations to finance their short-term
--------------------------------------------------------------------------------
23
INVESTMENT OBJECTIVE AND PRINCIPAL INVESTMENT STRATEGIES
--------------------------------------------------------------------------------
credit needs), certificates of deposit, bankers' acceptances and repurchase
agreements relating to any of the foregoing. U.S. government securities include
Treasury notes, bonds and bills, which are direct obligations of the U.S.
government backed by the full faith and credit of the United States, and
securities issued by agencies and instrumentalities of the U.S. government,
which may be guaranteed by the U.S. Treasury, may be supported by the issuer's
right to borrow from the U.S. Treasury or may be backed only by the credit of
the federal agency or instrumentality itself. Income payments received by the
Fund on money market securities will not be eligible for treatment as
tax-advantaged dividends.
U.S. GOVERNMENT SECURITIES
U.S. government securities in which the Fund invests include debt obligations of
varying maturities issued by the U.S. Treasury or issued or guaranteed by an
agency or instrumentality of the U.S. government, including the Federal Housing
Administration, Federal Financing Bank, Farmers Home Administration,
Export-Import Bank of the United States, Small Business Administration,
Government National Mortgage Association (GNMA), General Services
Administration, Central Bank for Cooperatives, Federal Farm Credit Banks,
Federal Home Loan Banks, Federal Home Loan Mortgage Corporation (FHLMC), Federal
National Mortgage Association (FNMA), Maritime Administration, Tennessee Valley
Authority, District of Columbia Armory Board, Student Loan Marketing
Association, Resolution Trust Corporation and various institutions that
previously were or currently are part of the Farm Credit System (which has been
undergoing reorganization since 1987). Some U.S. government securities, such as
U.S. Treasury bills, Treasury notes and Treasury bonds, which differ only in
their interest rates, maturities and times of issuance, are supported by the
full faith and credit of the United States government. Others are supported by:
(i) the right of the issuer to borrow from the U.S. Treasury, such as securities
of the Federal Home Loan Banks; (ii) the discretionary authority of the U.S.
government to purchase the agency's obligations, such as securities of the FNMA;
or (iii) only the credit of the issuer. No assurance can be given that the U.S.
government will provide financial support in the future to U.S. government
agencies, authorities or instrumentalities that are not supported by the full
faith and credit of the United States. Securities guaranteed as to principal and
interest by the U.S. government, its agencies, authorities or instrumentalities
include: (i) securities for which the payment of principal and interest is
backed by an irrevocable letter of credit issued by the U.S. government or any
of its agencies, authorities or instrumentalities; and (ii) participations in
loans made to non-U.S. governments or other entities that are so guaranteed. The
secondary market for certain of these participations is limited and, therefore,
may be regarded as illiquid. Income payments on U.S. government securities
received by the Fund will not be eligible for treatment as tax-advantaged
dividends.
REITS
The Fund may invest in common and preferred interests in real estate investment
trusts ("REITs"). REITs primarily invest in income producing real estate or real
estate related loans or interests. REITs are generally classified as equity
REITs, mortgage REITs or a combination of equity and mortgage REITs. Equity
REITs invest the majority of their assets directly in real property and derive
income primarily from the collection of rents. Equity REITs can also realize
capital gains by selling properties that have appreciated in value. Mortgage
REITs invest the majority of their assets in real estate mortgages and derive
income from the collection of interest payments. REITs are not taxed on income
distributed to shareholders provided they comply with the applicable
requirements of the Code. The Fund will in some cases indirectly bear its
proportionate share of any management and other expenses paid by REITs in which
it invests in addition to the expenses paid by the Fund. Debt securities issued
by REITs are, for the most part, general and unsecured obligations and are
subject to risks associated with REITs. Generally, REIT income distributions
will not, subject to certain limited exceptions, be eligible for treatment as
tax-advantaged dividends.
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INVESTMENT OBJECTIVE AND PRINCIPAL INVESTMENT STRATEGIES
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OTHER INVESTMENT COMPANIES
The Fund may invest in the securities of other investment companies to the
extent that such investments are consistent with the Fund's investment objective
and principal investment strategies and permissible under the 1940 Act. Under
the 1940 Act, the Fund may not acquire the securities of other investment
companies if, as a result, (i) more than 10% of the Fund's total assets would be
invested in securities of other investment companies, (ii) such purchase would
result in more than 3% of the total outstanding voting securities of any one
investment company being held by the Fund and its affiliates or (iii) more than
5% of the Fund's total assets would be invested in any one investment company.
These limitations do not apply to the purchase of shares of any investment
company in connection with a merger, consolidation, reorganization or
acquisition of substantially all the assets of another investment company. The
Fund, as a holder of the securities of other investment companies, will bear its
pro rata portion of the other investment companies' expenses, including advisory
fees. These expenses are in addition to the direct expenses of the Fund's own
operations. Income generated from the Fund's investment in another investment
company may not be eligible for treatment as tax-advantaged dividends.
CREDIT QUALITY
Under normal market conditions, the Fund expects that its investments in
preferred stock and other fixed income securities will primarily be rated
investment grade (that is rated at least BBB- as determined by S&P or Fitch or
Baa3 by Moody's) or, if unrated, determined to be of comparable credit quality
by the Adviser. However, the Fund may, from time to time, invest up to 20% of
its total assets in preferred stocks and other fixed income securities rated
below investment grade at the time of acquisition (that is rated BB, Ba or lower
as determined by S&P, Fitch or Moody's) or, if unrated, determined to be of
comparable credit quality by the Adviser. The below investment grade securities
in which the Fund invests may be rated as low as Cc or Ca, provided that no more
than 5% of the Fund's total assets will be invested in securities rated below B
at the time of investment. Securities of below investment grade quality are
considered to be predominantly speculative because of the credit risk of the
issuers.
Securities rated BBB by S&P are regarded by S&P as having an adequate capacity
to pay dividends or interest and repay capital or principal, as the case may be;
whereas such securities normally exhibit adequate protection parameters, adverse
economic conditions or changing circumstances are more likely, in the opinion of
S&P, to lead to a weakened capacity to pay dividends or interest and repay
capital or principal for securities in this category than in higher rating
categories. Securities rated Baa by Moody's are considered by Moody's as medium
to lower medium grade securities; they are neither highly protected nor poorly
secured; dividend or interest payments and capital or principal security, as the
case may be, appear to Moody's to be adequate for the present but certain
protective elements may be lacking or may be characteristically unreliable over
time; and in the opinion of Moody's, securities in this rating category lack
outstanding investment characteristics and in fact have speculative
characteristics as well. A rating of Ca by Moody's means the securities are
speculative in a high degree and may be in default. A rating of CC by S&P means
there is a currently identifiable vulnerability to default. Below investment
grade securities and comparable unrated securities involve substantial risk of
loss, are considered highly speculative with respect to the issuer's ability to
pay interest and any required redemption or principal payments and are
susceptible to default or decline in market value due to adverse economic and
business developments. The descriptions of the investment grade and below
investment grade rating categories by Moody's and S&P, including a description
of their speculative characteristics, are set forth in the Statement of
Additional Information. All references to securities ratings by Moody's, S&P and
Fitch in this Prospectus shall, unless otherwise indicated, include all
securities within each such rating category (e.g., Baa1, Baa2 and Baa3 in the
case of Moody's and BBB+, BBB and BBB- in the case of S&P and Fitch). All
percentage and ratings limitations on securities in which the Fund may invest
apply at the time of making an investment and
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25
INVESTMENT OBJECTIVE AND PRINCIPAL INVESTMENT STRATEGIES
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shall not be considered violated if an investment rating is subsequently
downgraded to a rating that would have precluded the Fund's initial investment
in such security or weighted average portfolio. In the event of such security
downgrade, the Fund will sell the portfolio security as soon as the Adviser
believes it to be prudent to do so in order to again cause the Fund to be within
the percentage and ratings limitations set forth in this Prospectus. In the
event that the Fund disposes of a portfolio security subsequent to its being
downgraded, the Fund may experience a greater risk of loss than if such security
had been sold prior to such downgrade.
HEDGING AND INTEREST RATE TRANSACTIONS
The Fund may, but is not required to, use various hedging and interest rate
transactions described below to earn income, facilitate portfolio management and
mitigate risks. Such transactions are generally accepted under modern portfolio
management theory and are regularly used by many mutual funds and other
institutional investors. Although the Adviser seeks to use such practices to
further the Fund's investment objective, no assurance can be given that these
practices will achieve this result.
The Fund may purchase and sell derivative instruments such as exchange-listed
and over-the-counter put and call options on securities, equity, fixed income
and interest rate indices, and other financial instruments, purchase and sell
financial futures contracts and options thereon, enter into various interest
rate transactions such as swaps, caps, floors or collars or credit transactions
and credit default swaps. The Fund also may purchase derivative instruments that
combine features of these instruments. Collectively, all of the above are
referred to as "Strategic Transactions." The Fund generally seeks to use
Strategic Transactions as a portfolio management or hedging technique to seek to
protect against possible adverse changes in the market value of securities held
in or to be purchased for the Fund's portfolio, protect the value of the Fund's
portfolio, facilitate the sale of certain securities for investment purposes,
manage the effective interest rate exposure of the Fund, including the effective
yield paid on any preferred shares issued by the Fund, manage the effective
maturity or duration of the Fund's portfolio, or establish positions in the
derivatives markets as a temporary substitute for purchasing or selling
particular securities. Income payments received by the Fund from Strategic
Transactions generally will not be eligible for treatment as tax-advantaged
dividends.
Strategic Transactions have risks, including the imperfect correlation between
the value of such instruments and the underlying assets, the possible default of
the other party to the transaction or illiquidity of the derivative instruments.
Furthermore, the ability to successfully use Strategic Transactions depends on
the Adviser's ability to predict pertinent market movements, which cannot be
assured. Thus, the use of Strategic Transactions may result in losses greater
than if they had not been used, may require the Fund to sell or purchase
portfolio securities at inopportune times or for prices other than current
market values, may limit the amount of appreciation the Fund can realize on an
investment, or may cause the Fund to hold a security that it might otherwise
sell. Additionally, amounts paid by the Fund as premiums and cash or other
assets held in margin accounts with respect to Strategic Transactions are not
otherwise available to the Fund for investment purposes.
A more complete discussion of Strategic Transactions and their risks is
contained in the Statement of Additional Information.
TEMPORARY DEFENSIVE STRATEGIES
There may be times when, in the Adviser's judgment, conditions in the securities
market would make pursuit of the Fund's investment strategies inconsistent with
achievement of the Fund's investment objective. At such times, the Adviser may
employ alternative strategies primarily to seek to reduce fluctuations in the
value of the Fund's assets. In implementing these temporary defensive
strategies, depending on the circumstances, the Fund may invest an unlimited
portion of its portfolio in U.S. dollar denominated corporate debt securities,
short-term money market instruments, U.S. government
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26
INVESTMENT OBJECTIVE AND PRINCIPAL INVESTMENT STRATEGIES
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securities and cash. It is impossible to predict when, or for how long, the Fund
may use these alternative strategies.
OTHER INVESTMENT POLICIES
SHORT SALES
The Fund may sell a security short if it owns at least an equal amount of the
security sold short or another security convertible or exchangeable for an equal
amount of the security sold short without payment of further compensation (a
short sale against-the-box). In a short sale against-the-box, the short seller
is exposed to the risk of being forced to deliver stock that it holds to close
the position if the borrowed stock is called in by the lender, which would cause
gain or loss to be recognized on the delivered stock.
The ability to use short sales against-the-box, certain equity swaps and certain
equity collar strategies as a tax-efficient management technique with respect to
holdings of appreciated securities is limited to circumstances in which the
hedging transaction is closed out within 30 days after the end of the Fund's
taxable year and the underlying appreciated securities position is held unhedged
for at least the next 60 days after the hedging transaction is closed and
certain other conditions are met. Not meeting these requirements would trigger
the recognition of gain on the underlying appreciated securities position under
the federal tax laws applicable to constructive sales. Dividends received on
securities with respect to which the Fund is obligated to make related payments
with respect to positions in substantially similar or related property (pursuant
to short sales or otherwise) will be treated as fully taxable ordinary income
(i.e., income other than tax-advantaged dividends).
REPURCHASE AGREEMENTS
The Fund may enter into repurchase agreements with broker-dealers, member banks
of the Federal Reserve System and other financial institutions. Repurchase
agreements are arrangements under which the Fund purchases securities and the
seller agrees to repurchase the securities within a specific time and at a
specific price. The repurchase price is generally higher than the Fund's
purchase price, with the difference being income to the Fund. Under the
direction of the Board of Trustees, the Adviser reviews and monitors the
creditworthiness of any institution which enters into a repurchase agreement
with the Fund. The counterparty's obligations under the repurchase agreement are
collateralized with U.S. Treasury and/or agency obligations with a market value
of not less than 100% of the obligations, valued daily. Collateral is held by
the Fund's custodian in a segregated, safekeeping account for the benefit of the
Fund. Repurchase agreements afford the Fund an opportunity to earn income on
temporarily available cash at low risk. In the event of commencement of
bankruptcy or insolvency proceedings with respect to the seller of the security
before repurchase of the security under a repurchase agreement, the Fund may
encounter delay and incur costs before being able to sell the security. Such a
delay may involve loss of interest or a decline in price of the security. If the
court characterizes the transaction as a loan and the Fund has not perfected a
security interest in the security, the Fund may be required to return the
security to the seller's estate and be treated as an unsecured creditor of the
seller. As an unsecured creditor, the Fund would be at risk of losing some or
all of the principal and interest involved in the transaction. Income payments
received by the Fund from repurchase agreements generally will not be eligible
for treatment as tax-advantaged dividends.
LENDING OF PORTFOLIO SECURITIES
The Fund may lend portfolio securities to registered broker-dealers or other
institutional investors deemed by the Adviser to be of good standing under
agreements which require that the loans be secured continuously by collateral in
cash, cash equivalents or U.S. Treasury bills maintained on a current basis at
an amount at least equal to the market value of the securities loaned. The Fund
continues to receive the equivalent of the interest or dividends paid by the
issuer on the securities loaned as well as the benefit of an increase and the
detriment of any decrease in the market value of
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27
INVESTMENT OBJECTIVE AND PRINCIPAL INVESTMENT STRATEGIES
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the securities loaned and would also receive compensation based on investment of
the collateral. The Fund would not, however, have the right to vote any
securities having voting rights during the existence of the loan, but would call
the loan in anticipation of an important vote to be taken among holders of the
securities or of the giving or withholding of consent on a material matter
affecting the investment.
As with other extensions of credit, there are risks of delay in recovery or even
loss of rights in the collateral should the borrower of the securities fail
financially. The Fund will lend portfolio securities only to firms that have
been approved in advance by the Board of Trustees, which will monitor the
creditworthiness of any such firms. At no time would the value of the securities
loaned exceed 33 1/3% of the value of the Fund's total assets. Income realized
by the Fund from securities lending and payments in lieu of dividends on loaned
stock will not be eligible for treatment as tax-advantaged dividends.
WHEN-ISSUED AND DELAYED DELIVERY PURCHASES
The Fund may make contracts to purchase securities on a "when-issued" or
"delayed delivery" basis. Pursuant to such contracts, delivery and payment for
the securities occurs at a date later than the customary settlement date. The
payment obligations and the interest rate on the securities will be fixed at the
time the Fund enters into the commitment, but interest will not accrue to the
Fund until delivery of and payment for the securities is made. An amount of cash
or high quality securities equal to the amount of the Fund's commitment will be
deposited in a segregated account at the Fund's custodian to secure the Fund's
obligation. Although the Fund would generally purchase securities on a
when-issued or delayed delivery basis with the intention of actually acquiring
the securities for its portfolio (or for delivery pursuant to options or futures
contracts it has entered into) and not for leverage purposes, the Fund could
dispose of a security prior to settlement if the Adviser deemed it advisable.
The purchase of securities on a when-issued or delayed delivery basis involves a
risk of loss if the value of the security to be purchased declines prior to the
settlement date. This risk is in addition to the risk of a decline in value of
the Fund's other assets. Furthermore, when such purchases are made through a
dealer, the dealer's failure to consummate the sale may result in the loss to
the Fund of an advantageous yield or price.
PORTFOLIO TURNOVER
The Fund may engage in portfolio trading when considered appropriate, but
short-term trading, other than pursuant to a dividend capture program, will not
be used as the primary means of achieving the Fund's investment objective.
Although the Fund cannot accurately predict its annual portfolio turnover rate,
it is not expected to exceed 100% under normal circumstances. However, there are
no limits on the rate of portfolio turnover, and investments may be sold without
regard to length of time held when, in the opinion of the Adviser, investment
considerations warrant such action. To the extent the Fund engages in dividend
capture strategies, the portfolio turnover rate will increase and may exceed
100%. A higher portfolio turnover rate results in correspondingly greater
brokerage commissions and other transactional expenses that are borne by the
Fund. High portfolio turnover may result in the realization of net short-term
capital gains by the Fund which, when distributed to shareholders, will be
taxable as ordinary income (i.e., income other than tax-advantaged dividends).
See "U.S. federal income tax matters."
Risk factors
Investing in the Fund involves risk, including the risk that you may receive
little or no return on your investment or that you may lose part or all of your
investment. Therefore, before investing you should consider carefully the
following risks that you assume when you invest in APS.
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28
RISK FACTORS
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RISKS OF INVESTMENT IN PREFERRED SHARES
AUCTION RISK
The dividend rate for the APS normally is set through an auction process. In the
Auction, holders of APS may indicate the dividend rate at which they would be
willing to hold or sell their APS or purchase additional APS. The Auction also
provides liquidity for the sale of APS. You may not be able to sell your APS at
an Auction if the Auction fails. An Auction fails if there are more APS offered
for sale than there are buyers. If Sufficient Clearing Bids do not exist in an
Auction, the Applicable Rate will be the Maximum Applicable Rate, and in such
event, owners of APS wishing to sell will not be able to sell all, and may not
be able to sell any, of such APS in the Auction. As a result, your investment in
APS may be illiquid. Neither the Broker-Dealers nor the Fund is obligated to
purchase APS in an Auction or otherwise, nor is the Fund required to redeem APS
in the event of a failed Auction. Also, if you place Hold Orders (orders to
retain APS) at an Auction only at a specified rate and that bid rate exceeds the
Applicable Rate set at the Auction, you will not retain your APS. Additionally,
if you buy APS or elect to retain APS without specifying a dividend rate below
which you would not wish to buy or continue to hold those APS, you could receive
a lower rate of return on your APS than the market rate. Finally, the dividend
period for the APS may be changed by the Fund, subject to certain conditions
with notice to the holders of APS, which could also effect the liquidation of
your investment. See "Description of Preferred Shares" and "The Auction--AUCTION
PROCEDURES."
RATINGS AND ASSET COVERAGE RISK
While it is expected that Moody's will assign a rating of "Aaa" to the APS and
S&P will assign a rating of "AAA" to the APS, such rating does not eliminate or
necessarily mitigate the risks of investing in APS. Moody's or S&P could
downgrade its rating of the APS or withdraw its rating of the APS at any time,
which may make your APS less liquid at an Auction or in the secondary market. If
Moody's or S&P downgrades the APS, the Fund may alter its portfolio or redeem
APS in an effort to improve the rating, although there is no assurance that it
will be able to do so to the extent necessary to restore the prior rating. If
the Fund fails to satisfy the asset coverage ratios discussed under "Description
of Preferred Shares--RATING AGENCY GUIDELINES AND ASSET COVERAGE," the Fund will
be required to redeem a sufficient number of APS in order to return to
compliance with the asset coverage ratios. The Fund may be required to redeem
APS at a time when it is not advantageous for the Fund to make such redemption
or to liquidate portfolio securities in order to have available cash for such
redemption. The Fund may voluntarily redeem APS under certain circumstances in
order to meet asset maintenance tests. While a sale of substantially all the
assets of the Fund or the merger of the Fund into another entity would require
the approval of the holders of the APS voting as a separate class as discussed
under "Description of Preferred Shares--VOTING RIGHTS," a sale of substantially
all the assets of the Fund or the merger of the Fund with or into another entity
would not be treated as a liquidation of the Fund nor require that the Fund
redeem the APS, in whole or in part, provided that the Fund continued to comply
with the asset coverage ratios discussed under "Description of Preferred
Shares--RATING AGENCY GUIDELINES AND ASSET COVERAGE." See "Description of
Preferred Shares--RATING AGENCY GUIDELINES AND ASSET COVERAGE" for a description
of the asset maintenance tests the Fund must meet.
SECONDARY MARKET RISK
If you try to sell your APS between Auctions, you may not be able to sell any or
all of your APS, or you may not be able to sell them for $25,000 per share or
$25,000 per share plus accumulated dividends. If the Fund has designated a
Special Dividend Period (a rate period of more than seven days for any series),
changes in interest rates could affect the price you would receive if you sold
your APS of that series in the secondary market. An increase in the level of
interest rates likely will have an adverse effect on the secondary market price
of the APS. You may transfer APS outside of Auctions only to or through a
Broker-Dealer that has entered into an agreement with the Fund's Auction Agent,
Deutsche Bank Trust Company Americas, and the Fund or other person as the Fund
permits. The
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RISK FACTORS
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Fund does not anticipate imposing significant restrictions on transfers to other
persons. However, unless any such other person has entered into a relationship
with a Broker-Dealer that has entered into a Broker-Dealer agreement with the
Auction Agent, that person will not be able to submit Bids at Auctions with
respect to the APS. Broker-Dealers that maintain a secondary trading market for
APS are not required to maintain this market, and the Fund is not required to
redeem APS if an Auction or an attempted secondary market sale fails because of
a lack of buyers. The APS will not be listed on any stock exchange or the Nasdaq
National Market. If you sell your APS to a Broker-Dealer between Auctions, you
may receive less than the price you paid for them, especially if market interest
rates have risen since the last Auction.
INTEREST RATE RISK
The APS pay dividends based on short-term interest rates. The Fund may invest
the proceeds from the issuance of the APS in dividend-paying common and
preferred securities which bear dividends or interest rates reflecting
intermediate and long-term interest rates. The interest or dividend rates on
equity securities are typically, although not always, higher than shorter-term
interest rates. Both shorter-term and intermediate to longer-term interest rates
may fluctuate. The dividend yield on the equity securities in the Fund's
portfolio will be influenced by a number of factors. If shorter-term interest
rates rise, dividend rates on the APS may rise so that the amount of dividends
to be paid to holders of APS may exceed the income from the equity securities
and other investments purchased by the Fund with the proceeds from the sale of
APS. Because income from the Fund's entire investment portfolio (not just the
portion of the portfolio purchased with the proceeds of the APS offering) is
available to pay dividends on the APS, however, dividend rates on the APS would
need to exceed the rate of return on the Fund's investment portfolio by a wide
margin before the Fund's ability to pay dividends on the APS would be
jeopardized. If intermediate- to longer-term interest rates rise, this could
negatively impact the value of the Fund's investment portfolio, reducing the
amount of assets serving as asset coverage for the APS.
LEVERAGE RISK
The Fund expects to use financial leverage on an ongoing basis for investment
purposes. Leverage risk includes the risk associated with the issuance of APS to
leverage the Common Shares. If the dividend rate on the APS exceeds the net rate
of return on the Fund's portfolio, the leverage will result in a lower net asset
value than if the Fund were not leveraged, and the Fund's ability to pay
dividends and meet its asset coverage requirements on the APS would be reduced.
Similarly, any decline in the net asset value of the Fund's investments could
result in the Fund being in danger of failing to meet its asset coverage
requirements or of losing its expected "Aaa/AAA" rating on the APS or, in an
extreme case, the Fund's current investment income might not be sufficient to
meet the dividend requirements on the APS. To counteract such an event, the Fund
might need to liquidate investments in order to fund a redemption of some or all
of the APS.
It is currently anticipated that, taking into account the APS being offered in
this Prospectus, the initial amount of leverage will represent approximately 34%
of the Fund's total capital.
The Fund's leveraged capital structure creates special risks not associated with
unleveraged funds having a similar investment objective and policies. These
include the possibility of higher volatility of the net asset value of the Fund
and the Preferred Shares' asset coverage.
While the Fund may from time to time consider reducing leverage in response to
actual or anticipated changes in interest rates in an effort to mitigate the
increased volatility of current income and net asset value associated with
leverage, there can be no assurance that the Fund will actually reduce leverage
in the future or that any reduction, if undertaken, will be effective. Changes
in the future direction of interest rates are very difficult to predict
accurately. If the Fund were to reduce leverage based on a prediction about
future changes to interest rates and that prediction turned out to be incorrect,
the reduction in leverage would likely operate to reduce the Fund's net asset
value relative to the
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30
RISK FACTORS
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circumstance where the Fund had not reduced leverage. The Fund may decide that
this risk outweighs the likelihood of achieving the desired reduction to
volatility in income and net asset value if the prediction were to turn out to
be correct, and determine not to reduce leverage as described above.
Because the fee paid to the Adviser will be calculated on the basis of the
Fund's managed assets (which equals the aggregate net asset value of the Common
Shares plus the liquidation preference of the APS), the fee will be higher when
leverage is utilized, giving the Adviser an incentive to utilize leverage.
RESTRICTIONS ON DIVIDENDS AND OTHER DISTRIBUTIONS
Restrictions imposed on the declaration and payment of dividends or other
distributions to the holders of the Fund's Common Shares and APS, both by the
1940 Act and by requirements imposed by Moody's, S&P or a Substitute Rating
Agency, might impair the Fund's ability to satisfy minimum distribution
requirements that it must satisfy to receive favorable treatment as a regulated
investment company for federal income tax purposes. While the Fund intends to
redeem APS to enable the Fund to distribute its income as required to maintain
its favorable tax treatment as a regulated investment company under the Code,
there can be no assurance that such redemptions can be effected in time to meet
the requirements of the Code. See "U.S. federal income tax matters."
GENERAL RISKS OF INVESTING IN THE FUND
GENERAL
The Fund is a diversified, closed-end management investment company designed
primarily as a long-term investment and not as a trading tool. An investment in
the Fund's APS may be speculative in that it involves risk. The Fund should not
constitute a complete investment program and should only be considered as an
addition to an investor's existing diversified portfolio of investments. Due to
the uncertainty in all investments, there can be no assurance that the Fund will
achieve its investment objective.
LIMITED OPERATING HISTORY
The Fund is a recently organized, closed-end management investment company which
has been operational for approximately two months.
TAX RISK
The value of the Fund's investments and its net asset value may be adversely
affected by changes in tax rates and policies. Because the Fund's investment
objective is to provide a high level of after-tax total return, the
attractiveness of investing in common and preferred securities that pay
tax-advantaged dividends in relation to other investment alternatives will be
affected by changes in federal income tax laws and regulations, including
changes in the tax-advantaged dividend provisions. Absent further legislation,
higher tax rates will apply to taxable years beginning after December 31, 2008.
Under current law, tax-advantaged dividends are taxed at a maximum federal
income tax rate of 15%. Any proposed or actual changes in such rates, therefore,
can significantly affect the after-tax returns of the Fund's investments in
equity securities. This could in turn affect the Fund's net asset value and
ability to acquire and dispose of equity securities at desirable returns and
price levels. There can be no assurance as to the portion of the Fund's
dividends that will be tax-advantaged. Additionally, the Fund is not a suitable
investment for IRAs, for other tax-exempt or tax-deferred accounts or for
investors who are not sensitive to the federal income tax consequences of their
investments. For an individual holder of APS to receive tax-advantaged dividends
from the Fund, the shareholder, in addition to other requirements, must have
held his or her APS for more than 91 days during the 181-day period beginning 90
days before the ex-dividend date. Although current law only provides a 180-day
period for holding such stock, a proposed technical correction to the law would
extend such period to 181 days. The Treasury Department and the Internal Revenue
Service have announced that taxpayers may apply the extended periods as if the
legislation were already enacted in filing their federal income
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RISK FACTORS
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tax returns. Consequently, short-term investors in the Fund will not realize the
benefits of tax-advantaged dividends.
COMMON STOCK RISK
The common stocks and other equity securities in which the Fund invests may
experience substantial volatility in their market value. Common stocks are
susceptible to adverse changes in market value due to issuer specific events,
such as unfavorable earnings reports, negative press releases and market related
news. The market values of common stocks are also sensitive to changes in
investor perceptions as well as general movements in the equities markets.
Common stockholders are also subordinate to debt holders and other senior
security holders in an issuer's capital structure, and a common stock may not
have any value in the event the issuer declares bankruptcy or is subject to the
claims of creditors if the value of the issuer's assets does not exceed the
issuer's liabilities. Common stock prices may be sensitive to rising interest
rates, as the costs of capital or borrowing increase. Common stocks are also
subject to the general risks of the issuer's industry, sector, geographic region
and market capitalization.
The Fund may invest its portfolio of equity securities in companies of any
market capitalization. Small-capitalization companies and their equity
securities are likely to be more sensitive to changes in the economy, earnings
results and investor perceptions, have limited product lines and capital
resources, experience sharper swings in market values, and may be more difficult
to sell than those of larger-capitalization companies.
PREFERRED SECURITIES RISK
There are special risks associated with investing in preferred securities:
+ LIMITED VOTING RIGHTS. Generally, holders of preferred securities (such as
the Fund) have no voting rights with respect to the issuing company unless
preferred dividends have been in arrears for a specified number of periods at
which time the preferred security holders may elect a number of trustees to
the issuer's board. Generally, once the issuer pays all the arrearages, the
preferred security holders no longer have voting rights.
+ SPECIAL REDEMPTION RIGHTS. In certain varying circumstances, an issuer of
preferred securities may redeem the securities prior to a specified date. For
instance, for certain types of preferred securities, a redemption may be
triggered by a change in federal income tax or securities laws. As with call
provisions, a special redemption by the issuer may negatively impact the
return of the security held by the Fund.
+ DEFERRAL. Preferred securities may include provisions that permit the
issuer, at its discretion, to defer distributions for a stated period without
any adverse consequences to the issuer. If the Fund owns a preferred security
that is deferring its distributions, the Fund may be required to report
income for tax purposes although it has not yet received such income.
+ SUBORDINATION. Preferred securities are subordinated to bonds and other debt
instruments in a company's capital structure in terms of priority to
corporate income and liquidation payments, and therefore will be subject to
greater credit risk than more senior debt instruments.
+ LIQUIDITY. Preferred securities may be substantially less liquid than many
other securities, such as common stocks or U.S. government securities.
+ SUPPLY OF TAXABLE PREFERRED SECURITIES. The Financial Accounting Standards
Board is reviewing accounting guidelines relating to taxable preferred
securities. To the extent that a change in the guidelines could adversely
affect the market for, and availability of, these securities, the Fund may be
adversely affected.
+ NEW TYPES OF SECURITIES. From time to time, preferred securities, including
taxable preferred securities, have been, and may in the future be, offered
having features other than those described
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RISK FACTORS
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herein. The Fund reserves the right to invest in these securities if the Adviser
believes that doing so would be consistent with the Fund's investment objective
and principal investment strategies. Since the market for these instruments
would be new, the Fund may have difficulty disposing of them at a suitable
price and time. In addition to limited liquidity, these instruments may
present other risks, such as high price volatility.
INTEREST RATE RISK
Interest rate risk is the risk that fixed income securities will decline in
value because of changes in market interest rates. When market interest rates
rise, the market value of such securities generally will fall. To the extent the
Fund invests in securities that primarily trade on the basis of yield, the net
asset value and market price of the common shares will tend to decline if market
interest rates rise. Interest rates are currently low relative to historical
levels, and interest rates may rise in the short- to intermediate-term if the
economy continues to show strength. Fixed income securities with longer
maturities are generally more sensitive to changes in interest rates than those
with shorter maturities.
Fixed income securities are subject to certain common risks, including:
+ if interest rates go up, the value of fixed income securities in the Fund's
portfolio generally will decline
+ during periods of declining interest rates, the issuer of a security may
exercise its option to prepay principal earlier than scheduled, forcing the
Fund to reinvest in lower yielding securities. This is known as call or
prepayment risk. Preferred securities and other fixed income securities
frequently have call features that allow the issuer to repurchase the
security prior to its stated maturity. An issuer may redeem an obligation if
the issuer can refinance the debt at a lower cost due to declining interest
rates or an improvement in the credit standing of the issuer
+ during periods of rising interest rates, the average life of certain types of
securities may be extended because of the right of the issuer to defer
payments or make slower than expected principal payments. This may lock in a
below market interest rate, increase the security's duration (the estimated
period until the security is paid in full) and reduce the value of the
security. This is known as extension risk
INDUSTRY CONCENTRATION RISK
The Fund will concentrate its investments (i.e., invest at least 25% of its net
assets) in securities issued or guaranteed by U.S. corporations in the groups of
related industries comprising each of the utilities sector and the financial
services sector.
The utilities industries in which the Fund may invest include companies engaged
in:
+ the generation, transmission, sale or distribution of electric energy
+ the distribution, purification and treatment of water
+ the provision of sewage management, treatment or other sanitary services
+ the production, transmission or distribution of natural gas
+ the provision of pollution control or abatement services
The Fund's emphasis on securities of utilities issuers makes it more susceptible
to adverse conditions affecting that sector than a fund that does not have its
assets invested to a similar degree in such issuers. Issuers in the utilities
sector are subject to a variety of factors that may adversely affect their
business or operations, including:
+ high interest costs in connection with capital construction programs
+ governmental regulation of rates charged to customers
+ costs associated with environmental and other regulations
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RISK FACTORS
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+ the effects of economic slowdowns and surplus capacity
+ increased competition from other providers of utility services
+ technological innovations that may render existing plants, equipment or
products obsolete
+ inexperience with and potential losses resulting from a developing
deregulatory environment, including losses and regulatory issues in
connection with energy trading
+ increased costs and reduced availability of certain types of fuel,
occasionally reduced availability and high costs of natural gas for resale,
the effects of energy conservation, and the potential that costs incurred by
the utility, such as the cost of fuel, change more rapidly than the rate the
utility is permitted to charge its customers
+ the effects of a national energy policy and lengthy delays and greatly
increased costs and other problems associated with the design, construction,
licensing, regulation and operation of nuclear facilities for electric
generation, including, among other considerations, the problems associated
with the use of radioactive materials and the disposal of radioactive wastes
There are substantial differences between the regulatory practices and policies
of various jurisdictions, and any given regulatory agency may make major shifts
in policy from time to time. There is no assurance that regulatory authorities
will, in the future, grant rate increases or that such increases will be
adequate to permit the payment of dividends on preferred or common stocks.
Additionally, existing and possible future regulatory legislation may make it
even more difficult for these utilities to obtain adequate relief. Certain of
the issuers of securities held in the Fund's portfolio may own or operate
nuclear generating facilities. Governmental authorities may from time to time
review existing policies and impose additional requirements governing the
licensing, construction and operation of nuclear power plants. Prolonged changes
in climatic conditions can also have a significant impact on both the revenues
of an electric and gas utility as well as the expenses of a utility,
particularly a hydro-based electric utility.
The nature of regulation of the utilities industries is evolving both in the
United States and in foreign countries. In recent years, changes in regulation
in the United States increasingly have allowed utility companies to provide
services and products outside their traditional geographic areas and lines of
business, creating new areas of competition within the industries. In some
instances, utility companies are operating on an unregulated basis. Because of
trends toward deregulation and the evolution of independent power producers as
well as new entrants, non-regulated providers of utility services have become a
significant part of their respective industries. The emergence of competition
and deregulation may result in certain utility companies being able to earn more
than their traditional regulated rates of return, while others may be forced to
defend their core business from increased competition and may be less
profitable. Reduced profitability, as well as new uses of funds (such as for
expansion, operations or stock buybacks) could result in cuts in dividend payout
rates.
In addition, the Fund will concentrate its investments in the group of related
industries comprising the financial services sector. The industries in the
financial services sector include:
+ bank holding companies
+ commercial banks
+ savings and loans associations
+ brokerage and investment companies
+ life, property, casualty and multi-line insurance companies
+ consumer and industrial finance companies
These industries are subject to extensive regulation at the federal and/or state
level and, to the extent that they operate internationally, in other countries.
These regulations have undergone substantial
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RISK FACTORS
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change in the past two decades and are likely to continue to experience change
in the coming years. Significant developments in the financial services sector
have included deregulation of interest rates, increased competition with other
types of financial institutions, regional expansion, increased numbers of
mergers and acquisitions, and increases in capital requirements. Governmental
regulation may limit a financial service business's activities as well as the
ability to earn a profit. Each of these industries may also be significantly
affected by intense competitive pressures, including market share and price
competition and by changes in prevailing interest rates, general economic
conditions and industry specific risks. The earnings of issuers in the financial
services sector, and particularly the banking industry, may be sensitive to
certain economic factors, such as interest rate changes or depressed market
conditions both nationally and in regions or the industries serviced by
institutions in this sector. The companies in which the Fund may invest also may
be exposed to risks from creating, dealing or holding derivative instruments.
The revenue and income from brokerage and investment management companies can be
significantly affected by changes in the equity and fixed income markets. The
insurance industry can be significantly affected by interest rates, general
economic conditions, and price and marketing competition. Property and casualty
insurance profits can be affected by weather catastrophes and other natural
disasters. Life and health insurance profits can be affected by mortality and
morbidity rates. Insurance companies can be adversely affected by inadequacy of
cash reserves, the inability to collect from reinsurance carriers, as well as
other anticipated and unanticipated liabilities. Insurance companies are also
subject to extensive government regulation, including the imposition of maximum
rate levels, and may be adversely affected by potential tax law changes.
The enactment of new legislation and regulation, as well as changes in the
interpretation and enforcement of existing laws and regulations, may directly
affect the manner of operations and profitability of participants in the
financial services sector. From time to time, changes in law and regulation have
permitted greater diversification of their financial products, but their ability
to expand by acquisition or branching across state lines and to engage in
non-banking activities continues to be limited. Federal or state law and
regulations require banks, bank holding companies, broker-dealers and insurance
companies to maintain minimum levels of capital and liquidity. Bank regulators
have broad authority and can impose sanctions, including conservatorship or
receivership, on non-complying banks even when these banks continue to be
solvent, thereby possibly resulting in the elimination of stockholders' equity.
Fiscal and monetary policies and general economic and political conditions can
affect the availability and cost of funds to the industries within the financial
services sector, loan demand and asset quality, thereby impacting the earnings
and financial condition of such institutions in those industries. Downturns in a
regional or local economy or in a general business cycle or depressed conditions
in an industry, for example, may adversely affect the quality or volume of a
financial services business's loan portfolio and the value of the collateral,
including real estate, held with respect to such loans, particularly if the loan
portfolio is concentrated in the affected region or industry.
Section 12(d)(3) of the 1940 Act and the rules and regulations enacted thereto
limit the acquisition by registered investment companies of securities of
issuers engaged in securities-related activities. The Adviser believes that
these limitations will not compromise the Fund's ability to concentrate its
investments in the securities of issuers in the financial services sector or
materially adversely affect the Fund's ability to achieve its investment
objective.
CREDIT RISK
Credit risk is the risk that fixed income securities, including preferred
securities, in the Fund's portfolio will decline in price or fail to make
dividend payments when due because the issuer of the security experiences a
decline in its financial status. Although the Fund will primarily invest in
investment grade securities, the Fund is authorized to invest up to 20% of its
total assets in preferred stocks and fixed
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RISK FACTORS
--------------------------------------------------------------------------------
income securities that are rated below investment grade at the time of
acquisition. These securities may be rated as low as Ca by Moody's and CC by
S&P, provided that the Fund will not invest more than 5% of its total assets in
securities rated below B at the time of investment. Securities rated Baa by
Moody's are considered by Moody's as medium to lower-medium grade securities;
they are neither highly protected nor poorly secured; dividend or interest
payments and capital or principal security, as the case may be, appear to
Moody's to be adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over time; and in the opinion of
Moody's, securities in this rating category lack outstanding investment
characteristics and in fact have speculative characteristics as well. Securities
rated BBB by S&P are regarded by S&P as having an adequate capacity to pay
dividends or interest and repay capital or principal, as the case may be;
whereas such securities normally exhibit adequate protection parameters, adverse
economic conditions or changing circumstances are more likely, in the opinion of
S&P, to lead to a weakened capacity to pay dividends or interest and repay
capital or principal for securities in this category than in higher rating
categories. A rating of Ca by Moody's means the securities are speculative in a
high degree and may be in default. A rating of CC by S&P means there is a
currently identifiable vulnerability to default. Below investment grade
securities and comparable unrated securities involve substantial risk of loss,
are considered highly speculative with respect to the issuer's ability to pay
interest and any required redemption or principal payments and are susceptible
to default or decline in market value due to adverse economic and business
developments. The ratings of Moody's, S&P and Fitch represent their opinions as
to the quality of those securities that they rate; ratings are relative and
subjective and are not absolute standards of quality.
CONVERTIBLE SECURITIES
The Fund may invest in convertible securities. Convertible preferred securities
generally offer lower interest or dividend yields than non-convertible
securities of similar quality. As with all fixed income securities, market
values of convertible securities tend to decline as interest rates increase and,
conversely, to increase as interest rates decline. However, when the market
price of the common stock underlying a convertible security exceeds the
conversion price, the convertible security tends to reflect the market price of
the underlying common stock. As the market price of the underlying common stock
declines, the convertible security tends to trade increasingly on a yield basis
and thus may not decline in price to the same extent as the underlying common
stock. Convertible securities rank senior to common stock in an issuer's capital
structure and consequently entail less risk than the issuer's common stock. The
Fund may invest in convertible securities of any maturity and will determine
whether to hold, sell or convert any security in which it has invested depending
upon the Adviser's outlook for the market value for such security and the
security into which it converts. Income payments received by the Fund on
convertible fixed income obligations will not be eligible for treatment as
tax-advantaged dividends; dividend payments received by the Fund on convertible
preferred stocks may be eligible for treatment as tax-advantaged dividends.
ILLIQUID SECURITIES
The Fund may invest up to 20% of its total assets in illiquid securities.
Illiquid securities may be difficult to dispose of at a fair price at the times
when the Adviser believes it is desirable to do so. The market price of illiquid
securities generally is more volatile than that of more liquid securities, which
may adversely affect the price that the Fund pays for or recovers upon the sale
of illiquid securities. Illiquid securities are also more difficult to value and
the Adviser's judgment may play a greater role in the valuation process.
Investment of the Fund's assets in illiquid securities may restrict the Fund's
ability to take advantage of market opportunities. The risks associated with
illiquid securities may be particularly acute in situations in which the Fund's
operations require cash and could result in the Fund borrowing to meet its
short-term needs or incurring losses on the sale of illiquid securities.
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36
RISK FACTORS
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FOREIGN SECURITIES
Although the Fund will invest primarily in the securities of U.S. issuers, the
Fund may invest up to 20% of its total assets in securities of corporate and
governmental issuers located outside the U.S. Although the Fund only invests in
securities of non-U.S. issuers that are traded or denominated in U.S. dollars,
the Fund's investments in non-U.S. issuers may involve unique risks compared to
investing in securities of U.S. issuers. These risks are more pronounced to the
extent that the Fund invests a significant portion of its non-U.S. investments
in one region or in the securities of emerging market issuers. These risks may
include:
+ less information about non-U.S. issuers or markets may be available due to
less rigorous disclosure, accounting standards or regulatory practices
+ many non-U.S. markets are smaller, less liquid and more volatile, and in a
changing market, the Adviser may not be able to sell the Fund's portfolio
securities at times, in amounts and at prices it considers reasonable
+ currency exchange rates or controls may adversely affect the value of the
Fund's investments
+ the economies of non-U.S. countries may grow at slower rates than expected or
may experience a downturn or recession
+ economic, political and social developments may adversely affect the
securities markets
+ withholdings and other non-U.S. taxes may decrease the Fund's return
There may be less publicly available information about non-U.S. markets and
issuers than is available with respect to U.S. securities and issuers. Non-U.S.
companies generally are not subject to accounting, auditing and financial
reporting standards, practices and requirements comparable to those applicable
to U.S. companies. The trading markets for most non-U.S. securities are
generally less liquid and subject to greater price volatility than the markets
for comparable securities in the U.S. The markets for securities in certain
emerging markets are in the earliest stages of their development. Even the
markets for relatively widely traded securities in certain non-U.S. markets,
including emerging market countries, may not be able to absorb, without price
disruptions, a significant increase in trading volume or trades of a size
customarily undertaken by institutional investors in the U.S. Additionally,
market making and arbitrage activities are generally less extensive in such
markets, which may contribute to increased volatility and reduced liquidity.
Economies and social and political climates in individual countries may differ
unfavorably from the U.S. Non-U.S. economies may have less favorable growth
rates of gross domestic product, rates of inflation, currency valuation, capital
reinvestment, resource self-sufficiency and balance of payment positions. Many
countries have experienced substantial, and in some cases extremely high, rates
of inflation for many years. Inflation and rapid fluctuations in inflation rates
have had, and may continue to have, very negative effects on the economies and
securities markets of certain emerging countries. Unanticipated political or
social developments may also affect the value of the Fund's investments and the
availability to the Fund of additional investments in such countries.
DERIVATIVES
Strategic Transactions have risks, including the imperfect correlation between
the value of such instruments and the underlying assets, the possible default of
the other party to the transaction or illiquidity of the derivative instruments.
Furthermore, the ability to successfully use Strategic Transactions depends on
the Adviser's ability to predict pertinent market movements, which cannot be
assured. Thus, the use of Strategic Transactions may result in losses greater
than if they had not been used, may require the Fund to sell or purchase
portfolio securities at inopportune times or for prices other than current
market values, may limit the amount of appreciation the Fund can realize on an
investment or may cause the Fund to hold a security that it might otherwise
sell. Additionally,
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37
RISK FACTORS
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amounts paid by the Fund as premiums and cash or other assets held in margin
accounts with respect to Strategic Transactions are not otherwise available to
the Fund for investment purposes.
There are several risks associated with the use of futures contracts and futures
options. The purchase or sale of a futures contract may result in losses in
excess of the amount invested in the futures contract. While the Fund may enter
into futures contracts and options on futures contracts for hedging purposes,
the use of futures contracts and options on futures contracts might result in a
poorer overall performance for the Fund than if it had not engaged in any such
transactions. There may be an imperfect correlation between the Fund's portfolio
holdings and futures contracts or options on futures contracts entered into by
the Fund, which may prevent the Fund from achieving the intended hedge or expose
the Fund to risk of loss. The degree of imperfection of correlation depends on
circumstances such as variations in market demand for futures, options on
futures and their related securities, including technical influences in futures
and futures options trading, and differences between the securities markets and
the securities underlying the standard contracts available for trading. Further,
the Fund's use of futures contracts and options on futures contracts to reduce
risk involves costs and will be subject to the Adviser's ability to predict
correctly changes in interest rate relationships or other factors.
Depending on whether the Fund would be entitled to receive net payments from the
counterparty on a swap or cap, which in turn would depend on the general state
of short-term interest rates at that point in time, a default by a counterparty
could negatively impact the performance of the common shares. In addition, at
the time an interest rate swap or cap transaction reaches its scheduled
termination date, there is a risk that the Fund would not be able to obtain a
replacement transaction or that the terms of the replacement would not be as
favorable as on the expiring transaction. If this occurs, it could have a
negative impact on the performance of the common shares. If the Fund fails to
maintain the required 200% asset coverage of the liquidation value of any
outstanding preferred shares or if the Fund loses its expected rating on the
preferred shares or fails to maintain other covenants, the Fund may be required
to redeem some or all of the preferred shares. Similarly, the Fund could be
required to prepay the principal amount of any borrowings. Such redemption or
prepayment would likely result in the Fund seeking to terminate early all or a
portion of any swap or cap transaction. Early termination of a swap could result
in a termination payment by or to the Fund. Early termination of a cap could
result in a termination payment to the Fund. The Fund intends to maintain, in a
segregated account, cash or liquid securities having a value at least equal to
the Fund's net payment obligations under any swap transaction, marked to market
daily. The Fund will not enter into interest rate swap or cap transactions
having a notional amount that exceeds the outstanding amount of the Fund's
leverage.
The use of interest rate swaps and caps is a highly specialized activity that
involves investment techniques and risks different from those associated with
ordinary portfolio security transactions. Depending on the state of interest
rates in general, the Fund's use of interest rate swaps or caps could enhance or
harm the overall performance of the common shares. To the extent there is a
decline in interest rates, the value of the interest rate swap or cap could
decline, and could result in a decline in the net asset value of the common
shares. In addition, if short-term interest rates are lower than the Fund's
fixed rate of payment on the interest rate swap, the swap will reduce common
share net earnings. If, on the other hand, short-term interest rates are higher
than the fixed rate of payment on the interest rate swap, the swap will enhance
common share net earnings. Buying interest rate caps could enhance the
performance of the common shares by providing a maximum leverage expense. Buying
interest rate caps could also decrease the net earnings of the common shares in
the event that the premium paid by the Fund to the counterparty exceeds the
additional amount the Fund would have been required to pay had it not entered
into the cap agreement. The Fund has no current intention of selling an interest
rate swap or cap.
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RISK FACTORS
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Interest rate swaps and caps do not involve the delivery of securities or other
underlying assets or principal. Accordingly, the risk of loss with respect to
interest rate swaps is limited to the net amount of interest payments that the
Fund is contractually obligated to make. If the counterparty defaults, the Fund
would not be able to use the anticipated net receipts under the swap or cap to
offset the dividend payments on the Fund's preferred shares or interest payments
on borrowings. Depending on whether the Fund would be entitled to receive net
payments from the counterparty on the swap or cap, which in turn would depend on
the general state of short-term interest rates at that point in time, such a
default could negatively impact the performance of the common shares.
