PROSPECTUS DECEMBER 5, 2003
--------------------------------------------------------------------------------
$700,000,000
EATON VANCE TAX-ADVANTAGED
DIVIDEND INCOME FUND
4,000 SHARES, SERIES A
4,000 SHARES, SERIES B
4,000 SHARES, SERIES C
4,000 SHARES, SERIES D
4,000 SHARES, SERIES E
4,000 SHARES, SERIES F
4,000 SHARES, SERIES G
[EATON VANCE LOGO]
AUCTION PREFERRED SHARES
LIQUIDATION PREFERENCE $25,000 PER SHARE
--------------------------------------------------------------------------------
INVESTMENT OBJECTIVE AND POLICIES. Eaton Vance Tax-Advantaged Dividend Income
Fund (the "Fund") is a newly organized, diversified, closed-end management
investment company. The Fund's investment objective is to provide a high level
of after-tax total return consisting primarily of tax-advantaged dividend income
and capital appreciation.
INVESTMENT ADVISER. The Fund's investment adviser is Eaton Vance Management
("Eaton Vance" or the "Adviser"). As of October 31, 2003, Eaton Vance and its
subsidiaries managed approximately $75.0 billion on behalf of funds,
institutional clients and individuals, including approximately $23.2 billion in
tax-managed equity fund assets.
PORTFOLIO CONTENTS. Under normal market conditions, the Fund will invest at
least 80% of its total managed assets in dividend-paying common and preferred
stocks that Eaton Vance believes at the time of investment are eligible to pay
dividends that qualify for federal income taxation at rates applicable to
long-term capital gains ("tax-advantaged dividends"). In selecting securities,
the Adviser will seek common and preferred stocks of issuers that are, in the
opinion of the Adviser, undervalued or inexpensive relative to the overall
market. Initially, the Fund expects to invest approximately 65%-70% of its total
assets in common stocks and approximately 30%-35% of its total assets in
preferred stocks. The Adviser retains broad discretion to allocate the Fund's
investments between common and preferred stocks in a manner that it believes
will best effectuate the Fund's objective. The Fund may invest in common and
preferred stocks of both domestic and foreign issuers.
The Fund seeks dividend income that qualifies for favorable federal income tax
treatment. Under federal income tax law enacted on May 28, 2003, tax-advantaged
dividends received by individual shareholders are taxed at rates equivalent to
long-term capital gain tax rates, which reach a maximum of 15%. Tax-advantaged
dividends generally include dividends from domestic corporations and dividends
from foreign corporations that meet certain specified criteria. (continued on
inside cover page)
INVESTING IN AUCTION PREFERRED SHARES ("APS") INVOLVES CERTAIN RISKS. SEE
"INVESTMENT OBJECTIVES, POLICIES AND RISKS--RISK CONSIDERATIONS," BEGINNING ON
PAGE 21.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION ("SEC") NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
PRICE TO PUBLIC SALES LOAD PROCEEDS TO FUND(1)
----------------------------------------------------------------------------------------------------------------
Per Share $25,000 $250 $24,750
----------------------------------------------------------------------------------------------------------------
Total $ 700,000,000 $7,000,000 $693,000,000
----------------------------------------------------------------------------------------------------------------
(1) Plus accumulated dividends, if any, from the date the Auction Preferred
Shares are issued, but before offering expenses payable by the Fund
estimated to be approximately $450,000. The Fund and Adviser have agreed to
indemnify the Underwriters against certain liabilities under the Securities
Act of 1933, as amended. See "Underwriting."
The Underwriters are offering the APS subject to various conditions. The
Underwriters expect to deliver the APS in book-entry form, through the
facilities of The Depository Trust Company to purchasers on or about December
10, 2003.
UBS INVESTMENT BANK
MERRILL LYNCH & CO.
CITIGROUP
WACHOVIA SECURITIES
A.G. EDWARDS & SONS, INC.
--------------------------------------------------------------------------------
(continued from the previous page)
Capitalized terms not otherwise defined are defined in the Glossary that appears
at the end of this Prospectus. The APS are offered at a price per share of
$25,000 subject to a sales load of $250 per share.
Dividends on the APS of the Fund offered hereby will be cumulative from the Date
of Original Issue and payable commencing on the dates specified below (an
"Initial Dividend Payment Date") and thereafter generally on the days specified
below, subject to certain exceptions. The cash dividend rate (the "Applicable
Rate") on the APS for the Initial Dividend Period on such dates will be the per
annum rate specified below:
INITIAL DIVIDEND INITIAL
PAYMENT DATE APPLICABLE RATE
----------------- ---------------
Series A.................................................. December 16, 2003 1.20%
Series B.................................................. December 17, 2003 1.20%
Series C.................................................. December 19, 2003 1.20%
Series D.................................................. December 22, 2003 1.20%
Series E(1)............................................... January 7, 2004 1.22%
Series F(2)............................................... January 20, 2004 1.22%
Series G(3)............................................... February 12, 2004 1.25%
------------
(1) The Initial Dividend Period for Series E will be a Dividend Period of 28
days ending January 6, 2004.
(2) The Initial Dividend Period for Series F will be a Dividend Period of 41
days ending January 19, 2004.
(3) The Initial Dividend Period for Series G will be a Dividend Period of 64
days ending February 11, 2004. The Fund will pay the Series G accumulated
dividends on the first Business Day of each month and the final dividend
payment will be made on February 12, 2004.
The APS will not be registered on any stock exchange or on any automated
quotation system. APS may only be bought or sold through an order at an auction
with or through a broker-dealer that has entered into an agreement with the
auction agent of the Fund or in a secondary market that may be maintained by
certain broker-dealers. These broker-dealers are not required to maintain this
market and it may not provide you with liquidity. An increase in the level of
interest rates, particularly during any Special Dividend Period that is a Long
Term Dividend Period as discussed in "Description of APS--Dividends and dividend
periods--General," likely will have an adverse effect on the secondary market
price of the APS, and a selling shareholder may sell APS between Auctions at a
price per share of less than $25,000.
Each prospective purchaser should review carefully the detailed information
regarding the Auction Procedures which appears in this Prospectus and the Fund's
Statement of Additional Information and should note that (i) an Order
constitutes an irrevocable commitment to hold, purchase or sell APS based upon
the results of the related Auction, (ii) the Auctions will be conducted through
telephone communications, (iii) settlement for purchases and sales will be on
the Business Day following the Auction and (iv) ownership of APS will be
maintained in book-entry form by or through the Securities Depository. In
certain circumstances, holders of APS may be unable to sell their APS in an
Auction and thus may lack liquidity of investment. The APS may only be
transferred pursuant to a Bid or a Sell Order placed in an Auction through a
Broker-Dealer to the Auction Agent or in the secondary market, if any.
This Prospectus sets forth concisely information you should know before
investing in the APS. Please read and retain this Prospectus for future
reference. A Statement of Additional Information for the Fund dated December 5,
2003 has been filed with the SEC and can be obtained without charge by calling
1-800-225-6265 or by writing to the Fund. The table of contents to the Statement
of Additional Information is located at page 55 of this Prospectus. This
Prospectus incorporates by reference the entire Statement of Additional
Information of the Fund. The Statement of Additional