MARKET DISRUPTION AND GEOPOLITICAL RISK
The war with, and the continuing occupation of, Iraq may have a substantial
impact on the U.S. and world economies and securities markets. The nature, scope
and duration of such impact cannot be predicted with any certainty. Terrorist
attacks on the World Trade Center and the Pentagon on September 11, 2001 closed
some of the U.S. securities markets for a four-day period. Similar events and
market disruptions may occur in the future. Geopolitical risks have, and may in
the future, contribute to increased short-term market volatility and may have
adverse long-term effects on U.S. and world economies and markets generally.
Those events could also have an acute effect on individual issuers or related
groups of issuers.
Description of Preferred Shares
The following is a brief description of the material terms of the APS. This
description does not purport to be complete and is subject to, and qualified in
its entirety by reference to, the By-laws, including the provisions thereof
establishing the APS. The By-laws establishing the terms of the APS have been
filed as an exhibit to the Registration Statement of which this Prospectus is a
part.
The APS are preferred shares that entitle their holders to receive dividends
when, as and if declared by the Fund's Board of Trustees, out of funds legally
available therefor, at a rate per annum that may vary for successive Dividend
Periods for each such series of APS. The Applicable Rate for a particular
Dividend Period for the APS will be determined by an Auction conducted on the
Business Day before the start of such Dividend Period. Beneficial Owners and
Potential Beneficial Owners of APS may participate in Auctions, although, except
in the case of Special Dividend Periods of longer than 91 days, Beneficial
Owners desiring to continue to hold all of their APS regardless of the
Applicable Rate resulting from Auctions need not participate in order to
continue to hold their APS. For an explanation of Auctions and the method of
determining the Applicable Rate, see "--DIVIDENDS AND DIVIDEND PERIODS" below
and "The Auction."
The nominee of the Securities Depository is expected to be the sole holder of
record of the APS. Accordingly, each purchaser of APS must rely on (i) the
procedures of the Securities Depository and, if such purchaser is not a member
of the Securities Depository, such purchaser's Agent Member, to receive
dividends, distributions and notices and to exercise voting rights (if and when
applicable) and (ii) the records of the Securities Depository and, if such
purchaser is not a member of the Securities Depository, such purchaser's Agent
Member, to evidence its beneficial ownership of the APS.
The APS will rank on parity with each other and any other series of preferred
shares of the Fund as to the payment of dividends and the distribution of assets
upon liquidation. Each share of APS carries one vote on matters on which APS can
be voted. When issued and sold, the APS will have a liquidation preference of
$25,000 per share plus an amount equal to accumulated but unpaid dividends
(whether or not declared) and will be fully paid and, except as discussed under
"Certain provisions of the Agreement and Declaration of Trust and By-laws,"
non-assessable. See "--LIQUIDATION." The APS will not be convertible into Common
Shares or other shares of beneficial interest of the Fund, and the holders
thereof will have no preemptive rights. The APS will not be subject to any
sinking fund but will be
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39
DESCRIPTION OF PREFERRED SHARES
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subject to redemption at the option of the Fund on any Dividend Payment Date for
the APS (except during the Initial Dividend Period and during a Non-Call Period)
of such series at a redemption price of $25,000 per share plus accumulated and
unpaid dividends. In certain circumstances, the APS will be subject to mandatory
redemption by the Fund at a redemption price of $25,000 per share plus
accumulated and unpaid dividends. See "--REDEMPTION."
DIVIDENDS AND DIVIDEND PERIODS
The holders of APS will be entitled to receive, when, as and if declared by the
Board of Trustees, out of funds legally available therefor, cumulative cash
dividends on their shares, at the Applicable Rate determined as set forth below
under "--Calculation of dividend payment," payable on the dates set forth below.
Dividends on the APS so declared and payable will be paid in preference to and
in priority over any dividends so declared and payable on the Common Shares. The
following is a general description of dividends for the APS.
DIVIDEND PERIODS
The Initial Dividend Payment Date for each series of APS is set forth below. Any
subsequent Dividend Period will generally be seven (7) days for each series of
APS; provided, however, that prior to any Auction, the Fund may elect, subject
to certain limitations described herein and upon giving notice to Existing
Holders, a Special Dividend Period. See "--Designation of Special Dividend
Periods."
DIVIDEND PAYMENT DATES
Dividends on the APS will be payable, when, as and if declared by the Fund's
Board of Trustees, out of legally available funds in accordance with the
Agreement and Declaration of Trust, the By-laws and applicable law. Initial
Dividend Payment Dates are scheduled as follows:
INITIAL DIVIDEND
PAYMENT DATE
------------------------------------------------------------------------------
Series M.................................................... May 11, 2004
Series W.................................................... May 13, 2004
Series TH................................................... June 1, 2004(1)
Series F.................................................... May 17, 2004
(1) During the Initial Dividend Period of Series TH APS, dividends will be
payable monthly on the first Business Day of each month, commencing on June
1, 2004, and the final dividend payment with respect to the Initial
Dividend Period will be made on October 29, 2004. After the Initial
Dividend Period, dividends on Series TH APS will be paid weekly except
during a Special Dividend Period.
Following the Initial Dividend Payment Date, dividends on each series of APS
will be payable (i) with respect to any seven day Dividend Period or any
Short-Term Dividend Period of 35 or fewer days, on the Business Day next
succeeding the last day thereof or (ii) with respect to any Short-Term Dividend
Period of more than 35 days and with respect to any Long-Term Dividend Period,
monthly on the first Business Day of each calendar month during such Short-Term
Dividend Period or Long-Term Dividend Period and on the Business Day next
succeeding the last day thereof. If dividends are payable on a day that is not a
Business Day, then dividends will generally be payable on the next day if that
is a Business Day or as otherwise specified in the By-laws.
Dividends will be paid through the Securities Depository on each Dividend
Payment Date. The Securities Depository, in accordance with its current
procedures, is expected to distribute dividends received from the Fund in
next-day funds on each Dividend Payment Date to Agent Members. These Agent
Members are in turn expected to distribute such dividends to the persons for
whom they are acting as agents. However, each of the current Broker-Dealers has
indicated to the Fund that dividend payments will be available in same-day funds
on each Dividend Payment Date to customers that use such Broker-Dealer or that
Broker-Dealer's designee as Agent Member.
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40
DESCRIPTION OF PREFERRED SHARES
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CALCULATION OF DIVIDEND PAYMENT
The amount of cash dividends per share of APS of each series payable (if
declared) on the Initial Dividend Payment Date, the Dividend Payment Date of
each seven day Dividend Period and each Dividend Payment Date of each Short-Term
Dividend Period will be computed by multiplying the Applicable Rate for such
Dividend Period by a fraction, the numerator of which will be the number of days
in such Dividend Period or part thereof that such share was outstanding and for
which dividends are payable on such Dividend Payment Date and the denominator of
which will be 365, multiplying the amount so obtained by $25,000 and rounding
the amount so obtained to the nearest cent. During any Long-Term Dividend
Period, the amount of cash dividends per share of APS payable (if declared) on
any Dividend Payment Date will be computed by multiplying the Applicable Rate
for such Dividend Period by a fraction, the numerator of which will be such
number of days in such part of such Dividend Period that such share was
outstanding and for which dividends are payable on such Dividend Payment Date
and the denominator of which will be 360, multiplying the amount so obtained by
$25,000 and rounding the amount so obtained to the nearest cent.
Dividends on APS will accumulate from the date of their original issue, which is
May 3, 2004. The initial dividend rate is 1.15% for Series M APS. The initial
dividend rate is 1.15% for Series W APS. The initial dividend rate is 1.45% for
Series TH APS. The initial dividend rate is 1.15% for Series F APS. For each
Dividend Period after the Initial Dividend Period, the dividend rate will be the
dividend rate for a series determined at Auction for such series, except that
the dividend rate that results from an Auction will not be greater than the
Maximum Applicable Rate described below.
Except during a Non-Payment Period, the Applicable Rate for any Dividend Period
for APS will not be more than the Maximum Applicable Rate applicable to such
series. The Maximum Applicable Rate for each series of APS will depend on the
credit rating assigned to such series and on the duration of the Dividend
Period. The Maximum Applicable Rate will be the higher of the Applicable
Percentage of the Reference Rate or the Reference Rate plus the Applicable
Spread. The Reference Rate is (i) with respect to any seven day Dividend Period
or any Short-Term Dividend Period having fewer than 183 days, the applicable
"AA" Financial Composite Commercial Paper Rate, (ii) with respect to any Short-
Term Dividend period having 183 or more but fewer than 364 days, the applicable
U.S. Treasury Bill Rate and (iii) with respect to any Long-Term Dividend Period,
the applicable U.S. Treasury Note Rate. The Applicable Percentage and the
Applicable Spread will be determined based on the credit rating assigned on such
date to the APS by Moody's and S&P (or, if either Moody's or S&P shall not make
such rating available, the equivalent of such rating by a Substitute Rating
Agency) as follows:
CREDIT RATINGS
----------------------------------------
MOODY'S S&P APPLICABLE PERCENTAGE APPLICABLE SPREAD
------------------------------------------------------------------------------------------------
Aaa AAA 125% 125 bps
Aa3 to Aa1 AA- to AA+ 150% 150 bps
A3 to A1 A- to A+ 200% 200 bps
Baa3 to Baa1 BBB- to BBB+ 250% 250 bps
Ba1 and lower BB+ and lower 300% 300 bps
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41
DESCRIPTION OF PREFERRED SHARES
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Assuming the Fund maintains an AAA/Aaa rating on the APS, the practical effect
of the different methods used to calculate the Maximum Applicable Rate is shown
in the table below:
MAXIMUM APPLICABLE METHOD USED TO
RATE USING THE MAXIMUM APPLICABLE DETERMINE THE
APPLICABLE RATE USING THE MAXIMUM APPLICABLE
REFERENCE RATE PERCENTAGE APPLICABLE SPREAD RATE
----------------------------------------------------------------------------------
1%................... 1.25% 2.25% Spread
2%................... 2.50% 3.25% Spread
3%................... 3.75% 4.25% Spread
4%................... 5.00% 5.25% Spread
5%................... 6.25% 6.25% Either
6%................... 7.50% 7.25% Percentage
Prior to each Dividend Payment Date, the Fund is required to deposit with the
Auction Agent sufficient funds for the payment of declared dividends. The Fund
does not intend to establish any reserves for the payment of dividends.
RESTRICTIONS ON DIVIDENDS AND OTHER DISTRIBUTIONS
While any of the APS are outstanding, the Fund, except as provided below, may
not declare, pay or set apart for payment any dividend or other distribution in
respect of its Common Shares. In addition, the Fund may not call for redemption
or redeem any of its Common Shares. However, the Fund is not confined by the
above restrictions if:
+ immediately after such transaction, the Discounted Value of the Fund's
portfolio would be equal to or greater than the Preferred Shares Basic
Maintenance Amount and the value of the Fund's portfolio would be equal to or
greater than the 1940 Act Preferred Shares Asset Coverage (see "--RATING
AGENCY GUIDELINES AND ASSET COVERAGE" below)
+ full cumulative dividends on each series of APS due on or prior to the date
of the transaction have been declared and paid or shall have been declared
and sufficient funds for the payment thereof deposited with the Auction Agent
+ the Fund has redeemed the full number of APS required to be redeemed by any
provision for mandatory redemption contained in the By-laws
The Fund generally will not declare, pay or set apart for payment any dividend
on any class or series of shares of the Fund ranking, as to the payment of
dividends, on a parity with APS unless the Fund has declared and paid or
contemporaneously declares and pays full cumulative dividends on the APS through
its most recent dividend payment date. However, when the Fund has not paid
dividends in full upon the APS through the most recent dividend payment date or
upon any other class or series of shares of the Fund ranking, as to the payment
of dividends, on a parity with APS through their most recent respective dividend
payment dates, the amount of dividends declared per share on APS and such other
class or series of shares will in all cases bear to each other the same ratio
that accumulated dividends per share on the APS and such other class or series
of shares bear to each other.
DESIGNATION OF SPECIAL DIVIDEND PERIODS
The Fund, at its option and to the extent permitted by law, by telephonic and
written notice (a "Request for Special Dividend Period") to the Auction Agent
and to each Broker-Dealer, may request that the next succeeding Dividend Period
for the APS of a series will be a number of days (other than seven days) evenly
divisible by seven, and not fewer than fourteen nor more than 364 in the case of
a Short-Term Dividend Period or one whole year or more but not greater than five
years in the case of a Long-Term Dividend Period, specified in such notice,
provided that the Fund may not give a Request for Special Dividend Period (and
any such request will be null and void) unless, for any Auction occurring after
the initial Auction, Sufficient Clearing Bids were made in the last occurring
Auction
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42
DESCRIPTION OF PREFERRED SHARES
--------------------------------------------------------------------------------
and unless full cumulative dividends and any amounts due with respect to
redemptions have been paid in full and provided further that the Fund may not
request a Special Dividend Period that is a Long-Term Dividend Period unless the
Fund has received written confirmation from Moody's (or any Substitute Rating
Agency) that the Fund's election of a proposed Long-Term Dividend Period will
not impair the ratings then assigned by Moody's and S&P (or any Substitute
Rating Agency) of the applicable series of APS. Such Request for Special
Dividend Period, in the case of a Short-Term Dividend Period, shall be given on
or prior to the second Business Day but not more than seven Business Days prior
to an Auction date for the APS of that series and, in the case of a Long-Term
Dividend Period, shall be given on or prior to the second Business Day but not
more than 28 days prior to an Auction Date for the APS of that series. Upon
receiving such Request for Special Dividend Period, the Broker-Dealers jointly
shall determine the Optional Redemption Price of the APS of that series during
such Special Dividend Period and the Specific Redemption Provisions and shall
give the Fund and the Auction Agent written notice (a "Response") of such
determination by no later than the second Business Day prior to such Auction
Date. In making such determination, the Broker-Dealers will consider (i)
existing short-term and long-term market rates and indices of such short-term
and long-term rates, (ii) existing market supply and demand for short-term and
long-term securities, (iii) existing yield curves for short-term and long-term
securities comparable to the APS, (iv) industry and financial conditions which
may affect the APS of that series, (v) the investment objective of the Fund and
(vi) the Dividend Periods and dividend rates at which current and potential
beneficial holders of the APS would remain or become beneficial holders.
After providing the Request for Special Dividend Period to the Auction Agent and
each Broker-Dealer as set forth above, the Fund, by no later than the second
Business Day prior to such Auction Date, may give a notice (a "Notice of Special
Dividend Period") to the Auction Agent, the Securities Depository and each
Broker-Dealer, which notice will specify the duration of the Special Dividend
Period and, if applicable, any Dividend Payment Date(s) for such Special
Dividend Period if different than as provided under "--Dividend Payment Dates"
above. The Fund has agreed to provide a copy of such Notice of Special Dividend
Period to Moody's and S&P. The Fund will not give a Notice of Special Dividend
Period and, if such Notice of Special Dividend Period was given already, will
give telephonic and written notice of its revocation (a "Notice of Revocation")
to the Auction Agent, each Broker-Dealer and the Securities Depository on or
prior to the Business Day prior to the relevant Auction Date if (x) either the
1940 Act Preferred Shares Asset Coverage or the Preferred Shares Basic
Maintenance Amount is not satisfied on each of the two Business Days immediately
preceding the Business Day prior to the relevant Auction Date or (y) sufficient
funds for the payment of dividends payable on the immediately succeeding
Dividend Payment Date have not been irrevocably deposited with the Auction Agent
by the close of business on the third Business Day preceding the Auction Date
immediately preceding such Dividend Payment Date. If the Fund is prohibited from
giving a Notice of Special Dividend Period as a result of the factors enumerated
in clause (x) or (y) above or if the Fund gives a Notice of Revocation with
respect to a Notice of Special Dividend Period, the next succeeding Dividend
Period for that series will be a seven day Dividend Period. In addition, in the
event Sufficient Clearing Bids are not made in an Auction, or if an Auction is
not held for any reason, the next succeeding Dividend Period will be a seven day
Dividend Period, and the Fund may not again give a Notice of Special Dividend
Period (and any such attempted notice will be null and void) until Sufficient
Clearing Bids have been made in an Auction with respect to a seven day Dividend
Period.
NON-PAYMENT PERIOD AND LATE CHARGE
A "Failure to Deposit," with respect to shares of a series of APS, means a
failure by the Fund to pay to the Auction Agent, not later than 12:00 noon, New
York City time, (A) on the Business Day next preceding any Dividend Payment Date
for shares of such series, in funds available on such Dividend Payment Date in
the City of New York, New York, the full amount of any dividend (whether or not
earned or declared) to be paid on such Dividend Payment Date on any share of
such series or (B) on
--------------------------------------------------------------------------------
43
DESCRIPTION OF PREFERRED SHARES
--------------------------------------------------------------------------------
the Business Day next preceding any redemption date in funds available on such
redemption date for shares of such series in the City of New York, New York, the
redemption price to be paid on such redemption date for any share of such series
after notice of redemption is mailed; provided, however, that the foregoing
clause (B) shall not apply to the Fund's failure to pay the redemption price in
respect of APS when the related notice of redemption provides that redemption of
such shares is subject to one or more conditions precedent and any such
condition precedent shall not have been satisfied at the time or times and in
the manner specified in such notice of redemption. If a Failure to Deposit
occurs with respect to a series of APS but, prior to 12:00 noon, New York City
time, on the third Business Day next succeeding the date on which such Failure
to Deposit occurred, such Failure to Deposit shall have been cured, the Fund
shall have paid to the Auction Agent a late charge ("Late Charge") equal to the
sum of (1) if such Failure to Deposit consisted of the failure timely to pay to
the Auction Agent the full amount of dividends with respect to any Dividend
Period of the shares of such series, an amount computed by multiplying (x) 300%
of the "AA" Financial Composite Commercial Paper Rate for the period during
which such Failure to Deposit occurs on the Dividend Payment Date for such
Dividend Period by (y) a fraction, the numerator of which shall be the number of
days for which such Failure to Deposit has not been cured (including the day
such Failure to Deposit occurs and excluding the day such Failure to Deposit is
cured) and the denominator of which shall be 360, and applying the rate obtained
against the aggregate liquidation preference of the outstanding shares of such
series and (2) if such Failure to Deposit consisted of the failure timely to pay
to the Auction Agent the redemption price of the shares, if any, of such series
for which notice of redemption has been mailed by the Fund, an amount computed
by multiplying (x) 300% of the "AA" Financial Composite Commercial Paper Rate
for the Rate Period during which such Failure to Deposit occurs on the
redemption date by (y) a fraction, the numerator of which shall be the number of
days for which such Failure to Deposit is not cured (including the day such
Failure to Deposit occurs and excluding the day such Failure to Deposit is
cured) and the denominator of which shall be 360, and applying the rate obtained
against the aggregate liquidation preference of the outstanding shares of such
series to be redeemed, and no Auction will be held in respect of shares of such
series for the subsequent rate period thereof and the dividend rate for shares
of such series for such subsequent rate period will be the Maximum Applicable
Rate for shares of such series on the Auction Date for such subsequent rate
period. If any Failure to Deposit shall have occurred with respect to shares of
such series during any Rate Period thereof, and, prior to 12:00 noon, New York
City time, on the third Business Day next succeeding the date on which such
Failure to Deposit occurred, such Failure to Deposit shall not have been cured
or the Fund shall not have paid the applicable Late Charge to the Auction Agent,
no Auction will be held in respect of shares of such series for the first
subsequent rate period thereafter (or for any Rate Period thereafter to and
including the Rate Period during which (1) such Failure to Deposit is cured and
(2) the Fund pays the applicable Late Charge to the Auction Agent (the condition
set forth in this clause (2) to apply only in the event Moody's is rating such
shares at the time the Fund cures such Failure to Deposit), in each case no
later than 12:00 noon, New York City time, on the fourth Business Day prior to
the end of such Rate Period) (a "Non-Payment Period") and the dividend rate for
shares of such series for each such subsequent rate period shall be a rate per
annum (the "Non-Payment Period Rate") equal to 300% of the applicable "AA"
Financial Composite Commercial Paper Rate, provided that the Board of Trustees
shall have the authority to adjust, modify, alter or change from time to time
such rate if the Board of Trustees determines and Moody's (or any Substitute
Rating Agency) advises the Fund in writing that such adjustment, modification,
alteration or change will not adversely affect its then current ratings on the
APS.
RATING AGENCY GUIDELINES AND ASSET COVERAGE
The Fund is required under Moody's and S&P guidelines to maintain assets having
in the aggregate a Discounted Value at least equal to the Preferred Shares Basic
Maintenance Amount. The Preferred Shares Basic Maintenance Amount is equal to a
percentage determined by the applicable rating agency
--------------------------------------------------------------------------------
44
DESCRIPTION OF PREFERRED SHARES
--------------------------------------------------------------------------------
of the sum of (a) the aggregate liquidation preference of the APS then
outstanding, together with the aggregate liquidation preference on any other
series of APS and (b) certain accrued and projected dividend and other payment
obligations of the Fund. Moody's and S&P have established guidelines for
determining Discounted Value which are described in the Statement of Additional
Information. The amount of discount from market value varies depending upon
functions such as the type of security, the maturity of the instrument and the
issuer's credit rating. The Moody's and S&P guidelines also impose certain
diversification requirements on the Fund's portfolio and other limitations on
the Fund's investments. To the extent any particular portfolio holding does not
satisfy Moody's and S&P guidelines, all or a portion of the holding's value will
not be included in the calculation of Discounted Value (as defined by Moody's
and S&P). The Moody's and S&P guidelines do not impose any limitations on the
percentage of the Fund's assets that may be invested in holdings not eligible
for inclusion in the calculation of the Discounted Value of the Fund's
portfolio. The amount of ineligible assets included in the Fund's portfolio at
any time may vary depending upon the rating, diversification and other
characteristics of the eligible assets included in the portfolio.
The Fund will be required under the By-laws to maintain, with respect to the
APS, as of the last Business Day of each month in which any APS are outstanding,
asset coverage of at least 200% with respect to senior securities which are
shares of beneficial interest in the Fund, including the APS (or such other
asset coverage as in the future may be specified in or under the 1940 Act as the
minimum asset coverage for senior securities which are shares of beneficial
interest of a closed-end investment company as a condition of paying dividends
on its common stock) ("1940 Act Preferred Shares Asset Coverage"). If the Fund
fails to maintain the 1940 Act Preferred Shares Asset Coverage and such failure
is not cured as of the last Business Day of the following month (the "1940 Act
Cure Date"), the Fund will be required under certain circumstances to redeem
certain of the APS. See "--REDEMPTION" below.
The 1940 Act Preferred Shares Asset Coverage immediately following the issuance
of APS offered hereby (after giving effect to the deduction of the sales load
and offering expenses for the APS), computed using the Fund's net assets as of
March 31, 2004, adjusted for the exercise of the over-allotment option on April
13, 2004, and assuming APS with an aggregate liquidation preference of $380
million had been issued as of such date, will be as follows:
Value of Fund assets less liabilities not
constituting senior securities 1,175,454,531
------------------------------------------------ = --------------- = 309%
Senior securities representing indebtedness plus 380,000,000
liquidation value of the APS
In the event the Fund does not timely cure a failure to maintain (a) a
Discounted Value of its portfolio equal to the Preferred Shares Basic
Maintenance Amount or (b) the 1940 Act Preferred Shares Asset Coverage, in each
case in accordance with the requirements of Moody's, S&P or a Substitute Rating
Agency, the Fund will be required by the By-laws to redeem shares of APS as
described under "--REDEMPTION--Mandatory redemption" below.
The Moody's and S&P guidelines restrict the Fund's use of some types of
investment strategies. For example, the guidelines, among other restrictions,
limit the Fund's use of futures, options and other derivative transactions and
limit the percentage of the Fund's assets that may be invested in any one issuer
or type or class of issuer.
The Moody's and S&P guidelines also prohibit the Fund from taking certain types
of actions unless it has received written confirmation from Moody's and S&P that
such actions would not impair the ratings then assigned to the APS. These
include restrictions on borrowing money, issuing any class or series of shares
ranking prior to or on a parity with the APS with respect to the payment of
dividends or the distribution of assets upon dissolution, liquidation or winding
up of the Fund or merging or consolidating into or with any other entity.
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45
DESCRIPTION OF PREFERRED SHARES
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The restrictions in the Moody's and S&P guidelines may limit the Fund's ability
to make investments that the Adviser believes would benefit the Fund. The
descriptions of the Moody's and S&P guidelines in this section are summaries
only and are not complete. The Moody's and S&P guidelines are described in
greater detail in the Statement of Additional Information and are set forth in
their entirety in the By-laws, which have been filed as an exhibit to the
Registration Statement of which this Prospectus is a part.
The Fund may, but is not required to, adopt any modifications to Moody's and S&P
guidelines that may hereafter be established by Moody's or S&P. Failure to adopt
any such modifications, however, may result in a change in the ratings assigned
to the APS or a withdrawal of ratings altogether. In addition, any rating agency
providing a rating for the APS may, at any time, change or withdraw any such
rating. The Board of Trustees may, without shareholder approval, amend, alter or
repeal any or all of the definitions and related provisions which have been
adopted by the Fund pursuant to Moody's or S&P guidelines in the event Moody's
or S&P, as the case may be, is no longer rating the APS or the Fund receives
written confirmation from Moody's, S&P or a Substitute Rating Agency that any
such amendment, alteration or repeal would not impair the rating then assigned
to the APS.
As described by Moody's, a preferred stock rating is an assessment of the
capacity and willingness of an issuer to pay preferred stock obligations. The
rating on the APS is not a recommendation to purchase, hold or sell those
shares, inasmuch as the rating does not comment as to market price or
suitability for a particular investor. The Moody's and S&P guidelines described
above also do not address the likelihood that an owner of APS will be able to
sell such shares in an Auction or otherwise. The rating is based on current
information furnished to Moody's and S&P by the Fund and/or the Adviser and
information obtained from other sources. The rating may be changed, suspended or
withdrawn as a result of changes in, or the unavailability of, such information.
The Common Shares have not been rated by Moody's or S&P.
The Moody's and S&P guidelines will apply to the APS only so long as Moody's and
S&P are rating APS. The Fund will pay certain fees to Moody's and S&P for rating
the APS. The Fund may at some future time seek to have the APS rated by an
additional or Substitute Rating Agency.
REDEMPTION
MANDATORY REDEMPTION
The Fund is required to maintain (a) a Discounted Value of eligible portfolio
securities at least equal to the Preferred Shares Basic Maintenance Amount and
(b) asset coverage of at least 200% of the value of senior securities of the
Fund which are equity shares, including the APS (1940 Act Preferred Shares Asset
Coverage). Eligible portfolio securities for purposes of the Preferred Shares
Basic Maintenance Amount and their Discounted Value will be determined from time
to time by the rating agency then rating the APS. The guidelines currently in
effect are described under "--RATING AGENCY GUIDELINES AND ASSET COVERAGE" above
and in the Statement of Additional Information. If the Fund fails to maintain
the 1940 Act Preferred Shares Asset Coverage and eligible portfolio securities
with a Discounted Value equal to the Preferred Shares Basic Maintenance Amount
and does not timely cure such failure in accordance with the requirements of the
rating agency that rates the APS, the Fund must redeem all or a portion of the
APS. This mandatory redemption will take place on a date that the Fund's Board
of Trustees specifies out of legally available funds, in accordance with the
Agreement and Declaration of Trust, the By-laws and applicable law, at the
redemption price of $25,000 per share plus accumulated but unpaid dividends
(whether or not earned or declared) to (but not including) the date fixed for
redemption. The mandatory redemption will be limited to the number of APS
necessary, after giving effect to such redemption, to cause the Discounted Value
of the Fund's portfolio to equal or exceed the Preferred Shares Basic
Maintenance Amount, and the value of the Fund's portfolio to equal or exceed the
1940 Act Preferred Shares Asset Coverage. In determining the number of APS
required to be redeemed in accordance with the foregoing, the Fund will allocate
the
--------------------------------------------------------------------------------
46
DESCRIPTION OF PREFERRED SHARES
--------------------------------------------------------------------------------
number of APS required to be redeemed to satisfy the Preferred Shares Basic
Maintenance Amount or the 1940 Act Preferred Shares Asset Coverage, as the case
may be, pro rata among the series of APS and any other preferred shares of the
Fund subject to redemption or retirement, subject to certain conditions with
respect to a series of APS subject to a Non-Call Period. The Fund shall effect
such redemption on the date fixed by the Fund, which date shall not be earlier
than 20 days nor later than 30 days after the applicable cure date, except if
the Fund does not have funds legally available therefor. If fewer than all
outstanding series of APS are, as a result, to be redeemed, the Fund may redeem
such shares by lot or other method that it deems fair and equitable.
OPTIONAL REDEMPTION
To the extent permitted under the 1940 Act and Massachusetts law, the Fund at
its option may, without the consent of the holders of APS, redeem APS, in whole
or in part, on the Business Day after the last day of such Dividend Period upon
not less than 15 calendar days' and not more than 40 calendar days' prior notice
at the optional redemption price per share; provided that no APS may be redeemed
at the option of the Fund during (a) the Initial Dividend Period or (b) a
Non-Call Period to which such APS are subject. The optional redemption price per
share will be $25,000 per share, plus an amount equal to accumulated but unpaid
dividends thereon (whether or not earned or declared) to the date fixed for
redemption plus any applicable redemption premium attributable to the
designation of a Premium Call Period. The Fund will not make any optional
redemption unless, after giving effect thereto, (i) the Fund has available
certain deposit securities with maturities or tender dates not later than the
day preceding the applicable redemption date and having a value not less than
the amount (including any applicable premium) due to holders of the APS of such
series by reason of the redemption of the APS on such date fixed for the
redemption and (ii) the Fund has eligible assets with an aggregate Discounted
Value at least equal to the Preferred Shares Basic Maintenance Amount.
Notwithstanding the foregoing, APS may not be redeemed at the option of the Fund
unless all dividends in arrears on the outstanding preferred shares, including
all outstanding APS, have been or are being contemporaneously paid or set aside
for payment. This would not prevent the lawful purchase or exchange offer for
APS made on the same terms to holders of all outstanding preferred shares.
LIQUIDATION
If the Fund is liquidated, the holders of any series of outstanding APS will
receive the liquidation preference on such series of $25,000 per share plus all
accumulated but unpaid dividends, before any payment is made to the holders of
Common Shares. The holders of APS will be entitled to receive these amounts from
the assets of the Fund available for distribution to its shareholders. In
addition, the rights of holders of APS to receive these amounts are subject to
the rights of holders of any series or class of shares, including other series
of preferred shares, ranking on a parity with the APS with respect to the
distribution of assets upon liquidation of the Fund. After the payment to the
holders of APS of the full preferential amounts as described, the holders of APS
will have no right or claim to any of the remaining assets of the Fund.
For purpose of the foregoing paragraph, a voluntary or involuntary liquidation
of the Fund does not include:
+ the sale, lease or exchange of all or substantially all the property or
assets of the Fund;
+ the merger or consolidation of the Fund into or with any other business
trust, corporation or other organization; or
+ the merger or consolidation of any other business trust or corporation into
or with the Fund.
In addition, none of the foregoing would result in the Fund being required to
redeem any APS if after such transaction the Fund continued to comply with the
rating agency guidelines and asset coverage ratios.
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47
DESCRIPTION OF PREFERRED SHARES
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VOTING RIGHTS
Except as otherwise provided in this Prospectus or as otherwise required by law,
holders of APS will have equal voting rights with holders of Common Shares and
any other preferred shares (one vote per share) and will vote together with
holders of Common Shares and any preferred shares as a single class.
Holders of outstanding preferred shares, including APS, voting as a separate
class, are entitled to elect two of the Fund's Trustees. The remaining Trustees
are elected by holders of Common Shares. In addition, if at any time dividends
(whether or not earned or declared) on outstanding preferred shares, including
APS, are due and unpaid in an amount equal to two full years of dividends, and
sufficient cash or specified securities have not been deposited with the Auction
Agent for the payment of such dividends, then, the sole remedy of holders of
outstanding preferred shares, including APS, is that the number of Trustees
constituting the Board will be automatically increased by the smallest number
that, when added to the two Trustees elected exclusively by the holders of
preferred shares, including APS, as described above, would constitute a majority
of the Board. The holders of preferred shares, including APS, will be entitled
to elect that smallest number of additional Trustees at a special meeting of
shareholders as soon as possible and at all subsequent meetings at which
Trustees are to be elected. The terms of office of the persons who are Trustees
at the time of that election will continue. If the Fund thereafter shall pay, or
declare and set apart for payment, in full, all dividends payable on all
outstanding preferred shares, including APS, the special voting rights stated
above will cease, and the terms of office of the additional Trustees elected by
the holders of preferred shares, including APS, will automatically terminate.
As long as any APS are outstanding, the Fund will not, without the affirmative
vote or consent of the holders of at least a majority of the APS outstanding at
the time (voting together as a separate class):
(a) authorize, create or issue any class or series of shares ranking prior to or
on a parity with the APS with respect to payment of dividends or the
distribution of assets on dissolution, liquidation or winding up the affairs of
the Fund, or authorize, create or issue additional shares of any series of APS
or any other preferred shares, unless, in the case of preferred shares on a
parity with the APS, the Fund obtains written confirmation from Moody's (if
Moody's is then rating the APS), S&P (if S&P is then rating the APS) or any
Substitute Rating Agency (if any such Substitute Rating Agency is then rating
the APS) that the issuance of a class or series would not impair the rating then
assigned by such rating agency to the APS and the Fund continues to comply with
Section 13 of the 1940 Act, the 1940 Act Preferred Shares Asset Coverage
requirements and the Preferred Shares Basic Maintenance Amount requirements, in
which case the vote or consent of the holders of the APS is not required;
(b) amend, alter or repeal the provisions of the Agreement and Declaration of
Trust or the By-laws, whether by merger, consolidation or otherwise, so as to
adversely affect any preference, right or power of the APS or holders of APS;
provided, however, that (i) none of the actions permitted by the exception to
(a) above will be deemed to affect such preferences, rights or powers, (ii) a
division of APS will be deemed to affect such preferences, rights or powers only
if the terms of such division adversely affect the holders of APS and (iii) the
authorization, creation and issuance of classes or series of shares ranking
junior to the APS with respect to the payment of dividends and the distribution
of assets upon dissolution, liquidation or winding up of the affairs of the Fund
will be deemed to affect such preferences, rights or powers only if Moody's or
S&P is then rating the APS and such issuance would, at the time thereof, cause
the Fund not to satisfy the 1940 Act Preferred Shares Asset Coverage or the
Preferred Shares Basic Maintenance Amount;
(c) authorize the Fund's conversion from a closed-end to an open-end investment
company;
(d) amend the provisions of the Agreement and Declaration of Trust which provide
for the classification of the Board of Trustees of the Fund into three classes,
each with a term of office of three years with only one class of Trustees
standing for election in any year; or
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48
DESCRIPTION OF PREFERRED SHARES
--------------------------------------------------------------------------------
(e) approve any reorganization (as such term is used in the 1940 Act) adversely
affecting the APS.
So long as any shares of the APS are outstanding, the Fund shall not, without
the affirmative vote or consent of the holders of at least 66 2/3% of the APS
outstanding at the time, in person or by proxy, either in writing or at a
meeting, voting as a separate class, file a voluntary application for relief
under federal bankruptcy law or any similar application under state law for so
long as the Fund is solvent and does not foresee becoming insolvent.
To the extent permitted under the 1940 Act, the Fund will not approve any of the
actions set forth in (a) or (b) above which adversely affects the rights
expressly set forth in the Agreement and Declaration of Trust or the By-laws of
a holder of shares of a series of preferred shares differently than those of a
holder of shares of any other series of preferred shares without the affirmative
vote or consent of the holders of at least a majority of the shares of each
series adversely affected. Unless a higher percentage is provided for under the
Agreement and Declaration of Trust or the By-laws, the affirmative vote of the
holders of a majority of the outstanding APS, voting together as a single class,
will be required to approve any plan of reorganization (including bankruptcy
proceedings) adversely affecting such shares or any action requiring a vote of
security holders under Section 13(a) of the 1940 Act.
The foregoing voting provisions will not apply with respect to APS if, at or
prior to the time when a vote is required, such shares have been (i) redeemed or
(ii) called for redemption and sufficient funds have been deposited in trust to
effect such redemption.
The Auction
GENERAL
Holders of the APS will be entitled to receive cumulative cash dividends on
their APS when, as and if declared by the Fund's Board of Trustees, out of the
funds legally available therefor, on the Initial Dividend Payment Date with
respect to the Initial Dividend Period for each series and, thereafter, on each
Dividend Payment Date with respect to a Subsequent Dividend Period (generally a
period of seven days, subject to certain exceptions set forth under "Description
of the Preferred Shares--DIVIDENDS AND DIVIDEND PERIODS"), at the rate per annum
equal to the Applicable Rate for each such Dividend Period.
The provisions of the By-laws establishing the terms of the APS offered hereby
will provide that the Applicable Rate for each Dividend Period after the Initial
Dividend Period for each series will be equal to the rate per annum that the
Auction Agent advises has resulted on the Business Day preceding the first day
of such Dividend Period due to implementation of the Auction Procedures set
forth in the By-laws in which persons determine to hold or offer to purchase or
sell the APS. The Auction Procedures are attached as Appendix D to the Statement
of Additional Information. Each periodic operation of such procedures with
respect to the APS is referred to herein as an "Auction." If, however, the Fund
should fail to pay or duly provide for the full amount of any dividend on or the
redemption price of the APS called for redemption, the Applicable Rate for the
APS will be determined as set forth under "Description of Preferred
Shares--DIVIDENDS AND DIVIDEND PERIODS--Non-Payment Period and Late Charge."
AUCTION AGENCY AGREEMENT
The Fund will enter into the Auction Agency Agreement with the Auction Agent
(currently, Deutsche Bank Trust Company Americas) which provides, among other
things, that the Auction Agent will follow the Auction Procedures to determine
the Applicable Rate for the APS. The Fund will pay the Auction Agent
compensation for its services under the Auction Agency Agreement.
The Auction Agent will act as agent for the Fund in connection with Auctions. In
the absence of bad faith or negligence on its part, the Auction Agent will not
be liable for any action taken, suffered or
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49
THE AUCTION
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omitted, or for any error of judgment made, by it in the performance of its
duties under the Auction Agency Agreement and will not be liable for any error
of judgment made in good faith unless the Auction Agent shall have been
negligent in ascertaining the pertinent facts. Pursuant to the Auction Agency
Agreement, the Fund is required to indemnify the Auction Agent for certain
losses and liabilities incurred by the Auction Agent without negligence or bad
faith on its part in connection with the performance of its duties under such
agreement.
The Auction Agent may terminate the Auction Agency Agreement upon notice to the
Fund no earlier than 60 days after delivery of said notice. If the Auction Agent
should resign, the Fund will use its best efforts to enter into an agreement
with a successor Auction Agent containing substantially the same terms and
conditions as the Auction Agency Agreement. The Fund may remove the Auction
Agent provided that, prior to removal, the Fund has entered into a replacement
agreement with a successor Auction Agent.
BROKER-DEALER AGREEMENTS
Each Auction requires the participation of one or more Broker-Dealers. The
Auction Agent will enter into agreements with several Broker-Dealers, or other
entities permitted by law to perform the functions required of a Broker-Dealer
in the Auction Procedures, selected by the Fund, which provide for the
participation of those Broker-Dealers in Auctions for APS. The Auction Agent
will pay to each Broker-Dealer after each Auction, from funds provided by the
Fund, a service charge at the annual rate: (i) for any seven day Dividend
Period, 0.25% of the liquidation preference ($25,000 per share) of the APS held
by a Broker-Dealer's customer upon settlement in an Auction and (ii) for any
Special Dividend Period, as determined by mutual consent of the Fund and any
such Broker-Dealer or Broker-Dealers and which shall be based upon a selling
concession that would be applicable to an underwriting of fixed or variable rate
preferred shares with a similar fixed maturity or variable rate dividend period,
respectively, at the commencement of the Dividend Period with respect to such
Auction.
The Fund may request that the Auction Agent terminate one or more Broker-Dealer
agreements at any time upon five days' notice, provided that at least one
Broker-Dealer agreement is in effect after termination of the agreement,
provided that neither the Broker-Dealer Agreement with UBS Securities LLC nor
the Broker-Dealer Agreement with Merrill Lynch, Pierce, Fenner & Smith
Incorporated may be terminated without the prior written consent of the Fund,
which consent may not be unreasonably withheld.
SECURITIES DEPOSITORY
The Depository Trust Company initially will act as the Securities Depository for
the Agent Members with respect to the APS. All of the shares of APS initially
will be registered in the name of Cede & Co., as nominee of the Securities
Depository. Such APS will be subject to the provisions restricting transfers of
APS, and Beneficial Owners will not be entitled to receive certificates
representing their ownership interest in such APS. See Appendix D (Auction
Procedures) to the Statement of Additional Information. The Securities
Depository will maintain lists of its participants and will maintain the
positions (ownership interests) of the APS held by each Agent Member, whether as
the Beneficial Owner thereof for its own account or as nominee for the
Beneficial Owner thereof. Payments made by the Fund to holders of APS will be
duly made by making payments to the nominee of the Securities Depository.
AUCTION PROCEDURES
The following is a brief summary of the procedures to be used in conducting
Auctions. This summary is qualified by reference to the Auction Procedures set
forth in Appendix D to the Statement of
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50
THE AUCTION
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Additional Information. The Settlement Procedures to be used with respect to
Auctions are set forth in Appendix E to the Statement of Additional Information.
ORDERS BY BENEFICIAL OWNERS, POTENTIAL BENEFICIAL OWNERS, EXISTING HOLDERS AND
POTENTIAL HOLDERS
Prior to the submission deadline on each Auction Date for the APS, each customer
of a Broker-Dealer who is listed on the records of that Broker-Dealer (or, if
applicable, the Auction Agent) as a Beneficial Owner of APS may submit the
following types of orders with respect to that Broker-Dealer:
1. Hold Order--indicating its desire to hold APS without regard to the
Applicable Rate for the next Dividend Period
2. Bid--indicating its desire to sell APS at $25,000 per share if the
Applicable Rate for the next Dividend Period is less than the rate or spread
specified in the bid
3. Sell Order--indicating its desire to sell APS at $25,000 per share without
regard to the Applicable Rate for the next Dividend Period
A Beneficial Owner may submit different types of orders to its Broker-Dealer
with respect to different shares of APS then held by the Beneficial Owner. A
Beneficial Owner that submits its bid to its Broker-Dealer having a rate higher
than the Maximum Applicable Rate on the Auction Date will be treated as having
submitted a Sell Order to its Broker-Dealer. A Beneficial Owner that fails to
submit an order to its Broker-Dealer will ordinarily be deemed to have submitted
a Hold Order to its Broker-Dealer. However, if a Beneficial Owner fails to
submit an order to its Broker-Dealer for an Auction relating to a Dividend
Period of more than 91 days such Beneficial Owner will be deemed to have
submitted a Sell Order to its Broker-Dealer. A Sell Order constitutes an
irrevocable offer to sell the APS subject to the Sell Order. A Beneficial Owner
that offers to become the Beneficial Owner of additional APS is, for purposes of
such offer, a Potential Holder as discussed below.
A Potential Holder is either a customer of a Broker-Dealer that is not a
Beneficial Owner of a series of APS but that wishes to purchase APS or that is a
Beneficial Owner that wishes to purchase additional APS. A Potential Holder may
submit Bids to its Broker-Dealer in which it offers to purchase APS at $25,000
per share if the Applicable Rate for APS for the next Dividend Period is not
less than the specified rate in such Bid. A Bid placed by a Potential Holder of
APS specifying a rate higher than the Maximum Applicable Rate for APS on the
Auction Date will not be accepted.
The Broker-Dealers in turn will submit the orders of their respective customers
who are Beneficial Owners and Potential Holders to the Auction Agent. They will
designate themselves (unless otherwise permitted by the Fund) as Existing
Holders of APS subject to orders submitted or deemed submitted to them by
Beneficial Owners. They will designate themselves as Potential Holders of APS
subject to orders submitted to them by Potential Holders. However, neither the
Fund nor the Auction Agent will be responsible for a Broker-Dealer's failure to
comply with these procedures. Any order placed with the Auction Agent by a
Broker-Dealer as or on behalf of an Existing Holder or a Potential Holder will
be treated the same way as an order placed with a Broker-Dealer by a Beneficial
Owner or Potential Holder. Similarly, any failure by a Broker-Dealer to submit
to the Auction Agent an order for any APS held by it or customers who are
Beneficial Owners will be treated as a Beneficial Owner's failure to submit to
its Broker-Dealer an order in respect of APS held by it. A Broker-Dealer may
also submit orders to the Auction Agent for its own account as an Existing
Holder or Potential Holder, provided it is not an affiliate of the Fund.
There are Sufficient Clearing Bids in an Auction if the number of APS subject to
Bids submitted or deemed submitted to the Auction Agent by Broker-Dealers for
Potential Holders with rates or spreads equal to or lower than the Maximum
Applicable Rate is at least equal to or exceeds the sum of the number of APS
subject to Sell Orders and the number of shares subject to Bids specifying rates
or spreads higher than the Maximum Applicable Rate submitted or deemed submitted
to the Auction Agent by Broker-Dealers for Existing Holders. If there are
Sufficient Clearing Bids, the Applicable Rate for the next succeeding Dividend
Period thereof will be the lowest rate specified in the submitted Bids
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51
THE AUCTION
--------------------------------------------------------------------------------
which, taking into account such rate and all lower rates bid by Broker-Dealers
as or on behalf of Existing Holders and Potential Holders, would result in
Existing Holders and Potential Holders owning the APS available for purchase in
the Auction.
If there are not Sufficient Clearing Bids, the Applicable Rate for the next
Dividend Period will be the Maximum Applicable Rate on the Auction Date.
However, if the Fund has declared a Special Dividend Period and there are not
Sufficient Clearing Bids, the election of a Special Dividend Period will not be
effective and the Applicable Rate for the next Dividend Period will be the
Applicable Rate determined on the previous Auction Date same as during the
Dividend Period. If there are not Sufficient Clearing Bids, Beneficial Owners of
APS that have submitted or are deemed to have submitted Sell Orders may not be
able to sell in the Auction all APS subject to such Sell Orders. If all of the
applicable outstanding APS are the subject of submitted Hold Orders (or Hold
Orders deemed to have been submitted), then the Dividend Period will be a seven
day Dividend Period and the Applicable Rate for the next Dividend Period will be
the "AA" Financial Composite Commercial Paper Rate for a seven day Dividend
Period.
The Auction Procedures include a pro rata allocation of shares for purchase and
sale which may result in an Existing Holder continuing to hold or selling, or a
Potential Holder purchasing, a number of APS that is different than the number
specified in its order. To the extent the allocation procedures have that
result, Broker-Dealers that have designated themselves as Existing Holders or
Potential Holders in respect of customer orders will be required to make
appropriate pro rata allocations among their respective customers.
If an Auction Date is not a Business Day because the New York Stock Exchange is
closed for business due to an act of God, natural disaster, act of war, civil or
military disturbance, act of terrorism, sabotage, riots or a loss or malfunction
of utilities or communications services, or the Auction Agent is not able to
conduct an Auction in accordance with the Auction Procedures for any such
reason, then the Applicable Rate for the next Dividend Period will be the
Applicable Rate determined on the previous Auction Date.
If a Dividend Payment Date is not a Business Day because the New York Stock
Exchange is closed for business due to an act of God, natural disaster, act of
war, civil or military disturbance, act of terrorism, sabotage, riots or a loss
or malfunction of utilities or communications services, or the dividend payable
on such date can not be paid for any such reason, then:
+ the Dividend Payment Date for the affected Dividend Period will be the next
Business Day on which the Fund and its paying agent, if any, are able to
cause the dividend to be paid using their reasonable best efforts
+ the affected Dividend Period will end on the day it otherwise would have
ended
+ the next Dividend Period will begin and end on the dates on which it
otherwise would have begun and ended
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52
THE AUCTION
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The following is a simplified example of how a typical Auction works. Assume
that the Fund has 1,000 outstanding APS and three Existing Holders. The three
Existing Holders and three Potential Holders submit orders through
Broker-Dealers at the Auction:
Existing Holder A............ Owns 500 shares, wants to Bid of 2.1% rate for all 500
sell all 500 shares if shares
Applicable Rate is less than
2.1%
Existing Holder B............ Owns 300 shares, wants to Hold Order--will take the
hold Applicable Rate
Existing Holder C............ Owns 200 shares, wants to Bid of 1.9% rate for all 200
sell all 200 shares if shares
Applicable Rate is less than
1.9%
Potential Holder D........... Wants to buy 200 shares Place order to buy at or
above 2.0%
Potential Holder E........... Wants to buy 300 shares Place order to buy at or
above 1.9%
Potential Holder F........... Wants to buy 200 shares Place order to buy at or
above 2.1%
The lowest dividend rate that will result in all 1,000 APS continuing to be held
is 2.0% (the offer by D). For the purposes of the example, the lowest dividend
rate is 2.0% at which there is Sufficient Clearing Bids and, therefore, the
dividend rate will be 2.0%. Existing Holders B and C will continue to own their
shares. Existing Holder A will sell its shares because A's bid was higher than
the Applicable Rate. Potential Holder D will buy 200 shares and Potential Holder
E will buy 300 shares because their bid rates were at or below the Applicable
Rate. Potential Holder F will not buy any shares because its bid rate was above
the dividend rate.
SUBMISSION OF ORDERS BY BROKER-DEALERS TO AUCTION AGENT
Prior to 1:30 p.m., New York City time, on each Auction Date, or such other time
on the Auction Date as may be specified by the Auction Agent (the "Submission
Deadline"), each Broker-Dealer will submit to the Auction Agent in writing or
through the Auction Agent's auction processing system all Orders obtained by it
for the Auction for a series of APS to be conducted on such Auction Date,
designating itself (unless otherwise permitted by the Fund) as the Existing
Holder or Potential Holder in respect of the APS subject to such Orders. Any
Order submitted by a Beneficial Owner or a Potential Beneficial Owner to its
Broker-Dealer, or by a Broker-Dealer to the Auction Agent, prior to the
Submission Deadline for any Auction Date, shall be irrevocable.
If the rate per annum specified in any Bid contains more than three figures to
the right of the decimal point, the Auction Agent will round such rate per annum
up to the next highest one-thousandth (.001) of one-percent. If one or more
Orders of an Existing Holder are submitted to the Auction Agent and such Orders
cover in the aggregate more than the number of outstanding shares of APS held by
such Existing Holder, such Orders will be considered valid in the following
order of priority:
(i) any Hold Order will be considered valid up to and including the number of
outstanding APS held by such Existing Holder, provided that if more than
one Hold Order is submitted by such Existing Holder and the number of APS
subject to such Hold Orders exceeds the number of outstanding APS held by
such Existing Holder, the number of APS subject to each of such Hold
Orders will be reduced pro rata so that such Hold Orders, in the
aggregate, will cover exactly the number of outstanding APS held by such
Existing Holder;
(ii) any Bids will be considered valid, in the ascending order of their
respective rates per annum if more than one Bid is submitted by such
Existing Holder, up to and including the excess of the number of
outstanding APS held by such Existing Holder over the number of
outstanding APS subject to any Hold Order referred to in clause (i) above
(and if more than one Bid submitted by
--------------------------------------------------------------------------------
53
THE AUCTION
--------------------------------------------------------------------------------
such Existing Holder specifies the same rate per annum and together they
cover more than the remaining number of shares that can be the subject of
valid Bids after application of clause (i) above and of the foregoing
portion of this clause (ii) to any Bid or Bids specifying a lower rate or
rates per annum, the number of shares subject to each of such Bids will
be reduced pro rata so that such Bids, in the aggregate, cover exactly
such remaining number of outstanding shares); and the number of
outstanding shares, if any, subject to Bids not valid under this clause
(ii) shall be treated as the subject of a Bid by a Potential Holder; and
(iii) any Sell Order will be considered valid up to and including the excess of
the number of outstanding APS held by such Existing Holder over the sum
of the number of APS subject to Hold Orders referred to in clause (i)
above and the number of APS subject to valid Bids by such Existing Holder
referred to in clause (ii) above; provided that, if more than one Sell
Order is submitted by any Existing Holder and the number of APS subject
to such Sell Orders is greater than such excess, the number of APS
subject to each of such Sell Orders will be reduced pro rata so that such
Sell Orders, in the aggregate, will cover exactly the number of APS equal
to such excess
If more than one Bid of any Potential Holder is submitted in any Auction, each
Bid submitted in such Auction will be considered a separate Bid with the rate
per annum and number of APS therein specified.
NOTIFICATION OF RESULTS AND SETTLEMENT
The Auction Agent will advise each Broker-Dealer who submitted a Bid or Sell
Order in an Auction whether such Bid or Sell Order was accepted or rejected in
whole or in part and of the Applicable Rate for the next Dividend Period for the
related APS by telephone or through the Auction Agent's auction processing
system at approximately 3:00 p.m., New York City time, on the Auction Date for
such Auction. Each such Broker-Dealer that submitted an Order for the account of
a customer then will advise such customer whether such Bid or Sell Order was
accepted or rejected, will confirm purchases and sales with each customer
purchasing or selling APS as a result of the Auction and will advise each
customer purchasing or selling APS to give instructions to its Agent Member of
the Securities Depository to pay the purchase price against delivery of such
shares or to deliver such shares against payment therefor as appropriate. If a
customer selling APS as a result of an Auction fails to instruct its Agent
Member to deliver such shares, the Broker-Dealer that submitted such customer's
Bid or Sell Order will instruct such Agent Member to deliver such shares against
payment therefor. Each Broker-Dealer that submitted a Hold Order in an Auction
on behalf of a customer also will advise such customer of the Applicable Rate
for the next Dividend Period for the APS. The Auction Agent will record each
transfer of APS on the record book of Existing Holders to be maintained by the
Auction Agent.
In accordance with the Securities Depository's normal procedures, on the day
after each Auction Date, the transactions described above will be executed
through the Securities Depository, and the accounts of the respective Agent
Members at the Securities Depository will be debited and credited as necessary
to effect the purchases and sales of APS as determined in such Auction.
Purchasers will make payment through their Agent Members in same-day funds to
the Securities Depository against delivery through their Agent Members; the
Securities Depository will make payment in accordance with its normal
procedures, which now provide for payment in same-day funds. If the procedures
of the Securities Depository applicable to APS shall be changed to provide for
payment in next-day funds, then purchasers may be required to make payment in
next-day funds. If the certificates for the APS are not held by the Securities
Depository or its nominee, payment will be made in same-day funds to the Auction
Agent against delivery of such certificates.
If any Existing Holder selling APS in an Auction fails to deliver such APS, the
Broker-Dealer of any person that was to have purchased APS in such Auction may
deliver to such person a number of
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54
THE AUCTION
--------------------------------------------------------------------------------
whole APS that is less than the number of APS that otherwise was to be purchased
by such person. In such event, the number of APS to be so delivered will be
determined by such Broker-Dealer. Delivery of such lesser number of APS will
constitute good delivery. Neither the Fund nor the Auction Agent will have
responsibility or liability with respect to the failure of a Beneficial Owner,
Potential Beneficial Owner or their respective Agent Members to deliver APS or
to pay for APS purchased or sold pursuant to an Auction or otherwise.
BROKER-DEALERS
The Auction Agent after each Auction will pay a service charge from funds
provided by the Fund to each Broker-Dealer on the basis of the purchase price of
APS placed by such Broker-Dealer at such Auction. The service charge (i) for any
seven day Dividend Period shall be payable at the annual rate of 0.25% of the
purchase price of the APS placed by such Broker-Dealer in any such Auction and
(ii) for any Special Dividend Period shall be determined by mutual consent of
the Fund and any such Broker-Dealer or Broker-Dealers and shall be based upon a
selling concession that would be applicable to an underwriting of fixed or
variable rate preferred shares with a similar final maturity or variable rate
dividend period, respectively, at the commencement of the Dividend Period with
respect to such Auction. For the purposes of the preceding sentence, the APS
will be placed by a Broker-Dealer if such shares were (i) the subject of Hold
Orders deemed to have been made by Beneficial Owners that were acquired by such
Beneficial Owners through such Broker-Dealer or (ii) the subject of the
following Orders submitted by such Broker-Dealer: (A) a submitted Bid of a
Beneficial Owner that resulted in such Beneficial Owner continuing to hold such
APS as a result of the Auction, (B) a Submitted Bid of a Potential Beneficial
Owner that resulted in such Potential Beneficial Owner purchasing such APS as a
result of the Auction or (C) a Submitted Hold Order.
The Broker-Dealer Agreements provide that a Broker-Dealer may submit Orders in
Auctions for its own account, unless the Fund notifies all Broker-Dealers that
they no longer may do so; provided that Broker-Dealers may continue to submit
Hold Orders and Sell Orders. If a Broker-Dealer submits an Order for its own
account in any Auction of APS, it may have knowledge of Orders placed through it
in that Auction and therefore have an advantage over other Bidders, but such
Broker-Dealer would not have knowledge of Orders submitted by other
Broker-Dealers in that Auction.
SECONDARY MARKET TRADING AND TRANSFERS OF PREFERRED SHARES
The Broker-Dealers are expected to maintain a secondary trading market in APS
outside of Auctions, but are not obligated to do so, and may discontinue such
activity at any time. There can be no assurance that any secondary trading
market in APS will provide owners with liquidity of investment. The APS will not
be registered on any stock exchange or on the Nasdaq National Market.
Investors who purchase APS in an Auction (particularly if the Fund has declared
a Special Dividend Period) should note that because the dividend rate on such
shares will be fixed for the length of that Dividend Period, the value of such
shares may fluctuate in response to the changes in interest rates, and may be
more or less than their original cost if sold on the open market in advance of
the next Auction thereof, depending on market conditions.
A Beneficial Owner or an Existing Holder may sell, transfer or otherwise dispose
of APS only in whole shares and only:
+ pursuant to a Bid or Sell Order placed with the Auction Agent in accordance
with the Auction Procedures
+ to a Broker-Dealer
+ to such other persons as may be permitted by the Fund; provided, however,
that a sale, transfer or other disposition of APS from a customer of a
Broker-Dealer who is listed on the records of that Broker-Dealer as the
holder of such shares to that Broker-Dealer or another customer of that
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THE AUCTION
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Broker-Dealer shall not be deemed to be a sale, transfer or other disposition
if such Broker-Dealer remains the Existing Holder of the shares; and in the
case of all transfers other than pursuant to Auctions, the Broker-Dealer (or
other person, if permitted by the Fund) to whom such transfer is made will
advise the Auction Agent of such transfer
Management of the Fund
TRUSTEES AND OFFICERS
The Fund's Board of Trustees provides broad supervision over the affairs of the
Fund. The officers of the Fund are responsible for the Fund's operations. The
Trustees and officers of the Fund, together with their principal occupations
during the past five years, are listed in the Statement of Additional
Information. Each of the Trustees serves as a Trustee of each of the other
leveraged closed-end investment companies for which the Adviser acts as
investment adviser.
INVESTMENT ADVISER AND ADMINISTRATOR
The Fund has contracted with John Hancock Advisers, LLC, located at 101
Huntington Avenue, Boston, Massachusetts 02199, to act as its investment
adviser. The Adviser was organized in 1968 and had, as of December 31, 2003,
approximately $29 billion in assets under management, of which approximately $16
billion was invested in common and preferred securities. The Adviser serves as
investment adviser to 10 leveraged, closed-end funds with total assets, as of
December 31, 2003, of over $4.3 billion. The Adviser has been managing
closed-end funds since 1971 and has a long history of delivering regular
dividends through several market cycles. The Adviser is an indirect wholly-owned
subsidiary of John Hancock Financial Services, Inc., a financial services
company. On April 28, 2004, Manulife Financial Corporation announced the
completion of its merger with John Hancock Financial Services, Inc.
The Adviser employs a team of seasoned investment professionals to manage the
Fund. This experienced team has been successful in managing assets in the
utilities sector and the financial services sector through the Adviser's
similarly structured dual-class, closed-end funds, as well as open-end funds and
institutional portfolios. The team consists of 61 professionals with an average
of 18 years of investment experience. The Adviser uses a total team approach in
which portfolio managers and analysts work together to research and identify
investment opportunities resulting in a free-flowing exchange of ideas. The
Adviser's goal is to deliver consistent investment results, where its investment
philosophy can be maintained through teamwork rather than individual efforts.
Under the terms of an investment advisory agreement between the Fund and the
Adviser (the "Advisory Agreement"), the Fund has retained the Adviser to provide
overall investment advice and to manage the investment of the Fund's assets and
to place orders for the purchase and sale of its portfolio securities. The
Adviser is responsible for obtaining and evaluating research, economic and
statistical data and, subject to the supervision of the Board of Trustees, for
formulating and implementing investment programs in furtherance of the Fund's
investment objective. The Adviser will furnish to the Fund the services of such
members of its organization as may be duly elected officers of the Fund. The
Adviser will not be liable to the Fund except for willful misfeasance, bad
faith, gross negligence or reckless disregard of its duties and obligations.
The Adviser will also provide administrative services to the Fund (to the extent
such services are not provided to the Fund pursuant to other agreements)
including (i) providing supervision of the Fund's non-investment operations,
(ii) providing the Fund with personnel to perform such executive, administrative
and clerical services as are reasonably necessary to provide effective
administration of the Fund, (iii) arranging for the preparation, at the Fund's
expense, of the Fund's tax returns, reports to shareholders and reports filed
with the Securities and Exchange Commission and other regulatory
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MANAGEMENT OF THE FUND
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authorities, (iv) providing the Fund with adequate office space and certain
related office equipment and services and (v) maintaining all of the Fund's
records other than those maintained pursuant to such other agreements.
COMPENSATION AND EXPENSES
For its advisory and administrative services, the Fund will accrue and pay to
the Adviser daily, as compensation for the services rendered and expenses paid
by it, a fee on an annual basis equal to 0.75% of the Fund's average daily
managed assets. Because the fee paid to the Adviser is determined on the basis
of the Fund's managed assets, the Adviser's interest in determining whether to
leverage the Fund may differ from the interest of the Fund. "Managed assets"
means the total assets of the Fund (including any assets attributable to any
leverage that may be outstanding) minus the sum of accrued liabilities (other
than liabilities representing financial leverage). The liquidation preference of
the APS is not a liability. Consequently, if the Fund issues preferred shares
and does not borrow, managed assets will generally be approximately equal to the
Fund's net assets attributable to common shares plus the liquidation preference
of any outstanding preferred shares.
Pursuant to a separate accounting and legal services agreement, the Adviser is
reimbursed for certain tax, accounting and legal services.
The Adviser has contractually agreed to waive a portion of its advisory fees.
The Adviser has agreed that, until the fifth anniversary of the Advisory
Agreement, the Adviser will limit its advisory fee to 0.55% of average daily
managed assets, in the sixth year to 0.60% of average daily managed assets, in
the seventh year to 0.65% of average daily managed assets, and in the eighth
year to 0.70% of average daily managed assets. After the eighth year, the
Adviser will no longer waive a portion of its advisory fee.
PORTFOLIO MANAGERS
Day-to-day management of the Fund's portfolio is the responsibility of a team of
portfolio managers led by Gregory K. Phelps, James K. Schmidt, Mark T. Maloney,
Lisa A. Welch and James J. McKelvey.
Gregory K. Phelps is a Senior Vice President and Portfolio Manager at the
Adviser with over 20 years of experience. He has extensive expertise managing
preferred securities within closed-end funds and in researching securities in
the utility, bank, and oil and gas industries. Mr. Phelps joined the Adviser in
1995 and has been a Senior Vice President and Portfolio Manager at the Adviser
since 2002. Prior to 2002, he was a Vice President and Portfolio Manager at the
Adviser.
James K. Schmidt, CFA, is an Executive Vice President at the Adviser and has 25
years experience in the investment business. Mr. Schmidt joined the Adviser in
1985 and heads the Adviser's financial institutions team. He has acted as
portfolio manager for the Adviser's open-end and closed-end financial services
funds since 1985.
Mark T. Maloney is a Portfolio Manager at the Adviser and has over 7 years of
investment experience focusing on electric utilities, gas distribution and local
distribution companies. Mr. Maloney joined the Adviser in 1982 and has been a
Second Vice President and Portfolio Manager at the Adviser since 2003. Prior to
2003, he was a Senior Research Officer and Assistant Portfolio Manager at the
Adviser.
Lisa A. Welch is a Vice President and Portfolio Manager at the Adviser and has
over 15 years of experience in the banking sector. As a member of the financial
institutions team, Ms. Welch specializes in small to mid-sized banks and
thrifts. Ms. Welch joined the Adviser in 1998 and has been a Vice President and
Portfolio Manager at the Adviser since 2003. Prior to 2003, she was a Research
Analyst at the Adviser.
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MANAGEMENT OF THE FUND
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James J. McKelvey is a Portfolio Manager for the Adviser and has over 20 years
of research and management experience focusing in the financial services sector.
Mr. McKelvey joined the Adviser in 1997 and has been a Portfolio Manager for the
Adviser since 1998.
SHAREHOLDER SERVICING AGENT
The Adviser has retained UBS Securities LLC to act as shareholder servicing
agent for the Fund. Pursuant to an agreement between the Adviser and UBS
Securities LLC, UBS Securities LLC will perform certain shareholder relations
services for the Fund and the Adviser, including making available public
information pertaining to the Fund and communicating to investors the Fund's
features and benefits, making available to investors market price, net asset
value, yield and other information regarding the Fund, and providing certain
economic research and statistical information and reports. In consideration of
these services, the Adviser will pay UBS Securities LLC a fee equal on an annual
basis to 0.10% of the Fund's average daily managed assets. This fee will be an
expense of the Adviser and not the Fund.
Net asset value
The Fund calculates a net asset value for its common shares every day the New
York Stock Exchange is open when regular trading closes (normally 4:00 p.m. New
York City time). For purposes of determining the net asset value of a common
share, the value of the securities held by the Fund plus any cash or other
assets (including interest accrued but not yet received) minus all liabilities
(including accrued expenses and indebtedness) and the aggregate liquidation
value of any outstanding preferred shares is divided by the total number of
common shares outstanding at such time. Currently, the net asset values of
shares of publicly traded closed-end investment companies are published in
Barron's, the Monday edition of The Wall Street Journal and the Monday and
Saturday editions of The New York Times.
The Fund generally values its portfolio securities using closing market prices
or readily available market quotations. When closing market prices or market
quotations are not available or, in the opinion of the Adviser, are not
representative of the true market value, the fair value of a security may be
determined in accordance with procedures approved by the Trustees. Debt
investment securities are valued on the basis of valuations furnished by a
principal market maker or a pricing service, both of which generally utilize
electronic data processing techniques to determine valuations for normal
institutional size trading units of debt securities without exclusive reliance
upon quoted prices. Short-term debt investments which have a remaining maturity
of 60 days or less are generally valued at amortized cost which approximates
market value. If market quotations are not readily available or if, in the
opinion of the Adviser, any quotation or price is not representative of true
market value, the fair value of the security may be determined in good faith in
accordance with procedures approved by the Trustees. Foreign securities are
valued on the basis of quotations from the primary market in which they are
traded. If quotations are not readily available, or the value has been
materially affected by the events occurring after closing of a foreign market,
assets are valued by a method that the Trustees believe accurately reflects fair
value. The value of interest rate swaps, caps and floors is determined in
accordance with a formula and then confirmed periodically by obtaining a bank
quotation. Positions in options are valued at the last sale price on the market
where any such option is principally traded. Positions in futures contracts are
valued at closing prices for such contracts established by the exchange on which
they are traded. Repurchase agreements are valued at cost plus accrued interest.
U.S. federal income tax matters
The following is a summary discussion of material U.S. federal income tax
consequences that may be relevant to a shareholder of acquiring, holding and
disposing of APS. This discussion addresses only U.S. federal income tax
consequences to U.S. shareholders who hold their shares as capital assets and
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U.S. FEDERAL INCOME TAX MATTERS
--------------------------------------------------------------------------------
does not address all of the U.S. federal income tax consequences that may be
relevant to particular shareholders in light of their individual circumstances.
This discussion also does not address the tax consequences to shareholders who
are subject to special rules, including, without limitation, financial
institutions, insurance companies, dealers in securities or foreign currencies,
foreign shareholders, shareholders who hold their shares as or in a hedge
against currency risk, a constructive sale, or a conversion transaction,
shareholders who are subject to the alternative minimum tax, or tax-exempt or
tax-deferred plans, accounts, or entities. In addition, the discussion does not
address any state, local, or foreign tax consequences, and it does not address
any U.S. federal tax consequences other than U.S. federal income tax
consequences. The discussion reflects applicable tax laws of the United States
as of the date of this Prospectus, which tax laws may be changed or subject to
new interpretations by the courts or the Internal Revenue Service ("IRS")
retroactively or prospectively. No attempt is made to present a detailed
explanation of all U.S. federal income tax concerns affecting the Fund and its
shareholders, and the discussion set forth herein does not constitute tax
advice. Investors are urged to consult their own tax advisers to determine the
specific tax consequences to them of investing in the Fund, including the
applicable federal, state, local and foreign tax consequences to them and the
effect of possible changes in tax laws.
The Fund intends to elect to be treated and to qualify each year as a "regulated
investment company" under Subchapter M of the Code and to comply with applicable
distribution requirements so that it generally will not pay U.S. federal income
tax on income and capital gains distributed to shareholders. In order to qualify
as a regulated investment company, which qualification the following discussion
assumes, the Fund must satisfy certain tests regarding the sources of its income
and the diversification of its assets. If the Fund qualifies as a regulated
investment company and, for each taxable year, it distributes to its
shareholders an amount equal to or exceeding the sum of (i) 90% of its
"investment company taxable income" as that term is defined in the Code (which
includes, among other things, dividends, taxable interest, and the excess of any
net short-term capital gains over net long-term capital losses, as reduced by
certain deductible expenses) without regard to the deduction for dividends paid
and (ii) 90% of the excess of its gross tax-exempt interest, if any, over
certain disallowed deductions, the Fund generally will be relieved of U.S.
federal income tax on any income of the Fund, including "net capital gain" (the
excess of net long-term capital gain over net short-term capital loss),
distributed to shareholders. However, if the Fund meets such distribution
requirements but chooses to retain some portion of its investment company
taxable income or net capital gain, it generally will be subject to U.S. federal
income tax at regular corporate rates on the amount retained. The Fund intends
to distribute at least annually all or substantially all of its investment
company taxable income, net tax-exempt interest, if any, and net capital gain.
If for any taxable year the Fund did not qualify as a regulated investment
company, it would be treated as a corporation subject to U.S. federal income tax
thereby subjecting any income earned by the Fund to tax at the corporate level
at a maximum 35% federal income tax rate and, when such income is distributed,
to a further tax at the shareholder level.
Although dividends generally will be treated as distributed when paid, any
dividend declared by the Fund as of a record date in October, November or
December and paid during the following January will be treated for U.S. federal
income tax purposes as received by shareholders on December 31 of the calendar
year in which it is declared.
Under the Code, the Fund will be subject to a nondeductible 4% federal excise
tax on a portion of its undistributed ordinary income and capital gains if it
fails to meet certain distribution requirements with respect to each calendar
year. The Fund intends to make distributions in a timely manner and accordingly
does not expect to be subject to the excise tax, but there can be no assurance
that the Fund's distributions will be sufficient to avoid this tax entirely.
Based in part on the lack of any present intention on the part of the Fund to
redeem or purchase the APS at any time in the future, the Fund intends to take
the position that under present law the APS
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U.S. FEDERAL INCOME TAX MATTERS
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will constitute stock of the Fund and distributions with respect to the APS
(other than distributions in redemption of the APS that are treated as exchanges
under Section 302(b) of the Code) will constitute dividends to the extent of the
Fund's current or accumulated earnings and profits as calculated for U.S.
federal income tax purposes. This view relies in part on a published ruling of
the IRS stating that certain preferred stock similar in many material respects
to the APS represents equity. It is possible, however, that the IRS might take a
contrary position asserting, for example, that the APS constitute debt of the
Fund. If this position were upheld, the discussion of the treatment of
distributions below would not apply. Instead, distributions by the Fund to
holders of APS would constitute interest, whether or not such distributions
exceeded the earnings and profits of the Fund, would be included in the income
of the recipient and would be taxed as ordinary income.
For U.S. federal income tax purposes, assuming the Fund has sufficient current
or accumulated earnings and profits, dividends from investment company taxable
income are taxable either as ordinary income or, if so designated by the Fund
and certain other requirements are met, as "qualified dividend income" taxable
to individual shareholders at a maximum 15% U.S. federal income tax rate, and
dividends from net capital gain that are designated as capital gain dividends
are taxable as long-term capital gains for U.S. federal income tax purposes
without regard to the length of time the shareholder has held shares of the
Fund. Distributions by the Fund in excess of the Fund's current and accumulated
earnings and profits will be treated as a return of capital to the extent of
(and in reduction of) the shareholder's basis in its shares and any such amount
in excess of that basis will be treated as gain from the sale of shares, as
discussed below.
Dividend income distributed to individual shareholders may qualify for such
maximum 15% U.S. federal income tax rate to the extent that such dividends are
attributable to "qualified dividend income," as that term is defined in Section
1(h)(11)(B) of the Code, from the Fund's investments in common and preferred
stock of U.S. companies and stock of certain foreign corporations, provided that
certain holding period and other requirements are met by both the Fund and the
shareholder. Capital gain dividends distributed by the Fund to individual
shareholders generally will qualify for the maximum 15% U.S. federal income tax
rate on long-term capital gains. Under current law, the maximum 15% U.S. federal
income tax rate on qualified dividend income and long-term capital gains will
cease to apply to taxable years beginning after December 31, 2008. Higher tax
rates will apply in 2009 unless further legislative action is taken by Congress.
Although the Fund intends to invest at least 80% of its assets in
dividend-paying equity securities that the Adviser believes at the time of
acquisition are eligible to pay tax-advantaged dividends and to satisfy the
holding period and other requirements, a portion of the Fund's income
distributions may be taxable as ordinary income. There can be no assurance as to
the portion of the Fund's dividends that will be tax-advantaged.
In the case of securities lending transactions, payments in lieu of dividends
are not qualified dividends, and dividends received by the Fund from REITs are
qualified dividends only in limited circumstances. Dividends distributed to
shareholders attributable to income from such investments and from the Fund's
investments in debt securities, taxable preferred securities or any other
investments that do not produce qualified dividend income will not qualify for
the maximum 15% U.S. federal income tax rate on qualified dividend income,
unless 95% or more the Fund's "gross income" (as specially computed) for a
taxable year is comprised of qualified dividend income received by the Fund, in
which case all dividends attributable to such gross income will be taxable to
individual shareholders at a maximum 15% U.S. federal income tax rate if certain
holding period and other requirements are met.
A dividend that is attributable to qualified dividend income of the Fund that is
paid by the Fund to an individual holder of APS will not be taxable as qualified
dividend income to such shareholder if (1) the dividend is received with respect
to any share of the Fund held for fewer than 91 days during the 181-day period
beginning on the date which is 90 days before the date on which such share
became ex-dividend with respect to such dividend, (2) to the extent that the
shareholder is under an obligation
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U.S. FEDERAL INCOME TAX MATTERS
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(whether pursuant to a short sale or otherwise) to make related payments with
respect to positions in substantially similar or related property, or (3) the
shareholder elects to have the dividend treated as investment income for
purposes of the limitation on deductibility of investment interest. Although
current law only provides a 180-day period for holding such stock, a proposed
technical correction to the law would extend such period to 181 days. The
Treasury Department and the Internal Revenue Service have announced that
taxpayers may apply the extended period as if the legislation were already
enacted in filing their federal income tax returns.
If the Fund retains any net capital gain for a taxable year, the Fund may
designate the retained amount as undistributed capital gains in a notice to
shareholders who, if subject to U.S. federal income tax on long-term capital
gains, (i) will be required to include in income for U.S. federal income tax
purposes, as long-term capital gain, their proportionate shares of such
undistributed amount, and (ii) will be entitled to credit their proportionate
shares of the tax paid by the Fund on the undistributed amount against their
U.S. federal income tax liabilities, if any, and to claim refunds to the extent
the credit exceeds such liabilities.
A shareholder should also be aware that the benefits of the favorable tax rate
applicable to long-term capital gains and qualified dividend income may be
impacted by the application of the alternative minimum tax to individual
shareholders.
The IRS has taken the position that if a regulated investment company has two or
more classes of shares, it must designate distributions made to each class in
any year as consisting of no more than such class's proportionate share of
particular types of income (including ordinary income and capital gains). A
class's proportionate share of a particular type of income is determined
according to the percentage of total dividends paid by the regulated investment
company to such class. Consequently, if both common shares of the Fund and APS
are outstanding, the Fund intends to designate distributions made to the classes
of particular types of income in accordance with each such class's proportionate
share of such income. The Fund will designate dividends that constitute
qualified dividend income, dividends qualifying for the dividends-received
deduction, capital gain dividends, and other dividends taxable at ordinary
income tax rates in a manner that allocates such income between the holders of
common shares of the Fund and APS in proportion to the total dividends paid to
each class during the taxable year, or otherwise as required by applicable law.
Sales and other dispositions of the Fund's shares generally are taxable events
for shareholders that are subject to tax. Shareholders should consult their own
tax advisers with reference to their individual circumstances to determine
whether any particular transaction in the Fund's shares is properly treated as a
sale for tax purposes, as the following discussion assumes, and the tax
treatment of any gains or losses recognized in such transactions. In general, if
shares of the Fund are sold, the shareholder will recognize gain or loss equal
to the difference between the amount realized on the sale and the shareholder's
adjusted basis in the shares sold. Such gain or loss generally will be treated
as long-term gain or loss if the shares were held for more than one year and
otherwise generally will be treated as short-term gain or loss. Any loss
recognized by a shareholder upon the sale or other disposition of shares with a
tax holding period of six months or less generally will be treated as a
long-term capital loss to the extent of any amounts treated as distributions of
long-term capital gains with respect to such shares. Losses on sales or other
dispositions of shares may be disallowed under "wash sale" rules in the event
other investments are made in the Fund (including those made pursuant to
reinvestment of dividends and/or capital gains distributions) within a period of
61 days beginning 30 days before and ending 30 days after a sale or other
disposition of shares.
If in connection with the selection of a Long-Term Dividend Period, (i) the Fund
provides that a Premium Call Period will follow a Non-Call Period, (ii) based on
all the facts and circumstances at the time of the designation of the Long-Term
Dividend Period the Fund is more likely than not to redeem the APS during the
Premium Call Period, and (iii) the premium to be paid upon redemption during the
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U.S. FEDERAL INCOME TAX MATTERS
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Premium Call Period exceeds a reasonable penalty for early redemption, it is
possible that the holder of APS will be required to accrue such premium as a
dividend (to the extent of the Fund's earnings and profits) over the term of the
Non-Call Period.
The Fund is required, in certain circumstances, to backup withhold on reportable
payments, including dividends, capital gains distributions, and proceeds of
sales or other dispositions of the Fund's shares paid to certain holders of the
Fund's shares who do not furnish the Fund with their correct Social Security
number or other taxpayer identification number and make certain other
certifications, or who are otherwise subject to backup withholding. Backup
withholding is not an additional tax. Any amounts withheld from payments made to
a shareholder may be refunded or credited against such shareholder's U.S.
federal income tax liability, if any, provided that the required information is
furnished to the IRS.
The foregoing is a general and abbreviated summary of the provisions of the Code
and the Treasury regulations currently in effect as they generally affect the
taxation of the Fund and its shareholders. As noted above, these provisions are
subject to change by legislative, judicial or administrative action, and any
such change may be retroactive. A further discussion of the U.S. federal income
tax rules applicable to the Fund can be found in the Statement of Additional
Information which is incorporated by reference into this Prospectus.
Description of shares
The Fund is authorized to issue an unlimited number of common shares. The Fund
is also authorized to issue an unlimited number of preferred shares. The Board
of Trustees is authorized to classify and reclassify any unissued shares into
one or more additional classes or series of shares. The Board of Trustees may
establish such series or class, including preferred shares, from time to time by
setting or changing in any one or more respects the designations, preferences,
conversion or other rights, voting powers, restrictions, limitations as to
dividends, qualifications or terms or conditions of redemption of such shares
and pursuant to such classification or reclassification to increase or decrease
the number of authorized shares of any existing class or series. The Board of
Trustees, without shareholder approval, is authorized to amend the Agreement and
Declaration of Trust and By-laws to reflect the terms of any such class or
series, including any class of preferred shares. The Fund is also authorized to
issue other securities, including debt securities.
Under Massachusetts law, shareholders of the Fund, including holders of the
common shares and any preferred shares, could, in certain circumstances, be held
personally liable for the obligations of the Fund. However, the Agreement and
Declaration of Trust disclaims shareholder liability for acts or obligations of
the Fund. Notice of such disclaimer may be given in any agreement, obligation or
instrument entered into or executed by the Fund or the Trustees on behalf of the
Fund. The Agreement and Declaration of Trust provides for indemnification out of
Fund property for all loss and expense of any shareholder held personally liable
for the obligations of the Fund. Thus, the risk of a shareholder incurring
financial loss on account of shareholder liability is limited to circumstances
in which the Fund would be unable to meet its obligations.
The Agreement and Declaration of Trust further provides that obligations of the
Fund are not binding upon the Trustees or officers individually but only upon
the property of the Fund and that the Trustees or officers will not be liable
for actions or failures to act. Nothing in the Agreement and Declaration of
Trust, however, protects a Trustee or officer against any liability to which
such Trustee or officer may be subject by reason of willful misfeasance, bad
faith, gross negligence or reckless disregard of the duties involved in the
conduct of such Trustee's or officer's office.
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62
DESCRIPTION OF SHARES
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COMMON SHARES
Common Shares, when issued and outstanding, are fully paid and non-assessable.
Shareholders are entitled to share pro rata in the net assets of the Fund
available for distribution to common shareholders upon liquidation of the Fund.
Common shareholders are entitled to one vote for each share held.
So long as any preferred shares of the Fund are outstanding, including the APS,
holders of common shares will not be entitled to receive any net income or other
distributions from the Fund unless all accumulated dividends on preferred shares
have been paid, and unless asset coverage (as defined in the 1940 Act) with
respect to preferred shares would be at least 200% after giving effect to such
distributions.
The Fund will send unaudited reports at least semiannually and audited annual
financial statements to all of its shareholders.
PREFERRED SHARES
In the event of any voluntary or involuntary liquidation, dissolution or winding
up of the Fund, the holders of preferred shares will be entitled to receive a
preferential liquidating distribution, which is expected to equal the original
purchase price per preferred share plus accrued and unpaid dividends, whether or
not declared, before any distribution of assets is made to holders of common
shares. After payment of the full amount of the liquidating distribution to
which they are entitled, the holders of preferred shares will not be entitled to
any further participation in any distribution of assets by the Fund.
The 1940 Act requires that the holders of any preferred shares, voting
separately as a single class, have the right to elect at least two Trustees at
all times. The remaining Trustees will be elected by holders of common shares.
In addition, subject to the prior rights, if any, of the holders of any other
class of senior securities outstanding, the holders of any preferred shares have
the right to elect a majority of the Trustees at any time two years' dividends
on any preferred shares are unpaid. The 1940 Act also requires that, in addition
to any approval by shareholders that might otherwise be required, the approval
of the holders of a majority of any outstanding preferred shares, voting
separately as a class, would be required to (i) adopt any plan of reorganization
that would adversely affect the preferred shares, and (ii) take any action
requiring a vote of security holders under Section 13(a) of the 1940 Act,
including, among other things, changes in the Fund's subclassification as a
closed-end investment company or changes in its fundamental investment
restrictions. See "Certain provisions of the Agreement and Declaration of Trust
and By-laws." As a result of these voting rights, the Fund's ability to take any
such actions may be impeded to the extent that there are any preferred shares
outstanding. The Board of Trustees presently intends that, except as otherwise
indicated in this Prospectus and except as otherwise required by applicable law,
holders of preferred shares will have equal voting rights with holders of common
shares (one vote per share, unless otherwise required by the 1940 Act) and will
vote together with holders of common shares as a single class.
The affirmative vote of the holders of a majority of the outstanding preferred
shares, voting as a separate class, will be required to amend, alter or repeal
any of the preferences, rights or powers of holders of preferred shares so as to
affect materially and adversely such preferences, rights or powers, or to
increase or decrease the authorized number of preferred shares. The class vote
of holders of preferred shares described above will in each case be in addition
to any other vote required to authorize the action in question.
The terms of the preferred shares provide that (i) they are redeemable by the
Fund in whole or in part at the original purchase price per share plus accrued
dividends per share, (ii) the Fund may tender for or purchase preferred shares
and (iii) the Fund may subsequently resell any shares so tendered for or
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DESCRIPTION OF SHARES
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purchased. Any redemption or purchase of preferred shares by the Fund will
reduce the leverage applicable to the common shares, while any resale of shares
by the Fund will increase that leverage.
The discussion above describes the possible offering of preferred shares by the
Fund. If the Board of Trustees determines to proceed with such an offering, the
terms of the preferred shares may be the same as, or different from, the terms
described above, subject to applicable law and the Agreement and Declaration of
Trust. The Board of Trustees, without the approval of the holders of common
shares, may authorize an offering of preferred shares or may determine not to
authorize such an offering, and may fix the terms of the preferred shares to be
offered.
Certain provisions of the Agreement and Declaration of Trust and By-laws
The Agreement and Declaration of Trust includes provisions that could limit the
ability of other entities or persons to acquire control of the Fund or to
convert the Fund to open-end status.
Specifically, the Agreement and Declaration of Trust requires a vote by holders
of at least 75% of the outstanding common and preferred shares, voting together
as a single class, to authorize:
+ a conversion of the Fund from a closed-end to an open-end investment company
+ a merger of the Fund, or a series of the Fund, with or into or a
consolidation or exchange of shares with any other entity
+ a sale, or conveyance of all or substantially all of the Fund's assets (other
than in the ordinary course of the Fund's business)
+ a termination of the Fund, or a series of the Fund
+ a removal of Trustees by shareholders, and then only for cause
unless, with respect to the foregoing, such transaction or removal has already
been authorized by the affirmative vote of 75% of the total number of Trustees
fixed in accordance with the Agreement and Declaration of Trust or the By-laws,
in which case the affirmative vote of the holders of at least a majority of the
Fund's common and preferred shares outstanding at the time, voting together as a
single class, is required, provided, however, that where only a particular class
or series is affected (or, in the case of removing a Trustee, when the Trustee
has been elected by only one class), only the required vote by the applicable
class or series will be required. Approval of shareholders is not required,
however, for any transaction, whether deemed a merger, consolidation,
reorganization or otherwise whereby the Fund issues shares in connection with
the acquisition of assets (including those subject to liabilities) from any
other investment company or similar entity. None of the foregoing provisions may
be amended except by the vote of at least 75% of the outstanding common shares
and preferred shares, voting together as a single class. In the case of the
conversion of the Fund to an open-end investment company, or in the case of any
of the foregoing transactions constituting a plan of reorganization which
adversely affects the holders of the Fund's preferred shares, the action in
question will also require the affirmative vote of the holders of at least 75%
of the outstanding preferred shares, voting as a separate class, or, if such
action has been authorized by the affirmative vote of 75% of the total number of
Trustees fixed in accordance with the Agreement and Declaration of Trust or the
By-laws, the affirmative vote of the holders of at least a majority of the
Fund's outstanding preferred shares, voting as a separate class.
The votes required to approve the conversion of the Fund from a closed-end to an
open-end investment company or to approve transactions constituting a plan of
reorganization which adversely affects the holders of the Fund's preferred
shares are higher than those required by the 1940 Act. The
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CERTAIN PROVISIONS OF THE AGREEMENT AND DECLARATION OF TRUST AND BY-LAWS
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Board of Trustees believes that the provisions of the Agreement and Declaration
of Trust relating to such higher votes are in the best interest of the Fund and
its shareholders.
The Board of Trustees is divided into three classes of approximately equal size.
The terms of the Trustees of the different classes are staggered so that
approximately one-third of the Board of Trustees is elected by shareholders each
year.
The provisions of the Agreement and Declaration of Trust described above could
have the effect of depriving the common shareholders of opportunities to sell
their common shares at a premium over the then current market price of the
common shares by discouraging a third-party from seeking to obtain control of
the Fund in a tender offer or similar transaction. The overall effect of these
provisions is to render more difficult the accomplishment of a merger or the
assumption of control by a third-party. They provide, however, the advantage of
potentially requiring persons seeking control of the Fund to negotiate with its
management regarding the price to be paid and facilitating the continuity of the
Fund's investment objective and principal investment strategies. The Board of
Trustees of the Fund has considered the foregoing anti-takeover provisions and
concluded that they are in the best interests of the Fund and its common
shareholders.
The Fund's By-laws generally require that advance notice be given to the Fund in
the event a shareholder desires to nominate a person for election to the Board
of Trustees or to transact any other business at an annual meeting of
shareholders. With respect to an annual meeting following the first annual
meeting of shareholders, notice of any such nomination or business must be
delivered to or received at the principal executive offices of the Fund not less
than 90 calendar days nor more than 120 calendar days prior to the anniversary
of the date of mailing of the notice for the prior year's annual meeting
(subject to certain exceptions). In the case of the first annual meeting of
shareholders, the notice must be given no later than the tenth calendar day
following public disclosure as specified in the By-laws of the date of the
meeting. Any notice by a shareholder must be accompanied by certain information
as provided in the By-laws.
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65
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Underwriting
The underwriters named below, (the "Underwriters") acting through UBS Securities
LLC, 299 Park Avenue, New York, New York, as lead manager, and Merrill Lynch,
Pierce, Fenner & Smith Incorporated, Wachovia Capital Markets, LLC and A.G.
Edwards & Sons, Inc. as their representatives (together with the lead manager,
the "Representatives"), have severally agreed, subject to the terms and
conditions of the Underwriting Agreement, to purchase from the Fund the number
of APS set forth opposite their respective names. The Underwriters are committed
to purchase and pay for all of such APS if any are purchased.
NUMBER OF
UNDERWRITERS APS
---------------------------------------------------------------------------
UBS Securities LLC.......................................... 6,840
Merrill Lynch, Pierce, Fenner & Smith
Incorporated................................... 5,320
Wachovia Capital Markets, LLC............................... 2,280
A.G. Edwards & Sons, Inc. .................................. 760
Total.................................................. 15,200
------------
------------
The Underwriters have advised the Fund that they propose initially to offer the
APS directly to the public at the public offering price set forth on the cover
page of this Prospectus, and to certain dealers at such price less a concession
not in excess of $137.50 per share. The Underwriters may allow, and such dealers
may reallow, a concession not in excess of $100.00 per share to other dealers.
After the initial public offering, the public offering price, concession and
discount may be changed. Investors must pay for any APS purchased in the initial
public offering on or before May 3, 2004.
The Underwriters will act in Auctions as Broker-Dealers and receive fees as set
forth under "The Auction" and in the Statement of Additional Information. The
Underwriters also may provide information to be used in determining the
Reference Rate.
The Fund anticipates that the Representatives may from time to time act as
brokers and dealers in connection with the execution of the Fund's portfolio
transactions after they have ceased to be principal underwriters of the Fund
under the 1940 Act and, subject to certain conditions, may act as such brokers
and dealers while they are principal underwriters.
In connection with this offering, certain of the Underwriters or selected
dealers may distribute prospectuses electronically.
The Fund and the Adviser have agreed to indemnify the Underwriters against
certain liabilities, including liabilities under the Securities Act.
In connection with the offering of the Fund's Common Shares, Adviser (and not
the Fund) has agreed, pursuant to additional compensation agreements, to pay
certain qualifying underwriters, including certain of the Representatives, an
annual fee of up to 0.15% of the Fund's average daily managed assets multiplied
by the percentage of the Fund's Common Shares sold by each respective qualifying
underwriter in connection with the Fund's Common Shares offering.
As described under "Management of the Fund," UBS Securities LLC will provide
shareholder services to the Fund pursuant to a shareholder servicing agreement
with the Adviser.
--------------------------------------------------------------------------------
66
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Custodian, transfer agent, registrar and dividend disbursing agent
The Fund's securities and cash are held under a custodian agreement with The
Bank of New York, located at One Wall Street, New York, New York 10286. Deutsche
Bank Trust Company Americas, located at 60 Wall Street, New York, New York 10005
is the Fund's transfer agent, registrar and dividend disbursing agent in its
capacity as Auction Agent for the APS.
Legal matters
Certain legal matters in connection with the shares offered hereby are passed on
for the Fund by Hale and Dorr LLP, Boston, Massachusetts. Certain matters have
been passed upon for the Underwriters by Skadden, Arps, Slate, Meagher & Flom
LLP, Chicago, Illinois, and its affiliates.
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67
--------------------------------------------------------------------------------
Table of contents for the
Statement of Additional Information
PAGE
------------------------------------------------------------------
Organization of the Fund.................................... 2
Investment objective and policies........................... 2
Investment restrictions..................................... 15
Those responsible for management............................ 16
Investment advisory and other services...................... 23
Additional information concerning the Auctions for the
Preferred Shares.......................................... 27
Rating Agency Guidelines.................................... 28
Net asset value............................................. 29
Brokerage allocation........................................ 29
U.S. federal income tax matters............................. 32
Performance................................................. 37
Custody of portfolio........................................ 38
Independent auditors........................................ 38
Additional information...................................... 38
Financial Statements........................................ 39
Appendix A--More about risks................................ A-1
Appendix B--Description of ratings.......................... B-1
Appendix C--Proxy voting guidelines and procedures.......... C-1
Appendix D--Auction Procedures.............................. D-1
Appendix E--Settlement Procedures........................... E-1
Appendix F--Amended and Restated By-laws.................... F-1
PRIVACY PRINCIPLES OF THE FUND
The Fund is committed to maintaining the privacy of its shareholders and to
safeguarding their non-public personal information. The following information is
provided to help you understand what personal information the Fund collects, how
the Fund protects that information and why, in certain cases, the Fund may share
information with select other parties.
Generally, the Fund does not receive any non-public personal information
relating to its shareholders, although certain non-public personal information
of its shareholders may become available to the Fund. The Fund does not disclose
any non-public personal information about its shareholders or former
shareholders to anyone, except as permitted by law or as is necessary in order
to service shareholder accounts (for example, to a transfer agent or third-party
administrator).
The Fund restricts access to non-public personal information about its
shareholders to employees of the Fund's investment adviser and its affiliates
with a legitimate business need for the information. The Fund maintains
physical, electronic and procedural safeguards designed to protect the
non-public personal information of its shareholders.
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68
--------------------------------------------------------------------------------
Glossary
" 'AA' Financial Composite Commercial Paper Rate" on any date, means (i) (A) the
Interest Equivalent of the 30-day rate (for Dividend Periods fewer than or equal
to 31 days), the 60-day rate (for Dividend Periods greater than 31 days but
fewer than or equal to 61 days) and the 90-day rate (for Dividend Periods
greater than 61 days but fewer than or equal to 91 days) on commercial paper on
behalf of issuers whose corporate bonds are rated "AA" by S&P, or the equivalent
of such rating by another rating agency, as announced by the Federal Reserve
Bank of New York for the close of business on the Business Day immediately
preceding such date; and (B) for Dividend Periods greater than 91 days but fewer
than 184 days, the rate described in clause (ii) below; or (ii) if the Federal
Reserve Bank of New York does not make available such a rate, or with respect to
Dividend Periods greater than 91 days but fewer than 184 days, then the
arithmetic average of the Interest Equivalent of such rates on commercial paper
placed on behalf of such issuers, as quoted on a discount basis or otherwise by
the Commercial Paper Dealers to the Auction Agent for the close of business on
the Business Day immediately preceding such date (rounded to the next highest
one-thousandth (0.001) of 1%). If any Commercial Paper Dealer does not quote a
rate required to determine the "AA" Financial Composite Commercial Paper Rate,
such rate shall be determined on the basis of the quotations (or quotation)
furnished by the remaining Commercial Paper Dealers (or Dealer), if any, or, if
there are no such Commercial Paper Dealers, by the Auction Agent. For purposes
of this definition, (A) "Commercial Paper Dealers" shall mean (1) UBS Securities
LLC and Merrill Lynch, Pierce, Fenner & Smith Incorporated; (2) in lieu of any
thereof, its respective affiliate or successor; and (3) in the event that any of
the foregoing shall cease to quote rates for commercial paper of issuers of the
sort described above, in substitution therefor, a nationally recognized dealer
in commercial paper of such issuers then making such quotations selected by the
Fund, and (B) "Interest Equivalent" of a rate stated on a discount basis for
commercial paper of a given number of days' maturity shall mean a number equal
to the quotient (rounded upward to the next higher one-thousandth (0.001) of 1%)
of (1) such rate expressed as a decimal, divided by (2) the difference between
(x) 1.00 and (y) a fraction, the numerator of which shall be the product of such
rate expressed as a decimal, multiplied by the number of days in which such
commercial paper shall mature and the denominator of which shall be 360.
"Agent Member" means a member, or participant in, of the Securities Depository
that will act on behalf of a Beneficial Owner of one or more Preferred Shares or
on behalf of a Potential Beneficial Owner.
"Applicable Percentage" has the meaning specified under "Description of
Preferred Shares--
DIVIDENDS AND DIVIDEND PERIODS" in this Prospectus.
"Applicable Rate" means the rate per annum at which cash dividends are payable
on the APS for any Dividend Period.
"Applicable Spread" has the meaning specified under "Description of Preferred
Shares--
DIVIDENDS AND DIVIDEND PERIODS" in this Prospectus.
"Auction" means a periodic operation of the Auction Procedures.
"Auction Agency Agreement" means the agreement entered into between the Fund and
the Auction Agent which provides, among other things, that the Auction Agent
will follow the Auction Procedures for the purpose of determining the Applicable
Rate.
"Auction Agent" means Deutsche Bank Trust Company Americas unless and until
another commercial bank, trust company or other financial institution appointed
by a resolution of the Board of Trustees of the Fund or a duly authorized
committee thereof enters into an agreement with the Fund to follow the Auction
Procedures for the purpose of determining the Applicable Rate and to act as
transfer agent, registrar, dividend disbursing agent and redemption agent for
the APS.
--------------------------------------------------------------------------------
69
GLOSSARY
--------------------------------------------------------------------------------
"Auction Date" with respect to any series of APS and any Rate Period, means the
Business Day next preceding the first day of such Rate Period.
"Auction Procedures" means the procedures for conducting Auctions set forth in
Appendix C to the Statement of Additional Information.
"Beneficial Owner" means a customer of a Broker-Dealer who is listed on the
records of that Broker-Dealer (or if applicable, the Auction Agent) as a holder
of Preferred Shares or a Broker-Dealer that holds Preferred Shares for its own
account.
"Bid" has the meaning specified under "The Auction--AUCTION PROCEDURES--Orders
by Beneficial Owners, Potential Beneficial Owners, Existing Holders and
Potential Holders" in this Prospectus.
"Broker-Dealer" has the meaning specified under "The Auction--BROKER-DEALER
AGREEMENTS" in this Prospectus.
"Broker-Dealer Agreement" has the meaning specified under "The
Auction--BROKER-DEALERS" in this Prospectus.
"Business Day" means a day on which the New York Stock Exchange is open for
trading and which is not a Saturday, Sunday or other day on which banks in New
York City are authorized or obligated by law to close.
"By-laws" means the By-laws of the Fund as amended, specifying, in part, the
powers, preferences and rights of the Preferred Shares.
"Common Shares" means the common shares of beneficial interest, no par value, of
the Fund.
"Date of Original Issue" means, with respect to any share of Preferred Shares,
the date on which such share first is issued by the Fund.
"Discounted Value" of any asset of the Fund means the quotient of the market
value of an asset eligible to be held by the Fund under the Moody's and S&P
guidelines divided by the applicable discount factor assigned to such asset
under the Moody's and S&P guidelines.
"Dividend Payment Date" has the meaning specified under "Description of
Preferred Shares--DIVIDENDS AND DIVIDEND PERIODS--Divided Payment Dates" in this
Prospectus.
"Dividend Period" has the meaning specified under "Description of Preferred
Shares--DIVIDENDS AND DIVIDEND PERIODS--Divided Periods" in this Prospectus.
"Existing Holder" means a Broker-Dealer or any such other person as may be
permitted by the Fund that is listed as the holder of record of Preferred Shares
in the records of the Auction Agent.
"Hold Order" has the meaning specified under "Description of Preferred
Shares--AUCTION PROCEDURES--Orders by Beneficial Owners, Potential Beneficial
Owners, Existing Holders and Potential Holders" in this Prospectus.
"Initial Dividend Payment Date" means, with respect to a series of Preferred
Shares, the Initial Dividend Payment Date specified under "Description of
Preferred Shares--DIVIDENDS AND DIVIDEND PERIODS--Divided payment dates" in this
Prospectus.
"Initial Dividend Period" means, for each series of Preferred Shares, the period
from and including the Date of Original Issue but excluding the Initial Dividend
Payment Date.
--------------------------------------------------------------------------------
70
GLOSSARY
--------------------------------------------------------------------------------
"Maximum Applicable Rate" has the meaning specified under "Description of
Preferred Shares--DIVIDENDS AND DIVIDEND PERIODS--Calculation of dividend
payment" in this Prospectus.
"Moody's" means Moody's Investors Service, Inc. or its successors.
"1940 Act Preferred Shares Asset Coverage" has the meaning specified under
"Description of Preferred Shares--RATING AGENCY GUIDELINES AND ASSET COVERAGE"
in this Prospectus.
"1940 Act Cure Date" has the meaning specified under "Description of Preferred
Shares--RATING AGENCY GUIDELINES AND ASSET COVERAGE" in this Prospectus.
"Non-Call Period" has the meaning set forth in the definition of "Specific
Redemption Provisions" below.
"Non-Payment Period Rate" has the meaning specified under "Description of
Preferred Shares--DIVIDENDS AND DIVIDEND PERIODS--Non-Payment Period and Late
Charge" in this Prospectus.
"Notice of Special Dividend Period" has the meaning specified under "Description
of Preferred Shares--DIVIDENDS AND DIVIDEND PERIODS--Designation of Special
Dividend Periods" in this Prospectus.
"Order" has the meaning specified under "Description of Preferred
Shares--AUCTION PROCEDURES--Orders by Beneficial Owners, Potential Beneficial
Owners, Existing Holders and Potential Holders" in this Prospectus.
"Potential Beneficial Owner" means a customer of a Broker-Dealer or a
Broker-Dealer that is not a Beneficial Owner of Preferred Shares but that wishes
to purchase such shares, or that is a Beneficial Owner that wishes to purchase
additional Preferred Shares.
"Potential Holder" means any Broker-Dealer or any such other person as may be
permitted by the Fund, including any Existing Holder, who may be interested in
acquiring Preferred Shares (or, in the case of an Existing Holder, additional
Preferred Shares).
"Preferred Shares" means the Auction Preferred Shares, no par value per share
and a liquidation preference of $25,000 per share plus an amount equal to
accumulated but unpaid dividends thereon (whether or not earned or declared) of
the Fund.
"Preferred Shares Basic Maintenance Amount" has the meaning specified under
"Description of Preferred Shares--RATING AGENCY GUIDELINES AND ASSET COVERAGE"
in this Prospectus.
"Premium Call Period" has the meaning set forth in the definition of "Specific
Redemption Provisions" below.
"Rate Period" means the Initial Dividend Period and any subsequent Dividend
Period, including a Special Dividend Period.
"Redemption Price" means the redemption price for the APS specified under
"Description of Preferred Shares--REDEMPTION" in the Prospectus.
"Reference Rate" has the meaning specified under "Description of Preferred
Shares -- DIVIDENDS AND DIVIDEND PERIODS" in this Prospectus.
"Request for Special Dividend Period" has the meaning specified under
"Description of Preferred Shares--DIVIDENDS AND DIVIDEND PERIODS--Designation of
Special Dividend Periods" in this Prospectus.
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71
GLOSSARY
--------------------------------------------------------------------------------
"Securities Depository" means The Depository Trust Company and its successors
and assigns or any successor securities depository selected by the Fund that
agrees to follow the procedures required to be followed by such securities
depository in connection with the Preferred Shares.
"Sell Order" has the meaning specified under "Description of Preferred
Shares--AUCTION PROCEDURES--Orders by Beneficial Owners, Potential Beneficial
Owners, Existing Holders and Potential Holders" in this Prospectus.
"Special Dividend Period" has the meaning specified under "Description of
Preferred Shares--DIVIDENDS AND DIVIDEND PERIODS--Description of Special
Dividend Periods" in this Prospectus.
"Specific Redemption Provisions" means, with respect to a Special Dividend
Period, either, or both of, (i) a period (a "Non-Call Period") determined by the
Fund, after consultation with the Auction Agent and the Broker-Dealers, during
which the APS subject to such Dividend Period shall not be subject to redemption
at the option of the Fund and (ii) a period (a "Premium Call Period"),
consisting of a number of whole years and determined by the Fund, after
consultation with the Auction Agent and the Broker-Dealers, during each year of
which the APS subject to such Dividend Period shall be redeemable at the Fund's
option at a price per share equal to $25,000 plus accumulated but unpaid
dividends plus a premium expressed as a percentage of $25,000, as determined by
the Fund after consultation with the Auction Agent and the Broker-Dealers.
"Subsequent Dividend Period" means each Dividend Period after the Initial
Dividend Period.
"Substitute Rating Agency" shall mean a nationally recognized statistical rating
organization selected by the Fund to act as a substitute rating agency to
determine the credit ratings of the Preferred Shares.
"Sufficient Clearing Bids" has the meaning specified in the Auction Procedures.
"S&P" means Standard & Poor's Ratings Group.
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72
[JHF LOGO]
P130PN 4/04
JOHN HANCOCK TAX-ADVANTAGED DIVIDEND INCOME FUND
STATEMENT OF ADDITIONAL INFORMATION
April 29, 2004
John Hancock Tax-Advantaged Dividend Income Fund (the "Fund") is a
recently organized, diversified, closed-end management investment company. This
Statement of Additional Information provides information about the Fund in
addition to the information that is contained in the Fund's current prospectus,
dated April 29, 2004 (the "Prospectus"). This Statement of Additional
Information does not include all information that a prospective investor should
consider before purchasing the Fund's Series M auction preferred shares, Series
W auction preferred shares, Series TH auction preferred shares or Series F
auction preferred shares (collectively, the "Preferred Shares" or "APS"), is not
a prospectus and investors should obtain and read the Prospectus prior to
purchasing the Preferred Shares. A copy of the Prospectus can be obtained free
of charge by writing or telephoning:
John Hancock Advisers, LLC
Closed-End Fund Product Management
101 Huntington Avenue, 12th Floor
Boston, MA 02199
1-800-225-6020
You may also obtain a copy of the Prospectus on the Securities and
Exchange Commission's web site (http://www.sec.gov).
TABLE OF CONTENTS
ORGANIZATION OF THE FUND................................................... 2
INVESTMENT OBJECTIVE AND POLICIES.......................................... 2
INVESTMENT RESTRICTIONS.................................................... 15
THOSE RESPONSIBLE FOR MANAGEMENT........................................... 17
INVESTMENT ADVISORY AND OTHER SERVICES..................................... 23
ADDITIONAL INFORMATION CONCERNING THE AUCTIONS FOR THE PREFERRED SHARES.... 27
RATING AGENCY GUIDELINES................................................... 28
NET ASSET VALUE............................................................ 29
BROKERAGE ALLOCATION....................................................... 29
U.S. FEDERAL INCOME TAX MATTERS............................................ 32
PERFORMANCE................................................................ 37
CUSTODY OF PORTFOLIO....................................................... 38
INDEPENDENT AUDITORS....................................................... 38
ADDITIONAL INFORMATION..................................................... 38
FINANCIAL STATEMENTS....................................................... 39
APPENDIX A - MORE ABOUT RISK............................................... A-1
APPENDIX B - DESCRIPTION OF RATINGS........................................ B-1
APPENDIX C - PROXY VOTING GUIDELINES AND PROCEDURES........................ C-1
APPENDIX D - AUCTION PROCEDURES............................................ D-1
APPENDIX E -SETTLEMENT PROCEDURES.......................................... E-1
APPENDIX F - AMENDED AND RESTATED BY-LAWS.................................. F-1
ORGANIZATION OF THE FUND
The Fund is a diversified, closed-end investment management company
organized as a Massachusetts business trust on August 7, 2003 under the laws of
the Commonwealth of Massachusetts as John Hancock Preferred & Equity Income
Fund. On December 16, 2003, the Fund changed its name to "John Hancock
Tax-Advantaged Dividend Income Fund." John Hancock Advisers, LLC (prior to
February 1, 2002, "John Hancock Advisers, Inc.") (the "Adviser") is the Fund's
investment adviser. The Adviser is an indirect, wholly-owned subsidiary of John
Hancock Life Insurance Company (formerly John Hancock Mutual Life Insurance
Company) (the "Life Company"), a Massachusetts life insurance company chartered
in 1862, with national headquarters at John Hancock Place, Boston,
Massachusetts. The Life Company is wholly owned by John Hancock Financial
Services, Inc., a Delaware corporation organized on February 2000. John Hancock
Financial Services, Inc. and Manulife Financial Corporation merged on April 28,
2004.
INVESTMENT OBJECTIVE AND POLICIES
The following information supplements the discussion of the Fund's
investment objective and policies discussed in the Prospectus. Appendix A
contains further information describing investment risks. The investment
objective is non-fundamental and may be changed by the Trustees without
shareholder approval. There is no assurance that the Fund will achieve its
investment objective.
Investment objective. The Fund's investment objective is to provide a
high level of after-tax total return from dividend income and capital
appreciation.
Portfolio contents. Under normal market conditions, the Fund will invest
at least 80% of its assets (net assets plus borrowing for investment purposes)
in dividend-paying common and preferred securities that the Adviser believes at
the time of acquisition to be eligible to pay dividends which, for individual
shareholders, qualify for U.S. federal income taxation at rates applicable to
long-term capital gains, which currently are taxed at a maximum rate of 15%
("tax-advantaged dividends"), provided certain holding period and other
requirements are satisfied. The Fund may invest the remainder of its assets in
other equity and fixed income securities the income from which does not qualify
for such tax treatment. There can be no assurance as to the portion of the
Fund's dividends that will be tax-advantaged. In selecting securities for the
Fund's portfolio, the Adviser also considers the potential for capital
appreciation.
Industry and issuer concentration. The Fund intends to concentrate its
investments in securities issued by U.S. corporations in the related groups of
industries comprising each of the utilities sector and the financial services
sector and will be subject to certain risks due to such emphasis. The Fund
allocates its investments among various industries and issuers in such sectors,
based on the Adviser's evaluation of market and economic conditions. See "Risks
of Concentration in Industries Comprising the Utilities Sector" and "Risks of
Concentration in Industries Comprising the Financial Services Sector."
Common Stocks. Common stocks represent an equity (ownership) interest in
a company or other entity. This ownership interest often gives the Fund the
right to vote on measures affecting the company's organization and operations.
Although common shares generally have a history of long-term growth in value,
their prices, particularly those of smaller capitalization companies, are often
volatile in the short-term.
Foreign securities. Although the Fund will invest primarily in the
securities of U.S. issuers, the Fund may invest up to 20% of its total assets in
securities of corporate and governmental issuers located outside the United
States that are traded or denominated in U.S. dollars.
Illiquid securities. The Fund may invest up to 20% of its total assets
in illiquid securities, which are securities that can not be disposed of by the
Fund within seven days in the ordinary course of business at
2
approximately the amount at which the Fund values the securities. The Fund may
invest in securities that are sold in direct private placement transactions and
are neither listed on an exchange nor traded in the over-the-counter market.
Other securities. Normally, the Fund will invest substantially all of
its assets to meet its investment objective. The Fund may invest the remainder
of its assets in other equity securities, fixed income securities, and
securities with remaining maturities of less than one year, cash equivalents or
may hold cash. For temporary defensive purposes, the Fund may depart from its
principal investment strategies and invest part or all of its assets in
securities with remaining maturities of less than one year or cash equivalents
or may hold cash. During such periods, the Fund may not be able to achieve its
investment objective.
Traditional fixed rate preferred stock. Traditional fixed rate preferred
stocks have fixed dividend rates for the life of the issue and typically pay
dividends that qualify for the dividends received deduction (the "Dividends
Received Deduction") under Section 243 of the Internal Revenue Code of 1986, as
amended (the "Code"). These securities can be perpetual with no maturity date or
subject to mandatory redemptions such as through a sinking fund. Certain fixed
rate preferred stocks have features intended to provide some degree of price
stability. These features may include an auction mechanism at some specified
future date. The auction feature is normally intended to enhance the probability
that a preferred stock shareholder will be able to dispose of his holdings close
to a pre-specified price, typically equal to par or stated value. Other price
stability mechanisms include convertibility into an amount of common equity of
the same issuer at some specified future date, typically in amounts not greater
than par value of the underlying preferred stocks. Another common form of fixed
rate preferred stock is the traditional convertible preferred stock, which
permits the holder to convert into a specified number of shares at the holder's
option at any time prior to some specified date.
Adjustable rate preferred stock. Unlike traditional fixed rate preferred
stocks, adjustable rate preferred stocks are preferred stocks that have a
dividend rate that adjusts periodically to reflect changes in the general level
of interest rates. The adjustable dividend rate feature is intended to make the
market value of these securities less sensitive to changes in interest rates
than similar securities with fixed dividend rates. Nonetheless, adjustable rate
preferred stocks have fluctuated in market value and are expected to do so in
the future.
The dividend rate on an adjustable rate preferred stock is determined
typically each quarter by applying an adjustment formula established at the time
of issuance of the stock. Although adjustment formulas vary among issues, they
typically involve a fixed relationship either to (1) rates on specific classes
of debt securities issued by the U.S. Treasury or (2) LIBOR, with limits (known
as "collars") on the minimum and maximum dividend rates that may be paid. As the
maximum dividend rate is approached, any further increase in interest rates may
adversely affect the market value of the stock. Conversely, as the minimum
dividend rate is approached, any further decrease in interest rates may
positively affect the market value of the stock. The adjustment formula is fixed
at the time of issuance of the adjustable rate preferred stock and cannot be
changed without the approval of the holders thereof.
The market values of outstanding issues of adjustable rate preferred
stock may fluctuate in response to changing market conditions. In the event that
market participants in a particular issue demand a different dividend yield than
the adjustment formula produces, the market price will change to produce the
desired yield. The dividend yield demanded by market participants may vary with
changing perceptions of credit quality and the relative levels of short-term and
long-term interest rates, as well as other factors.
Preferred securities. Generally, preferred stocks receive dividends
prior to distributions on common stock and usually have a priority of claim over
common stockholders if the issuer of the stock is liquidated. The income paid by
an issuer to holders of its preferred and common stocks is typically eligible
for the Dividends Received Deduction. Preferred stocks do not usually have
voting rights equivalent to common stock of the same issue but may be
convertible into common stock. Perpetual preferred stocks are issued with no
mandatory retirement provisions, but typically are callable after a period of
time at the option of the issuer. Generally, no redemption can occur if full
cumulative dividends have not been paid, although issuers may be able to engage
in open-market repurchases without regard to any cumulative dividends payable.
Sinking fund preferred stocks provide for the redemption of a portion of the
issue on a regularly scheduled basis with, in most cases, the entire issue being
retired at a future date. Preferred securities other than preferred stock have
certain characteristics of both debt and equity securities. Like debt
securities, preferred securities' rate of income is contractually fixed. Like
equity securities, preferred securities do not have rights to precipitate
bankruptcy filings or collection activities in the event of missed
3
payments. Furthermore, preferred securities are in a subordinated position in an
issuer's capital structure and their value is heavily dependent on the
profitability of the issuer rather than on any legal claims to specific assets
or cash flows. Taxable preferred securities are a comparatively new asset class
having first been introduced late in 1993. Income paid on these securities is
not eligible for the Dividends Received Deduction or for treatment as
tax-advantaged dividends, but does constitute deductible interest expense for
issuers thereof. The universe of issuers of taxable preferred securities
consists overwhelmingly of fixed coupon rate issues with final stated maturity
dates. However, certain issues have adjustable coupon rates, which reset
quarterly in a manner similar to adjustable rate preferred stocks described
above. The preferred securities universe is divided into the "$25 par" and the
"institutional" segments. The $25 par segment is typified by securities that are
listed on the New York Stock Exchange, which trade and are quoted "flat", i.e.,
without accrued dividend income, and which are typically callable at par value
five years after their original issuance date. The institutional segment is
typified by $1,000 par value securities that are not exchange-listed, which
trade and are quoted on an "accrued income" basis, and which typically have a
minimum of ten years of call protection (at premium prices) from the date of
their original issuance.
Taxable preferred securities are not considered equity of an issuer for
certain purposes. They are typically junior and fully subordinated liabilities
of an issuer or the beneficiary of a guarantee that is junior and fully
subordinated to the other liabilities of the guarantor. In addition, taxable
preferred securities typically permit an issuer to defer the payment of income
for specified periods triggering an event of default. Because of their
subordinated position in the capital structure of an issuer, the ability to
defer payments for extended periods of time without adverse consequence to the
issuer, and certain other features (such as restrictions on common dividend
payments by the issuer or ultimate guarantor when cumulative payments on the
hybrids have not been made), taxable preferred securities may also be treated in
a similar fashion to traditional preferred stocks by several regulatory
agencies, including the Federal Reserve Bank, and by credit rating agencies, for
various purposes, such as the assignment of minimum capital ratios,
over-collateralization rates and diversification limits. Taxable preferred
securities may be convertible into underlying common stock of the issuer or
associated grantor.
Taxable preferred securities are typically issued with a final maturity
date, although, in certain instances the date may be extended and/or the final
payment of principal may be deferred at the issuer's option for a specified time
without any adverse consequences to the issuer. No redemption can typically take
place unless all cumulative payment obligations have been met, although issuers
may be able to engage in open-market repurchases without regard to any
cumulative dividends payable.
In order to be payable, dividends on preferred stock must be declared by
the issuer's board of directors. In addition, distributions on taxable preferred
securities are also subject to deferral and are thus not automatically payable.
Income payments on the typical preferred securities currently outstanding are
cumulative, causing dividends and distributions to accrue even if not declared
by the board of directors or otherwise made payable. There is, of course, no
assurance that dividends or distributions on the preferred securities in which
the Fund invests will be declared or otherwise made payable. The Fund may
acquire non-cumulative preferred securities subject to the restrictions on
quality adopted by the Fund.
Because the claim on an issuer's earnings represented by preferred
securities may become onerous when interest rates fall below the rate payable on
the stock or for other reasons, the issuer may redeem the securities. Thus, in
declining interest rate environments in particular, the Fund's holdings of
higher coupon-paying preferred securities may be reduced and the Fund would be
unable to acquire securities paying comparable coupons with the redemption
proceeds.
From time to time, preferred securities issues have been, and may in the
future be, offered having features other than those described in the Prospectus
and in this Statement of Additional Information that are typical for fixed rate,
adjustable rate, or auction rate preferred securities. The Fund reserves the
right to invest in these securities if the Adviser believes that doing so would
be consistent with the Fund's investment objective and policies. Since the
market for these instruments would be new, the Fund may have difficulty
disposing of them at a suitable price and time. In addition to limited
liquidity, these instruments may present other risks, such as high price
volatility.
4
Risks of Concentration in Industries Comprising the Utilities Sector.
Risks that are intrinsic to the utility industries include:
- difficulty in obtaining an adequate return on invested capital,
- difficulty in financing large construction programs during an inflationary
period,
- restrictions on operations and increased cost and delays attributable to
environmental considerations and regulation,
- difficulty in raising capital in adequate amounts on reasonable terms in
periods of high inflation and unsettled capital markets,
- technological innovations that may render existing plants, equipment or
products obsolete,
- the potential impact of natural or man-made disasters,
- increased costs and reduced availability of certain types of fuel,
- occasionally reduced availability and high costs of natural gas for resale,
- the effects of energy conservation,
- inexperience with and potential losses resulting from a developing
deregulatory environment, including losses and regulatory issues in
connection with energy trading,
- the effects of a national energy policy, and
- lengthy delays and greatly increased costs and other problems associated
with the design, construction, licensing, regulation and operation of
nuclear facilities for electric generation, including, among other
considerations, the problems associated with the use of radioactive
materials and the disposal of radioactive wastes.
There are substantial differences between the regulatory practices and
policies of various jurisdictions, and any given regulatory agency may make
major shifts in policy from time to time. There is no assurance that regulatory
authorities will, in the future, grant rate increases or that such increases
will be adequate to permit the payment of dividends on common stocks.
Additionally, existing and possible future regulatory legislation may make it
even more difficult for these utilities to obtain adequate relief. Certain of
the issuers of securities held in the Fund's portfolio may own or operate
nuclear generating facilities. Governmental authorities may from time to time
review existing policies and impose additional requirements governing the
licensing, construction and operation of nuclear power plants. Prolonged changes
in climatic conditions can also have a significant impact on both the revenues
of an electric and gas utility as well as the expenses of a utility,
particularly a hydro-based electric utility.
Utility companies in the United States and in foreign countries are
generally subject to regulation. In the United States, most utility companies
are regulated by state and/or federal authorities. Such regulation is intended
to ensure appropriate standards of service and adequate capacity to meet public
demand. Generally, prices are also regulated in the United States and in foreign
countries with the intention of protecting the public while ensuring that the
rate of return earned by utility companies is sufficient to allow them to
attract capital in order to grow and continue to provide appropriate services.
There can be no assurance that such pricing policies or rates of return will
continue in the future.
The nature of regulation of the utility industries is evolving both in
the United States and in foreign countries. In recent years, changes in
regulation in the United States increasingly have allowed utility companies to
provide services and products outside their traditional geographic areas and
lines of business, creating new areas of competition within the industries. In
some instances, utility companies are operating on an unregulated basis. Because
of trends toward deregulation and the evolution of independent power producers
as well as new entrants to the field, non-regulated providers of utility
services have become a significant part of their respective industries.
Foreign utility companies are also subject to regulation, although such
regulations may or may not be comparable to those in the United States. Foreign
utility companies may be more heavily regulated by their respective governments
than utilities in the United States and, as in the United States, generally are
required to seek government approval for rate increases. In addition, many
foreign utilities use fuels that may cause more pollution than those used in the
United States, which may require such utilities to invest in pollution control
equipment to meet any proposed pollution restrictions. Foreign regulatory
systems vary from country to country and may evolve in ways different from
regulation in the United States.
5
The revenues of domestic and foreign utility companies generally reflect
the economic growth and development in the geographic areas in which they do
business. The Adviser will take into account anticipated economic growth rates
and other economic developments when selecting securities of utility companies.
Electric. The electric utility industry consists of companies that are
engaged principally in one of more of the following activities: the generation,
transmission, sale and distribution of electric energy, although many also
provide other energy-related services. In the past, electric utility companies,
in general, have been favorably affected by lower fuel and financing costs and
the full or near completion of major construction programs. In addition, many of
these companies have generated cash flows in excess of current operating
expenses and construction expenditures, permitting some degree of
diversification into unregulated businesses. Some electric utilities have also
taken advantage of the right to sell power outside of their traditional
geographic areas. Electric utility companies have historically been subject to
the risks associated with increases in fuel and other operating costs, high
interest costs on borrowings needed for capital construction programs, costs
associated with compliance with environmental and safety regulations and changes
in the regulatory climate. As interest rates declined, many utilities refinanced
high cost debt and in doing so improved their fixed charges coverage.
Regulators, however, lowered allowed rates of return as interest rates declined
and thereby caused the benefits of the rate declines to be shared wholly or in
part with customers.
The construction and operation of nuclear power facilities are subject
to increased scrutiny by, and evolving regulations of, the Nuclear Regulatory
Commission and state agencies having comparable jurisdiction. Increased scrutiny
might result in higher operating costs and higher capital expenditures, with the
risk that the regulators may disallow inclusion of these costs in rate
authorizations or the risk that a company may not be permitted to operate or
complete construction of a facility. In addition, operators of nuclear power
plants may be subject to significant costs for disposal of nuclear fuel and for
decommissioning such plants.
The rating agencies are taking a closer look at the business profile of
utilities. Ratings for companies are expected to be impacted to a greater extent
in the future by the division of their asset base. Electric utility companies
that focus more on the generation of electricity may be assigned less favorable
ratings as this business is expected to be competitive and the least regulated.
On the other hand, companies that focus on transmission and distribution which
is expected to be the least competitive and the more regulated part of the
business may see higher ratings given the greater predictability of cash flow.
Currently, several states are considering deregulation proposals, while
other states have already enacted enabling legislation. The introduction of
competition into the industry as a result of deregulation may result in lower
revenue, lower credit ratings, increased default risk, and lower electric
utility security prices. Such increased competition may also cause long-term
contracts, which electric utilities previously entered into to buy power, to
become "stranded assets" which have no economic value. Any loss associated with
such contracts must be absorbed by ratepayers and investors. In addition, in
anticipation of increasing competition, some electric utilities have acquired
electric utilities overseas to diversify, enhance earnings and gain experience
in operating in a deregulated environment. In some instances, such acquisitions
have involved significant borrowings, which have burdened the acquirer's balance
sheet. There is no assurance that current deregulation proposals will be
adopted. However, deregulation in any form could significantly impact the
electric utilities industry.
Following deregulation of the energy markets in certain states, a number
of companies have engaged in energy trading and incurred substantial losses.
Certain of these energy trading businesses have been accused of employing
improper accounting practices and have been required to make significant
restatements of their financial results. In addition, several energy companies
have been accused of attempting to manipulate the price and availability of
energy in certain states.
Gas. Gas transmission companies and gas distribution companies are also
undergoing significant changes. In the United States, interstate transmission
companies are regulated by the Federal Energy Regulatory Commission, which is
reducing its regulation of the industry. Many companies have diversified into
oil and gas exploration and development, making returns more sensitive to energy
prices. In the recent decade, gas utility companies have been adversely affected
by disruptions in the oil industry and have also been affected by increased
concentration and competition.
6
Water. Water supply utilities are companies that collect, purify,
distribute and sell water. In the United States and around the world the
industry is highly fragmented because most of the water utilities are owned by
local authorities. Companies in this industry are generally mature and are
experiencing little or no per capita volume growth.
There can be no assurance that the positive developments noted above,
including those relating to privatization and changing regulation, will occur or
that risk factors other than those noted above will not develop in the future.
Risks of Concentration in the Industries Comprising the Financial
Services Sector. Since a significant portion of the Fund's investments may be
focused in issuers in the financial services sector, the Fund will be subject to
risks or events which significantly affect the sector as a whole or a particular
segment in which the Fund invests.
Most financial services companies are subject to extensive governmental
regulation which limits their activities and may (as with insurance rate
regulation) affect the ability to earn a profit from a given line of business.
Certain financial services businesses are subject to intense competitive
pressures, including market share and price competition. The removal of
regulatory barriers to participation in certain segments of the financial
services sector may also increase competitive pressures on different types of
firms. For example, recent legislation removing traditional barriers between
banking and investment banking activities will allow large commercial banks to
compete for business that previously was the exclusive domain of securities
firms. Similarly, the removal of regional barriers in the banking industry has
intensified competition within the industry. The availability and cost of funds
to financial services firms is crucial to their profitability. Consequently,
volatile interest rates and general economic conditions can adversely affect
their financial performance.
Financial services companies in foreign countries are subject to similar
regulatory and interest rate concerns. In particular, government regulation in
certain foreign countries may include controls on interest rates, credit
availability, prices and currency movements. In some cases, foreign governments
have taken steps to nationalize the operations of banks and other financial
services companies.
As deregulation of various financial services businesses continues and
new segments of the financial services sector are opened to certain larger
financial services firms formerly prohibited from doing business in these
segments (such as national and money center banks), certain established
companies in these market segments (such as regional banks or securities firms)
may become attractive acquisition candidates for the larger firm seeking
entrance into the segment.
In addition, financial services companies in growth segments (such as
securities firms during times of stock market expansion) or geographically
linked to areas experiencing strong economic growth (such as certain regional
banks) are likely to participate in and benefit from such growth through
increased demand for their products and services. Many financial services
companies which are actively and aggressively managed and are expanding services
as deregulation opens up new opportunities also show potential for capital
appreciation, particularly in expanding into areas where non-regulatory barriers
to entry are low.
Ratings as Investment Criteria. In general, the ratings of Moody's
Investors Service, Inc. ("Moody's") and Standard & Poor's Rating Group ("S&P")
represent the opinions of these agencies as to the quality of the securities
which they rate. It should be emphasized, however, that ratings are relative and
subjective and are not absolute standards of quality. These ratings will be used
by the Fund as initial criteria for the selection of debt securities. Among the
factors which will be considered are the long-term ability of the issuer to pay
principal and interest and general economic trends. Appendix B contains further
information concerning the rating of Moody's and S&P and their significance.
Subsequent to its purchase by the Fund, an issue of securities may cease to be
rated or its rating may be reduced below the minimum required for purchase by
the Fund or the average weighted credit quality of the Fund's portfolio may
cease to be investment grade. None of these events will require the sale of the
securities by the Fund.
Short-Term Bank and Corporate Obligations. The Fund may invest in
depository-type obligations of banks and savings and loan associations and other
high quality money market instruments consisting of short-term obligations of
the U.S. Government or its agencies and commercial paper. Commercial paper
represents short-term
7
unsecured promissory notes issued in bearer form by banks or bank holding
companies, corporations and finance companies. Depository-type obligations in
which the Fund may invest include certificates of deposit, bankers' acceptances
and fixed time deposits. Certificates of deposit are negotiable certificates
issued against funds deposited in a commercial bank for a definite period of
time and earning a specified return.
Bankers' acceptances are negotiable drafts or bills of exchange,
normally drawn by an importer or exporter to pay for specific merchandise, which
are "accepted" by a bank, meaning, in effect, that the bank unconditionally
agrees to pay the face value of the instrument at maturity. Fixed time deposits
are bank obligations payable at a stated maturity date and bearing interest at a
fixed rate. Fixed time deposits may be withdrawn on demand by the investor, but
may be subject to early withdrawal penalties which vary depending upon market
conditions and the remaining maturity of the obligation. There are no
contractual restrictions on the right to transfer a beneficial interest in a
fixed time deposit to a third party, although there is no market for such
deposits. Bank notes and bankers' acceptances rank junior to domestic deposit
liabilities of the bank and pari passu with other senior, unsecured obligations
of the bank. Bank notes are not insured by the Federal Deposit Insurance
Corporation or any other insurer. Deposit notes are insured by the Federal
Deposit Insurance Corporation only to the extent of $100,000 per depositor per
bank.
Investments in Foreign Securities. The Fund may invest directly in the
securities of foreign issuers as well as securities in the form of sponsored or
unsponsored American Depository Receipts ("ADRs"), European Depository Receipts
("EDRs") and Global Depository Receipts ("GDRs") or other securities convertible
into foreign securities. ADRs are receipts typically issued by a U.S. bank or
trust company which evidence ownership of underlying securities issued by a
foreign corporation. EDRs are receipts issued in Europe which evidence a similar
ownership arrangement. Issuers of unsponsored ADRs are not contractually
obligated to disclose material information, including financial information, in
the United States. Generally, ADRs are designed for use in the United States
securities markets and EDRs are designed for use in European securities markets.
An investment in foreign securities including ADRs may be affected by
changes in currency rates and in exchange control regulations. Issuers of
unsponsored ADRs are not contractually obligated to disclose material
information including financial information, in the United States and,
therefore, there may not be a correlation between such information and the
market value of the unsponsored ADR. Foreign companies may not be subject to
accounting standards or government supervision comparable to U.S. companies, and
there is often less publicly available information about their operations.
Foreign companies may also be affected by political or financial instability
abroad. These risk considerations may be intensified in the case of investments
in ADRs of foreign companies that are located in emerging market countries. ADRs
of companies located in these countries may have limited marketability and may
be subject to more abrupt or erratic price movements.
Risks of Foreign Securities. Investments in foreign securities may
involve a greater degree of risk than those in domestic securities. There is
generally less publicly available information about foreign companies in the
form of reports and ratings similar to those that are published about issuers in
the United States. Also, foreign issuers are generally not subject to uniform
accounting, auditing and financial reporting requirements comparable to those
applicable to United States issuers.
Foreign securities will be purchased in the best available market,
whether through over-the-counter markets or exchanges located in the countries
where principal offices of the issuers are located. Foreign securities markets
are generally not as developed or efficient as those in the United States. While
growing in volume, they usually have substantially less volume than the New York
Stock Exchange, and securities of some foreign issuers are less liquid and more
volatile than securities of comparable United States issuers. Fixed commissions
on foreign exchanges are generally higher than negotiated commissions on United
States exchanges, although the Fund will endeavor to achieve the most favorable
net results on its portfolio transactions. There is generally less government
supervision and regulation of securities exchanges, brokers and listed issuers
than in the United States.
With respect to certain foreign countries, there is the possibility of
adverse changes in investment or exchange control regulations, expropriation,
nationalization or confiscatory taxation limitations on the removal of funds or
other assets of the Fund, political or social instability, or diplomatic
developments which could affect United States investments in those countries.
Moreover, individual foreign economies may differ favorably or
8
unfavorably from the United States' economy in terms of growth of gross national
product, rate of inflation, capital reinvestment, resource self-sufficiency and
balance of payments position.
The dividends, in some cases capital gains and interest payable on
certain of the Fund's foreign portfolio securities, may be subject to foreign
withholding or other foreign taxes, thus reducing the net amount of income or
gains available for distribution to the Fund's shareholders.
Repurchase Agreements. In a repurchase agreement the Fund buys a
security for a relatively short period (usually not more than 7 days) subject to
the obligation to sell it back to the issuer at a fixed time and price plus
accrued interest. The Fund will enter into repurchase agreements only with
member banks of the Federal Reserve System and with "primary dealers" in U.S.
Government securities. The Adviser will continuously monitor the
creditworthiness of the parties with whom the Fund enters into repurchase
agreements.
The Fund has established a procedure providing that the securities
serving as collateral for each repurchase agreement must be delivered to the
Fund's custodian either physically or in book-entry form and that the collateral
must be marked to market daily to ensure that each repurchase agreement is fully
collateralized at all times. In the event of bankruptcy or other default by a
seller of a repurchase agreement, the Fund could experience delays in
liquidating the underlying securities during the period in which the Fund seeks
to enforce its rights thereto, possible subnormal levels of income decline in
value of the underlying securities or lack of access to income during this
period and the expense of enforcing its rights.
Reverse Repurchase Agreements. The Fund may also enter into reverse
repurchase agreements, which involve the sale of U.S. Government securities held
in its portfolio to a bank with an agreement that the Fund will buy back the
securities at a fixed future date at a fixed price plus an agreed amount of
"interest" which may be reflected in the repurchase price. Reverse repurchase
agreements are considered to be borrowings by the Fund. Reverse repurchase
agreements involve the risk that the market value of securities purchased by the
Fund with proceeds of the transaction may decline below the repurchase price of
the securities sold by the Fund which it is obligated to repurchase. The Fund
will also continue to be subject to the risk of a decline in the market value of
the securities sold under the agreements because it will reacquire those
securities upon effecting their repurchase. To minimize various risks associated
with reverse repurchase agreements, the Fund will establish and maintain a
separate account consisting of liquid securities, of any type or maturity, in an
amount at least equal to the repurchase prices of the securities (plus any
accrued interest thereon) under such agreements. Income payments received by the
Fund from reverse repurchase agreements will not be eligible for treatment as
tax-advantaged dividends.
Options on Securities and Securities Indices. The Fund may purchase and
write (sell) call and put options on any securities and securities indices.
These options may be listed on national domestic securities exchanges or foreign
securities exchanges or traded in the over-the-counter market. The Fund may
write covered put and call options and purchase put and call options as a
substitute for the purchase or sale of securities or to protect against declines
in the value of portfolio securities and against increases in the cost of
securities to be acquired.
Writing Covered Options. A call option on securities written by the Fund
obligates the Fund to sell specified securities to the holder of the option at a
specified price if the option is exercised at any time before the expiration
date. A put option on securities written by the Fund obligates the Fund to
purchase specified securities from the option holder at a specified price if the
option is exercised at any time before the expiration date. Options on
securities indices are similar to options on securities, except that the
exercise of securities index options requires cash settlement payments and does
not involve the actual purchase or sale of securities. In addition, securities
index options are designed to reflect price fluctuations in a group of
securities or segment of the securities market rather than price fluctuations in
a single security. Writing covered call options may deprive the Fund of the
opportunity to profit from an increase in the market price of the securities in
its portfolio. Writing covered put options may deprive the Fund of the
opportunity to profit from a decrease in the market price of the securities to
be acquired for its portfolio.
All call and put options written by the Fund are covered. A written call
option or put option may be covered by (i) maintaining cash or liquid securities
in a segregated account with a value at least equal to the Fund's obligation
under the option, (ii) entering into an offsetting forward commitment and/or
(iii) purchasing an offsetting option or any other option which, by virtue of
its exercise price or otherwise, reduces the Fund's net exposure on its
9
written option position. A written call option on securities is typically
covered by maintaining the securities that are subject to the option in a
segregated account. The Fund may cover call options on a securities index by
owning securities whose price changes are expected to be similar to those of the
underlying index.
The Fund may terminate its obligations under an exchange traded call or
put option by purchasing an option identical to the one it has written.
Obligations under over-the-counter options may be terminated only by entering
into an offsetting transaction with the counterparty to such option. Such
purchases are referred to as "closing purchase transactions."
Purchasing Options. The Fund would normally purchase call options in
anticipation of an increase, or put options in anticipation of a decrease
("protective puts"), in the market value of securities of the type in which it
may invest. The Fund may also sell call and put options to close out its
purchased options.
The purchase of a call option would entitle the Fund, in return for the
premium paid, to purchase specified securities or currency at a specified price
during the option period. The Fund would ordinarily realize a gain on the
purchase of a call option if, during the option period, the value of such
securities or currency exceeded the sum of the exercise price, the premium paid
and transaction costs; otherwise the Fund would realize either no gain or a loss
on the purchase of the call option.
The purchase of a put option would entitle the Fund, in exchange for the
premium paid, to sell specified securities at a specified price during the
option period. The purchase of protective puts is designed to offset or hedge
against a decline in the market value of the Fund's portfolio securities. Put
options may also be purchased by the Fund for the purpose of affirmatively
benefiting from a decline in the price of securities which it does not own. The
Fund would ordinarily realize a gain if, during the option period, the value of
the underlying securities decreased below the exercise price sufficiently to
cover the premium and transaction costs; otherwise the Fund would realize either
no gain or a loss on the purchase of the put option. Gains and losses on the
purchase of put options may be offset by countervailing changes in the value of
the Fund's portfolio securities.
The Fund's options transactions will be subject to limitations
established by each of the exchanges, boards of trade or other trading
facilities on which such options are traded. These limitations govern the
maximum number of options in each class which may be written or purchased by a
single investor or group of investors acting in concert, regardless of whether
the options are written or purchased on the same or different exchanges, boards
of trade or other trading facilities or are held or written in one or more
accounts or through one or more brokers. Thus, the number of options which the
Fund may write or purchase may be affected by options written or purchased by
other investment advisory clients of the Adviser. An exchange, board of trade or
other trading facility may order the liquidation of positions found to be in
excess of these limits, and it may impose certain other sanctions.
Risks Associated with Options Transactions. There is no assurance that a
liquid secondary market on a domestic or foreign options exchange will exist for
any particular exchange-traded option or at any particular time. If the Fund is
unable to effect a closing purchase transaction with respect to covered options
it has written, the Fund will not be able to sell the underlying securities or
dispose of assets held in a segregated account until the options expire or are
exercised. Similarly, if the Fund is unable to effect a closing sale transaction
with respect to options it has purchased, it would have to exercise the options
in order to realize any profit and will incur transaction costs upon the
purchase or sale of underlying securities or currencies.
Reasons for the absence of a liquid secondary market on an exchange
include the following: (i) there may be insufficient trading interest in certain
options; (ii) restrictions may be imposed by an exchange on opening transactions
or closing transactions or both; (iii) trading halts, suspensions or other
restrictions may be imposed with respect to particular classes or series of
options; (iv) unusual or unforeseen circumstances may interrupt normal
operations on an exchange; (v) the facilities of an exchange or the Options
Clearing Corporation may not at all times be adequate to handle current trading
volume; or (vi) one or more exchanges could, for economic or other reasons,
decide or be compelled at some future date to discontinue the trading of options
(or a particular class or series of options). If trading were discontinued, the
secondary market on that exchange (or in that class or series of options) would
cease to exist. However, outstanding options on that exchange that had been
issued by the Options Clearing Corporation as a result of trades on that
exchange would continue to be exercisable in accordance with their terms.
10
The Fund's ability to terminate over-the-counter options is more limited
than with exchange-traded options and may involve the risk that broker-dealers
participating in such transactions will not fulfill their obligations. The
Adviser will determine the liquidity of each over-the-counter option in
accordance with guidelines adopted by the Board of Trustees (the "Board").
The writing and purchase of options is a highly specialized activity
which involves investment techniques and risks different from those associated
with ordinary portfolio securities transactions. The successful use of options
depends in part on the Adviser's ability to predict future price fluctuations
and, for hedging transactions, the degree of correlation between the options and
securities or currency markets.
Futures Contracts and Options on Futures Contracts. The Fund may
purchase and sell futures contracts based on various securities (such as U.S.
Government securities) and securities indices, and any other financial
instruments and indices and purchase and write call and put options on these
futures contracts. The Fund may also enter into closing purchase and sale
transactions with respect to any of these contracts and options. All futures
contracts entered into by a Fund are traded on U.S. or foreign exchanges or
boards of trade that are licensed, regulated or approved by the Commodity
Futures Trading Commission ("CFTC").
Futures Contracts. A futures contract may generally be described as an
agreement between two parties to buy and sell particular financial instruments
or currencies for an agreed price during a designated month (or to deliver the
final cash settlement price, in the case of a contract relating to an index or
otherwise not calling for physical delivery at the end of trading in the
contract).
Positions taken in the futures markets are not normally held to maturity
but are instead liquidated through offsetting transactions which may result in a
profit or a loss. While futures contracts on securities will usually be
liquidated in this manner, the Fund may instead make, or take, delivery of the
underlying securities or currency whenever it appears economically advantageous
to do so. A clearing corporation associated with the exchange on which futures
contracts are traded guarantees that, if still open, the sale or purchase will
be performed on the settlement date.
A Fund may, for example, take a "short" position in the futures market
by selling futures contracts in an attempt to hedge against an anticipated
decline in market prices that would adversely affect the value of the Fund's
portfolio securities. Such futures contracts may include contracts for the
future delivery of securities held by a Fund or securities with characteristics
similar to those of the Fund's portfolio securities.
Hedging and Other Strategies. Hedging is an attempt to establish with
more certainty than would otherwise be possible the effective price or rate of
return on portfolio securities or securities that the Fund proposes to acquire
or the exchange rate of currencies in which the portfolio securities are quoted
or denominated. When securities prices are falling, the Fund can seek to offset
a decline in the value of its current portfolio securities through the sale of
futures contracts. When securities prices are rising, the Fund, through the
purchase of futures contracts, can attempt to secure better rates or prices than
might later be available in the market when it effects anticipated purchases.
If, in the opinion of the Adviser, there is a sufficient degree of
correlation between price trends for the Fund's portfolio securities and futures
contracts based on other financial instruments, securities indices or other
indices, the Fund may also enter into such futures contracts as part of its
hedging strategy. Although under some circumstances prices of securities in the
Fund's portfolio may be more or less volatile than prices of such futures
contracts, the Adviser will attempt to estimate the extent of this volatility
difference based on historical patterns and compensate for any differential by
having the Fund enter into a greater or lesser number of futures contracts or by
attempting to achieve only a partial hedge against price changes affecting the
Fund's portfolio securities.
When a short hedging position is successful, any depreciation in the
value of portfolio securities will be substantially offset by appreciation in
the value of the futures position. On the other hand, any unanticipated
appreciation in the value of the Fund's portfolio securities would be
substantially offset by a decline in the value of the futures position. On other
occasions, the Fund may take a "long" position by purchasing futures contracts.
11
Options on Futures Contracts. The purchase of put and call options on
futures contracts will give the Fund the right (but not the obligation) for a
specified price to sell or to purchase, respectively, the underlying futures
contract at any time during the option period. As the purchaser of an option on
a futures contract, the Fund obtains the benefit of the futures position if
prices move in a favorable direction but limits its risk of loss in the event of
an unfavorable price movement to the loss of the premium and transaction costs.
The writing of a call option on a futures contract generates a premium
which may partially offset a decline in the value of the Fund's assets. By
writing a call option, the Fund becomes obligated, in exchange for the premium
(upon exercise of the option) to sell a futures contract if the option is
exercised, which may have a value higher than the exercise price. Conversely,
the writing of a put option on a futures contract generates a premium which may
partially offset an increase in the price of securities that the Fund intends to
purchase. However, a Fund becomes obligated (upon exercise of the option) to
purchase a futures contract if the option is exercised, which may have a value
lower than the exercise price. The loss incurred by each Fund in writing options
on futures is potentially unlimited and may exceed the amount of the premium
received.
The holder or writer of an option on a futures contract may terminate
its position by selling or purchasing an offsetting option of the same series.
There is no guarantee that such closing transactions can be effected. A Fund's
ability to establish and close out positions on such options will be subject to
the development and maintenance of a liquid market.
Other Considerations. The Fund will engage in futures and related
options transactions in accordance with CFTC Regulations, which permit
principals of an investment company registered under the Investment Company Act
of 1940, as amended (the "1940 Act") to engage in such transactions without
registering as a commodity pool operator.
Transactions in futures contracts and options on futures involve
brokerage costs, require margin deposits and, in the case of contracts and
options obligating the Fund to purchase securities, require the Fund to
establish a segregated account consisting of cash or liquid securities in an
amount equal to the underlying value of such contracts and options.
While transactions in futures contracts and options on futures may
reduce certain risks, these transactions themselves entail certain other risks.
For example, unanticipated changes in interest rates or securities prices may
result in a poorer overall performance for the Fund than if it had not entered
into any futures contracts or options transactions.
Perfect correlation between the Fund's futures positions and portfolio
positions will be impossible to achieve. In the event of an imperfect
correlation between a futures position and a portfolio position which is
intended to be protected, the desired protection may not be obtained and the
Fund may be exposed to risk of loss.
Some futures contracts or options on futures may become illiquid under
adverse market conditions. In addition, during periods of market volatility, a
commodity exchange may suspend or limit trading in a futures contract or related
option, which may make the instrument temporarily illiquid and difficult to
price. Commodity exchanges may also establish daily limits on the amount that
the price of a futures contract or related option can vary from the previous
day's settlement price. Once the daily limit is reached, no trades may be made
that day at a price beyond the limit. This may prevent the Fund from closing out
positions and limiting its losses.
Equity Swaps and Interest Rate Swaps, Collars, Caps and Floors. In order
to hedge the value of the Fund's portfolio against fluctuations in the market
value of equity securities or interest rates or to enhance the Fund's income,
the Fund may, but is not required to, enter into equity swaps and various
interest rate transactions such as interest rate swaps and the purchase or sale
of interest rate caps and floors. To the extent that the Fund enters into these
transactions, the Fund expects to do so primarily to preserve a return or spread
on a particular investment or portion of its portfolio, to protect against any
increase in the price of securities the Fund anticipates purchasing at a later
date or to manage the Fund's interest rate exposure on any debt securities or
preferred shares issued by the Fund for leverage purposes. The Fund intends to
use these transactions primarily as a hedge. However, the Fund also may invest
in equity and interest rate swaps to enhance income or to increase the Fund's
yield, for example, during periods of steep interest rate yield curves (i.e.,
wide differences between short-term and long-term interest rates).
12
The Fund is not required to hedge its portfolio and may choose not to do so. The
Fund cannot guarantee that any hedging strategies it uses will work.
In an equity swap, the cash flows exchanged by the Fund and the
counterparty are based on the total return on some stock market index and an
interest rate (either a fixed rate or a floating rate) or the payment of
dividends and capital appreciation (or depreciation) on a particular equity
security or basket of equity securities. In an interest rate swap, the Fund
exchanges with another party their respective commitments to pay or receive
interest (e.g., an exchange of fixed rate payments for floating rate payments).
For example, if the Fund holds a debt instrument with an interest rate that is
reset only once each year, it may swap the right to receive interest at this
fixed rate for the right to receive interest at a rate that is reset every week.
This would enable the Fund to offset a decline in the value of the debt
instrument due to rising interest rates but would also limit its ability to
benefit from falling interest rates. Conversely, if the Fund holds a debt
instrument with an interest rate that is reset every week and it would like to
lock in what it believes to be a high interest rate for one year, it may swap
the right to receive interest at this variable weekly rate for the right to
receive interest at a rate that is fixed for one year. Such a swap would protect
the Fund from a reduction in yield due to falling interest rates and may permit
the Fund to enhance its income through the positive differential between one
week and one year interest rates, but would preclude it from taking full
advantage of rising interest rates.
The Fund usually will enter into equity and interest rate swaps on a net
basis (i.e., the two payment streams are netted out with the Fund receiving or
paying, as the case may be, only the net amount of the two payments). The net
amount of the excess, if any, of the Fund's obligations over its entitlements
with respect to each swap contract will be accrued on a daily basis, and an
amount of cash or liquid instruments having an aggregate net asset value at
least equal to the accrued excess will be maintained in a segregated account by
the Fund's custodian. If the swap transaction is entered into on other than a
net basis, the full amount of the Fund's obligations will be accrued on a daily
basis, and the full amount of the Fund's obligations will be maintained in a
segregated account by the Fund's custodian.
The Fund also may engage in interest rate transactions in the form of
purchasing or selling interest rate caps or floors. The Fund will not sell
interest rate caps or floors that it does not own. The purchase of an interest
rate cap entitles the purchaser, to the extent that a specified index exceeds a
predetermined interest rate, to receive payments of interest equal to the
difference of the index and the predetermined rate on a notional principal
amount (i.e., the reference amount with respect to which interest obligations
are determined although no actual exchange of principal occurs) from the party
selling such interest rate cap. The purchase of an interest rate floor entitles
the purchaser, to the extent that a specified index falls below a predetermined
interest rate, to receive payments of interest at the difference of the index
and the predetermined rate on a notional principal amount from the party selling
such interest rate floor.
Typically, the parties with which the Fund will enter into equity and
interest rate transactions will be broker-dealers and other financial
institutions. The Fund will not enter into any equity swap, interest rate swap,
cap or floor transaction unless the unsecured senior debt or the claims-paying
ability of the other party thereto is rated investment grade quality by at least
one nationally recognized statistical rating organization at the time of
entering into such transaction or whose creditworthiness is believed by the
Adviser to be equivalent to such rating. If there is a default by the other
party to such a transaction, the Fund will have contractual remedies pursuant to
the agreements related to the transaction. The swap market has grown
substantially in recent years with a large number of banks and investment
banking firms acting both as principals and as agents utilizing standardized
swap documentation. As a result, the swap market has become relatively liquid in
comparison with other similar instruments traded in the interbank market. Caps
and floors, however, are less liquid than swaps. Certain federal income tax
requirements may limit the Fund's ability to engage in interest rate swaps.
Credit Default Swap Agreements. The Fund may enter into credit default
swap agreements. The "buyer" in a credit default contract is obligated to pay
the "seller" a periodic stream of payments over the term of the contract
provided that no event of default on an underlying reference obligation has
occurred. If an event of default occurs, the seller must pay the buyer the "par
value" (full notional value) of the reference obligation in exchange for the
reference obligation. The Fund may be either the buyer or seller in the
transaction. If the Fund is a buyer and no event of default occurs, the Fund
loses its investment and recovers nothing. However, if an event of default
occurs, the buyer receives full notional value for a reference obligation that
may have little or no value. As a seller, the Fund
13
receives a fixed rate of income throughout the term of the contract, which
typically is between six months and three years, provided that there is no
default event. If an event of default occurs, the seller must pay the buyer the
full notional value of the reference obligation.
Credit default swaps involve greater risks than if the Fund had invested
in the reference obligation directly. In addition to general market risks,
credit default swaps are subject to illiquidity risk, counterparty risk and
credit risks. The Fund will enter into swap agreements only with counterparties
who are rated investment grade quality by at least one nationally recognized
statistical rating organization at the time of entering into such transaction or
whose creditworthiness is believed by the Adviser to be equivalent to such
rating. A buyer also will lose its investment and recover nothing should no
event of default occur. If an event of default were to occur, the value of the
reference obligation received by the seller, coupled with the periodic payments
previously received, may be less than the full notional value it pays to the
buyer, resulting in a loss of value to the Fund. When the Fund acts as a seller
of a credit default swap agreement it is exposed to the risks of leverage since
if an event of default occurs the seller must pay the buyer the full notional
value of the reference obligation.
If the Fund enters into a credit default swap, the Fund may be required
to report the swap as a "listed transaction" for tax shelter reporting purposes
on the Fund's federal income tax return. If the Internal Revenue Service (the
"IRS") were to determine that the credit default swap is a tax shelter, the Fund
could be subject to penalties under the Code.
The Fund may in the future employ new or additional investment
strategies and hedging instruments if those strategies and instruments are
consistent with the Fund's investment objective and are permissible under
applicable regulations governing the Fund.
Rights and Warrants. The Fund may purchase warrants and rights which are
securities permitting, but not obligating, their holder to purchase the
underlying securities at a predetermined price, subject to the Fund's investment
restrictions. Generally, warrants and stock purchase rights do not carry with
them the right to receive dividends or exercise voting rights with respect to
the underlying securities, and they do not represent any rights in the assets of
the issuer. As a result, an investment in warrants and rights may be considered
to entail greater investment risk than certain other types of investments. In
addition, the value of warrants and rights does not necessarily change with the
value of the underlying securities, and they cease to have value if they are not
exercised on or prior to their expiration date. Investment in warrants and
rights increases the potential profit or loss to be realized from the investment
of a given amount of the Fund's assets as compared with investing the same
amount in the underlying stock.
Forward Commitment and When-Issued Securities. The Fund may purchase
securities on a when-issued or forward commitment basis. "When-issued" refers to
securities whose terms are available and for which a market exists, but which
have not been issued. The Fund will engage in when-issued transactions with
respect to securities purchased for its portfolio in order to obtain what is
considered to be an advantageous price and yield at the time of the transaction.
For when-issued transactions, no payment is made until delivery is due, often a
month or more after the purchase. In a forward commitment transaction, the Fund
contracts to purchase securities for a fixed price at a future date beyond
customary settlement time.
When the Fund engages in forward commitment and when-issued
transactions, it relies on the seller to consummate the transaction. The failure
of the issuer or seller to consummate the transaction may result in the Fund's
losing the opportunity to obtain a price and yield considered to be
advantageous. The purchase of securities on a when-issued or forward commitment
basis also involves a risk of loss if the value of the security to be purchased
declines prior to the settlement date.
On the date the Fund enters into an agreement to purchase securities on
a when-issued or forward commitment basis, the Fund will segregate in a separate
account cash or liquid securities equal, of any type or maturity, in value to
the Fund's commitment. These assets will be valued daily at market, and
additional cash or securities will be segregated in a separate account to the
extent that the total value of the assets in the account declines below the
amount of the when-issued commitments. Alternatively, the Fund may enter into
offsetting contracts for the forward sale of other securities that it owns.
14
INVESTMENT RESTRICTIONS
Fundamental Investment Restrictions. The following investment
restrictions will not be changed without the approval of a majority of the
Fund's outstanding voting securities which, as used in the Prospectus and this
Statement of Additional Information, means the approval by the lesser of (1) the
holders of 67% or more of the Fund's shares represented at a meeting if more
than 50% of the Fund's outstanding shares are present in person or by proxy at
that meeting or (2) more than 50% of the Fund's outstanding shares.
The Fund may not:
1. Issue senior securities, except as permitted by the 1940 Act and the
rules and interpretive positions of the Securities and Exchange
Commission (the "SEC") thereunder. Senior securities that the Fund may
issue in accordance with the 1940 Act include preferred shares,
borrowing, futures, when-issued and delayed delivery securities and
forward foreign currency exchange transactions.
2. Borrow money, except as permitted by the 1940 Act and the rules and
interpretive positions of the SEC thereunder.
3. Act as an underwriter, except to the extent that in connection with the
disposition of portfolio securities, the Fund may be deemed to be an
underwriter for purposes of the Securities Act of 1933.
4. Purchase, sell or invest in real estate, but subject to its other
investment policies and restrictions may invest in securities of
companies that deal in real estate or are engaged in the real estate
business. These companies include real estate investment trusts and
securities secured by real estate or interests in real estate. The Fund
may hold and sell real estate acquired through default, liquidation or
other distributions of an interest in real estate as a result of the
Fund's ownership of securities.
5. Invest in commodities or commodity futures contracts, other than
financial derivative contracts. Financial derivatives include forward
currency contracts; financial futures contracts and options on financial
futures contracts; options and warrants on securities, currencies and
financial indices; swaps, caps, floors, collars and swaptions; and
repurchase agreements entered into in accordance with the Fund's
investment policies.
6. Make loans, except that the Fund may (i) lend portfolio securities in
accordance with the Fund's investment policies, (ii) enter into
repurchase agreements, and (iii) purchase all or a portion of an issue
of publicly distributed debt securities, bank loan participation
interests, bank certificates of deposit, bankers' acceptances,
debentures or other securities, whether or not the purchase is made upon
the original issuance of the securities.
7. Purchase the securities of issuers conducting their principal activity
in the same industry if, immediately after such purchase, the value of
its investments in such industry would exceed 25% of its total assets
taken at market value at the time of such investment, except that the
Fund will invest 25% or more of its total assets in the group of
industries comprising each of the utilities and financial services
sectors. This limitation does not apply to investments in securities
issued by the U.S. Government or any of its agencies, instrumentalities
or authorities.
8. With respect to 75% of the fund's total assets, the Fund may not invest
more than 5% of the fund's total assets in the securities of any single
issuer or own more than 10% of the outstanding voting securities of any
one issuer, in each case other than (i) securities issued or guaranteed
by the U.S. Government, its agencies or its instrumentalities or (ii)
securities of other investment companies.
The Fund does not have a fundamental policy with respect to short sales
and purchases on margin.
15
Non-Fundamental Investment Restrictions. The following investment restrictions
are designated as non-fundamental and may be changed by the Trustees without
shareholder approval.
1. Purchase a security if, as a result, (i) more than 10% of the Fund's
total assets would be invested in the securities of other investment
companies, (ii) the Fund would hold more than 3% of the total
outstanding voting securities of any one investment company, or (iii)
more than 5% of the Fund's total assets would be invested in the
securities of any one investment company. These limitations do not apply
to (a) the investment of cash collateral, received by the Fund in
connection with lending of the Fund's portfolio securities, in the
securities of open-end investment companies or (b) the purchase of
shares of any investment company in connection with a merger,
consolidation, reorganization or purchase of substantially all of the
assets of another investment company. Subject to the above percentage
limitations, the Fund may, in connection with the John Hancock Deferred
Compensation Plan for Independent Trustees/Directors (a means for the
Fund's trustee to defer receipt of his or her fees as trustee), purchase
securities of other investment companies within the group of open-end
and closed-end investment companies for which the Adviser acts as
investment adviser (the "John Hancock Fund Complex").
2. Invest more than 20% of its total assets in securities which are
illiquid.
If a percentage restriction on investment or utilization of assets as
set forth above is adhered to at the time an investment is made, a later change
in percentage resulting from changes in the value of the Fund's assets will not
be considered a violation of the restriction.
The Fund intends to apply for ratings for its preferred shares from a
nationally recognized statistical rating organization ("NRSRO"). In order to
obtain and maintain the required ratings, the Fund may be required to comply
with investment quality, diversification and other guidelines established by the
NRSRO. Such guidelines will likely be more restrictive than the restrictions set
forth above. The Fund may also be subject to certain restrictions and guidelines
imposed by lenders if the Fund engages in borrowings. The Fund does not
anticipate that such guidelines would have a material adverse effect on its
common shareholders or the Fund's ability to achieve its investment objective.
The Fund will invest only in countries on the Adviser's Approved Country
Listing. The Approved Country Listing is a list maintained by the Adviser's
investment department that outlines all countries, including the United States,
that have been approved for investment by Funds managed by the Adviser.
If allowed by the Fund's other investment policies and restrictions, the
Fund may invest up to 5% of its total assets in Russian equity securities and up
to 10% of its total assets in Russian fixed income securities. All Russian
securities must be: (1) denominated in U.S. dollars; (2) traded on a major
exchange; and (3) held physically outside of Russia.
16
THOSE RESPONSIBLE FOR MANAGEMENT
The business of the Fund is managed by its Trustees, who elect officers
who are responsible for the day-to-day operations of the Fund and who execute
policies formulated by the Trustees. Several of the officers and Trustees of the
Fund are also officers or directors of the Adviser, or officers and directors of
the Fund's principal distributor, John Hancock Funds, LLC (prior to February 1,
2002, John Hancock Funds, Inc.) ("John Hancock Funds").
John Hancock Fund Complex means the open and closed-end investment
companies for which the Adviser acts as investment adviser.
NUMBER OF
FUNDS IN
POSITION(S) TRUSTEE/ THE JOHN
NAME, ADDRESS (1) HELD WITH OFFICER PRINCIPAL OCCUPATION(S) DURING PAST HANCOCK OTHER
AND AGE FUND SINCE (2) 5 YEARS FUND DIRECTORSHIPS
COMPLEX
OVERSEEN
BY TRUSTEE
--------------------------------------------------------------------------------------------------------------------
INTERESTED TRUSTEES
Maureen Ford Goldfarb Trustee, 2003 Executive Vice President, John 50 None
(3) Chairman, Hancock Financial Services, Inc.,
(Age 47) President John Hancock Life Insurance Company;
and Chief Chairman, Director, President and
Executive Chief Executive Officer, John
Officer Hancock Advisers, LLC (the
"Adviser") and The Berkeley
Financial Group, LLC (the
"Berkeley Group"); Chairman,
President, Director and Chief
Executive Officer, John Hancock
Funds, LLC ("John Hancock
Funds"); Chairman, Director,
President and Chief Executive
Officer, Sovereign Asset
Management Corporation
("SAMCorp."); Director, John
Hancock Subsidiaries, LLC; John
Hancock Signature Services,
Inc., Independence Investment
LLC; Investment Company
Institute Board of Governors
(since 2002); Senior Vice
President, MassMutual Insurance
Co. (until 1999).
INDEPENDENT TRUSTEES
James F. Carlin Trustee 2003 Chairman and Treasurer, Alpha 30 Trustee,
(Age 63) Analytical Inc. (analytical Massachusetts
laboratory) (since 1985); Part Owner Health and
and Treasurer, Lawrence Carlin Education Tax
Insurance Agency, Inc. (since 1995); Exempt Trust
Part Owner and Vice President, Mone (since 1993).
Lawrence Carlin Insurance Agency,
Inc. (since 1996); Director and
Treasurer, Rizzo Associates (until
2000); Chairman and CEO, Carlin
Consolidated, Inc.
(management/investments) (since
1987);
17
Director and Partner, Proctor
Carlin & Co., Inc. (until 1999);
Director of the following: Uno
Restaurant Corp. (until 2001),
Arbella Mutual (insurance) (until
2000), HealthPlan Services, Inc.
(until 1999), Flagship Healthcare,
Inc. (until 1999), Carlin Insurance
Agency, Inc. (until 1999); Chairman,
Massachusetts Board of Higher
Education (until 1999).
William H. Cunningham Trustee 2003 Former Chancellor, University of 30 Director of the
(Age 59) Texas System and former President of following:
the University of Texas, Austin, Hire.com (since
Texas; Chairman and CEO, IBT 2000); Symtx,
Technologies (until 2001); Director Inc. (since
of the following: The University of 2001),
Texas Investment Management Company Adorno/Rogers
(until 2000), STC Broadcasting, Inc. Technology, Inc.
and Sunrise Television Corp. (until (since 2001),
2001), New Century Equity Holdings Pinnacle Foods
(formerly Billing Concepts) (until Corporation
2001), eCertain (until 2001), (since 2001),
ClassMap.com (until 2001), Agile rateGenius
Ventures (until 2001), LBJ (since 2001),
Foundation (until 2000), Golfsmith Jefferson-Pilot
International, Inc. (until 2000), Corporation
Metamor Worldwide (until 2000), (diversified
AskRed.com (until 2001). life insurance
company) (since
1985), Southwest
Airlines (since
2000) and
Introgen (since
2000); Advisory
Director, Q
Investments
(since 2000);
Advisory
Director, Chase
Bank (formerly
Texas Commerce
Bank - Austin)
(since 1988),
LIN Television
(since 2002) and
WilTel
Communications
(since 2002).
Ronald R. Dion Trustee 2003 Chairman and Chief Executive 30 Director, The
(Age 57) Officer, R.M. Bradley & Co., Inc. New England
Council and
Massachusetts
Roundtable;
Director, Boston
Stock Exchange;
Trustee, North
Shore Medical
Center;
Director, BJ's
Wholesale Club,
Inc. and a
corporator of
the Eastern
Bank; Trustee,
Emmanuel
18
College.
Charles L. Ladner Trustee 2003 Chairman and Trustee, Dunwoody 30 Director, Parks
(Age 65) Village, Inc. (retirement services); and History
Senior Vice President and Chief Association
Financial Officer, UGI Corporation (since 2001).
(Public Utility Holding Company)
(retired 1998); Vice President and
Director for AmeriGas, Inc. (retired
1998); Director of AmeriGas
Partners, L.P. (until 1997)(gas
distribution); Director,
EnergyNorth, Inc. (until 1995).
John A. Moore Trustee 2003 President and Chief Executive 29 Director, CIIT
(Age 64) Officer, Institute for Evaluating (nonprofit
Health Risks, (nonprofit research) (since
institution) (until 2001); Chief 2002).
Scientist, Sciences International
(health research) (since 1998);
Principal, Hollyhouse (consulting)
(since 2000).
Patti McGill Peterson Trustee 2003 Executive Director, Council for 29 Director of the
(Age 60) International Exchange of Scholars following:
(since 1998); Vice President, Niagara Mohawk
Institute of International Education Power
(since 1998); Senior Fellow, Cornell Corporation
Institute of Public Affairs, Cornell (electric
University (until 1997); President utility); Ford
Emerita of Wells College and St. Foundation,
Lawrence University. International
Fellowship
Program (since
2002); Lois Roth
Endowment (since
2002); Council
for
International
Exchange (since
2003); and
Advisory Board,
UNCF, Global
Partnership
Center (since
2002).
Steven R. Pruchansky Trustee 2003 Chairman and Chief Executive 30 None.
(Age 59) Officer, Greenscapes of Southwest
Florida, Inc. (since 2000); Director
and President, Greenscapes of
Southwest Florida, Inc. (until
2000); Managing Director, JonJames,
LLC (real estate) (since 2001);
Director, First Signature Bank &
Trust Company (until 1991);
Director, Mast Realty Trust (until
1994); President, Maxwell Building
Corp. (until 1991).
Norman H. Smith Trustee 2003 Lieutenant General, United States 30 None.
(Age 70) Marine Corps; Deputy Chief of Staff
for Manpower and Reserve Affairs,
Headquarters Marine Corps;
Commanding General III Marine
Expeditionary Force/3rd Marine
Division (retired 1991).
19
John P. Toolan Trustee 2003 Director, The Smith Barney Muni Bond 30 None.
(Age 73) Funds, The Smith Barney Tax-Free
Money Funds, Inc., Vantage Money
Market Funds (mutual funds), The
Inefficient-Market Fund, Inc.
(closed-end investment company);
Chairman, Smith Barney Trust Company
of Florida (retired 1991); Director,
Smith Barney, Inc., Mutual
Management Company and Smith Barney
Advisers, Inc. (investment advisers)
(retired 1991); Senior Executive
Vice President, Director and member
of the Executive Committee, Smith
Barney, Harris Upham & Co.,
Incorporated (investment bankers)
(until 1991).
The following persons are the officers of the Fund who are not also members of
the Board of Trustees.
NUMBER OF OTHER
FUNDS IN THE DIRECTORSHIPS
POSITION(S) TRUSTEE/ JOHN HANCOCK
NAME, ADDRESS (1) HELD WITH OFFICER PRINCIPAL OCCUPATION(S) DURING PAST FUND COMPLEX
AND AGE FUND SINCE (2) 5 YEARS OVERSEEN BY
TRUSTEE
-------------------------------------------------------------------------------------------------------------------
PRINCIPAL OFFICERS
WHO ARE NOT TRUSTEES
Richard A. Brown Senior Vice 2003 Senior Vice President, Chief N/A None.
(Age 54) President Financial Officer and Treasurer,
and Chief the Adviser, John Hancock Funds,
Financial and The Berkeley Group; Second Vice
Officer President and Senior Associate
Controller, Corporate Tax
Department, John Hancock Financial
Services, Inc. (until 2001).
William H. King Vice 2003 Vice President and Assistant N/A None.
(Age 51) President Treasurer, the Adviser; Vice
and President and Treasurer of each of
Treasurer the John Hancock funds;
Assistant Treasurer of each of
the John Hancock funds (until
2001).
Susan S. Newton Senior Vice 2003 Senior Vice President, Secretary N/A None.
(Age 53) President, and Chief Legal Officer, SAMCorp.,
Secretary the Adviser and each of the John
and Chief Hancock funds, John Hancock Funds
Legal and The Berkeley Group; Vice
Officer President, Signature Services
(until 2000), Director, Senior Vice
President and Secretary, NM Capital.
(1) Business address for independent and interested Trustees and officers is 101
Huntington Avenue, Boston, Massachusetts 02199.
(2) Each Trustee serves until resignation, retirement age or until her or his
successor is elected.
(3) Interested Trustee: holds positions with the Fund's investment adviser,
underwriter, and/or certain other affiliates.
20
The Fund's Board of Trustees currently consists of 10 members. The term
of one class expires each year commencing with the first annual meeting
following this initial public offering of the Fund's common shares. The terms of
Messrs. Dion, Ladner and Moore and Ms. Ford Goldfarb shall expire at the first
annual meeting following this public offering. The terms of Messrs. Pruchansky
and Smith and Ms. Peterson expire at the second annual meeting, and the terms of
Messrs. Carlin, Cunningham and Toolan expire at the third annual meeting.
Subsequently, each class of Trustees will stand for election at the conclusion
of its respective term. Such classification may prevent replacement of a
majority of the Trustees for up to a two-year period.
BOARD COMMITTEES
The Fund's Board of Trustees currently has four standing Committees: the
Audit Committee, the Administration Committee, the Contracts/Operations
Committee and the Investment Performance Committee. Each Committee is comprised
of Independent Trustees who are not "interested persons."
The Audit Committee members are Messrs. Toolan (Chairman), Ladner and
Moore and Ms. Peterson. All of the members of the Audit Committee are
independent under the New York Stock Exchange's Revised Listing Rules, and each
member is financially literate with at least one having accounting or financial
management expertise. The Board has adopted a written charter for the Audit
Committee. The Audit Committee recommends to the full board auditors for the
Fund, monitors and oversees the audits of the Fund, communicates with both
independent auditors and internal auditors on a regular basis and provides a
forum for the auditors to report and discuss any matters they deem appropriate
at any time.
The Administration Committee members are all of the independent
Trustees. The Administration Committee reviews the activities of the other four
standing committees and makes the final selection and nomination of candidates
to serve as Independent Trustees. All members of the Administration Committee
are independent under the New York Stock Exchange's Revised Listing Rules and
are not interested persons, as defined in the 1940 Act, of John Hancock or the
Fund (the "Independent Trustees"). Among other things, the Administration
Committee acts as a nominating committee of the Board. The Trustees who are not
Independent Trustees and the officers of the Fund are nominated and selected by
the Board. The Administration Committee does not have at this time formal
criteria for the qualifications of candidates to serve as an Independent
Trustee, although the Administration Committee may develop them in the future.
In reviewing a potential nominee and in evaluating the renomination of current
Independent Trustees, the Administration Committee expects to apply the
following criteria: (i) the nominee's reputation for integrity, honesty and
adherence to high ethical standards, (ii) the nominee's business acumen,
experience and ability to exercise sound judgments, (iii) a commitment to
understand the Fund and the responsibilities of a trustee of an investment
company, (iv) a commitment to regularly attend and participate in meetings of
the Board and its committees, (v) the ability to understand potential conflicts
of interest involving management of the Fund and to act in the interests of all
shareholders, and (vi) the absence of a real or apparent conflict of interest
that would impair the nominee's ability to represent the interests of all the
shareholders and to fulfill the responsibilities of an Independent Trustee. The
Administration Committee does not necessarily place the same emphasis on each
criteria and each nominee may not have each of these qualities. The
Administration Committee does not discriminate on the basis of race, religion,
national origin, sex, sexual orientation, disability or any other basis
proscribed by law.
As long as an existing Independent Trustee continues, in the opinion of
the Administration Committee, to satisfy these criteria, the Fund anticipates
that the Committee would favor the renomination of an existing Trustee rather
than a new candidate. Consequently, while the Administration Committee will
consider nominees recommended by shareholders to serve as trustees, the
Administration Committee may only act upon such recommendations if there is a
vacancy on the Board or the Administration Committee determines that the
selection of a new or additional Independent Trustee is in the best interests of
the Fund. In the event that a vacancy arises or a change in Board membership is
determined to be advisable, the Administration Committee will, in addition to
any shareholder recommendations, consider candidates identified by other means,
including candidates proposed by members of the Administration Committee. While
it has not done so in the past, the Administration Committee may retain a
consultant to assist the Committee in a search for a qualified candidate.
21
Any shareholder recommendation must be submitted in compliance with all
of the pertinent provisions of Rule 14a-8 under the Securities Exchange Act of
1934, as amended, to be considered by the Administration Committee. In
evaluating a nominee recommended by a shareholder, the Administration Committee,
in addition to the criteria discussed above, may consider the objectives of the
shareholder in submitting that nomination and whether such objectives are
consistent with the interests of all shareholders. If the Board determines to
include a shareholder's candidate among the slate of nominees, the candidate's
name will be placed on the Fund's proxy card. If the Administration Committee or
the Board determines not to include such candidate among the Board's designated
nominees and the shareholder has satisfied the requirements of Rule 14a-8, the
shareholder's candidate will be treated as a nominee of the shareholder who
originally nominated the candidate. In that case, the candidate will not be
named on the proxy card distributed with the Fund's proxy statement.
Shareholders may communicate with the members of the Board as a group or
individually. Any such communication should be sent to the Board or an
individual Trustee c/o the secretary of the Fund at the address on the notice of
this meeting. The Secretary may determine not to forward any letter to the
members of the Board that does not relate to the business of the Fund.
The Contracts/Operations Committee members are Messrs. Pruchansky
(Chairman), Carlin and Smith. The Contracts/Operations Committee oversees the
initiation, operation, and renewal of contracts between the Fund and other
entities. These contracts include advisory and subadvisory agreements, custodial
and transfer agency agreements and arrangements with other service providers.
The Investment Performance Committee members are Messrs. Cunningham
(Chairman) and Dion. The Investment Performance Committee monitors and analyzes
the performance of the Fund generally, consults with the adviser as necessary if
the Fund requires special attention, and reviews peer groups and other
comparative standards as necessary.
The following table provides a dollar range indicating each Trustee's
ownership of equity securities of the Fund, as well as aggregate holdings of
shares of equity securities of all funds in the John Hancock Fund Complex
overseen by the Trustee, as of December 31, 2003.
Aggregate Dollar Range of
Dollar Range of Fund Shares Holdings in John Hancock
Name of Trustee Owned by Trustee Fund Complex Overseen by
Trustee (1)
---------------------------------------------------------------------------------------
INDEPENDENT TRUSTEES
James F. Carlin None Over $100,000
William H. Cunningham None $10,001-$50,000
Ronald R. Dion None Over $100,000
Charles L. Ladner None Over $100,000
John A. Moore None Over $100,000
Patti McGill Peterson None Over $100,000
Steven R. Pruchansky None $50,001-$100,000
Norman H. Smith None Over $100,000
John P. Toolan None $50,001 - $100,000
INTERESTED TRUSTEES
Maureen Ford Goldfarb None Over $100,000
(1) Under the John Hancock Deferred Compensation Plan for Independent Trustees,
an Independent Trustee may elect to earn a return on his or her deferred fees
equal to the amount that he or she would have earned if the deferred
22
fees amount were invested in one or more funds in the John Hancock Fund Complex.
Under these circumstances, a trustee is not the legal owner of the underlying
shares, but participates in any positive or negative return on those shares to
the same extent as other shareholders. If the Trustees were deemed to own the
shares used in computing the value of his or deferred compensation, as of
December 31, 2003, the respective "Dollar Range of Fund Shares Owned by Trustee"
and the "Aggregate Dollar Range of Holdings in the John Hancock Fund Complex
Overseen by Trustee" would be none and over $100,000 for Messrs. Cunningham,
Pruchansky and Toolan.
The following table provides information regarding the compensation paid by the
Fund and the other investment companies in the John Hancock Fund Complex to the
Independent Trustees for their services. Ms. Ford, an interested Trustee, and
each of the officers of the Fund who are interested persons of the Adviser,
and/or affiliates are compensated by the Adviser and receive no compensation
from the Fund for their services.
Aggregate Total Compensation from All
Compensation Funds in John Hancock Fund
Trustees from the Fund(1) Complex to Trustees (2)
-------- ---------------- -----------------------
James F. Carlin $ 1,200 $ 76,250
William H. Cunningham* $ 1,200 $ 74,250
Ronald R. Dion* $ 1,200 $ 77,250
Charles L. Ladner $ 1,200 $ 78,000
John A. Moore* $ 1,200 $ 74,000
Patti McGill Peterson $ 1,200 $ 72,750
Steven R. Pruchansky* $ 1,200 $ 79,250
Norman H. Smith* $ 1,200 $ 77,750
John P. Toolan* $ 1,200 $ 78,250
------- --------
Total $10,800 $687,750
(1) Since the Fund is newly organized, this figure is estimated for the calendar
year ending December 31, 2004.
(2) Total compensation paid by the John Hancock Fund Complex to the independent
Trustees is for the calendar year ended December 31, 2003. As of that date,
there were 50 funds in the John Hancock Fund Complex, of which Mr. Moore and
Ms. Peterson served on 29 funds and each other independent Trustee served on
30 funds.
(*) As of December 31, 2003 the value of the aggregate accrued deferred
compensation from all Funds in the John Hancock Fund Complex for Mr.
Cunningham was $563,218, for Mr. Dion was $193,220, for Mr. Moore was
$248,380, for Mr. Pruchansky was $150,981, for Mr. Smith was $276,224 and
for Mr. Toolan was $633,254 under the John Hancock Deferred Compensation
Plan for Independent Trustees (the "Plan").
All of the officers listed are officers or employees of the Adviser or
affiliated companies. Some of the Trustees and officers may also be officers
and/or Directors and/or Trustees of one or more other funds for which the
Adviser serves as investment adviser.
As of April 15, 2004 officers and Trustees of the Fund as a group owned
less than 1% of the outstanding shares of the Fund. To the knowledge of the
Fund, no persons owned of record or beneficially 5% or more of any class of the
Fund's outstanding shares of the Fund.
INVESTMENT ADVISORY AND OTHER SERVICES
The Adviser, located at 101 Huntington Avenue, Boston, Massachusetts
02199-7603, was organized in 1968 and had approximately $29.3 billion in assets
under management as of December 31, 2003 in its capacity as investment adviser
to the Fund and other funds in the John Hancock Fund Complex as well as retail
and institutional privately managed accounts. The Adviser is an affiliate of the
Life Company, one of the most recognized and respected financial institutions in
the nation. With total assets under management of approximately $142.5 billion,
as of December 31, 2003, the Life Company is one of the ten largest life
insurance companies in the United States, and carries a high rating with S&P and
A. M. Best. Founded in 1862, the Life Company has been serving clients for over
130 years. The Life Company merged with Manulife Financial Corporation on April
28, 2004.
23
The Fund has entered into an investment management contract (the
"Advisory Agreement") with the Adviser, which was approved by the Fund's sole
shareholder. Pursuant to the Advisory Agreement, the Adviser will: (a) furnish
continuously an investment program for the Fund and determine, subject to the
overall supervision and review of the Trustees, which investments should be
purchased, held, sold or exchanged, and (b) provide supervision over all aspects
of the Fund's operations except those which are delegated to a custodian,
transfer agent or other agent.
The Fund bears all costs of its organization and operation, including
but not limited to expenses of preparing, printing and mailing all shareholders'
reports, notices, prospectuses, proxy statements and reports to regulatory
agencies; expenses relating to the issuance, registration and qualification of
shares; government fees; interest charges; expenses of furnishing to
shareholders their account statements; taxes; expenses of redeeming shares;
brokerage and other expenses connected with the execution of portfolio
securities transactions; expenses pursuant to the Fund's plan of distribution;
fees and expenses of custodians including those for keeping books and accounts,
maintaining a committed line of credit, and calculating the net asset value of
shares; fees and expenses of transfer agents and dividend disbursing agents;
legal, accounting, financial, management, tax and auditing fees and expenses of
the Fund (including an allocable portion of the cost of the Adviser's employees
rendering such services to the Fund); the compensation and expenses of Trustees
who are not otherwise affiliated with the Fund, the Adviser or any of their
affiliates; expenses of Trustees' and shareholders' meetings; trade association
memberships; insurance premiums; and any extraordinary expenses.
For its advisory and administrative services, the Fund will accrue and
pay to the Adviser daily, as compensation for the services rendered and expenses
paid by it, a fee on an annual basis equal to 0.75% of the Fund's average daily
managed assets. Because the fee paid to the Adviser is determined on the basis
of the Fund's managed assets, the Adviser's interest in determining whether to
leverage the Fund may differ from the interests of the Fund. "Managed assets"
means the total assets of the Fund (including any assets attributable to any
leverage that may be outstanding) minus the sum of accrued liabilities (other
than liabilities representing financial leverage). The liquidation preference of
any preferred shares is not a liability.
The Adviser has contractually agreed to waive a portion of its advisory
fee. The Adviser has agreed that, until the fifth anniversary of investment
advisory agreement, the Adviser will limit its advisory fee to 0.55% of average
daily managed assets, in the sixth year to 0.60% of average daily managed
assets, in the seventh year to 0.65% of average daily managed assets, and in the
eighth year to 0.70% of average daily managed assets. After the eighth year the
Adviser will no longer waive a portion of its advisory fee.
From time to time, the Adviser may reduce its fee or make other
arrangements to limit the Fund's expenses to a specified percentage of its
average daily net assets. The Adviser retains the right to reimpose a fee and
recover any other payments to the extent that, at the end of any fiscal year,
the Fund's annual expenses fall below this limit.
In connection with the offering of the Fund's common shares, the Adviser
(and not the Fund) has agreed to pay to each of UBS Securities LLC and Merrill
Lynch, Pierce, Fenner & Smith Incorporated, as lead managers, an incentive fee.
This fee will be paid at an annual rate which may be up to 0.15% of the Fund's
managed assets multiplied by the percentage of the Fund's common shares sold by
such lead manager in this offering. The Adviser (and not the Fund) has also
agreed to pay from its own assets to underwriters (other than the lead managers)
that meet a sales target (which may be waived or modified in the discretion of
the Adviser) (each, a "Qualifying Underwriter") an incentive fee at an annual
rate of up to 0.10% of the Fund's managed assets multiplied by the percentage of
the Fund's common shares sold by the Qualifying Underwriter in this offering.
Each such fee will be payable in arrears at the end of each calendar quarter so
long as the Advisory Agreement remains in effect between the Fund and the
Adviser or any successor in interest or affiliate of the Adviser, as and to the
extent that such Advisory Agreement is renewed periodically in accordance with
the 1940 Act. The total amount of the incentive fee payments, discounted to the
closing date of this offering, plus the sales load paid, will not exceed the
maximum compensation allowed under the conduct rules of the National Association
of Securities Dealers (which the underwriters currently understand to be 9.0%),
as the rules are then in effect.
Securities held by the Fund may also be held by other funds or
investment advisory clients for which the Adviser or its affiliates provide
investment advice. Because of different investment objectives or other factors,
a particular security may be bought for one or more funds or clients when one or
more other funds or clients are
24
selling the same security. If opportunities for purchase or sale of securities
by the Adviser for the Fund or for other funds or clients for which the Adviser
renders investment advice arise for consideration at or about the same time,
transactions in such securities will be made, insofar as feasible, for the
respective funds or clients in a manner deemed equitable to all of them. To the
extent that transactions on behalf of more than one client of the Adviser or its
affiliates may increase the demand for securities being purchased or the supply
of securities being sold, there may be an adverse effect on price.
Pursuant to its Advisory Agreement, the Adviser is not liable for any
error of judgment or mistake of law or for any loss suffered by the Fund in
connection with the matters to which the Advisory Agreement relates, except a
loss resulting from willful misfeasance, bad faith or gross negligence on the
part of the Adviser in the performance of its duties or from reckless disregard
by the Adviser of its obligations and duties under the Advisory Agreement.
Under the Advisory Agreement, the Fund may use the name "John Hancock"
or any name derived from or similar to it only for so long as the Advisory
Agreement or any extension, renewal or amendment thereof remains in effect. If
the Advisory Agreement is no longer in effect, the Fund (to the extent that it
lawfully can) will cease to use such a name or any other name indicating that it
is advised by or otherwise connected with the Adviser. In addition, the Adviser
or the Life Company may grant the nonexclusive right to use the name "John
Hancock" or any similar name to any other corporation or entity, including but
not limited to any investment company of which the Life Company or any
subsidiary or affiliate thereof or any successor to the business of any
subsidiary or affiliate thereof shall be the investment adviser.
The Board is responsible for overseeing the performance of the Adviser
and determining whether to approve and renew the Advisory Agreement. Prior to
the August 26, 2003 meeting, the Board requested and received from the Adviser
certain information the Board deemed important in evaluating the Adviser's
qualifications and the reasonableness of the proposed fee. The Board also met
with the proposed portfolio management team for the Fund. In addition, the Board
drew upon its experience in acting as trustees for other investment companies.
The primary factors that the Board considered to be favorable in approving the
Advisory Agreement were:
- The Adviser's experience in managing other investment companies,
including investment companies that invest in equity securities, as well
as the Adviser's prior experience in managing similarly structured
closed-end funds that employ a leveraged structure, including the John
Hancock Group of Patriot Funds and the recent initial public offerings
of John Hancock Preferred Income Fund I, John Hancock Preferred Income
Fund II and John Hancock Preferred Income Fund III (the "Comparable
Funds"). In this regard, the Board noted that the Adviser managed at
June 30, 2003 investment companies with aggregate equity securities
investments of over $13.9 billion and managed closed-end funds employing
a leverage structure with total assets at June 30, 2003 of over $28.8
billion. In addition, the Board considered the experience of the
portfolio management team in managing similar portfolios. The members of
the Board also considered their experience, as trustees of the
Comparable Funds, with the quality of the compliance and administrative
staff of the Adviser. In making that evaluation, the Trustees considered
the Adviser's compliance record and the quality of its administrative
staff during the past several years on other investment companies
management by the Adviser for which the Board serves as Trustees.
- The investment performance of the Comparable Funds, both in absolute
terms at net asset value and relative to their performance benchmarks.
During the one, three and five year periods ended June 30, 2003, the
average annual return of the John Hancock Patriot Global Dividend Fund
was 12.64%, 9.91% and 4.62% respectively, the average annual return of
John Hancock Patriot Preferred Dividend Fund was 19.56%, 12.81% and
6.26% respectively, the average annual return of John Hancock Patriot
Premium Dividend Fund I was 9.23%, 7.16% and 4.08% respectively, the
average annual return of John Hancock Patriot Premium Dividend Fund II
was 10.23%, 8.90% and 4.45% respectively, and the average annual return
of John Hancock Patriot Select Dividend Trust was 8.33%, 7.53% and 3.71%
respectively. During the same one, three and five year periods, the
average annual return of the Standard & Poor's 500 was 0.25%, (11.19)%
and (1.16)% and the average annual return of the Dow Jones Utilities
Average was (3.92)%, (2.80)% and 0.68%.
25
- The reasonableness of the proposed fee. In making that determination,
the Board took into consideration the fees charged by similar funds
managed by other investment advisers and the fees charged by the Adviser
for managing the Comparable Funds. The fee payable by the Fund is lower
than the fee charged to the Comparable Funds and lower than another
closed-end fund focusing on preferred securities that had recently
completed the public offering of its common shares, before giving effect
to fee waivers.
- The Adviser's commitment to waive a portion of its advisory fee for a
period of eight years. The Adviser has agreed that, until the fifth
anniversary of the investment advisory agreement, the Adviser will limit
its advisory fee to 0.55% of average daily managed assets, in the sixth
year to 0.60% of average daily managed assets, in the seventh year to
0.65% of average daily managed assets, and in the eighth year to 0.70%
of average daily managed assets. After the eighth year the Adviser will
no longer waive a portion of its advisory fee.
- The reasonableness of the estimated total expenses of the Fund, both
with and without the advisory fee waiver.
The Advisory Agreement was approved by all Trustees. The Advisory
Agreement will continue in effect from year to year, provided that its
continuance is approved annually after its initial two year term both (i) by the
holders of a majority of the outstanding voting securities of the Fund or by the
Trustees, and (ii) by a majority of the Trustees who are not parties to the
Agreement or "interested persons" of any such parties. The Advisory Agreement
may be terminated on 60 days written notice by any party or by vote of a
majority of the outstanding voting securities of the Fund and will terminate
automatically if assigned.
Accounting and Legal Services Agreement. The Fund is a party to an
Accounting and Legal Services Agreement with the Adviser. Pursuant to this
agreement, the Adviser provides the Fund with certain tax, accounting and legal
services.
Proxy Voting. The Fund's Trustees have delegated to the Adviser the
authority to vote proxies on behalf of the Fund. The Trustees have approved the
proxy voting guidelines of the Adviser and will review the guidelines and
suggest changes as they deem advisable. A summary of the Adviser's proxy voting
guidelines and proxy voting procedures are attached to this Statement of
Additional Information as Appendix C.
Shareholder Servicing Agent. The Adviser has retained UBS Securities LLC
to act as shareholder servicing agent for the Fund. Pursuant to the Shareholder
Servicing Agreement, UBS Securities LLC will: (i) undertake to make public
information pertaining to the Fund on an ongoing basis and to communicate to
investors and prospective investors the Fund's features and benefits (including
periodic seminars or conference calls, responses to questions from current or
prospective shareholders and specific shareholder contact where appropriate);
(ii) make available to investors and prospective investors market price, net
asset value, yield and other information regarding the Fund, if reasonably
obtainable, for the purpose of maintaining the visibility of the Fund in the
investor community; (iii) at the request of the Adviser, provide certain
economic research and statistical information and reports, if reasonably
obtainable, on behalf of the Fund, and consult with representatives and Trustees
of the Fund in connection therewith, which information and reports shall
include: (a) statistical and financial market information with respect to the
Fund's market performance and (b) comparative information regarding the Fund and
other closed-end management investment companies with respect to (1) the net
asset value of their respective share, (2) the respective market performance of
the Fund and such other companies, (3) other relevant performance indicators;
and (iv) at the request of the Adviser, provide information to and consult with
the Board with respect to applicable modifications to dividend policies or
capital structure, repositioning or restructuring of the Fund, conversion of the
Fund to an open-end investment company, or a Fund liquidation or merger;
provided, however, that under the terms of the Shareholder Servicing Agreement,
UBS Securities LLC is not obligated to render any opinions, valuations or
recommendations of any kind or to perform any such similar services. Under the
terms of the Shareholder Servicing Agreement, UBS Securities LLC is relieved
from liability to the Adviser for any act or omission in the course of its
performances under the Shareholder Servicing Agreement in the absence of gross
negligence or willful misconduct. In consideration of these services, the
Adviser will pay UBS Securities LLC a fee equal on an annual basis to 0.10% of
the Fund's average daily managed assets. This fee will be an expense of the
26
Adviser and not the Fund. The Shareholder Servicing Agreement has an initial
term of two years and is renewable thereafter with the consent of both parties.
Code of Ethics. Personnel of the Adviser and its affiliates may trade
securities for their personal accounts. The Fund also may hold, or may be buying
or selling, the same securities. To prevent the Fund from being disadvantaged,
the adviser(s), principal underwriter and the Fund have adopted a code of
ethics, which restricts the trading activity of those personnel.
ADDITIONAL INFORMATION CONCERNING THE AUCTIONS FOR THE PREFERRED SHARES
GENERAL. Depository Trust Company ("DTC") will act as the securities
depository with respect to the Preferred Shares. One certificate for all of the
Preferred Shares of any series will be registered in the name of Cede & Co., as
nominee of the securities depository. Such certificate will bear a legend to the
effect that such certificate is issued subject to the provisions restricting
transfers of the Preferred Shares contained in the By-Laws. Prior to the
commencement of the right of holders of the Preferred Shares to elect a majority
of the Trustees, as described under "Description of Preferred Shares -- Voting
Rights" in the prospectus, Cede & Co. will be the holder of record of the
Preferred Shares and owners of such shares will not be entitled to receive
certificates representing their ownership interest in such shares.
DTC, a New York-chartered limited purpose trust company, performs
services for its participants, some of whom (and/or their representatives) own
DTC. DTC maintains lists of its participants and will maintain the positions
(ownership interests) held by each such participant in the Preferred Shares,
whether for its own account or as a nominee for another person.
CONCERNING THE AUCTION AGENT. Deutsche Bank Trust Company Americas (the
"Auction Agent") will act as agent for the Fund in connection with the auctions
of the Preferred Shares (the "Auctions"). In the absence of willful misconduct
or gross negligence on its part, the Auction Agent will not be liable for any
action taken, suffered, or omitted or for any error of judgment made by it in
the performance of its duties under the auction agency agreement between the
Fund and the Auction Agent and will not be liable for any error of judgment made
in good faith unless the Auction Agent was grossly negligent in ascertaining the
pertinent facts.
The Auction Agent may conclusively rely upon, as evidence of the
identities of the holders of the Preferred Shares, the Auction Agent's registry
of holders, and the results of auctions and notices from any Broker-Dealer (or
other person, if permitted by the Fund) with respect to transfers described
under "The Auction -- Secondary Market Trading and Transfers of Preferred
Shares" in the prospectus and notices from the Fund. The Auction Agent is not
required to accept any such notice for an auction unless it is received by the
Auction Agent by 3:00 p.m., New York City time, on the business day preceding
such Auction.
The Auction Agent may terminate its auction agency agreement with the
Fund upon notice to the Fund on a date no earlier than 60 days after such
notice. If the Auction Agent should resign, the Fund will use its best efforts
to enter into an agreement with a successor auction agent containing
substantially the same terms and conditions as the auction agency agreement. The
Fund may remove the Auction Agent provided that prior to such removal the Fund
shall have entered into such an agreement with a successor auction agent.
BROKER-DEALERS. The Auction Agent after each Auction for Preferred
Shares will pay to each Broker-Dealer, from funds provided by the Fund, a
service charge at the annual rate of 0.25% in the case of any Auction
immediately preceding the dividend period of less than one year, or a percentage
agreed to by the Fund and the Broker-Dealer in the case of any auction
immediately preceding a dividend period of one year or longer, of the purchase
price of the Preferred Shares placed by such Broker-Dealer at such auction. For
the purposes of the preceding sentence, the Preferred Shares will be placed by a
Broker-Dealer if such shares were (a) the subject of hold orders deemed to have
been submitted to the Auction Agent by the Broker-Dealer and were acquired by
such Broker-Dealer for its customers who are beneficial owners or (b) the
subject of an order submitted by such Broker-Dealer that is (i) a submitted bid
of an existing holder that resulted in the existing holder continuing to hold
such shares as a result of the Auction or (ii) a submitted bid of a potential
bidder that resulted in the potential holder purchasing such shares as a result
of the Auction or (iii) a valid hold order.
27
The Fund may request the Auction Agent to terminate one or more
Broker-Dealer agreements at any time, provided that at least one Broker-Dealer
agreement is in effect after such termination.
The Broker-Dealer agreement provides that a Broker-Dealer (other than
an affiliate of the Fund) may submit orders in Auctions for its own account,
unless the Fund notifies all Broker-Dealers that they may no longer do so, in
which case Broker-Dealers may continue to submit hold orders and sell orders for
their own accounts. Any Broker-Dealer that is an affiliate of the Fund may
submit orders in Auctions, but only if such orders are not for its own account.
If a Broker-Dealer submits an order for its own account in any Auction, it might
have an advantage over other bidders because it would have knowledge of all
orders submitted by it in that Auction; such Broker-Dealer, however, would not
have knowledge of orders submitted by other Broker-Dealers in that Auction.
RATING AGENCY GUIDELINES
The description of Moody's and S&P rating guidelines contained in this
Statement of Additional Information does not purport to be complete and is
subject to and qualified in its entirety by reference to the Amended and
Restated By-Laws (the "By-Laws"). A copy of the By-Laws is attached to and
incorporated into this Statement of Additional Information.
The composition of the Fund's portfolio reflects guidelines (referred
to herein as the "Rating Agency Guidelines") established by Moody's and S&P in
connection with the Fund's receipt of a rating of "Aaa" from Moody's and a
rating of "AAA" from S&P for the Preferred Shares. These Rating Agency
Guidelines form part of the By-Laws and relate, among other things, to industry
and credit quality characteristics of issuers and diversification requirements
and specify various discount factors for different types of securities (with the
level of discount greater as the rating of a security becomes lower). Under the
Rating Agency Guidelines, certain types of securities in which the Fund may
otherwise invest consistent with its investment strategy are not eligible for
inclusion in the calculation of the discounted value of the Fund's portfolio.
Accordingly, although the Fund reserves the right to invest in such securities
to the extent set forth herein, they have not and it is anticipated that they
will not constitute a significant portion of the Fund's portfolio.
The Rating Agency Guidelines require that the Fund maintain assets
having an aggregate discounted value, determined on the basis of the Rating
Agency Guidelines, greater than the aggregate liquidation preference of the
Preferred Shares plus specified liabilities, payment obligations and other
amounts, as of periodic valuation dates. The Rating Agency Guidelines also
require the Fund to maintain asset coverage for the Preferred Shares on a
non-discounted basis of at least 200% as of the end of each month, and the 1940
Act requires this asset coverage as a condition to paying dividends or other
distributions on the Fund's common shares. The Fund has agreed with Moody's and
S&P that the auditors must certify once per year the asset coverage test on a
date randomly selected by the auditor. The effect of compliance with the Rating
Agency Guidelines may be to cause the Fund to invest in higher quality assets
and/or to maintain relatively substantial balances of highly liquid assets or to
restrict the Fund's ability to make certain investments than would otherwise be
deemed potentially desirable by the Adviser, including private placements other
than Rule 144A Securities. The Rating Agency Guidelines are subject to change
from time to time with the consent of Moody's or S&P and would not apply if the
Fund in the future elected not to use investment leverage consisting of senior
securities rated by one or more rating agencies, although other similar
arrangements might apply with respect to other senior securities that the Fund
may issue.
The Fund intends to maintain, at specified times, a discounted value
for its portfolio at least equal to the amount specified by Moody's and S&P (the
"Preferred Shares Basic Maintenance Amount"). Each of Moody's and S&P have
established guidelines for determining discounted value. To the extent any
particular portfolio holding does not satisfy the Rating Agency's Guidelines,
all or a portion of such holding's value will not be included in the calculation
of discounted value (as defined by such rating agency).
The Rating Agency Guidelines do not impose any limitations on the
percentage of Fund's assets that may be invested in holdings not eligible for
inclusion in the calculation of the discounted value of the Fund's portfolio.
The amount of such assets included in the portfolio at any time may vary
depending upon the rating, diversification and other characteristics of the
assets included in the portfolio which are eligible for inclusion in the
discounted value of the portfolio under the Rating Agency Guidelines.
28
A credit rating of preferred stock does not address the likelihood that
a resale mechanism (e.g., the Auction) will be successful. As described by
Moody's, an issue of preferred stock which is rated "Aaa" is considered to be
top-quality preferred stock with good asset protection and the least risk of
dividend impairment within the universe of preferred stocks. "Aaa" ratings
denote the lowest expectation of credit risk and are assigned only in case of
exceptionally strong capacity for timely payment of financial commitments. This
capacity is highly unlikely to be adversely affected by foreseeable events.
Ratings are not recommendations to purchase, hold or sell Preferred
Shares, inasmuch as the rating does not comment as to market price or
suitability for a particular investor. The rating is based on current
information furnished to Moody's and S&P by the Fund and obtained by Moody's and
S&P from other sources. The rating may be changed, suspended or withdrawn as a
result of changes in, or unavailability of, such information.
NET ASSET VALUE
For purposes of calculating the net asset value ("NAV") of the Fund's
common shares, the following procedures are utilized wherever applicable.
Debt investment securities are valued on the basis of valuations
furnished by a principal market-maker or a pricing service, both of which
generally utilize electronic data processing techniques to determine valuations
for normal institutional size trading units of debt securities without exclusive
reliance upon quoted prices.
Equity securities traded on a principal exchange are generally valued
at last sale price on the day of valuation or, in the case of securities traded
on NASDAQ, the NASDAQ official closing price. Securities in the aforementioned
category for which no sales are reported and other securities traded
over-the-counter are generally valued at the last available bid price.
Short-term debt investments which have a remaining maturity of 60 days
or less are generally valued at amortized cost which approximates market value.
If market quotations are not readily available or if in the opinion of the
Adviser any quotation or price is not representative of true market value, the
fair value of the security may be determined in good faith in accordance with
procedures approved by the Board of Trustees.
Foreign securities are valued on the basis of quotations from the
primary market in which they are traded. Any assets or liabilities expressed in
terms of foreign currencies are translated into U.S. dollars by the custodian
bank based on London currency exchange quotations as of 5:00 p.m., London time
(12:00 noon, New York time) on the date of a determination of the Fund's NAV. If
quotations are not readily available, or the value has been materially affected
by the events occurring after the closing of a foreign market, assets are valued
by a method that the Board of Trustees believes accurately reflects fair value.
The NAV of the Fund's common shares is determined each business day at
the close of regular trading on the New York Stock Exchange (typically 4:00 p.m.
Eastern Time) by dividing the net assets by the number of its common shares
outstanding. On any day an international market is closed and the New York Stock
Exchange is open, any foreign securities will be valued at the prior day's close
with the current day's exchange rate. Trading of foreign securities may take
place on Saturdays and U.S. business holidays on which the Fund's NAV is not
calculated. Consequently, the Fund's portfolio securities may trade and the NAV
of the Fund's common shares may be significantly affected on days when a
shareholder has no access to the New York Stock Exchange.
BROKERAGE ALLOCATION
Decisions concerning the purchase and sale of portfolio securities and
the allocation of brokerage commissions are made by the Adviser pursuant to
recommendations made by an investment committee of the Adviser, which consists
of officers and directors of the Adviser and affiliates and officers and
Trustees who are interested persons of the Fund. Orders for purchases and sales
of securities are placed in a manner which, in the opinion of the Adviser, will
offer the best price and market for the execution of each such transaction.
Purchases from underwriters of portfolio securities may include a commission or
commissions paid by the issuer, and transactions with dealers serving as market
makers reflect a "spread". Debt securities are generally traded on a net
29
basis through dealers acting for their own account as principals and not as
brokers; no brokerage commissions are payable on these transactions.
In the U.S. Government securities market, securities are generally
traded on a "net" basis with dealers acting as principal for their own account
without a stated commission, although the price of the security usually includes
a profit to the dealer. On occasion, certain money market instruments and agency
securities may be purchased directly from the issuer, in which case no
commissions or premiums are paid. In other countries, both debt and equity
securities are traded on exchanges at fixed commission rates. Commissions on
foreign transactions are generally higher than the negotiated commission rates
available in the U.S. There is generally less government supervision and
regulation of foreign stock exchanges and broker-dealers than in the U.S.
The Fund's primary policy is to execute all purchases and sales of
portfolio instruments at the most favorable prices consistent with best
execution, considering all of the costs of the transaction including brokerage
commissions. This policy governs the selection of brokers and dealers and the
market in which a transaction is executed.
To the extent consistent with the foregoing, the Fund will be governed
in the selection of brokers and dealers, and the negotiation of brokerage
commission rates and dealer spreads, by the reliability and quality of the
services, including primarily the availability and value of research information
and, to a lesser extent, statistical assistance furnished to the Adviser and
their value and expected contribution to the performance of the Fund.
As permitted by Section 28(e) of the Securities Exchange Act of 1934,
the Fund may pay a broker which provides brokerage and research services to the
Fund an amount of disclosed commission in excess of the commission which another
broker would have charged for effecting that transaction. This practice is
subject to a good faith determination by the Board of Trustees that such
commission is reasonable in light of the services provided and to such policies
as the Board of Trustees may adopt from time to time.
Research services received from broker-dealers supplement the Adviser's
own research (and the research of its affiliates), and may include the following
types of information: statistical and background information on the U.S. and
foreign economies, industry groups and individual companies; forecasts and
interpretations with respect to the U.S. and foreign economies, securities,
markets, specific industry groups and individual companies; information on
federal, state, local and foreign political developments; portfolio management
strategies; performance information on securities, indexes and investment
accounts; and information concerning prices of securities. Broker-dealers may
communicate such information electronically, orally, in written form or on
computer software. Research services may also include the providing of
electronic communication of trade information and the providing of custody
services, as well as the providing of equipment used to communicate research
information, the providing of specialized consultations with the Adviser's
personnel with respect to computerized systems and data furnished to the Adviser
as a component of other research services, the arranging of meetings with
management of companies, and the providing of access to consultants who supply
research information.
The outside research assistance is useful to the Adviser since the
broker-dealers used by the Adviser tend to follow a broader universe of
securities and other matters than the Adviser's staff can follow. In addition,
the research provides the Adviser with a diverse perspective on financial
markets. Research services provided to the Adviser by broker-dealers are
available for the benefit of all accounts managed or advised by the Adviser or
by its affiliates. Some broker-dealers may indicate that the provision of
research services is dependent upon the generation of certain specified levels
of commissions and underwriting concessions by the Adviser's clients, including
the Fund. However, the Fund is not under any obligation to deal with any
broker-dealer in the execution of transactions in portfolio securities. In some
cases, the research services are available only from the broker-dealer providing
them. In other cases, the research services may be obtainable from alternative
sources in return for cash payments.
The Adviser believes that the research services are beneficial in
supplementing the Adviser's research and analysis and that they improve the
quality of the Adviser's investment advice. It is not possible to place a dollar
value on information and services to be received from brokers and dealers, since
it is only supplementary to the research efforts of the Adviser. The advisory
fee paid by the Fund is not reduced because the Adviser receives such services.
However, to the extent that the Adviser would have purchased research services
had they not been provided by broker-dealers, the expenses to the Adviser could
be considered to have been reduced accordingly. The
30
research information and statistical assistance furnished by brokers and dealers
may benefit the Life Company or other advisory clients of the Adviser, and
conversely, brokerage commissions and spreads paid by other advisory clients of
the Adviser may result in research information and statistical assistance
beneficial to the Fund. The Fund will make no commitment to allocate portfolio
transactions upon any prescribed basis.
While the Adviser's officers will be primarily responsible for the
allocation of the Fund's brokerage business, the policies and practices of the
Adviser in this regard must be consistent with the foregoing and at all times be
subject to review by the Trustees.
The Adviser may determine target levels of commission business with
various brokers on behalf of its clients (including the Fund) over a certain
time period. The target levels will be based upon the following factors, among
others: (1) the execution services provided by the broker; (2) the research
services provided by the broker; and (3) the broker's interest in mutual funds
in general and in the Fund and other mutual funds advised by the Adviser in
particular, including sales of the Fund. In connection with (3) above, the
Fund's trades may be executed directly by dealers that sell shares of the John
Hancock funds or by other broker-dealers with which such dealers have clearing
arrangements, consistent with obtaining best execution and the Conduct Rules of
the National Association of Securities Dealers, Inc. The Adviser will not use a
specific formula in connection with any of these considerations to determine the
target levels.
The Adviser's indirect parent, the Life Company, is the indirect sole
shareholder of Signator Investors, Inc., a broker-dealer (until January 1, 1999,
John Hancock Distributors, Inc.) ("Signator" or "Affiliated Broker"). Pursuant
to procedures determined by the Trustees and consistent with the above policy of
obtaining best net results, the Fund may execute portfolio transactions with or
through the Affiliated Broker.
Signator may act as broker for the Fund on exchange transactions,
subject, however, to the general policy of the Fund set forth above and the
procedures adopted by the Trustees pursuant to the 1940 Act. Commissions paid to
an Affiliated Broker must be at least as favorable as those which the Trustees
believe to be contemporaneously charged by other brokers in connection with
comparable transactions involving similar securities being purchased or sold. A
transaction would not be placed with an Affiliated Broker if the Fund would have
to pay a commission rate less favorable than the Affiliated Broker's
contemporaneous charges for comparable transactions for its other most favored,
but unaffiliated, customers, except for accounts for which the Affiliated Broker
acts as clearing broker for another brokerage firm, and any customers of the
Affiliated Broker not comparable to the Fund as determined by a majority of the
Trustees who are not "interested persons" (as defined in the 1940 Act) of the
Fund, the Adviser or the Affiliated Broker. Because the Adviser, which is
affiliated with the Affiliated Broker, has, as an investment adviser to the
Fund, the obligation to provide investment management services, which include
elements of research and related investment skills, such research and related
skills will not be used by the Affiliated Broker as a basis for negotiating
commissions at a rate higher than that determined in accordance with the above
criteria.
Other investment advisory clients advised by the Adviser may also
invest in the same securities as the Fund. When these clients buy or sell the
same securities at substantially the same time, the Adviser may average the
transactions as to price and allocate the amount of available investments in a
manner which the Adviser believes to be equitable to each client, including the
Fund. Because of this, client accounts in a particular style may sometimes not
sell or acquire securities as quickly or at the same prices as they might if
each were managed and traded individually.
For purchases of equity securities, when a complete order is not
filled, a partial allocation will be made to each account pro rata based on the
order size. For high demand issues (for example, initial public offerings),
shares will be allocated pro rata by account size as well as on the basis of
account objective, account size (a small account's allocation may be increased
to provide it with a meaningful position), and the account's other holdings. In
addition, an account's allocation may be increased if that account's portfolio
manager was responsible for generating the investment idea or the portfolio
manager intends to buy more shares in the secondary market. For fixed income
accounts, generally securities will be allocated when appropriate among accounts
based on account size, except if the accounts have different objectives or if an
account is too small to get a meaningful allocation. For new issues, when a
complete order is not filled, a partial allocation will be made to each account
pro rata based on the order size. However, if a partial allocation is too small
to be meaningful, it may be reallocated based on such factors as account
objectives, strategies, duration benchmarks and credit and sector exposure. For
example, value funds will likely not
31
participate in initial public offerings as frequently as growth funds. In some
instances, this investment procedure may adversely affect the price paid or
received by the Fund or the size of the position obtainable for it. On the other
hand, to the extent permitted by law, the Adviser may aggregate securities to be
sold or purchased for the Fund with those to be sold or purchased for other
clients managed by it in order to obtain best execution.
U.S. FEDERAL INCOME TAX MATTERS
The following is a summary discussion of material U.S. federal income
tax consequences that may be relevant to a shareholder of acquiring, holding and
disposing of APS. This discussion only addresses U.S. federal income tax
consequences to U.S. shareholders who hold their shares as capital assets and
does not address all of the U.S. federal income tax consequences that may be
relevant to particular shareholders in light of their individual circumstances.
This discussion also does not address the tax consequences to shareholders who
are subject to special rules, including, without limitation, financial
institutions, insurance companies, dealers in securities or foreign currencies,
foreign holders, persons who hold their shares as or in a hedge against currency
risk, a constructive sale, or conversion transaction, holders who are subject to
the alternative minimum tax, or tax-exempt or tax-deferred plans, accounts, or
entities. In addition, the discussion does not address any state, local, or
foreign tax consequences, and it does not address any federal tax consequences
other than U.S. federal income tax consequences. The discussion reflects
applicable tax laws of the United States as of the date of this Statement of
Additional Information, which tax laws may be changed or subject to new
interpretations by the courts or the IRS retroactively or prospectively. No
attempt is made to present a detailed explanation of all U.S. federal income tax
concerns affecting the Fund and its shareholders, and the discussion set forth
herein does not constitute tax advice. Investors are urged to consult their own
tax advisers to determine the tax consequences to them of investing in the Fund,
including the applicable federal, state, local and foreign tax consequences to
them and the effect of possible changes in tax laws.
The Fund intends to elect to be treated and to qualify each year as a
"regulated investment company" under Subchapter M of the Code so that it
generally will not pay U.S. federal income tax on income and capital gains
distributed to shareholders. In order to qualify as a regulated investment
company under Subchapter M of the Code, which qualification this discussion
assumes, the Fund must, among other things, derive at least 90% of its gross
income for each taxable year from dividends, interest, payments with respect to
securities loans, gains from the sale or other disposition of stock, securities
or foreign currencies, or other income (including gains from options, futures
and forward contracts) derived with respect to its business of investing in such
stock, securities or currencies (the "90% income test") and satisfy certain
quarterly asset diversification requirements. For purposes of the 90% income
test, the character of income earned by certain entities in which the Fund
invests that are not treated as corporations for U.S. federal income tax
purposes (e.g., partnerships or trusts) will generally pass through to the Fund.
Consequently, the Fund may be required to limit its equity investments in such
entities that earn fee income, rental income or other nonqualifying income.
If the Fund qualifies as a regulated investment company and, for each
taxable year, it distributes to its shareholders an amount equal to or exceeding
the sum of (i) 90% of its "investment company taxable income" as that term is
defined in the Code (which includes, among other things, dividends, taxable
interest, and the excess of any net short-term capital gains over net long-term
capital losses, as reduced by certain deductible expenses) without regard to the
deduction for dividends paid and (ii) 90% of the excess of its gross tax-exempt
interest, if any, over certain disallowed deductions, the Fund will generally be
relieved of U.S. federal income tax on any income of the Fund, including "net
capital gain" (the excess of net long-term capital gain over net short-term
capital loss), distributed to shareholders. However, if the Fund meets such
distribution requirements, but chooses to retain some portion of its investment
company taxable income or net capital gain, it generally will be subject to U.S.
federal income tax at regular corporate rates on the amount retained. The Fund
intends to distribute at least annually all or substantially all of its
investment company taxable income, net tax-exempt interest, if any, and net
capital gain. If for any taxable year the Fund did not qualify as a regulated
investment company, it would be treated as a corporation subject to U.S. federal
income tax (even if it distributed all of its income to its shareholders) and
all distributions out of earnings and profits would be taxed to shareholders as
ordinary income. In addition, the Fund could be required to recognize unrealized
gains, pay taxes and make distributions (which could be subject to interest
charges) before requalifying as a regulated investment company.
32
Under the Code, the Fund will be subject to a nondeductible 4% federal
excise tax on a portion of its undistributed ordinary income and capital gain
net income if it fails to meet certain distribution requirements with respect to
each calendar year. For purposes of the excise tax, any ordinary income or
capital gain net income retained by, and subject to federal income tax in the
hands of, the Fund will be treated as having been distributed. The Fund intends
to make distributions in a timely manner and accordingly does not expect to be
subject to the excise tax, but, as described below, there can be no assurance
that the Fund's distributions will be sufficient to avoid entirely this tax.
Based in part on the lack of any present intention on the part of the
Fund to redeem or purchase APS at any time in the future, the Fund intends to
take the position that under present law APS will constitute stock of the Fund
and distributions with respect to APS (other than distributions in redemption of
APS that are treated as exchanges under Section 302(b) of the Code) will
constitute dividends to the extent of the Fund's current or accumulated earnings
and profits as calculated for U.S. federal income tax purposes. This view relies
in part on a published ruling of the IRS stating that certain preferred stock,
similar in many material respects to the APS, represents equity. It is possible,
however, that the IRS might take a contrary position asserting, for example,
that APS constitute debt of the Fund. If this position were upheld, the
discussion of the treatment of distributions below would not apply. Instead
distributions by the Fund to holders of APS would constitute interest, whether
or not such distributions exceeded the earnings and profits of the Fund, would
be included in the income of the recipient, and would be taxed as ordinary
income.
For U.S. federal income tax purposes, assuming that the Fund has
sufficient earnings and profits, dividends from investment company taxable
income are taxable either as ordinary income or, if so designated by the Fund
and certain other conditions are met, as "qualified dividend income" taxable to
individual shareholders at a maximum 15% U.S. federal income tax rate, and
dividends from net capital gain (if any) that are designated as capital gains
dividends, are taxable as long-term capital gains for U.S. federal income tax
purposes without regard to the length of time the shareholder has held shares of
the Fund. Although the Fund intends to invest at least 80% of its assets in
equity securities that the Adviser believes at the time of acquisition to be
eligible to pay tax-advantaged dividends, and to satisfy the holding period and
other requirements, a portion of the Fund's income distributions may be taxable
as ordinary income. There can be no assurance as to the portion of the Fund's
dividends that will constitute tax-advantaged dividends.
Dividend income distributed to individual shareholders will qualify for
such maximum 15% U.S. federal income tax rate to the extent that such dividends
are attributable to "qualified dividend income" as that term is defined in
Section 1(h)(11)(B) of the Code from the Fund's investments in common and
preferred stock of U.S. companies and stock of certain foreign corporations,
provided that certain holding period and other requirements are met by both the
Fund and the shareholders. Capital gain distributions distributed by the Fund to
individual shareholders generally will qualify for the maximum 15% U.S. federal
income tax rate on long-term capital gains. Under current law, the maximum 15%
U.S. federal income tax rate on qualified dividend income and long-term capital
gains will cease to apply to taxable years beginning after December 31, 2008.
High tax rates will apply in 2009 unless further legislative action is taken by
Congress.
Dividends distributed to shareholders attributable to income from the
Fund's investments in debt securities, taxable preferred securities, and any
other securities that do not produce qualified dividend income will not qualify
for the maximum 15% U.S. federal income tax rate on qualified dividend income,
unless 95% or more of the Fund's "gross income" (as specially computed) for a
taxable year is comprised of qualified dividend income received by the Fund, in
which case all dividends attributable to such gross income will be taxable to
individual shareholders at the maximum 15% U.S. federal income tax rate
applicable to long-term capital gains if certain holding period and other
requirements are met. Distributions by the Fund in excess of the Fund's current
and accumulated earnings and profits will be treated as a return of capital to
the extent of (and in reduction of) the shareholder's tax basis in its shares
and any such amount in excess of that basis will be treated as gain from the
sale of shares, as discussed below. The U.S. federal income tax status of all
distributions will be reported to shareholders annually.
A dividend that is attributable to qualified dividend income of the
Fund that is paid by the Fund to an individual holder of APS will not be taxable
as qualified dividend income to such shareholder if (1) the dividend is received
with respect to any share of the Fund held for fewer than 91 days during the 181
day-period beginning on the date which is 90 days before the date on which such
share became ex-dividend with respect to such dividend, (2)
33
to the extent that the shareholder is under an obligation (whether pursuant to a
short sale or otherwise) to make related payments with respect to positions in
substantially similar or related property, or (3) the shareholder elects to have
the dividend treated as investment income for purposes of the limitation on
deductibility of investment interest. Although current law only provides a
180-day period for measuring the holding of such stock, a proposed technical
correction to the law would extend such period to 181 days. The Treasury
Department and the IRS have announced that taxpayers may apply the extended
period as if the legislation were already enacted in filing their federal income
tax returns.
Dividends received by the Fund from U.S. corporations (not including
corporations qualifying as REITs) in respect of any share of stock that has been
held for a requisite holding period in an unleveraged position and that are
distributed and designated by the Fund (except for capital gain dividends
received from a regulated investment company) may be eligible for the 70%
dividends-received deduction generally available to corporations under the Code.
Any corporate shareholder should consult its tax adviser regarding the
possibility that its tax basis in its shares may be reduced for U.S. federal
income tax purposes by reason of "extraordinary dividends" received with respect
to the shares and, to the extent such basis would be reduced below zero, current
recognition of income may be required. In order to qualify for the deduction,
corporate shareholders must meet a minimum holding period requirement with
respect to their Fund shares, and, if they borrow to acquire or otherwise incur
debt attributable to Fund shares, they may be denied a portion of the
dividends-received deduction. The entire dividend, including the otherwise
deductible amount, will be included in determining the excess, if any, of a
corporation's adjusted current earnings over its alternative minimum taxable
income, which may increase a corporation's alternative minimum tax liability.
A shareholder should also be aware that the benefits of the favorable
tax rate applicable to long-term capital gains and qualified dividend income may
be impacted by the application of the alternative minimum tax to individual
shareholders.
If the Fund retains any net capital gain for a taxable year, the Fund
may designate the retained amount as undistributed capital gains in a notice to
shareholders who, if subject to U.S. federal income tax on long-term capital
gains, (i) will be required to include in income for U.S. federal income tax
purposes, as long-term capital gain, their proportionate shares of such
undistributed amount, (ii) will be entitled to credit their proportionate shares
of the tax paid by the Fund on the undistributed amount against their U.S.
federal income tax liabilities, if any, and (iii) to claim refunds to the extent
the credit exceeds such liabilities.
Although dividends generally will be treated as distributed when paid,
any dividend declared by the Fund as of a record date in October, November or
December and paid during the following January will be treated for U.S. federal
income tax purposes as received by shareholders on December 31 of the calendar
year in which it is declared. In addition, certain other distributions made
after the close of a taxable year of the Fund may be "spilled back" and treated
as paid by the Fund (except for purposes of the nondeductible 4% federal excise
tax) during such taxable year. In such case, shareholders will be treated as
having received such dividends in the taxable year in which the distributions
were actually made.
If the Fund acquires any equity interest (under Treasury regulations
that may be promulgated in the future, generally including not only stock but
also an option to acquire stock such as is inherent in a convertible bond) in
certain foreign corporations that receive at least 75% of their annual gross
income from passive sources (such as interest, dividends, certain rents and
royalties, or capital gains) or that hold at least 50% of their assets in
investments producing such passive income ("passive foreign investment
companies"), the Fund could be subject to U.S. federal income tax and additional
interest charges on "excess distributions" received from such companies or on
gain from the disposition of stock in such companies, even if all income or gain
actually received by the Fund is timely distributed to its shareholders. The
Fund would not be able to pass through to its shareholders any credit or
deduction for such a tax. An election may generally be available that would
ameliorate these adverse tax consequences, but any such election could require
the Fund to recognize taxable income or gain (subject to tax distribution
requirements) without the concurrent receipt of cash. These investments could
also result in the treatment of capital gains from the sale of stock of passive
foreign investment companies as ordinary income. The Fund will monitor and may
limit and/or manage its holdings in passive foreign investment companies to
limit its tax liability or maximize its return from these investments.
34
The Fund may invest to a limited extent in debt obligations that are in
the lowest rating categories or are unrated, including debt obligations of
issuers not currently paying interest or who are in default. Investments in debt
obligations that are at risk of or in default present special tax issues for the
Fund. Tax rules are not entirely clear about issues such as when the Fund may
cease to accrue interest, original issue discount or market discount, when and
to what extent deductions may be taken for bad debts or worthless securities,
how payments received on obligations in default should be allocated between
principal and income and whether exchanges of debt obligations in a workout
context are taxable. These and other issues will be addressed by the Fund, in
the event it invests in such securities, in order to seek to ensure that it
distributes sufficient income to preserve its status as a regulated investment
company and does not become subject to U.S. federal income or excise tax.
If the Fund utilizes leverage through borrowing or issuing preferred
shares, a failure by the Fund to meet the asset coverage requirements imposed by
the 1940 Act or by any rating organization that has rated such leverage or
additional restrictions that may be imposed by certain lenders on the payment of
dividends or distributions potentially could limit or suspend the Fund's ability
to make distributions on its common shares. Such a suspension or limitation
could prevent the Fund from distributing at least 90% of its investment company
taxable income as is required under the Code and therefore might jeopardize the
Fund's qualification for taxation as a regulated investment company and/or might
subject the Fund to the nondeductible 4% federal excise tax discussed above.
Upon any failure to meet such asset coverage requirements, the Fund may, in its
sole discretion, purchase or redeem APS in order to maintain or restore the
requisite asset coverage and avoid the adverse consequences to the Fund and its
shareholders of failing to satisfy the distribution requirement. There can be no
assurance, however, that any such action would achieve these objectives. The
Fund will endeavor to avoid restrictions on its ability to distribute dividends.
If the Fund invests in certain pay-in-kind securities, zero coupon
securities, deferred interest securities or, in general, any other securities
with original issue discount (or with market discount if the Fund elects to
include market discount in income currently), the Fund generally must accrue
income on such investments for each taxable year, which generally will be prior
to the receipt of the corresponding cash payments. However, the Fund must
distribute, at least annually, all or substantially all of its investment
company taxable income, including such accrued income, to shareholders to
qualify as a regulated investment company under the Code and avoid U.S. federal
income and excise taxes. Therefore, the Fund may have to dispose of its
portfolio securities under disadvantageous circumstances to generate cash, or
may have to borrow the cash, to satisfy distribution requirements.
At the time of an investor's purchase of the Fund's shares, a portion
of the purchase price may be attributable to realized or unrealized appreciation
in the Fund's portfolio or undistributed taxable income of the Fund.
Consequently, subsequent distributions by the Fund with respect to these shares
from such appreciation or income may be taxable as ordinary income to such
investor even if the net asset value of the investor's shares is, as a result of
the distributions, reduced below the investor's cost for such shares and the
distributions economically represent a return of a portion of the investment.
Sales and other dispositions of the Fund's shares generally are taxable
events for shareholders that are subject to tax. Shareholders should consult
their own tax advisers with reference to their individual circumstances to
determine whether any particular transaction in the Fund's shares is properly
treated as a sale or exchange for tax purposes, as the following discussion
assumes, and the tax treatment of any gains or losses recognized in such
transactions. In general, if Fund shares are sold, the shareholder will
recognize gain or loss equal to the difference between the amount realized on
the sale and the shareholder's adjusted basis in the shares. Such gain or loss
generally will be treated as long-term gain or loss if the shares were held for
more than one year and otherwise generally will be treated as short-term gain or
loss. The Fund may, at its option, redeem APS in whole or in part subject to
certain limitations and to the extent permitted under applicable law, and is
required to redeem all or a portion of APS to the extent required to maintain
the Preferred Shares Basic Maintenance Amount and the 1940 Act asset coverage
requirements. Gain or loss, if any, resulting from a redemption of APS generally
will be taxed as gain or loss from the sale of APS under Section 302 of the Code
rather than as a dividend, but only if the redemption distribution (a) is deemed
not to be essentially equivalent to a dividend, (b) is in complete redemption of
a shareholder's interest in the Fund, (c) is substantially disproportionate with
respect to the shareholder, or (d) with respect to a non-corporate shareholder,
is in partial liquidation of the shareholder's interest in the Fund. For the
purposes of (a), (b), and (c) above, a shareholder's ownership of common shares
and APS will be taken into account and the common shares and APS held by persons
who are related to the redeemed shareholder may also have to be
35
taken into account. If none of the conditions (a) through (d) are met, the
redemption proceeds may be considered to be a dividend distribution taxable as
ordinary income as discussed above. In addition, any declared but unpaid
dividends distributed to shareholders in connection with a redemption will be
taxable to shareholders as dividends as described above.
Any loss recognized by a shareholder upon the sale or other disposition
of shares with a tax holding period of six months or less generally will be
treated as a long-term capital loss to the extent of any amounts treated as
distributions of long-term capital gain with respect to such shares. Losses on
sales or other dispositions of shares may be disallowed under "wash sale" rules
in the event other investments are made in the Fund (including those made
pursuant to reinvestment of dividends and/or capital gain distributions) within
a period of 61 days beginning 30 days before and ending 30 days after a sale or
other disposition of shares. In that event, the basis of the replacement shares
of the Fund will be increased to reflect the disallowed loss.
Under recently promulgated Treasury regulations, if a shareholder
recognizes a loss with respect to shares of $2 million or more for an individual
shareholder, or $10 million or more for a corporate shareholder, in any single
taxable year (or a greater amount over a combination of years), the shareholder
must file with the IRS a disclosure statement on Form 8886. Direct shareholders
of portfolio securities are in many cases excepted from this reporting
requirement but, under current guidance, shareholders of regulated investment
companies are not excepted. The fact that a loss is reportable under these
regulations does not affect the legal determination of whether or not the
taxpayer's treatment of the loss is proper. Shareholders should consult with
their tax advisers to determine the applicability of these regulations in light
of their individual circumstances.
If the Fund enters into a credit default swap, the Fund may be required
to report the swap as a "listed transaction" for tax shelter reporting purposes
on the Fund's federal income tax return. If the IRS were to determine that the
credit default swap is a tax shelter, the Fund could be subject to penalties
under the Code.
Options written or purchased and futures contracts entered into by the
Fund on certain securities and indices may cause the Fund to recognize gains or
losses from marking-to-market even though such options may not have lapsed, been
closed out, or exercised, or such futures or forward contracts may not have been
performed or closed out. The tax rules applicable to these contracts may affect
the characterization of some capital gains and losses recognized by the Fund as
long-term or short-term. Additionally, the Fund may be required to recognize
gain if an option, futures contract, forward contract, short sale or other
transaction that is not subject to the mark-to-market rules is treated as a
"constructive sale" of an "appreciated financial position" held by the Fund
under Section 1259 of the Code. Any net mark-to-market gains and/or gains from
constructive sales may also have to be distributed to satisfy the distribution
requirements referred to above even though the Fund may receive no corresponding
cash amounts, possibly requiring the Fund to dispose of portfolio securities or
borrow to obtain the necessary cash. Losses on certain options, futures or
forward contracts and/or offsetting positions (portfolio securities or other
positions with respect to which the Fund's risk of loss is substantially
diminished by one or more options, futures or forward contracts) may also be
deferred under the tax straddle rules of the Code, which may also affect the
characterization of capital gains or losses from straddle positions and certain
successor positions as long-term or short-term. Certain tax elections may be
available that would enable the Fund to ameliorate some adverse effects of the
tax rules described in this paragraph. The tax rules applicable to options,
futures, forward contracts and straddles may affect the amount, timing and
character of the Fund's income and gains or losses and hence of its
distributions to shareholders.
The federal income tax treatment of the Fund's investment in preferred
securities or other securities and its transactions involving, among other
things, swaps, caps, floors and collars is uncertain and may be subject to
recharacterization by the IRS. To the extent the tax treatment of such
securities or transactions differs from the tax treatment expected by the Fund,
the timing or character of income recognized by the Fund could be affected, and
the Fund may be required to purchase or sell securities, or otherwise change its
portfolio, in order to comply with the tax rules applicable to regulated
investment companies under the Code.
The IRS has taken the position that if a regulated investment company
has two or more classes of shares, it must designate distributions made to each
class in any year as consisting of no more than such class's proportionate share
of particular types of income (including ordinary income and capital gains). A
class's proportionate share of a particular type of income is determined
according to the percentage of total dividends paid by the regulated
36
investment company to such class. Consequently, if both common shares and APS
are outstanding, the Fund intends to designate distributions made to the classes
of particular types of income in accordance with each such class's proportionate
shares of such income. Thus, the Fund will designate dividends that constitute
qualified dividend income, dividends qualifying for the Dividends Received
Deduction, income not constituting qualified dividend income, income not
qualifying for the Dividends Received Deduction and capital gain dividends in a
manner that allocates such income between the holders of common shares and
preferred shares in proportion to the total dividends paid to each class during
or for the taxable year, or otherwise as required by applicable law.
The Fund may be subject to withholding and other taxes imposed by
foreign countries, including taxes on interest, dividends and capital gains with
respect to its investments in those countries, which would, if imposed, reduce
the yield on or return from those investments. Tax conventions between certain
countries and the U.S. may reduce or eliminate such taxes in some cases. The
Fund does not expect to satisfy the requirements for passing through to its
shareholders their pro rata shares of qualified foreign taxes paid by the Fund,
with the general result that shareholders will not be entitled to a tax
deduction or credit for such taxes on their own tax returns.
Federal law requires that the Fund withhold (as "backup withholding")
on reportable payments, including dividends, capital gain distributions and the
proceeds of sales or other dispositions of the Fund's shares paid to certain
shareholders who have not complied with IRS regulations. In order to avoid this
withholding requirement, shareholders must certify on their Account
Applications, or on separate IRS Forms W-9, that the Social Security number or
other taxpayer identification number they provide is their correct number and
that they are not currently subject to backup withholding, or that they are
exempt from backup withholding. The Fund may nevertheless be required to backup
withhold if it receives notice from the IRS or a broker that the number provided
is incorrect or backup withholding is applicable as a result of previous
underreporting of income.
The description of certain federal tax provisions above relates only to
U.S. federal income tax consequences for shareholders who are U.S. persons,
i.e., U.S. citizens or residents or U.S. corporations, partnerships, trusts or
estates, and who are subject to U.S. federal income tax. Investors other than
U.S. persons may be subject to different U.S. federal income tax treatment,
including a non-resident alien U.S. withholding tax on amounts treated as
ordinary dividends from the Fund and, unless an effective IRS Form W-8BEN or
other authorized withholding certificate is on file, to backup withholding on
certain other payments from the Fund.
PERFORMANCE
From time to time, in reports and promotional literature, the Fund's
total return will be compared to indices of mutual funds such as Lipper
Analytical Services, Inc.'s "Lipper - Mutual Fund Performance Analysis," a
monthly publication which tracks net assets, total return and yield on mutual
funds in the United States. Ibottson and Associates, CDA Weisenberger and F.C.
Towers are also used for comparison purposes, as well as the Russell and
Wilshire Indices.
Performance rankings and ratings reported periodically in, and excerpts
from, national financial publications such as MONEY Magazine, FORBES, BUSINESS
WEEK, THE WALL STREET JOURNAL, MICROPAL, INC., MORNINGSTAR, STANGER'S and
BARRON'S may also be utilized. The Fund's promotional and sales literature may
make reference to the Fund's "beta". Beta is a reflection of the market related
risk of the Fund by showing how responsive the Fund is to the market.
The performance of the Fund is not fixed or guaranteed. Performance
quotations should not be considered to be representations of performance of the
Fund for any period in the future. The performance of the Fund is a function of
many factors including its earnings, expenses and number of outstanding shares.
Fluctuating market conditions; purchases, sales and maturities of portfolio
securities; sales and redemptions of shares of beneficial interest; and changes
in operating expenses are all examples of items that can increase or decrease
the Fund's performance.
37
CUSTODY OF PORTFOLIO
Portfolio securities of the Fund are held pursuant to a custodian
agreement between the Fund and The Bank of New York, One Wall Street, New York,
New York 10286. Under the custodian agreement, The Bank of New York is
performing custody, portfolio, foreign custody manager and fund accounting
services.
INDEPENDENT AUDITORS
The independent auditors of the Fund, Deloitte & Touche LLP, 200
Berkeley Street, Boston, MA 02116 audit and render an opinion on the Fund's
annual financial statements, and reviews the Fund's annual federal income tax
return.
ADDITIONAL INFORMATION
A Registration Statement on Form N-2, relating to the shares offered
hereby, has been filed by the Fund with the Securities and Exchange Commission
(the "Commission"), Washington, D.C. The Prospectus and this Statement of
Additional Information do not contain all of the information set forth in the
Registration Statement, including any exhibits and schedules thereto. For
further information with respect to the Fund and the shares offered hereby,
reference is made to the Registration Statement. Statements contained in the
Prospectus and this Statement of Additional Information as to the contents of
any contract or other document referred to are not necessarily complete and in
each instance reference is made to the copy of such contract or other document
filed as an exhibit to the Registration Statement, each such statement being
qualified in all respects by such reference. A copy of the Registration
Statement may be inspected without charge at the Commission's principal office
in Washington, D.C., and copies of all or any part thereof may be obtained from
the Commission upon the payment of certain fees prescribed by the Commission.
38
FINANCIAL STATEMENTS
Following are the audited financial statements for the initial capitalization of
the John Hancock Tax-Advantaged Dividend Income Fund dated February 4, 2004, and
the report of Deloitte and Touche LLP.
JOHN HANCOCK TAX-ADVANTAGED DIVIDEND INCOME FUND
STATEMENT OF ASSETS AND LIABILITIES
February 4, 2004
Assets:
Cash $ 143,002
---------
TOTAL ASSETS $ 143,002
=========
Liabilities:
Payable for organization expenses $ 43,000
---------
TOTAL LIABILITIES $ 43,000
=========
Net Assets:
Capital paid-in $ 143,002
Accumulated net investment loss (43,000)
---------
NET ASSETS $ 100,002
=========
Net assets value per share:
(Based on net assets and 7,487 shares of
beneficial interest outstanding - unlimited
number of shares authorized with no par value) $ 13.36
=========
STATEMENT OF OPERATIONS
For the period from August 7, 2003 (date of inception) to February 4, 2004
Organization expenses $ 43,000
---------
NET INVESTMENT LOSS ($ 43,000)
=========
STATEMENT OF CHANGES IN NET ASSETS
For the period from August 7, 2003 (date of inception) to February 4, 2004
INCREASE (DECREASE) IN NET ASSETS
From operations:
Net investment loss ($ 43,000)
---------
DECREASE IN NET ASSETS RESULTING FROM OPERATIONS (43,000)
=========
From Fund share transactions:
Net proceeds from the issuance of common shares 143,002
=========
NET ASSETS
Beginning of period --
END OF PERIOD $ 100,002
=========
See notes to financial statements.
39
NOTES TO FINANCIAL STATEMENTS
Note 1. Organization
John Hancock Tax-Advantaged Dividend Income Fund (the "Fund") was organized on
August 7, 2003 as a diversified closed-end management investment company
registered under the Investment Company Act of 1940. The Fund's primary
investment objective is to provide a high level of after-tax total return from
dividend income and capital appreciation. The Fund will invest at least 80% of
its managed assets (net assets plus borrowing for investment purposes) in
dividend paying common and preferred securities that John Hancock Advisers, LLC
(the "Adviser"), an indirect, wholly-owned subsidiary of John Hancock Life
Insurance Company believes at the time of acquisition are eligible to pay
tax-advantaged dividends.
At February 4, 2004 the Fund is inactive except for matters relating to its
organization, registration and the sale of 7,487 shares for $143,002 ($19.10 per
share) to the Adviser.
Note 2. Agreements
The Fund will enter into an investment management contract with the Adviser. The
Fund will also have an administrative agreement with the Adviser under which the
Adviser will oversee the custodial, auditing, valuation, accounting, legal,
stock transfer and dividend disbursing services and will maintain the Fund's
communications with shareholders. Upon commencement of the Fund's operations,
the Adviser will receive a daily management fee from the Fund at an annual rate
of 0.75% of the Fund's average daily managed assets. The Adviser has agreed to
limit the Fund's management fee to the following: 0.55% of the Fund's average
daily managed assets until the fifth anniversary of the commencement of the
Fund's operations, 0.60% of such assets in the sixth year, 0.65% of such assets
in the seventh year, and 0.70% of the average daily managed assets in the eighth
year. After the eighth year the Adviser will no longer waive a portion of the
management fee.
Note 3. Organization Expenses and Offering Costs
Organization expenses, which amount to $43,000, have been expensed by the Fund.
Offering costs, estimated to be approximately $867,000, will be charged to the
Fund's capital paid-in at the time shares of beneficial interest are sold.
Note 4. Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires the Fund's
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities at the date of the financial statements and the reported
amounts of revenue and expenses during the reporting period. Actual results
could differ from those estimates.
40
INDEPENDENT AUDITORS' REPORT
The Board of Trustees and Shareholder of
John Hancock Tax-Advantaged Dividend Income Fund
We have audited the accompanying statement of assets and liabilities of John
Hancock Tax-Advantaged Dividend Income Fund (the "Fund") as of February 4, 2004
and the related statements of operations and changes in net assets for the
period from August 7, 2003 (date of inception) to February 4, 2004. These
financial statements are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. 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 audit provides a
reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Fund at February 4, 2004 and the results
of its operations and changes in its net assets for the period then ended, in
conformity with accounting principles generally accepted in the United States of
America.
/S/ DELOITTE & TOUCHE LLP
Boston, Massachusetts
February 11, 2004
41
APPENDIX A - MORE ABOUT RISK
A fund's risk profile is largely defined by the fund's primary
securities and investment practices. You may find the most concise description
of the fund's risk profile in the Prospectus.
A fund is permitted to utilize -- within limits established by the
Trustees -- certain other securities and investment practices that have higher
risks and opportunities associated with them. To the extent that the Fund
utilizes these securities or practices, its overall performance may be affected,
either positively or negatively. On the following pages are brief definitions of
certain associated risks with them with examples of related securities and
investment practices included in brackets. See the "Investment Objective and
Policies" and "Investment Restrictions" sections of this Statement of Additional
Information for a description of this Fund's investment policies. The Fund
follows certain policies that may reduce these risks.
As with any mutual fund, there is no guarantee that the Fund will earn
income or show a positive return over any period of time -- days, months or
years.
TYPES OF INVESTMENT RISK
CORRELATION RISK. The risk that changes in the value of a hedging
instrument will not match those of the asset being hedged (hedging is the use of
one investment to offset the effects of another investment). Incomplete
correlation can result in unanticipated risks. (e.g., short sales, financial
futures and options; securities and index options, currency contracts).
CREDIT RISK. The risk that the issuer of a security, or the
counterparty to a contract, will default or otherwise become unable to honor a
financial obligation (e.g., borrowing; reverse repurchase agreements, repurchase
agreements, securities lending, non-investment-grade securities, financial
futures and options; securities and index options).
INFORMATION RISK. The risk that key information about a security or
market is inaccurate or unavailable (e.g., non-investment-grade securities,
foreign equities).
INTEREST RATE RISK. The risk of market losses attributable to changes
in interest rates. With fixed-rate securities, a rise in interest rates
typically causes a fall in values, while a fall in rates typically causes a rise
in values (e.g., non-investment-grade securities, financial futures and options;
securities and index options).
LEVERAGE RISK. Associated with securities or practices (such as
borrowing) that multiply small index or market movements into large changes in
value (e.g., borrowing; reverse repurchase agreements, when-issued securities
and forward commitments).
HEDGING RISK. When a derivative (a security whose value is based on
another security or index) is used as a hedge against an opposite position that
the fund also holds, any loss generated by the derivative should be
substantially offset by gains on the hedged investment, and vice versa. While
hedging can reduce or eliminate losses, it can also reduce or eliminate gains
(e.g., short sales, financial futures and options securities and index options;
currency contracts).
SPECULATIVE RISK. To the extent that a derivative is not used as a
hedge, the fund is directly exposed to the risks of that derivative. Gains or
losses from speculative positions in a derivative may be substantially greater
than the derivative's original cost (e.g., short sales, financial futures and
options securities and index options; currency contracts).
LIQUIDITY RISK. The risk that certain securities may be difficult or
impossible to sell at the time and the price that the seller would like. The
seller may have to lower the price, sell other securities instead or forego an
investment opportunity, any of which could have a negative effect on fund
management or performance (e.g., non-investment-grand securities, short sales,
restricted and illiquid securities, financial futures and options securities and
index options; currency contracts).
A-1
MANAGEMENT RISK. The risk that a strategy used by a fund's management
may fail to produce the intended result. Common to all mutual funds.
MARKET RISK. The risk that the market value of a security may move up
and down, sometimes rapidly and unpredictably. These fluctuations may cause a
security to be worth less than the price originally paid for it, or less than it
was worth at an earlier time. Market risk may affect a single issuer, industry,
sector of the economy or the market as a whole. Common to all stocks and bonds
and the mutual funds that invest in them (e.g., short sales, short-term trading,
when-issued securities and forward commitments, non-investment-grade securities,
foreign equities, financial futures and options; securities and index options
restricted and illiquid securities).
NATURAL EVENT RISK. The risk of losses attributable to natural
disasters, crop failures and similar events. (e.g., foreign equities).
OPPORTUNITY RISK. The risk of missing out on an investment opportunity
because the assets necessary to take advantage of it are tied up in less
advantageous investments (e.g., short sales, when-issued securities and forward
commitments; financial futures and options; securities and index options,
currency contracts).
POLITICAL RISK. The risk of losses attributable to government or
political actions, from changes in tax or trade statutes to governmental
collapse and war.(e.g., foreign equities).
VALUATION RISK. The risk that a fund has valued certain of its
securities at a higher price than it can sell them for (e.g.,
non-investment-grade securities, restricted and illiquid securities).
A-2
APPENDIX B - DESCRIPTION OF RATINGS
The ratings of Moody's Investors Service, Inc. and Standard & Poor's
Ratings Group represent their opinions as to the quality of various debt
instruments they undertake to rate. It should be emphasized that ratings are not
absolute standards of quality. Consequently, debt instruments with the same
maturity, coupon and rating may have different yields while debt instruments of
the same maturity and coupon with different ratings may have the same yield.
MOODY'S INVESTORS SERVICE, INC. - PREFERRED SECURITIES RATINGS
AAA: Preferred stocks which are rated "aaa" are considered to be top quality.
This rating indicates good asset protection and the least risk of dividend
impairment within the universe of preferred stocks.
AA: Preferred stocks which are rated "aa" are considered to be high grade. This
rating indicates that there is reasonable assurance that earnings and asset
protection will remain relatively well maintained in the foreseeable future.
A: Preferred stocks which are rated "a" are considered to be upper-medium grade.
While risks are judged to be somewhat greater than in the "aaa" and "aa"
classifications, earnings and asset protection are, nevertheless, expected to be
maintained at adequate levels.
BAA: Preferred stocks which are rated "baa" are judged lower-medium grade,
neither highly protected nor poorly secured. Earnings and asset protection
appear adequate at present but may be questionable over any great length of
time.
BA: Preferred stocks which are rated "ba" are considered to have speculative
elements and their future cannot be considered well assured. Earnings and asset
protection may be very moderate and not well safeguarded during adverse periods.
Uncertainty of position characterizes preferred stocks in this class.
MOODY'S INVESTORS SERVICE, INC. - BOND RATINGS
AAA: Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edge." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
AA: Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuations of protective elements
may be of greater amplitude or there may be other elements present which make
the long-term risks appear somewhat larger than in Aaa securities.
A: Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment at some time in the future.
BAA: Bonds which are rated Baa are considered as medium grade obligations, i.e.,
they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
BA: Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B-1
B: Bonds which are rated B generally lack the characteristics of desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
CAA: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
CA: Bonds which are rated Ca represented obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
STANDARD & POOR'S RATINGS GROUP - PREFERRED SECURITIES RATINGS
AAA: This is the highest rating that may be assigned to a preferred stock issue
and indicates an extremely strong capacity to pay the preferred stock
obligations.
AA: A preferred stock issue rated AA also qualifies as a high quality fixed
income security. The capacity to pay preferred stock obligations is very strong,
although not as overwhelming as for issues rated AAA.
A: An issue rated A is backed by a sound capacity to pay the preferred stock
obligations, although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions.
BBB: An issue rated BBB is regarded as backed by an adequate capacity to pay the
preferred stock obligations. Although it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to make payments for preferred stock in
this category for issues in the A category.
BB: An issue rated BB is regarded, on balance, as predominantly speculative with
respect to the issuer's capacity to pay the preferred stock obligation. While
such issues will likely have some quality and protective characteristics, there
are outweighed by large uncertainties or major risk exposures to adverse
conditions.
STANDARD & POOR'S RATINGS GROUP - BOND RATINGS
AAA: Debt rated AAA has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA: Debt rated AA has a very strong capacity to pay interest and repay principal
and differs from the highest rated issues only in small degree.
A: Debt rated A has a strong capacity to pay interest and repay principal,
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB: Debt rated BBB is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
BB, B: Debt rated BB and B is regarded, on balance, as predominantly speculative
with respect to capacity to pay interest and repay principal in accordance with
the terms of the obligation. BB indicates the lowest degree of speculation and
CC the highest degree of speculation. While such debt will likely have some
quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions.
CCC: Debt rated `CCC' has a currently identifiable vulnerability to default, and
is dependent upon favorable business, financial, and economic conditions to meet
timely payment of interest and repayment of principal. In the event of adverse
business, financial or economic conditions, it is not likely to have the
capacity to pay interest and repay principal. The `CCC' rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
`B' or `B-' rating.
B-2
CC: The rating `CC' is typically applied to debt subordinated to senior debt
that is assigned an actual or implied `CCC' rating.
B-3
APPENDIX C - PROXY VOTING GUIDELINES AND PROCEDURES
JOHN HANCOCK ADVISERS, LLC
SOVEREIGN ASSET MANAGEMENT CORPORATION
PROXY VOTING SUMMARY
We believe in placing our clients' interests first. Before we invest in a
particular stock or bond, our team of portfolio managers and research analysts
look closely at the company by examining its earnings history, its management
team and its place in the market. Once we invest, we monitor all our clients'
holdings, to ensure that they maintain their potential to produce results for
investors.
As part of our active investment management strategy, we keep a close eye on
each company we invest in. Routinely, companies issue proxies by which they ask
investors like us to vote for or against a change, such as a new management
team, a new business procedure or an acquisition. We base our decisions on how
to vote these proxies with the goal of maximizing the value of our clients'
investments.
Currently, John Hancock Advisers, LLC ("JHA") and Sovereign Asset Management
Corporation ("Sovereign") manage open-end funds, closed-end funds and portfolios
for institutions and high-net-worth investors. Occasionally, we utilize the
expertise of an outside asset manager by means of a subadvisory agreement. In
all cases, JHA or Sovereign makes the final decision as to how to vote our
clients' proxies. There is one exception, however, and that pertains to our
international accounts. The investment management team for international
investments votes the proxies for the accounts they manage. Unless voting is
specifically retained by the named fiduciary of the client, JHA and Sovereign
will vote proxies for ERISA clients.
In order to ensure a consistent, balanced approach across all our investment
teams, we have established a proxy oversight group comprised of associates from
our investment, operations and legal teams. The group has developed a set of
policies and procedures that detail the standards for how JHA and Sovereign vote
proxies. The guidelines of JHA have been approved and adopted by each fund
client's board of trustees who have voted to delegate proxy voting authority to
their investment adviser, JHA. JHA and Sovereign's other clients have granted us
the authority to vote proxies in our advisory contracts or comparable documents.
JHA and Sovereign have hired a third party proxy voting service which has been
instructed to vote all proxies in accordance with our established guidelines
except as otherwise instructed.
In evaluating proxy issues, our proxy oversight group may consider information
from many sources, including the portfolio manager, management of a company
presenting a proposal, shareholder groups, and independent proxy research
services. Proxies for securities on loan through securities lending programs
will generally not be voted, however a decision may be made to recall a security
for voting purposes if the issue is material.
Below are the guidelines we adhere to when voting proxies. Please keep in mind
that these are purely guidelines. Our actual votes will be driven by the
particular circumstances of each proxy. From time to time votes may ultimately
be cast on a case-by-case basis, taking into consideration relevant facts and
circumstances at the time of the vote. Decisions on these matters (case-by-case,
abstention, recall) will normally be made by a portfolio manager under the
supervision of the chief investment officer and the proxy oversight group. We
may abstain from voting a proxy if we conclude that the effect on our clients'
economic interests or the value of the portfolio holding is indeterminable or
insignificant.
C-1
PROXY VOTING GUIDELINES
BOARD OF DIRECTORS
We believe good corporate governance evolves from an independent board.
We support the election of uncontested director nominees, but will withhold our
vote for any nominee attending less than 75% of the board and committee meetings
during the previous fiscal year. Contested elections will be considered on a
case by case basis by the proxy oversight group, taking into account the
nominee's qualifications. We will support management's ability to set the size
of the board of directors and to fill vacancies without shareholder approval but
will not support a board that has fewer than 3 directors or allows for the
removal of a director without cause.
We will support declassification of a board and block efforts to adopt a
classified board structure. This structure typically divides the board into
classes with each class serving a staggered term.
In addition, we support proposals for board indemnification and limitation of
director liability, as long as they are consistent with corporate law and
shareholders' interests. We believe that this is necessary to attract qualified
board members.
SELECTION OF AUDITORS
We believe an independent audit committee can best determine an auditor's
qualifications.
We will vote for management proposals to ratify the board's selection of
auditors, and for proposals to increase the independence of audit committees.
CAPITALIZATION
We will vote for a proposal to increase or decrease authorized common or
preferred stock and the issuance of common stock, but will vote against a
proposal to issue or convert preferred or multiple classes of stock if the board
has unlimited rights to set the terms and conditions of the shares, or if the
shares have voting rights inferior or superior to those of other shareholders.
In addition, we will support a management proposal to: create or restore
preemptive rights; approve a stock repurchase program; approve a stock split or
reverse stock split; and, approve the issuance or exercise of stock warrants
ACQUISITIONS, MERGERS AND CORPORATE RESTRUCTURING
Proposals to merge with or acquire another company will be voted on a
case-by-case basis, as will proposals for recapitalization, restructuring,
leveraged buyout, sale of assets, bankruptcy or liquidation. We will vote
against a reincorporation proposal if it would reduce shareholder rights. We
will vote against a management proposal to ratify or adopt a poison pill or to
establish a supermajority voting provision to approve a merger or other business
combination. We would however support a management proposal to opt out of a
state takeover statutory provision, to spin-off certain operations or divisions
and to establish a fair price provision.
CORPORATE STRUCTURE AND SHAREHOLDER RIGHTS
In general, we support proposals that foster good corporate governance
procedures and that provide shareholders with voting power equal to their equity
interest in the company.
To preserve shareholder rights, we will vote against a management proposal to
restrict shareholders' right to: call a special meeting and to eliminate a
shareholders' right to act by written consent. In addition, we will not support
a
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management proposal to adopt a supermajority vote requirement to change certain
by-law or charter provisions or a non-technical amendment to by-laws or a
charter that reduces shareholder rights.
EQUITY-BASED COMPENSATION
Equity-based compensation is designed to attract, retain and motivate talented
executives and independent directors, but should not be so significant as to
materially dilute shareholders' interests.
We will vote against the adoption or amendment of a stock option plan if the:
- plan dilution is more than 10% of outstanding common stock,
- plan allows for non-qualified options to be priced at less
than 85% of the fair market value on the grant date,
- company allows or has allowed the re-pricing or replacement of
underwater options in the past fiscal year (or the exchange of
underwater options).
With respect to the adoption or amendment of employee stock purchase plans or a
stock award plan, we will vote against management if:
- the plan allows stock to be purchased at less than 85% of fair
market value;
- this plan dilutes outstanding common equity greater than 10%
- all stock purchase plans, including the proposed plan, exceed
15% of outstanding common equity.
OTHER BUSINESS
For routine business matters which are the subject of many proxy related
questions, we will vote with management proposals to:
- change the company name;
- approve other business;
- adjourn meetings;
- make technical amendments to the by-laws or charters;
- approve financial statements;
- approve an employment agreement or contract.
SHAREHOLDER PROPOSALS
Shareholders are permitted per SEC regulations to submit proposals for inclusion
in a company's proxy statement. We will generally vote against shareholder
proposals and in accordance with the recommendation of management except as
follows where we will vote for proposals:
- calling for shareholder ratification of auditors;
- calling for auditors to attend annual meetings;
- seeking to increase board independence;
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- requiring minimum stock ownership by directors;
- seeking to create a nominating committee or to increase the
independence of the nominating committee;
- seeking to increase the independence of the audit committee.
CORPORATE AND SOCIAL POLICY ISSUES
We believe that "ordinary business matters" are primarily the responsibility of
management and should be approved solely by the corporation's board of
directors.
Proposals in this category, initiated primarily by shareholders, typically
request that the company disclose or amend certain business practices. We
generally vote against business practice proposals and abstain on social policy
issues, though we may make exceptions in certain instances where we believe a
proposal has substantial economic implications.
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JOHN HANCOCK ADVISERS, LLC
SOVEREIGN ASSET MANAGEMENT CORPORATION
PROXY VOTING PROCEDURES
THE ROLE OF THE PROXY VOTING SERVICE
John Hancock Advisers, LLC ("JHA") and Sovereign Asset Management Corporation
("Sovereign") have hired a proxy voting service to assist with the voting of
client proxies. The proxy service coordinates with client custodians to ensure
that proxies are received for securities held in client accounts and acted on in
a timely manner. The proxy service votes all proxies received in accordance with
the proxy voting guidelines established and adopted by JHA and Sovereign. When
it is unclear how to apply a particular proxy voting guideline or when a
particular proposal is not covered by the guidelines, the proxy voting service
will contact the proxy oversight group coordinator for a resolution.
THE ROLE OF THE PROXY OVERSIGHT GROUP AND COORDINATOR
The coordinator will interact directly with the proxy voting service to resolve
any issues the proxy voting service brings to the attention of JHA or Sovereign.
When a question arises regarding how a proxy should be voted the coordinator
contacts the firm's investment professionals and the proxy oversight group for a
resolution. In addition the coordinator ensures that the proxy voting service
receives responses in a timely manner. Also, the coordinator is responsible for
identifying whether, when a voting issue arises, there is a potential conflict
of interest situation and then escalating the issue to the firm's Executive
Committee. For securities out on loan as part of a securities lending program,
if a decision is made to vote a proxy, the coordinator will manage the
return/recall of the securities so the proxy can be voted.
THE ROLE OF MUTUAL FUND TRUSTEES
The boards of trustees of our mutual fund clients have reviewed and adopted the
proxy voting guidelines of the funds' investment adviser, JHA. The trustees will
periodically review the proxy voting guidelines and suggest changes they deem
advisable.
CONFLICTS OF INTEREST
Conflicts of interest are resolved in the best interest of clients.
With respect to potential conflicts of interest, proxies will be voted in
accordance with JHA's or Sovereign's predetermined policies. If application of
the predetermined policy is unclear or does not address a particular proposal, a
special internal review by the JHA Executive Committee or Sovereign Executive
Committee will determine the vote. After voting, a report will be made to the
client (in the case of an investment company, to the fund's board of trustees),
if requested. An example of a conflict of interest created with respect to a
proxy solicitation is when JHA or Sovereign must vote the proxies of companies
that they provide investment advice to or are currently seeking to provide
investment advice to, such as to pension plans.
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APPENDIX D - AUCTION PROCEDURES
The following procedures will be set forth in provisions of the By-Laws
relating to the Preferred Shares and will be incorporated by reference in the
Auction Agency Agreement and each Broker-Dealer Agreement. Capitalized terms
used herein are defined in the By-Laws or the Prospectus, except that the term
"Trust" means the Fund. Nothing contained in this Appendix D constitutes a
representation by the Fund that in each Auction each party referred to herein
actually will perform the procedures described herein to be performed by such
party.
SECTION 8.9. AUCTION PROCEDURES
(a) ORDERS.
(i) Prior to the Submission Deadline on each Auction Date for shares of
a series of APS:
(A) each Beneficial Owner of shares of such series may submit to its
Broker-Dealer by telephone or otherwise information as to:
(1) the number of Outstanding shares, if any, of such series
held by such Beneficial Owner which such Beneficial Owner desires to continue to
hold without regard to the Applicable Rate for shares of such series for the
next succeeding Rate Period of such shares;
(2) the number of Outstanding shares, if any, of such series
held by such Beneficial Owner which such Beneficial Owner offers to sell if the
Applicable Rate for shares of such series for the next succeeding Rate Period of
shares of such series shall be less than the rate per annum specified by such
Beneficial Owner; and/or
(3) the number of Outstanding shares, if any, of such series
held by such Beneficial Owner which such Beneficial Owner offers to sell without
regard to the Applicable Rate for shares of such series for the next succeeding
Rate Period of shares of such series; and
(B) one or more Broker-Dealers, using lists of Potential Beneficial
Owners, shall in good faith for the purpose of conducting a competitive Auction
in a commercially reasonable manner, contact Potential Beneficial Owners (by
telephone or otherwise), including Persons that are not Beneficial Owners, on
such lists to determine the number of shares, if any, of such series which each
such Potential Beneficial Owner offers to purchase if the Applicable Rate for
shares of such series for the next succeeding Rate Period of shares of such
series shall not be less than the rate per annum specified by such Potential
Beneficial Owner.
(C) For the purposes hereof, the communication by a Beneficial Owner
or Potential Beneficial Owner to a Broker-Dealer, or by a Broker-Dealer to the
Auction Agent, of information referred to in clause (A)(1), (A)(2), (A)(3) or
(B) of this Section 8.9(a)(i) is hereinafter referred to as an "Order" and
collectively as "Orders" and each Beneficial Owner and each Potential Beneficial
Owner placing an Order with a Broker-Dealer, and such Broker-Dealer placing an
order with the Auction Agent, is hereinafter referred to as a "Bidder" and
collectively as "Bidders"; an Order containing the information referred to in
clause (A)(1) of this Section 8.9(a)(i) is hereinafter referred to as a "Hold
Order" and collectively as "Hold Orders"; an Order containing the information
referred to in clause (A)(2) or (B) of this Section 8.9(a)(i) is hereinafter
referred to as a "Bid" and collectively as "Bids"; and an Order containing the
information referred to in clause (A)(3) of this Section 8.9(a)(i) is
hereinafter referred to as a "Sell Order" and collectively as "Sell Orders."
(D) A Bid by a Beneficial Owner or an Existing Holder of shares of a
series of APS subject to an Auction on any Auction Date shall constitute an
irrevocable offer to sell:
(1) the number of Outstanding shares of such series specified
in such Bid if the Applicable Rate for shares of such series determined on such
Auction Date shall be less than the rate specified therein;
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(2) such number or a lesser number of Outstanding shares of
such series to be determined as set forth in Section 8.9(d)(i)(A)(4) if the
Applicable Rate for shares of such series determined on such Auction Date shall
be equal to the rate specified therein; or
(3) the number of Outstanding shares of such series specified
in such Bid if the rate specified therein shall be higher than the Maximum
Applicable Rate for shares of such series, or such number or a lesser number of
Outstanding shares of such series to be determined as set forth in Section
8.9(d)(i)(A)(4) if the rate specified therein shall be higher than the Maximum
Applicable Rate for shares of such series and Sufficient Clearing Bids for
shares of such series do not exist.
(E) A Sell Order by a Beneficial Owner or an Existing Holder of
shares of a series of APS subject to an Auction on any Auction Date shall
constitute an irrevocable offer to sell:
(1) the number of Outstanding shares of such series specified
in such Sell Order; or
(2) such number or a lesser number of Outstanding shares of
such series as set forth in Section 8.9(d)(i)(B)(3) if Sufficient Clearing Bids
for shares of such series do not exist; provided, however, that a Broker-Dealer
that is an Existing Holder with respect to shares of a series of APS shall not
be liable to any Person for failing to sell such shares pursuant to a Sell Order
described in the proviso to paragraph (iii) of Section 8.9(b) if (X) such shares
were transferred by the Beneficial Owner thereof without compliance by such
Beneficial Owner or its transferee Broker-Dealer (or other transferee person, if
permitted by the Fund) with the provisions of Section 8.9(f) or (Y) such
Broker-Dealer has informed the Auction Agent pursuant to the terms of its
Broker-Dealer Agreement that, according to such Broker-Dealer's records, such
Broker Dealer believes it is not the Existing Holder of such shares.
(F) A Bid by a Potential Beneficial Holder or a Potential Holder of
shares of a series of APS subject to an Auction on any Auction Date shall
constitute an irrevocable offer to purchase:
(1) the number of Outstanding shares of such series specified
in such Bid if the Applicable Rate for shares of such series determined on such
Auction Date shall be higher than the rate specified therein; or
(2) such number or a lesser number of Outstanding shares of
such series as set forth in Section 8.9(d)(i)(A)(5) if the Applicable Rate for
shares of such series determined on such Auction Date shall be equal to the rate
specified therein.
(ii) No Order for any number of APS other than whole shares shall be
valid.
(b) SUBMISSION OF ORDERS BY BROKER-DEALERS TO AUCTION AGENT.
(i) Each Broker-Dealer shall submit in writing to the Auction Agent prior
to the Submission Deadline on each Auction Date all Orders for APS of a series
subject to an Auction on such Auction Date obtained by such Broker-Dealer,
designating itself (unless otherwise permitted by the Fund) as an Existing
Holder in respect of shares subject to Orders submitted or deemed submitted to
it by Beneficial Owners and as a Potential Holder in respect of shares subject
to Orders submitted to it by Potential Beneficial Owners, and shall specify with
respect to each Order for such shares:
(A) the name of the Bidder placing such Order (which shall be the
Broker-Dealer unless otherwise permitted by the Fund);
(B) the aggregate number of shares of such series that are the
subject of such Order;
(C) to the extent that such Bidder is an Existing Holder of shares
of such series:
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(1) the number of shares, if any, of such series subject to
any Hold Order of such Existing Holder;
(2) the number of shares, if any, of such series subject to
any Bid of such Existing Holder and the rate specified in such Bid; and
(3) the number of shares, if any, of such series subject to
any Sell Order of such Existing Holder; and
(D) to the extent such Bidder is a Potential Holder of shares of
such series, the rate and number of shares of such series specified in such
Potential Holder's Bid.
(ii) If any rate specified in any Bid contains more than three figures to
the right of the decimal point, the Auction Agent shall round such rate up to
the next highest one thousandth (.001) of 1%.
(iii) If an Order or Orders covering all of the outstanding APS of a
series held by any Existing Holder is not submitted to the Auction Agent prior
to the Submission Deadline, the Auction Agent shall deem a Hold Order to have
been submitted by or on behalf of such Existing Holder covering the number of
Outstanding shares of such series held by such Existing Holder and not subject
to Orders submitted to the Auction Agent; provided, however, that if an Order or
Orders covering all of the Outstanding shares of such series held by any
Existing Holder is not submitted to the Auction Agent prior to the Submission
Deadline for an Auction relating to a Special Rate Period consisting of more
than 91 days, the Auction Agent shall deem a Sell order to have been submitted
by or on behalf of such Existing Holder covering the number of outstanding
shares of such series held by such Existing Holder and not subject to Orders
submitted to the Auction Agent.
(iv) If one or more Orders of an Existing Holder is submitted to the
Auction Agent covering in the aggregate more than the number of Outstanding APS
of a series subject to an Auction held by such Existing Holder, such Orders
shall be considered valid in the following order of priority:
(A) all Hold Orders for shares of such series shall be considered
valid, but only up to and including in the aggregate the number of Outstanding
shares of such series held by such Existing Holder, and if the number of shares
of such series subject to such Hold Orders exceeds the number of Outstanding
shares of such series held by such Existing Holder, the number of shares subject
to each such Hold Order shall be reduced pro rata to cover the number of
Outstanding shares of such series held by such Existing Holder;
(B)
(1) any Bid for shares of such series shall be considered
valid up to and including the excess of the number of Outstanding shares of such
series held by such Existing Holder over the number of shares of such series
subject to any Hold Orders referred to in clause (A) above;
(2) subject to subclause (1), if more than one Bid of an
Existing Holder for shares of such series is submitted to the Auction Agent with
the same rate and the number of Outstanding shares of such series subject to
such Bids is greater than such excess, such Bids shall be considered valid up to
and including the amount of such excess, and the number of shares of such series
subject to each Bid with the same rate shall be reduced pro rata to cover the
number of shares of such series equal to such excess;
(3) subject to subclauses (1) and (2), if more than one Bid of
an Existing Holder for shares of such series is submitted to the Auction Agent
with different rates, such Bids shall be considered valid in the ascending order
of their respective rates up to and including the amount of such excess;
(4) in any such event, the number, if any, of such Outstanding
shares of such series subject to any portion of Bids considered not valid in
whole or in part under this clause (B) shall be treated as the subject of a Bid
for shares of such series by or on behalf of a Potential Holder at the rate
therein specified; and
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(C) all Sell Orders for shares of such series shall be considered
valid up to and including the excess of the number of Outstanding shares of such
series held by such Existing Holder over the sum of shares of such series
subject to valid Hold Orders referred to in clause (A) above and valid Bids
referred to in clause (B) above.
(v) If more than one Bid for one or more shares of a series of APS is
submitted to the Auction Agent by or on behalf of any Potential Holder, each
such Bid submitted shall be a separate Bid with the rate and number of shares
therein specified.
(vi) Any Order submitted by a Beneficial Owner or a Potential Beneficial
Owner to its Broker-Dealer, or by a Broker-Dealer to the Auction Agent, prior to
the Submission Deadline on any Auction Date, shall be irrevocable.
(c) DETERMINATION OF SUFFICIENT CLEARING BIDS, WINNING BIDS RATE AND
APPLICABLE RATE.
(i) Not earlier than the Submission Deadline on each Auction Date for
shares of a series of APS, the Auction Agent shall assemble all valid Orders
submitted or deemed submitted to it by the Broker-Dealers in respect of shares
of such series (each such Order as submitted or deemed submitted by a
Broker-Dealer being hereinafter referred to individually as a "Submitted Hold
Order," a "Submitted Bid" or a "Submitted Sell Order," as the case may be, or as
a "Submitted Order" and collectively as "Submitted Hold Orders," "Submitted
Bids" or "Submitted Sell Orders," as the case may be, or as "Submitted Orders")
and shall determine for such series:
(A) the excess of the number of Outstanding shares of such series
over the number of Outstanding shares of such series subject to Submitted Hold
Orders (such excess being hereinafter referred to as the "Available APS" of such
series);
(B) from the Submitted Orders for shares of such series whether:
(1) the number of Outstanding shares of such series subject to
Submitted Bids of Potential Holders specifying one or more rates equal to or
lower than the Maximum Applicable Rate for shares of such series exceeds or is
equal to the sum of:
(2) the number of Outstanding shares of such series subject to
Submitted Bids of Existing Holders specifying one or more rates higher than the
Maximum Applicable Rate for shares of such series; and
(3) the number of Outstanding shares of such series subject to
Submitted Sell Orders
(in the event such excess or such equality exists (other than because the
number of shares of such series in subclauses (2) and (3) above is zero because
all of the Outstanding shares of such series are subject to Submitted Hold
Orders), such Submitted Bids in subclause (1) above being hereinafter referred
to collectively as "Sufficient Clearing Bids" for shares of such series); and
(C) if Sufficient Clearing Bids for shares of such series exist, the
lowest rate specified in such Submitted Bids (the "Winning Bid Rate" for shares
of such series) which if:
(1) (X) each such Submitted Bid of Existing Holders specifying
such lowest rate and (Y) all other such Submitted Bids of Existing Holders
specifying lower rates were rejected, thus entitling such Existing Holders to
continue to hold the shares of such series that are subject to such Submitted
Bids; and
(2) (X) each such Submitted Bid of Potential Holders
specifying such lowest rate and (Y) all other such Submitted Bids of Potential
Holders specifying lower rates were accepted would result in such Existing
Holders described in Section 8.9(c(i)(B)(2) (1) above continuing to hold an
aggregate number of Outstanding shares of such series which, when added to the
number of Outstanding shares of such series to be
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purchased by such Potential Holders described in Section 8.9(c(i)(B)(2), would
equal not less than the Available APS of such series.
(ii) Promptly after the Auction Agent has made the determinations pursuant
to paragraph (i) of this Section 8.9(c), the Auction Agent shall advise the Fund
of the Maximum Applicable Rate for shares of the series of APS for which an
Auction is being held on the Auction Date and, based on such determination the
Applicable Rate for shares of such series for the next succeeding Rate Period
thereof as follows:
(A) if Sufficient Clearing Bids for shares of such series exist,
that the Applicable Rate for all shares of such series for the next succeeding
Rate Period thereof shall be equal to the Winning Bid Rate for shares of such
series so determined;
(B) if Sufficient Clearing Bids for shares of such series do not
exist (other than because all of the Outstanding shares of such series are
subject to Submitted Hold Orders), that the Applicable Rate for all shares of
such series for the next succeeding Rate Period thereof shall be equal to the
Maximum Applicable Rate for shares of such series; or
(C) if all of the Outstanding shares of such series are subject to
Submitted Hold Orders, that the Applicable Rate for all shares of such series
for the next succeeding Rate Period thereof shall be the applicable "AA"
Financial Composite Commercial Paper Rate on such Auction Date.
(d) ACCEPTANCE AND REJECTION OF SUBMITTED BIDS AND SUBMITTED SELL ORDERS AND
ALLOCATION OF SHARES.
(i) Existing Holders shall continue to hold the APS that are subject to
Submitted Hold Orders, and, based on the determinations made pursuant to Section
8.9(c)(i)(A), the Submitted Bids and Submitted Sell Orders shall be accepted or
rejected by the Auction Agent and the Auction Agent shall take such other action
as set forth below:
(A) If Sufficient Clearing Bids for shares of a series of APS have
been made, all Submitted Sell Orders with respect to shares of such series shall
be accepted and, subject to the provisions of paragraphs (iv) and (v) of Section
8.9(d), Submitted Bids with respect to shares of such series shall be accepted
or rejected as follows in the following order of priority and all other
Submitted Bids with respect to shares of such series shall be rejected:
(1) Existing Holders' Submitted Bids for shares of such series
specifying any rate that is higher than the Winning Bid Rate for shares of such
series shall be accepted, thus requiring each such Existing Holder to sell the
APS subject to such Submitted Bids;
(2) Existing Holders' Submitted Bids for shares of such series
specifying any rate that is lower than the Winning Bid Rate for shares of such
series shall be rejected, thus entitling each such Existing Holder to continue
to hold the APS subject to such Submitted Bids;
(3) Potential Holders' Submitted Bids for shares of such
series specifying any rate that is lower than the Winning Bid Rate for shares of
such series shall be accepted;
(4) each Existing Holder's Submitted Bid for shares of such
series specifying a rate that is equal to the Winning Bid Rate for shares of
such series shall be rejected, thus entitling such Existing Holder to continue
to hold the APS subject to such Submitted Bid, unless the number of Outstanding
APS subject to all such Submitted Bids shall be greater than the number of APS
("remaining shares") in the excess of the Available APS of such series over the
number of APS subject to Submitted Bids described in Sections 8.9(d)(i)(A) and
(C), in which event such Submitted Bid of such Existing Holder shall be rejected
in part, and such Existing Holder shall be entitled to continue to hold APS
subject to such Submitted Bid, but only in an amount equal to the number of APS
of such series obtained by multiplying the number of remaining shares by a
fraction, the numerator of which shall be the number of Outstanding APS held by
such Existing Holder subject to such Submitted Bid and the denominator of
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which shall be the aggregate number of Outstanding APS subject to such Submitted
Bids made by all such Existing Holders that specified a rate equal to the
Winning Bid Rate for shares of such series; and
(5) each Potential Holder's Submitted Bid for shares of such
series specifying a rate that is equal to the Winning Bid Rate for shares of
such series shall be accepted but only in an amount equal to the number of
shares of such series obtained by multiplying the number of shares in the excess
of the Available APS of such series over the number of APS subject to Submitted
Bids described in clauses (2) through (4) of this Section 8.9(i)(A) by a
fraction, the numerator of which shall be the number of Outstanding APS subject
to such Submitted Bid and the denominator of which shall be the aggregate number
of Outstanding APS subject to such Submitted Bids made by all such Potential
Holders that specified a rate equal to the Winning Bid Rate for shares of such
series.
(B) If Sufficient Clearing Bids for shares of a series of APS have
not been made (other than because all of the Outstanding shares of such series
are subject to Submitted Hold Orders), subject to the provisions of Section
8.9(d)(4), Submitted Orders for shares of such series shall be accepted or
rejected as follows in the following order of priority and all other Submitted
Bids for shares of such series shall be rejected:
(1) Existing Holders' Submitted Bids for shares of such series
specifying any rate that is equal to or lower than the Maximum Applicable Rate
for shares of such series shall be rejected, thus entitling such Existing
Holders to continue to hold the APS subject to such Submitted Bids;
(2) Potential Holders' Submitted Bids for shares of such
series specifying any rate that is equal to or lower than the Maximum Applicable
Rate for shares of such series shall be accepted; and
(3) Each Existing Holder's Submitted Bid for shares of such
series specifying any rate that is higher than the Maximum Applicable Rate for
shares of such series and the Submitted Sell Orders for shares of such series of
each Existing Holder shall be accepted, thus entitling each Existing Holder that
submitted or on whose behalf was submitted any such Submitted Bid or Submitted
Sell Order to sell the shares of such series subject to such Submitted Bid or
Submitted Sell Order, but in both cases only in an amount equal to the number of
shares of such series obtained by multiplying the number of shares of such
series subject to Submitted Bids described in clause (2) of this paragraph (B)
by a fraction, the numerator of which shall be the number of Outstanding shares
of such series held by such Existing Holder subject to such Submitted Bid or
Submitted Sell Order and the denominator of which shall be the aggregate number
of Outstanding shares of such series subject to all such Submitted Bids and
Submitted Sell Orders.
(C) If all of the Outstanding shares of a series of APS are subject
to Submitted Hold Orders, all Submitted Bids for shares of such series shall be
rejected.
(D) If, as a result of the procedures described in clause (4) or (5)
of paragraph (A) or clause (3) of paragraph (B) of this Section 8.9(d)(i), any
Existing Holder would be entitled or required to sell, or any Potential Holder
would be entitled or required to purchase, a fraction of a share of a series of
APS on any Auction Date, the Auction Agent shall, in such manner as it shall
determine in its sole discretion, round up or down the number of APS of such
series to be purchased or sold by any Existing Holder or Potential Holder on
such Auction Date as a result of such procedures so that the number of shares so
purchased or sold by each Existing Holder or Potential Holder on such Auction
Date shall be whole APS.
(E) If, as a result of the procedures described in clause (5) of
Section 8.9(d)(i)(A), any Potential Holder would be entitled or required to
purchase less than a whole share of a series of APS on any Auction Date, the
Auction Agent shall, in such manner as it shall determine in its sole
discretion, allocate APS of such series for purchase among Potential Holders so
that only whole shares of APS of such series are purchased on such Auction Date
as a result of such procedures by any Potential Holder, even if such allocation
results in one or more Potential Holders not purchasing APS of such series on
such Auction Date.
(F) Based on the results of each Auction for shares of a series of
APS, the Auction Agent shall determine the aggregate number of shares of such
series to be purchased and the aggregate number of shares of such series to be
sold by Potential Holders and
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Existing Holders and, with respect to each Potential Holder and Existing Holder,
to the extent that such aggregate number of shares to be purchased and such
aggregate number of shares to be sold differ, determine to which other Potential
Holder(s) or Existing Holder(s) they shall deliver, or from which other
Potential Holder(s) or Existing Holder(s) they shall receive, as the case may
be, APS of such series. Notwithstanding any provision of the Auction Procedures
to the contrary, in the event an Existing Holder or Beneficial Owner of a series
of APS with respect to whom a Broker-Dealer submitted a Bid to the Auction Agent
for such shares that was accepted in whole or in part, or submitted or is deemed
to have submitted a Sell Order for such shares that was accepted in whole or in
part, fails to instruct its Agent Member to deliver such shares against payment
therefor, partial deliveries of APS that have been made in respect of Potential
Holders' or Potential Beneficial Owners' submitted Bids for shares of such
series that have been accepted in whole or in part shall constitute good
delivery to such Potential Holders and Potential Beneficial Owners.
(G) None of the Fund, the Adviser, nor the Auction Agent nor any
affiliate of either shall have any responsibility or liability with respect to
the failure of an Existing Holder, a Potential Holder, a Beneficial Owner, a
Potential Beneficial Owner or its respective Agent Member to deliver APS of any
series or to pay for APS of any series sold or purchased pursuant to the Auction
Procedures or otherwise.
(e) AUCTION AGENT.
For so long as any APS are outstanding, the Auction Agent, duly appointed
by the Fund to so act, shall be in each case a commercial bank, trust company or
other financial institution independent of the Fund and its Affiliates (which
however may engage or have engaged in business transactions with the Fund or its
Affiliates) and at no time shall the Fund or any of its affiliates act as the
Auction Agent in connection with the Auction Procedures. If the Auction Agent
resigns or for any reason its appointment is terminated during any period that
any APS are outstanding, the Board of Trustees shall use its best efforts
promptly thereafter to appoint another qualified commercial bank, trust company
or financial institution to act as the Auction Agent. The Auction Agent's
registry of Existing Holders of a series of APS shall be conclusive and binding
on the Broker-Dealers. A Broker-Dealer may inquire of the Auction Agent between
3:00 p.m. on the Business Day preceding an Auction for a series of APS and 9:30
a.m. on the Auction Date for such Auction to ascertain the number of shares of
such series in respect of which the Auction Agent has determined such
Broker-Dealer to be an Existing Holder. If such Broker-Dealer believes it is the
Existing Holder of fewer shares of such series than specified by the Auction
Agent in response to such Broker-Dealer's inquiry, such Broker-Dealer may so
inform the Auction Agent of that belief. Such Broker-Dealer shall not, in its
capacity as Existing Holder of shares of such series, submit Orders in such
Auction in respect of shares of such series covering in the aggregate more than
the number of shares of such series specified by the Auction Agent in response
to such Broker-Dealer's inquiry.
(f) TRANSFER OF APS.
Unless otherwise permitted by the Fund, a Beneficial Owner or an Existing
Holder may sell, transfer or otherwise dispose of APS only in whole shares and
only pursuant to a Bid or Sell Order placed with the Auction Agent in accordance
with the procedures described in this Section 8.9 or to a Broker-Dealer;
provided, however, that (a) a sale, transfer or other disposition of APS from a
customer of a Broker-Dealer who is listed on the records of that Broker-Dealer
as the holder of such shares to that Broker-Dealer or another customer of that
Broker-Dealer shall not be deemed to be a sale, transfer or other disposition
for purposes of this Section 8.9 if such Broker-Dealer remains the Existing
Holder of the shares so sold, transferred or disposed of immediately after such
sale, transfer or disposition and (b) in the case of all transfers other than
pursuant to Auctions, the Broker-Dealer (or other Person, if permitted by the
Fund) to whom such transfer is made shall advise the Auction Agent of such
transfer.
(g) GLOBAL CERTIFICATE.
Prior to the commencement of a any period in which the holders of
Preferred Shares are entitled to elect a majority of the Board of Trustees, (i)
all of the shares of a series of APS outstanding from time to time shall be
represented by one global certificate registered in the name of the Securities
Depository or its nominee and (ii) no registration of transfer of shares of a
series of APS shall be made on the books of the Fund to any Person other than
the Securities Depository or its nominee.
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(h) FORCE MAJEURE.
(i) Notwithstanding anything else set forth herein, if an Auction Date is
not a Business Day because the New York Stock Exchange is closed for business
due to an act of God, natural disaster, act of war, civil or military
disturbance, act of terrorism, sabotage, riots or a loss or malfunction of
utilities or communications services or the Auction Agent is not able to conduct
an Auction in accordance with the Auction Procedures for any such reason, then
the Auction Rate for the next Dividend Period shall be the Auction Rate
determined on the previous Auction Date.
(ii) Notwithstanding anything else set forth herein, if a Dividend Payment
Date is not a Business Day because the New York Stock Exchange is closed for
business due to an act of God, natural disaster, act of war civil or military
disturbance, act of terrorism, sabotage, riots or a loss or malfunction of
utilities or communications services or the dividend payable on such date can
not be paid for any such reason, then:
(A) the Dividend Payment Date for the affected Dividend Period shall
be the next Business Day on which the Fund and its paying agent, if any, are
able to cause the dividend to be paid using their reasonable best efforts;
(B) the affected Dividend Period shall end on the day it would have
ended had such event not occurred and the Dividend Payment Date had remained the
scheduled date; and
(C) the next Dividend Period will begin and end on the dates on
which it would have begun and ended had such event not occurred and the Dividend
Payment Date remained the scheduled date.
(i) MISCELLANEOUS.
The Board of Trustees may interpret the provisions of this Section 8.9 to
resolve any inconsistency or ambiguity, remedy any formal defect or make any
other change or modification that does not materially adversely affect the
rights of Existing Holders of the Preferred Shares, and if such inconsistency,
ambiguity or formal defect reflects an inaccurate provision hereof, the Board of
Trustees may, in appropriate circumstances, amend this Section 8.9. An Existing
Holder (A) may sell, transfer or otherwise dispose of Preferred Shares only
pursuant to a Bid or Sell Order in accordance with the procedures described in
this Section 8.9 or to or through a Broker-Dealer, provided that in the case of
all transfers other than pursuant to Auctions such Existing Holder or its
Broker-Dealer or its Agent Member advises the Auction Agent of such transfer,
and (B) shall have the ownership of the Preferred Shares held by it maintained
in book-entry form by the Securities Depository in the account of its Agent
Member, which in turn will maintain records of such Existing Holder's beneficial
ownership. Neither the Fund nor any affiliated person of the Fund (as defined
under the Investment Company Act) shall submit any Order in any Auction. All of
the Outstanding Preferred Shares shall be represented by one certificate
registered in the name of the nominee of the Securities Depository. Each such
certificate shall bear a legend substantially to the effect that transfer of the
Shares represented by such certificate is subject to the restrictions specified
in Section 8.9(f). Neither the Fund nor any of its agents, including, without
limitation, the Auction Agent, shall have any liability with respect to the
failure of a Potential Holder, Existing Holder or Agent Member to deliver, or to
pay for, Preferred Shares sold or purchased in an Auction or otherwise.
D-8
APPENDIX E - SETTLEMENT PROCEDURES
The following summary of Settlement Procedures sets forth the procedures
expected to be followed in connection with the settlement of each Auction and
will be incorporated by reference in the Auction Agency Agreement and each
Broker-Dealer Agreement. Nothing contained in this Appendix constitutes a
representation by the Fund that in each Auction each party referred to herein
will actually perform the procedures described herein to be performed by such
party. Capitalized terms used herein shall have the respective meanings
specified in the glossary of the Prospectus or Appendix C hereto, as the case
may be.
(a) On each Auction Date, the Auction Agent shall notify by telephone, or
through the Auction Agent's auction processing system, the Broker-Dealers that
participated in the Auction held on such Auction Date and submitted an Order on
behalf of any Existing Holder or Potential Holder of:
(i) the Applicable Rate fixed for the next succeeding Dividend
Period;
(ii) whether Sufficient Clearing Bids existed for the determination
of the Applicable Rate;
(iii) if such Broker-Dealer (a "Seller's Broker-Dealer") submitted a
Bid or a Sell Order on behalf of an Existing Holder, the number of shares, if
any, of APS to be sold by such Existing Holder;
(iv) if such Broker-Dealer (a "Buyer's Broker-Dealer") submitted a
Bid on behalf of a Potential Holder, the number of shares, if any, of APS to be
purchased by such Potential Holder;
(v) if the aggregate number of APS to be sold by all Existing
Holders on whose behalf such Broker-Dealer submitted a Bid or a Sell Order
exceeds the aggregate number of APS to be purchased by all potential Holders on
whose behalf such Broker-Dealer submitted a Bid, the name or names of one or
more Buyer's Broker-Dealers (and the name of the Agent Member, if any, of each
such Buyer's Broker-Dealer) acting for one or more purchasers of such excess
number of APS and the number of such shares to be purchased from one or more
Existing Holders on whose behalf such Broker-Dealer acted by one or more
Potential Holders on whose behalf each of such Buyer's Broker-Dealers acted;
(vi) if the aggregate number of APS to be purchased by all Potential
Holders on whose behalf such Broker-Dealer submitted a Bid exceeds the aggregate
number of APS to be sold by all Existing Holders on whose behalf such
Broker-Dealer submitted a Bid or a Sell Order, the name or names of one or more
Seller's Broker Dealers (and the name of the Agent Member, if any, of each such
Seller's Broker-Dealer) acting for one or more sellers of such excess number of
APS and the number of such shares to be sold to one or more Potential Holders on
whose behalf such Broker-Dealer acted by one or more Existing Holders on whose
behalf each of such Seller's Broker-Dealers acted; and
(vii) the Auction Date of the next succeeding Auction with respect
to the APS.
(b) On each Auction Date, each Broker-Dealer that submitted an Order on
behalf of any Existing Holder or Potential Holder shall:
(i) in the case of a Broker-Dealer that is a Buyer's Broker-Dealer,
instruct each Potential Holder on whose behalf such Broker-Dealer submitted a
Bid that was accepted, in whole or in part, to instruct such Potential Holder's
Agent Member to pay to such Broker - Dealer (or its Agent Member) through the
Securities Depository the amount necessary to purchase the number of APS to be
purchased pursuant to such Bid against receipt of such shares and advise such
Potential Holder of the Applicable Rate for the next succeeding Dividend Period;
(ii) in the case of a Broker-Dealer that is a Seller's
Broker-Dealer, instruct each Existing Holder on whose behalf such Broker-Dealer
submitted a Sell Order that was accepted, in whole or in part, to instruct such
Existing Holder's Agent Member to deliver to such Broker-Dealer (or its Agent
Member) through the
E-1
Securities Depository the number of APS to be sold pursuant to such Order
against payment therefor and advise any such Existing Holder that will continue
to hold APS of the Applicable Rate for the next succeeding Dividend Period;
(iii) advise each Existing Holder on whose behalf such Broker-Dealer
submitted a Hold Order of the Applicable Rate for the next succeeding Dividend
Period;
(iv) advise each Existing Holder on whose behalf such Broker-Dealer
submitted an Order of the Auction Date for the next succeeding Auction; and
(v) advise each Potential Holder on whose behalf such Broker-Dealer
submitted a Bid that was accepted, in whole or in part, of the Auction Date for
the next succeeding Auction.
(c) On the basis of the information provided to it pursuant to (a) above,
each Broker-Dealer that submitted a Bid or a Sell Order on behalf of a Potential
Holder or an Existing Holder shall, in such manner and at such time or times as
in its sole discretion it may determine, allocated any funds received by it
pursuant to (b)(i) above and any APS received by it pursuant to (b)(ii) above
among the Potential Holders, if any, on whose behalf such Broker-Dealer
submitted Bids, the Existing Holders, if any, on whose behalf such Broker-Dealer
submitted Bids that were accepted or Sell Orders, and any Broker-Dealer or
Broker-Dealers identified to it by the Auction Agent pursuant to (a)(v) or
(a)(vi) above.
(d) On each Auction Date:
(i) each Potential Holder and Existing Holder shall instruct its
Agent Member as provided in (b)(i) or (ii) above, as the case may be;
(ii) each Seller's Broker-Dealer which is not an Agent Member of the
Securities Depository shall instruct its Agent Member to (A) pay through the
Securities Depository to the Agent Member of the Existing Holder delivering
shares to such Broker-Dealer pursuant to (b)(ii) above the amount necessary to
purchase such shares against receipt of such shares, and (B) deliver such shares
through the Securities Depository to a Buyer's Broker-Dealer (or its Agent
Member) identified to such Seller's Broker-Dealer pursuant to (a)(v) above
against payment therefor; and
(iii) each Buyer's Broker-Dealer which is not an Agent Member of the
Securities Depository shall instruct its Agent Member to (A) pay through the
Securities Depository to a Seller's Broker-Dealer (or its Agent Member)
identified pursuant to (a) (vi) above the amount necessary to purchase the
shares to be purchased pursuant to (b) (i) above against receipt of such shares,
and (B) deliver such shares through the Securities Depository to the Agent
Member of the purchaser thereof against payment therefor.
(e) On the day after the Auction Date:
(i) each Bidder's Agent Member referred to in (d) (i) above shall
instruct the Securities Depository to execute the transactions described under
(b) (i) or (ii) above, and the Securities Depository shall execute such
transactions;
(ii) each Seller's Broker-Dealer or its Agent Member shall instruct
the Securities Depository to execute the transactions described in (d) (ii)
above, and the Securities Depository shall execute such transactions; and
(iii) each Buyer's Broker-Dealer or its Agent Member shall instruct
the Securities Depository to execute the transactions described in (d) (iii)
above, and the Securities Depository shall execute such transactions.
(f) If an Existing Holder selling APS in an Auction fails to deliver such
shares (by authorized book-entry), a Broker-Dealer may deliver to the Potential
Holder on behalf of which it submitted a Bid that was accepted a number of whole
APS that is less than the number of shares that otherwise was to be purchased by
such Potential Holder. In such event, the number of APS to be so delivered shall
be determined solely by such Broker-Dealer.
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Delivery of such lesser number of shares shall constitute good delivery.
Notwithstanding the foregoing terms of this paragraph (f), any delivery or
non-delivery of shares which shall represent any departure from the results of
an Auction, as determined by the Auction Agent, shall be of no effect unless and
until the Auction Agent shall have been notified of such delivery or
non-delivery in accordance with the provisions of the Auction Agent Agreement
and the Broker-Dealer Agreements.
E-3
THE AMENDED AND RESTATED BY-LAWS
OF
JOHN HANCOCK TAX-ADVANTAGED DIVIDEND INCOME FUND
DECEMBER 16, 2003, AS AMENDED APRIL 29, 2004
Table of Contents
Page
----
ARTICLE I DEFINITIONS................................................. 3
ARTICLE II OFFICES..................................................... 3
Section 2.1. Principal Office........................................ 3
Section 2.2. Other Offices........................................... 3
ARTICLE III SHAREHOLDERS................................................ 3
Section 3.1. Meetings................................................ 3
Section 3.2. Annual Meetings......................................... 3
Section 3.3. Special Meetings........................................ 3
Section 3.4. Notice of Meetings...................................... 5
Section 3.5. Proxies................................................. 5
Section 3.6. Nominations and Proposals by Shareholders............... 5
Section 3.7. Abstentions and Broker Non-Votes........................ 7
Section 3.8. Inspection of Records................................... 7
Section 3.9. Action without Meeting.................................. 7
ARTICLE IV TRUSTEES.................................................... 7
Section 4.1. Meetings of the Trustees................................ 7
Section 4.2. Quorum and Manner of Acting............................. 7
ARTICLE V COMMITTEES.................................................. 8
Section 5.1. Executive and Other Committees.......................... 8
Section 5.2. Meetings, Quorum and Manner of Acting................... 8
ARTICLE VI OFFICERS.................................................... 8
Section 6.1. General Provisions...................................... 8
Section 6.2. Election, Term of Office and Qualifications............. 8
Section 6.3. Removal................................................. 8
Section 6.4. Powers and Duties of the Chairman....................... 8
Section 6.5. Powers and Duties of the Vice Chairman.................. 8
Section 6.6. Powers and Duties of the President...................... 9
Section 6.7. Powers and Duties of Vice Presidents.................... 9
Section 6.8. Powers and Duties of the Treasurer...................... 9
Section 6.9. Powers and Duties of the Secretary...................... 9
Section 6.10. Powers and Duties of Assistant Treasurer .............. 9
Section 6.11. Powers and Duties of Assistant Secretaries ............ 9
Section 6.12. Compensation of Officers and Trustees and
Members of the Advisory Board ....................... 9
ARTICLE VII SHARES OF BENEFICIAL INTEREST............................... 10
Section 7.1. Share Certificates...................................... 10
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Section 7.2. Transfers of Pledged Shares............................. 10
Section 7.3. Regulations............................................. 10
Section 7.4. Lost, Destroyed or Mutilated Certificates............... 10
ARTICLE VIII TERMS OF AUCTION PREFERRED SHARES........................... 11
Section 8.1. Designation............................................. 11
Section 8.2. Definitions............................................. 12
Section 8.3. Investment Company Act Preferred Share Asset Coverage
and Preferred Shares Basic Maintenance Amount Coverage.. 38
Section 8.4. Dividends............................................... 40
Section 8.5. Liquidation Rights...................................... 45
Section 8.6. Redemption.............................................. 46
Section 8.7. Voting Rights........................................... 49
Section 8.8. Other Restrictions...................................... 52
Section 8.9. Auction Procedures...................................... 57
ARTICLE IX TERMS OF COMMON SHARES...................................... 66
Section 9.1. Designation............................................. 66
Section 9.2. Common Shares........................................... 66
ARTICLE X FISCAL YEAR................................................. 66
ARTICLE XI SEAL........................................................ 66
ARTICLE XII SUFFICIENCY AND WAIVERS OF NOTICE........................... 66
ARTICLE XIII AMENDMENTS.................................................. 67
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ARTICLE I
DEFINITIONS
All capitalized terms have the respective meanings given them in the
Agreement and Declaration of Trust of John Hancock Tax-Advantaged Dividend
Income Fund (the "Trust"), dated August 7, 2003 (and amended as to the Trust's
name on December 16, 2003), as amended or restated from time to time.
ARTICLE II
OFFICES
Section 2.1. Principal Office. Until changed by the Trustees, the principal
office of the Trust shall be in Boston, Massachusetts.
Section 2.2. Other Offices. The Trust may have offices in such other places
without as well as within The Commonwealth of Massachusetts as the Trustees may
from time to time determine.
ARTICLE III
SHAREHOLDERS
Section 3.1. Meetings. (a) Meetings of the Shareholders of the Trust or a Series
or Class thereof shall be held as provided in the Declaration of Trust or
required by the 1940 Act at such place within or without The Commonwealth of
Massachusetts as the Trustees shall designate.
Section 3.2. Annual Meetings. Annual meetings of the Shareholders of the Trust
or a Series or Class thereof shall be held on such date and at such place within
or without the Commonwealth of Massachusetts as the Trustees shall designate.
Section 3.3. Special Meetings.
(a) Special meetings of the Shareholders may be called at any time by the
Chairman, the President or the Trustees. Subject to subsection (c) of this
Section 3.3, a special meeting of Shareholders shall also be called by the
Secretary of the Trust upon the written request of the Shareholders entitled to
cast not less than a majority of all the votes entitled to be cast at such
meeting.
(b) Any Shareholder of record seeking to have Shareholders request a
special meeting shall, by sending written notice to the Secretary (the "Record
Date Request Notice") by registered mail, return receipt requested, request the
Trustees to fix a record date to determine the Shareholders entitled to request
a special meeting (the "Requested Record Date"). The Record Date Request Notice
shall set forth the purpose of the meeting and the matters proposed to be acted
on at it, shall be signed by one or more Shareholders of record as of the date
of signature (or their duly authorized agents), shall bear the date of signature
of each such Shareholder (or other agent) and shall set forth all information
relating to each such Shareholder that must be disclosed in solicitations of
proxies for election of trustees in an election contest (even if an election
contest is not involved), or is otherwise required, in each case pursuant to
Regulation 14A under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), and Rule 14a-8 thereunder. Upon receiving the Record Date
Request Notice, the Trustees may fix a Requested Record Date. The Requested
Record Date shall not precede and shall not be more than ten (10) days after the
close of business on the date on which the resolution fixing the Requested
Record Date is adopted by the Trustees. If the Trustees, within thirty (30) days
after the date on which a valid Record Date Request Notice is received, fails to
adopt a resolution fixing the Requested Record Date and make a public
announcement of such Requested Record Date, the Requested Record Date shall be
the close of business on the 30th after the first date on which the Record Date
Request Notice is received by the Secretary.
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(c) In order for any Shareholder to request a special meeting, one or more
written requests for a special meeting signed by Shareholders of record (or
their duly authorized agents) as of the Requested Record Date entitled to cast
not less than a majority (the "Special Meeting Percentage") of all of the votes
entitled to be cast at such meeting (the "Special Meeting Request") shall be
delivered to the Secretary. In addition, the Special Meeting Request shall set
forth the purpose of the meeting and the matters proposed to be acted on at it
(which shall be limited to the matters set forth in the Record Date Request
Notice received by the Secretary), shall bear the date of signature of each such
Shareholder (or other agent) signing the Special Meeting Request, shall set
forth the name and address, as they appear in the Trust's books, of each
Shareholder signing such request (or on whose behalf the Special Meeting Request
is signed) and the class and number of shares of the Trust which are owned of
record and beneficially by each such Shareholder, shall be sent to the Secretary
by registered mail, return receipt requested, and shall be received by the
Secretary within sixty (60) days after the Request Record Date. Any requesting
Shareholder may revoke his, her or its request for a special meeting at any time
by written revocation delivered to the Secretary.
(d) The Secretary shall inform the requesting Shareholders of the
reasonably estimated cost of preparing and mailing the notice of meeting
(including the Trust's proxy materials). The Secretary shall not be required to
call a special meeting upon Shareholder request and such meeting shall not be
held unless, in addition to the documents required by paragraphs (b) and (c) of
this Section 3.3, the Secretary receives payment of such reasonably estimated
cost prior to the mailing of any notice of the meeting.
(e) Except as provided in the next sentence, any special meeting shall be
held at such place, date and time as may be designated by the President,
Chairman or Trustees, whoever has called the meeting. In the case of any special
meeting called by the Secretary upon the request of Shareholders (a "Shareholder
Requested Meeting"), such meeting shall be held at such place, date and time as
may be designated by the Trustees; provided, however, that the date of any
Shareholder Requested Meeting shall be not more than ninety (90) days after the
record date for such meeting (the "Meeting Record Date"); and provided further
that if the Trustees fail to designate, within thirty (30) days after the date
that a valid Special Meeting Request is actually received by the Secretary (the
"Delivery Date"), a date and time for a Shareholder Requested Meeting, then such
meeting shall be held at 2:00 p.m. Eastern Time on the 90th day after the date
the request for such meeting is actually received by the Trust or, if such 90th
day is not a Business Day (as defined below), on the first preceding Business
Day; and provided further that in the event that the Trustees fail to designate
a place for a Shareholder Requested Meeting within thirty (30) days after the
Delivery Date, then such meeting shall be held at the principal executive
offices of the Trust. In fixing a date for any special meeting, the President,
Chairman or Trustees may consider such factors as he, she, or they deem(s)
relevant within the good faith exercise of business judgment, including, without
limitation, the nature of the matters to be considered, the facts and
circumstances surrounding any request for a meeting and any plan of the Trustees
to call an annual meeting or a special meeting. In the case of any Shareholder
Requested Meeting, if the Trustees fail to fix a Meeting Record Date that is a
date within thirty (30) days after the Delivery Date, then the close of business
on the 30th day after the Delivery Date shall be the Meeting Record Date.
(f) If at any time as a result of written revocations of requests for the
special meeting, Shareholders of record (or their duly authorized agents) as of
the Requested Record Date entitled to cast less than the Special Meeting
Percentage shall have delivered and not revoked requests for a special meeting,
the Secretary may refrain from mailing the notice of the meeting or, if the
notice of the meeting has been mailed, the Secretary may revoke the notice of
the meeting at any time before ten (10) days prior to the meeting if the
Secretary has first sent to all other requesting Shareholders written notice of
such revocation and of intention to revoke the notice of the meeting. Any
request for a special meeting received after a revocation by the Secretary of a
notice of a meeting shall be considered a request for a new special meeting.
(g) The Chairman, the President or the Trustees may appoint regionally or
nationally recognized independent inspectors of elections to act as the agent of
the Trust for the purpose of promptly performing a ministerial review of the
validity of any purported Special Meeting Request received by the Secretary. For
the purpose of permitting the inspectors to perform such review, no such
purported request shall be deemed to have been delivered to the Secretary until
the earlier of (i) five (5) Business Days after receipt by the Secretary of such
purported request and (ii) such date as the independent inspectors certify to
the Trust that the valid requests received by the Secretary represent at least a
majority of the issued and outstanding shares of stock that would be entitled to
vote at such meeting. Nothing contained in this paragraph (g) shall in any way
be construed to suggest or imply that
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the Trust or any Shareholder shall not be entitled to contest the validity of
any request, whether during or after such five (5) Business Day period, or to
take any other action (including, without limitation, the commencement,
prosecution or defense of any litigation with respect thereto, and the seeking
of injunctive relief in such litigation).
Section 3.4. Notice of Meetings. Notice of all meetings of the Shareholders,
stating the time, place and purposes of the meeting, shall be given by the
Trustees by mail or telegraphic means to each Shareholder at his address as
recorded on the register of the Trust mailed at least seven (7) days before the
meeting, provided, however, that notice of a meeting need not be given to a
Shareholder to whom such notice need not be given under the proxy rules of the
Commission under the 1940 Act and the Exchange Act. Any adjourned meeting may be
held as adjourned without further notice. No notice need be given to any
Shareholder who shall have failed to inform the Trust of his current address or
if a written waiver of notice, executed before or after the meeting by the
Shareholder or his attorney thereunto authorized, is filed with the records of
the meeting.
Section 3.5. Proxies. At any meeting of Shareholders, any holder of Shares
entitled to vote thereat may vote by proxy, provided that no proxy shall be
voted at any meeting unless it shall have been placed on file with the
Secretary, or with such other officer or agent of the Trust as the Secretary may
direct, for verification prior to the time at which such vote shall be taken. A
proxy shall be deemed signed if the shareholder's name is placed on the proxy
(whether by manual signature, typewriting or telegraphic transmission) by the
Shareholder or the Shareholder's attorney-in-fact. Proxies may be solicited in
the name of one or more Trustees or one or more of the officers of the Trust.
Only Shareholders of record shall be entitled to vote. Each whole share shall be
entitled to one vote as to any matter on which it is entitled by the Declaration
of Trust to vote and fractional shares shall be entitled to a proportionate
fractional vote. When any Share is held jointly by several persons, any one of
them may vote at any meeting in person or by proxy in respect of such Share, but
if more than one of them shall be present at such meeting in person or by proxy,
and such joint owners or their proxies so present disagree as to any vote to be
cast, such vote shall not be received in respect of such Share. A proxy,
including a photographic or similar reproduction thereof and a telegram,
cablegram, wireless or similar transmission thereof, purporting to be executed
by or on behalf of a Shareholder shall be deemed valid unless challenged at or
prior to its exercise, and the burden of proving invalidity shall rest on the
challenger. If the holder of any such Share is a minor or a person of unsound
mind, and subject to guardianship or the legal control of any other person as
regards the charge or management of such Share, he may vote by his guardian or
such other person appointed or having such control, and such vote may be given
in person or by proxy. The placing of a Shareholder's name on a proxy pursuant
to telephonic or electronically transmitted instructions obtained pursuant to
procedures reasonably designed to verify that such instructions have been
authorized by such Shareholder shall constitute execution of such proxy by or on
behalf of such Shareholder.
Section 3.6. Nominations and Proposals by Shareholders.
(a) Annual Meetings of Shareholders. Nominations of persons for election
as a Trustee and the proposal of business to be considered by the Shareholders
may be made at an annual meeting of Shareholders (i) pursuant to the Trust's
notice of meeting, (ii) by or at the direction of the Trustees or (iii) by any
Shareholder of the Trust who was a Shareholder of record both at the time of
giving of notice provided for in this Section 3.6(a) and at the time of the
annual meeting, who is entitled to vote at the meeting and who complied with the
notice procedures set forth in this Section 3.6(a). For nominations for election
to the Trustees or other business to be properly brought before an annual
meeting by a Shareholder pursuant to this Section 3.6(a), the Shareholder must
have given timely notice thereof in writing to the Secretary of the Trust and
such other business must otherwise be a proper matter for action by
Shareholders. To be timely, a Shareholder's notice must be delivered to the
Secretary at the principal executive office of the Trust by not later than the
close of business on the 90th day prior to the first anniversary of the date of
mailing of the notice for the preceding year's annual meeting nor earlier than
the close of business on the 120th day prior to the first anniversary of the
date of mailing of the notice for the preceding year's annual meeting; provided,
however, that in the event that the date of the mailing of the notice for the
annual meeting is advanced or delayed by more than thirty (30) days from the
anniversary date of the mailing of the notice for the preceding year's annual
meeting, notice by the Shareholder to be timely must be so delivered not earlier
than the close of business on the 120th day prior to the date of mailing of the
notice for such annual meeting and not later than the close of business on the
later of the 90th day prior to the date of mailing of the notice for such annual
meeting or the 10th day following the day on which public announcement of the
date of mailing of the notice for such meeting is first made by the Trust. In no
event shall the public announcement of a postponement of the mailing of the
notice for such
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annual meeting or of an adjournment or postponement of an annual meeting to a
later date or time commence a new time period for the giving of a Shareholder's
notice as described above. A Shareholder's notice to be proper must set forth
(i) as to each person whom the Shareholder proposes to nominate for election or
reelection as a trustee (A) the name, age, business address and residence
address of such person, (B) the class and number of shares of stock of the Trust
that are beneficially owned or owned of record by such person and (C) all other
information relating to such person that is required to be disclosed in
solicitations of proxies for election of trustees in an election contest, or is
otherwise required, in each case pursuant to Regulation 14A (or any successor
provision) under the Exchange Act (including such person's written consent to
being named in the proxy statement as a nominee and to serving as a trustee if
elected); (ii) as to any other business that the Shareholder proposes to bring
before the meeting, a description of the business desired to be brought before
the meeting, the reasons for conducting such business at the meeting and any
material interest in such business of such Shareholder (including any
anticipated benefit to the Shareholder therefrom) and of each beneficial owner,
if any, on whose behalf the proposal is made; and (iii) as to the Shareholder
giving the notice and each beneficial owner, if any, on whose behalf the
nomination or proposal is made, (x) the name and address of such Shareholder, as
they appear on the Trust's stock ledger and current name and address, if
different, and of such beneficial owner, and (y) the class and number of shares
of stock of the Trust which are owned beneficially and of record by such
Shareholder and such beneficial owner. Notwithstanding anything in the second
sentence of paragraph (a) of this Section 3.6 to the contrary, in the event that
the number of trustees to be elected to the Board of Trustees is increased and
there is no public announcement by the Trust of such action or specifying the
size of the increased Trustees at least one hundred (100) days prior to the
first anniversary of the date of mailing of the notice for the preceding year's
annual meeting, a Shareholder's notice required by this Section 3.6(a) shall
also be considered timely, but only with respect to nominees for any new
positions created by such increase, if the notice is delivered to the Secretary
at the principal executive offices of the Trust not later than the close of
business on the 10th day immediately following the day on which such public
announcement is first made by the Trust.
(b) Special Meetings of Shareholders. Only such business shall be
conducted at a special meeting of Shareholders as shall have been brought before
the meeting pursuant to the Trust's notice of meeting. Nominations of persons
for election to the Trustees may be made at a special meeting of Shareholders at
which trustees are to be elected (i) pursuant to the Trust's notice of meeting,
(ii) by or at the direction of the Trustees or (iii) provided that the Trustees
have determined that trustees shall be elected at such special meeting, by any
Shareholder of the Trust who is a Shareholder of record both at the time of
giving of notice provided for in this Section 3.6(b) and at the time of the
special meeting, who is entitled to vote at the meeting and who complied with
the notice procedures set forth in this Section 3.6(b). In the event the Trust
calls a special meeting of Shareholders for the purpose of electing one or more
Trustees, any such Shareholder may nominate a person or persons (as the case may
be) for election to such position as specified in the Trust's notice of meeting,
if the Shareholder's notice containing the information required by this Section
3.6(b) shall have been delivered to the Secretary at the principal executive
offices of the Trust not earlier than the close of business on the 120th day
prior to such special meeting and not later than the close of business on the
later of the 90th day prior to such special meeting or the 10th day following
the day on which public announcement is first made of the date of the special
meeting and the nominees proposed by the Trustees to be elected at such meeting.
In no event shall the public announcement of a postponement or adjournment of a
special meeting to a later date or time commence a new time period for the
giving of a Shareholder's notice as described above.
(c) General. Only such persons who are nominated in accordance with the
procedures set forth in this Section 3.6 shall be eligible to serve as trustee,
and only such business shall be conducted at a meeting of Shareholders as shall
have been brought before the meeting in accordance with the procedures set forth
in this Section 3.6. The chairman of the meeting shall have the power and duty
to determine whether a nomination or any other business proposed to be brought
before the meeting was made or proposed, as the case may be, in accordance with
the procedures set forth in this Section 3.6 and, if any proposed nomination or
other business is not in compliance with this Section 3.6, to declare that such
nomination or proposal shall be disregarded. For purposes of this Section 3.6,
(a) the "date of mailing of the notice" shall mean the date of the proxy
statement for the solicitation of proxies for election of trustees and (b)
"public announcement" shall mean disclosure (i) in a press release either
transmitted to the principal securities exchange on which Shares of the Trust's
common stock are traded or reported by a recognized news service or (ii) in a
document publicly filed by the Trust with the Commission.
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(d) Compliance with State and Federal Law. Notwithstanding the foregoing
provisions of this Section 3.6, a Shareholder shall also comply with all
applicable requirements of state law and of the Exchange Act and the rules and
regulations thereunder with respect to the matters set forth in this Section
3.6. Nothing in this Section 3.6 shall be deemed to affect any right of a
Shareholder to request inclusion of a proposal in, nor the right of the Trust to
omit a proposal from, the Trust's proxy statement pursuant to Rule 14a-8 (or any
successor provision) under the Exchange Act.
Section 3.7. Abstentions and Broker Non-Votes. Outstanding Shares represented in
person or by proxy (including Shares which abstain or do not vote with respect
to one or more of any proposals presented for Shareholder approval) will be
counted for purposes of determining whether a quorum is present at a meeting.
Abstentions will be treated as Shares that are present and entitled to vote for
purposes of determining the number of Shares that are present and entitled to
vote with respect to any particular proposal, but will not be counted as a vote
in favor of such proposal. If a broker or nominee holding Shares in "street
name" indicates on the proxy that it does not have discretionary authority to
vote as to a particular proposal, those Shares will not be considered as present
and entitled to vote with respect to such proposal.
Section 3.8. Inspection of Records. The records of the Trust shall be open to
inspection by Shareholders to the same extent as is permitted shareholders of a
Massachusetts business corporation.
Section 3.9. Action without Meeting. For as long as there are under one hundred
fifty (150) shareholders, any action which may be taken by Shareholders may be
taken without a meeting if a majority of Outstanding Shares entitled to vote on
the matter (or such larger proportion thereof as shall be required by law, the
Declaration of Trust, or the By-Laws) consent to the action in writing and the
written consents are filed with the records of the meetings of Shareholders.
Such consents shall be treated for all purposes as a vote taken at a meeting of
Shareholders.
ARTICLE IV
TRUSTEES
Section 4.1. Meetings of the Trustees. The Trustees may in their discretion
provide for regular or stated meetings of the Trustees. Notice of regular or
stated meetings need not be given. Meetings of the Trustees other than regular
or stated meetings shall be held whenever called by the President, the Chairman
or by any one of the Trustees, at the time being in office. Notice of the time
and place of each meeting other than regular or stated meetings shall be given
by the Secretary or an Assistant Secretary or by the officer or Trustee calling
the meeting and shall be mailed to each Trustee at least two days before the
meeting, or shall be given by telephone, cable, wireless, facsimile or
electronic means to each Trustee at his business address, or personally
delivered to him at least one day before the meeting. Such notice may, however,
be waived by any Trustee. Notice of a meeting need not be given to any Trustee
if a written waiver of notice, executed by him before or after the meeting, is
filed with the records of the meeting, or to any Trustee who attends the meeting
without protesting prior thereto or at its commencement the lack of notice to
him. A notice or waiver of notice need not specify the purpose of any meeting.
The Trustees may meet by means of a telephone conference circuit or similar
communications equipment by means of which all persons participating in the
meeting can hear each other at the same time and participation by such means
shall be deemed to have been held at a place designated by the Trustees at the
meeting. Participation in a telephone conference meeting shall constitute
presence in person at such meeting. Any action required or permitted to be taken
at any meeting of the Trustees may be taken by the Trustees without a meeting if
a majority of the Trustees consent to the action in writing and the written
consents are filed with the records of the Trustees' meetings. Such consents
shall be treated as a vote for all purposes.
Section 4.2. Quorum and Manner of Acting. A majority of the Trustees shall be
present in person at any regular or special meeting of the Trustees in order to
constitute a quorum for the transaction of business at such meeting and (except
as otherwise required by law, the Declaration of Trust or these By-Laws) the act
of a majority of the Trustees present at any such meeting, at which a quorum is
present, shall be the act of the Trustees. In the absence of a quorum, a
majority of the Trustees present may adjourn the meeting from time to time until
a quorum shall be present. Notice of an adjourned meeting need not be given.
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ARTICLE V
COMMITTEES
Section 5.1. Executive and Other Committees. The Trustees by vote of a majority
of all the Trustees may elect from their own number an Executive Committee to
consist of not less than two (2) members to hold office at the pleasure of the
Trustees, which shall have the power to conduct the current and ordinary
business of the Trust while the Trustees are not in session, including the
purchase and sale of securities and the designation of securities to be
delivered upon redemption of Shares of the Trust or a Series thereof, and such
other powers of the Trustees as the Trustees may, from time to time, delegate to
them except those powers which by law, the Declaration of Trust or these By-Laws
they are prohibited from delegating. The Trustees may also elect from their own
number other Committees from time to time; the number composing such Committees,
the powers conferred upon the same (subject to the same limitations as with
respect to the Executive Committee) and the term of membership on such
Committees to be determined by the Trustees. The Trustees may designate a
chairman of any such Committee. In the absence of such designation the Committee
may elect its own Chairman.
Section 5.2. Meetings, Quorum and Manner of Acting. The Trustees may (1) provide
for stated meetings of any Committee, (2) specify the manner of calling and
notice required for special meetings of any Committee, (3) specify the number of
members of a Committee required to constitute a quorum and the number of members
of a Committee required to exercise specified powers delegated to such
Committee, (4) authorize the making of decisions to exercise specified powers by
written assent of the requisite number of members of a Committee without a
meeting, and (5) authorize the members of a Committee to meet by means of a
telephone conference circuit.
The Executive Committee shall keep regular minutes of its meetings and
records of decisions taken without a meeting and cause them to be recorded in a
book designated for that purpose and kept in the office of the Trust.
ARTICLE VI
OFFICERS
Section 6.1. General Provisions. The officers of the Trust shall be a Chairman,
a President, a Treasurer and a Secretary, who shall be elected by the Trustees.
The Trustees may elect or appoint such other officers or agents as the business
of the Trust may require, including one or more Vice Presidents, one or more
Assistant Secretaries, and one or more Assistant Treasurers. The Trustees may
delegate to any officer or committee the power to appoint any subordinate
officers or agents.
Section 6.2. Election, Term of Office and Qualifications. The officers of the
Trust (except those appointed pursuant to Section 6.10) shall be elected by the
Trustees. Except as provided in Sections 6.3 and 6.4 of this Article VI, each
officer elected by the Trustees shall hold office at the pleasure of the
Trustees. Any two or more offices may be held by the same person. The Chairman
of the Board shall be selected from among the Trustees and may hold such office
only so long as he/she continues to be a Trustee. Any Trustee or officer may be
but need not be a Shareholder of the Trust.
Section 6.3. Removal. The Trustees, at any regular or special meeting of the
Trustees, may remove any officer with or without cause, by a vote of a majority
of the Trustees then in office. Any officer or agent appointed by an officer or
committee may be removed with or without cause by such appointing officer or
committee.
Section 6.4. Powers and Duties of the Chairman. The Chairman shall preside at
the meetings of the Shareholders and of the Trustees. He may call meetings of
the Trustees and of any committee thereof whenever he deems it necessary. He
shall be the Chief Executive Officer of the Trust and shall have, with the
President, general supervision over the business and policies of the Trust.
Section 6.5. Powers and Duties of the Vice Chairman. The Trustees may, but need
not, appoint one or more Vice Chairman of the Trust. A Vice Chairman shall be an
executive officer of the Trust and shall have the powers
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and duties of a Vice President of the Trust as provided in Section 6.7 of this
Article VI. The Vice Chairman shall perform such duties as may be assigned to
him or her from time to time by the Trustees or the Chairman.
Section 6.6. Powers and Duties of the President. The President shall preside at
all meetings of the Shareholders in the absence of the Chairman. Subject to the
control of the Trustees and to the control of any Committees of the Trustees,
within their respective spheres as provided by the Trustees, he shall at all
times exercise general supervision over the business and policies of the Trust.
He shall have the power to employ attorneys and counsel for the Trust and to
employ such subordinate officers, agents, clerks and employees as he may find
necessary to transact the business of the Trust. He shall also have the power to
grant, issue, execute or sign such powers of attorney, proxies or other
documents as may be deemed advisable or necessary in furtherance of the
interests of the Trust. The President shall have such other powers and duties,
as from time to time may be conferred upon or assigned to him by the Trustees.
Section 6.7. Powers and Duties of Vice Presidents. In the absence or disability
of the President, the Vice President or, if there be more than one Vice
President, any Vice President designated by the Trustees, shall perform all the
duties and may exercise any of the powers of the President, subject to the
control of the Trustees. Each Vice President shall perform such other duties as
may be assigned to him from time to time by the Trustees and the President.
Section 6.8. Powers and Duties of the Treasurer. The Treasurer shall be the
principal financial and accounting officer of the Trust. He shall deliver all
funds of the Trust or any Series or Class thereof which may come into his hands
to such Custodian as the Trustees may employ. He shall render a statement of
condition of the finances of the Trust or any Series or Class thereof to the
Trustees as often as they shall require the same and he shall in general perform
all the duties incident to the office of a Treasurer and such other duties as
from time to time may be assigned to him by the Trustees. The Treasurer shall
give a bond for the faithful discharge of his duties, if required so to do by
the Trustees, in such sum and with such surety or sureties as the Trustees shall
require.
Section 6.9. Powers and Duties of the Secretary. The Secretary shall keep the
minutes of all meetings of the Trustees and of the Shareholders in proper books
provided for that purpose; he shall have custody of the seal of the Trust; he
shall have charge of the Share transfer books, lists and records unless the same
are in the charge of a transfer agent. He shall attend to the giving and serving
of all notices by the Trust in accordance with the provisions of these By-Laws
and as required by law; and subject to these By-Laws, he shall in general
perform all duties incident to the office of Secretary and such other duties as
from time to time may be assigned to him by the Trustees.
Section 6.10. Powers and Duties of Assistant Treasurer. In the absence or
disability of the Treasurer, any officer designated by the Trustees shall
perform all the duties, and may exercise any of the powers, of the Treasurer.
Each officer shall perform such other duties as from time to time may be
assigned to him by the Trustees. Each officer performing the duties and
exercising the powers of the Treasurer, if any, and any Assistant Treasurer,
shall give a bond for the faithful discharge of his duties, if required so to do
by the Trustees, in such sum and with such surety or sureties as the Trustees
shall require.
Section 6.11. Powers and Duties of Assistant Secretaries. In the absence or
disability of the Secretary, any Assistant Secretary designated by the Trustees
shall perform all the duties, and may exercise any of the powers, of the
Secretary. Each Assistant Secretary shall perform such other duties as from time
to time may be assigned to him by the Trustees.
Section 6.12. Compensation of Officers and Trustees and Members of the Advisory
Board. Subject to any applicable provisions of the Declaration of Trust, the
compensation of the officers and Trustees and members of an advisory board shall
be fixed from time to time by the Trustees or, in the case of officers, by any
Committee or officer upon whom such power may be conferred by the Trustees. No
officer shall be prevented from receiving such compensation as such officer by
reason of the fact that he is also a Trustee.
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ARTICLE VII
SHARES OF BENEFICIAL INTEREST
Section 7.1. Share Certificates. The Trustees may issue Shares either in
certificated or uncertificated form, and if they have issued Shares in
certificated form, they may, by written notice to the holders of such Shares,
require the surrender of their certificates to the Trust for cancellation, which
surrender and cancellation shall not affect the ownership of such Shares. For
any Shares issued without certificates, the Trust or its transfer agent may
either issue receipts therefor or may keep accounts upon the books of the Trust
for the record holders of such Shares, who shall in either case be deemed, for
all purposes hereunder, to be the holders of such Shares as if they had received
certificates therefor and shall be held to have expressly assented and agreed to
the terms hereof and of the Declaration. For any Shares for which the Trustees
shall issue certificates, each holder of such Shares shall be entitled to a
certificate stating the number of Shares owned by him in such form as shall be
prescribed from time to time by the Trustees. The certificates representing
Shares shall be signed by the President or a Vice-President and by the Secretary
or an Assistant Secretary, or the Treasurer or an Assistant Treasurer, and
sealed with the seal of the Trust. Any or all of the signatures or the seal of
the Trust on the certificate may be a facsimile. In case any officer, transfer
agent or registrar who has signed or whose facsimile signature has been placed
upon a certificate which shall have ceased to be such officer, transfer agent or
registrar before such certificate shall be issued, it may be issued by the Trust
with the same effect as if such officer, transfer agent or registrar were still
in office at the date of issue.
Section 7.2. Transfers of Pledged Shares. Unless otherwise provided herein, a
pledgee of Shares pledged as collateral security shall be entitled to a new
certificate in his name as pledgee, in the case of certificated Shares, or to be
registered as the holder in pledge of such Shares in the case of uncertificated
Shares; provided, that the instrument of pledge substantially describes the debt
or duty that is intended to be secured thereby. Any such new certificate shall
express on its face that it is held as collateral security, and the name of the
pledgor shall be stated thereon, and any such registration of uncertificated
Shares shall be in a form which indicates that the registered holder holds such
Shares in pledge. After such issue or registration, and unless and until such
pledge is released, such pledgee and his successors and assigns shall alone be
entitled to the rights of a Shareholder, and entitled to vote such Shares.
Section 7.3. Regulations. The Trustees may make such additional rules and
regulations, not inconsistent with these By-Laws, as they may deem expedient
concerning the issue, transfer and registration of certificates for Shares of
the Trust. They may appoint, or authorize any officer or officers to appoint,
one or more transfer agents or one or more transfer clerks and one or more
registrars and may require all certificates for Shares to bear the signature or
signatures of any of them.
Lost, Destroyed or Mutilated Certificates. The holder of any certificates
representing Shares of the Trust shall immediately notify the Trust of any loss,
destruction or mutilation of such certificate, and the Trust may issue a new
certificate in the place of any certificate theretofore issued by it which the
owner thereof shall allege to have been lost or destroyed or which shall have
been mutilated, and the Trustees may, in their discretion, require such owner or
his legal representative to give to the Trust a bond in such sum, limited or
unlimited, and in such form and with such surety or sureties, as the Trustees in
their absolute discretion shall determine, to indemnify the Trust against any
claim that may be made against it on account of the alleged loss or destruction
of any such certificate or issuance of a new certificate.
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ARTICLE VIII
TERMS OF AUCTION PREFERRED SHARES
Section 8.1. Designation.
(a) Pursuant to authority expressly vested in the Board of Trustees by the
Declaration of Trust, the Board of Trustees authorizes the establishment,
designation and issuance of an unlimited number of shares of a class of the
Trust's Preferred Shares, which class is designated as the Trust's Auction
Preferred Shares (the "Auction Preferred Shares"). The Auction Preferred Shares
shall be issuable in such series as are designated from time to time in these
By-Laws and shall have the preferences, voting powers, restrictions, limitations
as to dividends, qualifications, terms and conditions of redemption, and other
rights and limitations set forth in this Article VIII.
(i) Auction Preferred Shares, Series M: An unlimited number of
Auction Preferred Shares, without par value, liquidation preference
$25,000 per Auction Preferred Share plus accumulated but unpaid dividends,
if any, thereon (whether or not earned or declared), is hereby designated
"Auction Preferred Shares, Series M." Each share of Auction Preferred
Shares, Series M (sometimes referred to herein as "Series M APS") may be
issued on a date to be determined by the Board of Trustees of the Trust or
pursuant to their delegated authority; have an Initial Dividend Rate and
an Initial Dividend Payment Date as shall be determined in advance of the
issuance thereof by the Board of Trustees of the Trust or pursuant to
their delegated authority and have such other preferences as provided
herein or as may be determined in advance of the issuance thereof by the
Board of Trustees or pursuant to their delegated authority. The Series M
APS shall constitute a separate series of Auction Preferred Shares, and
each share of Series M APS shall be identical.
(ii) Auction Preferred Shares, Series W: An unlimited number of
Auction Preferred Shares, without par value, liquidation preference
$25,000 per Auction Preferred Share plus accumulated but unpaid dividends,
if any, thereon (whether or not earned or declared), is hereby designated
"Auction Preferred Shares, Series W." Each share of Auction Preferred
Shares, Series W (sometimes referred to herein as "Series W APS") may be
issued on a date to be determined by the Board of Trustees of the Trust or
pursuant to their delegated authority; have an Initial Dividend Rate and
an Initial Dividend Payment Date as shall be determined in advance of the
issuance thereof by the Board of Trustees of the Trust or pursuant to
their delegated authority and have such other preferences as provided
herein or as may be determined in advance of the issuance thereof by the
Board of Trustees or pursuant to their delegated authority. The Series W
APS shall constitute a separate series of Auction Preferred Shares, and
each share of Series W APS shall be identical.
(iii) Auction Preferred Shares, Series TH: An unlimited number of
Auction Preferred Shares, without par value, liquidation preference
$25,000 per Auction Preferred Share plus accumulated but unpaid dividends,
if any, thereon (whether or not earned or declared), is hereby designated
"Auction Preferred Shares, Series TH." Each share of Auction Preferred
Shares, Series TH (sometimes referred to herein as "Series TH APS") may be
issued on a date to be determined by the Board of Trustees of the Trust or
pursuant to their delegated authority; have an Initial Dividend Rate and
an Initial Dividend Payment Date as shall be determined in advance of the
issuance thereof by the Board of Trustees of the Trust or pursuant to
their delegated authority and have such other preferences as provided
herein or as may be determined in advance of the issuance thereof by the
Board of Trustees or pursuant to their delegated authority. The Series TH
APS shall constitute a separate series of Auction Preferred Shares, and
each share of Series TH APS shall be identical.
(iv) Auction Preferred Shares, Series F: An unlimited number of
Auction Preferred Shares, without par value, liquidation preference
$25,000 per Auction Preferred Share plus accumulated but unpaid dividends,
if any, thereon (whether or not earned or declared), is hereby designated
"Auction Preferred Shares, Series F." Each share of Auction Preferred
Shares, Series F (sometimes referred to herein as "Series F APS") may be
issued on a date to be determined by the Board of Trustees of the Trust or
pursuant
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to their delegated authority; have an Initial Dividend Rate and an Initial
Dividend Payment Date as shall be determined in advance of the issuance
thereof by the Board of Trustees of the Trust or pursuant to their
delegated authority and have such other preferences as provided herein or
as may be determined in advance of the issuance thereof by the Board of
Trustees or pursuant to their delegated authority. The Series F APS shall
constitute a separate series of Auction Preferred Shares, and each share
of Series F APS shall be identical.
(b) The preferences, voting powers restrictions, limitations as to
dividends, qualifications, terms and conditions of redemption, and other rights
and limitations of the shares of the Auction Preferred Shares, Series M, Auction
Preferred Shares, Series W, Auction Preferred Shares, Series TH, Auction
Preferred Shares, Series F, and each other series of APS now or hereafter
described in these By-Laws are or shall be as set forth in these By-Laws. No
fractional APS shall be issued.
Section 8.2. Definitions.
Unless the context or use indicates another or different meaning, the
following terms shall have the following meanings, whether used in the singular
or plural:
(a) "AA Financial Composite Commercial Paper Rate" on any date means (i)
(A) the Interest Equivalent of the 30-day rate (for Dividend Periods fewer than
or equal to 31 days), the 60-day rate (for Dividend Periods greater than 31 days
but fewer than or equal to 61 days) and the 90-day rate (for Dividend Periods
greater than 61 days but fewer than or equal to 91 days) on commercial paper on
behalf of issuers whose corporate bonds are rated AA by S&P, or the equivalent
of such rating by another Rating Agency, as announced by the Federal Reserve
Bank of New York for the close of business on the Business Day immediately
preceding such date; and (B) for Dividend Periods greater than 91 days but fewer
than 184 days, the rate described in clause (ii) below; or (ii) if the Federal
Reserve Bank of New York does not make available such a rate, or with respect to
Dividend Periods greater than 91 days but fewer than 184 days, then the
arithmetic average of the Interest Equivalent of such rates on commercial paper
placed on behalf of such issuers, as quoted on a discount basis or otherwise by
the Commercial Paper Dealers to the Auction Agent for the close of business on
the Business Day immediately preceding such date (rounded to the next highest
one-thousandth (0.001) of 1%). If any Commercial Paper Dealer does not quote a
rate required to determine the "AA" Financial Composite Commercial Paper Rate,
such rate shall be determined on the basis of the quotations (or quotation)
furnished by the remaining Commercial Paper Dealers (or Dealer), if any, or, if
there are no such Commercial Paper Dealers, by the Auction Agent. For purposes
of this definition, (A) "Commercial Paper Dealers" shall mean (1) UBS Securities
LLC and Merrill Lynch, Pierce, Fenner & Smith Incorporated; (2) in lieu of any
thereof, their respective affiliates or successors; and (3) in the event that
any of the foregoing shall cease to quote rates for commercial paper of issuers
of the sort described above, in substitution therefor, a nationally recognized
dealer in commercial paper of such issuers then making such quotations selected
by the Trust, and (B) "Interest Equivalent" of a rate stated on a discount basis
for commercial paper of a given number of days' maturity shall mean a number
equal to the quotient (rounded upward to the next higher one-thousandth (0.001)
of 1%) of (1) such rate expressed as a decimal, divided by (2) the difference
between (x) 1.00 and (y) a fraction, the numerator of which shall be the product
of such rate expressed as a decimal, multiplied by the number of days in which
such commercial paper shall mature and the denominator of which shall be 360.
(b) "Adviser" means the Trust's investment adviser, John Hancock Advisers,
LLC.
(c) "Affected Series" has the meaning specified in Section 8.7(b)(i).
(d) "Affiliate" means any Person known to the Auction Agent to be
controlled by, in control of, or under common control with, the Trust.
(e) "Agent Member" means a member of, or participant in, the Securities
Depository that will act on behalf of a Beneficial Owner of one or more APS or
on behalf of a Potential Beneficial Owner.
(f) "Annual Valuation Date" means the last Business Day of each fiscal
year of the Trust.
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(g) "Applicable Percentage" and "Applicable Spread" mean the percentage
determined based on the lower of the credit ratings assigned to the series of
APS on such date by Moody's and S&P (or if Moody's and S&P are not making such
rating available, the equivalent of such rating by a Substitute Rating Agency):
Moody's Credit S&P Credit Applicable Applicable
Rating Rating Percentage Spread
------ ------ ---------- ------
Aaa AAA 125% 1.25%
Aa3 to Aa1 AA- to AA+ 150% 1.50%
A3 to A1 A- to A+ 200% 2.00%
Baa3 to Baa1 BBB- to BBB+ 250% 2.50%
Ba1 and lower BB+ and lower 300% 3.00%
The Applicable Percentage and the Applicable Spread as so determined shall
be further subject to upward but not downward adjustment in the discretion of
the Board of Trustees of the Trust after consultation with the Broker-Dealers,
provided that immediately following any such increase the Trust would be in
compliance with the Preferred Shares Basic Maintenance Amount. The Trust shall
take all reasonable action necessary to enable Moody's and S&P to provide a
rating for each series of APS. If both Moody's and S&P shall not make such a
rating available, the Trust shall select another Rating Agency to act as a
Substitute Rating Agency. However, the Trust shall not be required to have more
than one Rating Agency provide a rating for any series of the APS.
In the case of a Special Rate Period, the Applicable Percentage and the
Applicable Spread are determined on the day that a Notice of a Special Rate
Period is delivered if the notice specifies a Maximum Applicable Rate for a
Special Rate Period. The Applicable Percentage and Applicable Spread will be
determined based on the lower of the credit rating or ratings assigned to the
APS by Moody's and S&P. If Moody's or S&P or both shall not make such rating
available, the rate shall be determined by reference to equivalent ratings
issued by a Substitute Rating Agency.
(h) "Applicable Rate" means the rate per annum at which cash dividends are
payable on a series of APS for any Dividend Period.
(i) "APS" means the Series M APS, the Series W APS, the Series TH APS, and
the Series F APS.
(j) "Auction" means a periodic operation of the Auction Procedures.
(k) "Auction Agent" means Deutsche Bank Trust Company Americas unless and
until another commercial bank, trust company or other financial institution
appointed by a resolution of the Board of Trustees or a duly authorized
committee thereof enters into an agreement with the Trust to follow the Auction
Procedures for the purpose of determining the Applicable Rate and to act as
transfer agent, registrar, dividend disbursing agent and redemption agent for
the APS.
(l) "Auction Date" with respect to any series of APS and any Rate Period
means the Business Day next preceding the first day of such Rate Period.
(m) "Auction Procedures" means the procedures set forth in Section 8.9.
(n) "Auditor's Confirmation" has the meaning specified in Section 8.3(d).
(o) "Available APS" has the meaning specified in Section 8.9(c)(i)(A).
(p) "Beneficial Owner" means a customer of a Broker-Dealer who is listed
on the records of that Broker-Dealer (or, if applicable, the Auction Agent) as a
holder of APS or a Broker-Dealer that holds APS for its own account.
(q) "Bid" and "Bids" have the respective meanings specified in Section
8.9(a)(i)(C).
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(r) "Bidder" and "Bidders" have the respective meanings specified in
Section 8.9(a)(i)(C); provided, however, that neither the Trust nor any
affiliate thereof shall be permitted to be a Bidder in an Auction, except that
any Broker-Dealer that is an affiliate of the Trust may be a Bidder in an
Auction, but only if the Orders placed by such Broker-Dealer are not for its own
account.
(s) "Board of Trustees" means the Board of Trustees of the Trust.
(t) "Broker-Dealer" means any broker-dealer, or other entity permitted by
law to perform the functions required of a Broker-Dealer in Section 8.9, that
has been selected by the Trust and has entered into a Broker-Dealer Agreement
with the Auction Agent that remains effective.
(u) "Broker-Dealer Agreement" means an agreement between the Auction Agent
and a Broker-Dealer pursuant to which such Broker-Dealer agrees to follow the
procedures specified in Section 8.9.
(v) "Business Day" means a day on which the New York Stock Exchange is
open for trading and which is not a Saturday, Sunday or other day on which
commercial banks in The City of New York are required or authorized by law to
close.
(w) "Closing Transactions" has the meaning set forth in Section
8.8(b)(iv)(A).
(x) "Code" means the Internal Revenue Code of 1986, as amended from time
to time. Each reference herein to a section of the Code shall be deemed to
include the United States Treasury Regulations in effect thereunder and
applicable to the APS or the use of proceeds thereof, and also includes all
applicable amendments or successor provisions unless the context requires
otherwise.
(y) "Commercial Paper Dealers" has the meaning set forth in the definition
of " `AA' Financial Composite Commercial Paper Rate."
(z) "Common Shares" means the shares of beneficial interest designated as
common shares, no par value, of the Trust.
(aa) "Cure Date" means the Preferred Shares Basic Maintenance Cure Date or
the Investment Company Act Cure Date.
(bb) "Date of Original Issue" means, with respect any series of APS, the
date on which the Trust first issues such shares.
(cc) "Deposit Securities" means cash and portfolio securities rated at
least A2 (having a remaining maturity of 12 months or less), P-1, VMIG-1 or
MIG-1 by Moody's or A (having a remaining maturity of 12 months or less), A-1+
or SP-1+ by S&P.
(dd) "Discount Factor" means a "Moody's Discount Factor" or an "S&P
Discount Factor."
(ee) "Discounted Value" of any asset of the Trust means, with respect to a
Moody's Eligible Asset, the quotient of the Market Value thereof divided by the
applicable Moody's Discount Factor and, with respect to an S&P Eligible Asset,
the quotient of the Market Value thereof divided by the applicable S&P Discount
Factor.
(ff) "Dividend Payment Date" means, with respect to APS, any date on which
dividends are payable for shares of such series pursuant to Section 8.4(a)(iv).
(gg) "Dividend Period" means, with respect to the APS, the period from and
including the Date of Original Issue to but excluding the Initial Dividend
Payment Date for such shares and any period thereafter from and including one
Dividend Payment Date for such shares to but excluding the next succeeding
Dividend Payment Date for such shares.
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(hh) "Eligible Asset" means Moody's Eligible Asset (if Moody's is then
rating the APS), and/or S&P Eligible Asset (if S&P is then rating the APS),
and/or any asset included in the calculations used by any Rating Agency then
rating the APS for purposes of determining such Rating Agency's rating on the
APS, as applicable.
(ii) "Existing Holder" means a Broker-Dealer, or any such other Person
that may be permitted by the Trust, that is listed as the holder of record of
APS in the Share Books.
(jj) "Failure to Deposit," means, with respect to shares of a series of
APS, a failure by the Trust to pay to the Auction Agent, not later than 12:00
noon, New York City time, (A) on the Business Day next preceding any Dividend
Payment Date for shares of such series, in funds available on such Dividend
Payment Date in the City of New York, New York, the full amount of any dividend
(whether or not earned or declared) to be paid on such Dividend Payment Date on
any share of such series or (B) on the Business Day next preceding any
redemption date in funds available on such redemption date for shares of such
series in the City of New York, New York, the Redemption Price to be paid on
such redemption date for any share of such series after Notice of Redemption is
mailed pursuant to Section 8.6; provided, however, that the foregoing clause (B)
shall not apply to the Trust's failure to pay the Redemption Price with respect
to APS when the related Notice of Redemption provides that redemption of such
shares is subject to one or more conditions precedent and any such condition
precedent shall not have been satisfied at the time or times and in the manner
specified in such Notice of Redemption.
(kk) "Holder" means an individual or entity in whose name an outstanding
share of the APS is registered on the Share Books.
(ll) "Hold Order" and "Hold Orders" have the respective meanings specified
in Section 8.9(a)(i)(C).
(mm) "Independent Accountant" means a nationally recognized accounting
firm that is, with respect to the Trust, an independent certified public
accountant under the Securities Act of 1933, and serving as such for the Trust.
(nn) "Initial Rate Period" with respect to shares of a series of APS,
means the period from the Date of Initial Issuance to and including the day
immediately prior to the Dividend Payment Date for the Initial Rate Period
specified with respect to shares of such series in Section 8.4(a), except in the
case of Series TH APS, with respect to which the Initial Rate Period means the
period from the Date of Initial Issuance to and including October 28, 2004.
(oo) "Investment Company Act" or "1940 Act" means the Investment Company
Act of 1940, as amended from time to time.
(pp) "Investment Company Act Cure Date," with respect to the failure by
the Trust to maintain the Investment Company Act Preferred Share Asset Coverage
(as required by Section 8.3(a)) as of the last Business Day of each month, means
the last Business Day of the following month.
(qq) "Investment Company Act Preferred Share Asset Coverage" means asset
coverage, as defined in Section 18(h) of the Investment Company Act, of at least
200% with respect to all outstanding senior securities of the Trust which are
shares of beneficial interest including all outstanding APS (or such other asset
coverage as may in the future be specified in or under the Investment Company
Act as the minimum asset coverage for senior securities which are shares or
stock of a closed-end investment company as a condition of declaring dividends
on its common shares or stock).
(rr) "Late Charge" has the meaning specified in Section 8.4(b)(ii)(B).
(ss) "Liens" means any material lien, mortgage, pledge, security interest
or security agreement of any kind.
(tt) "Long Term Dividend Period" means a Special Dividend Period
consisting of a specific period of one whole year or more but not greater than
five years.
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(uu) "Market Value" means the fair market value of an asset of the Trust
as computed as follows: Securities listed on the New York Stock Exchange are
valued at the last sale price reflected on the consolidated tape at the close of
the New York Stock Exchange on the Business Day as of which such value is being
determined provided that, if there has been no sale on such day, the securities
are valued at the closing bid prices on such day and provided further that, if
no bid prices are quoted on such day, then the security is valued by such method
as the Board of Trustees determine in good faith to reflect its fair market
value. Readily marketable securities not listed on the New York Stock Exchange
but listed on other domestic or foreign securities exchanges or admitted to
trading on the National Association of Securities Dealers Automated Quotations,
Inc. ("NASDAQ") National List are valued in a like manner: Portfolio securities
traded on more than one securities exchange are valued at the last sale price on
the Business Day as of which such value is being determined as reflected on the
tape at the close of the exchange representing the principal market for such
securities. Readily marketable securities traded in the over-the-counter market,
including listed securities whose primary market is believed by the Adviser t o
be over-the-counter, but excluding securities admitted to trading on the NASDAQ
National List, are valued at the current bid prices as reported by NASDAQ or, in
the case of securities not quoted by NASDAQ, the National Quotation Bureau or
such other comparable source as the Board of Trustees deem appropriate to
reflect their fair market value. The fair market value of fixed-income
securities is computed based upon (i) prices provided by a Pricing Service or
(ii) the lower of the value set forth in bids from two independent dealers in
securities, one of which bids will be in writing, in each case with interest
accrued added to such computation for those assets of the Trust where such
computation does not include interest accrued. The independent dealers from whom
bids are sought will be either (a) market makers in the securities being valued
or (b) members of the National Association of Securities Dealers, Inc. Where
securities are traded on more than one exchange and also over-the-counter, the
securities will generally be valued using the quotations the Board of Trustees
believes reflect most closely the value of such securities.
(vv) "Maximum Applicable Rate" means, with respect to APS for any Dividend
Period, the higher of the Applicable Percentage of the Reference Rate or the
Reference Rate plus the Applicable Spread. The Auction Agent will round each
applicable Maximum Applicable Rate to the nearest one-thousandth (0.001) of one
percent per annum, with any such number ending in five ten-thousandths of one
percent being rounded upwards to the nearest one-thousandth (0.001) of one
percent.
(ww) "Minimum Rate Period" means a period of seven (7) Rate Period days.
(xx) "Moody's" means Moody's Investors Service, Inc. or any successor
thereto.
(yy) "Moody's Discount Factor" means, for purposes of determining the
Discounted Value of any Moody's Eligible Asset, the percentage determined as
follows:
(i) Preferred Stock: The Moody's Discount Factor for taxable
preferred stock shall be:
Aaa ................... 150%
Aa .................... 155%
A ..................... 160%
Baa ................... 165%
Ba .................... 196%
B ..................... 216%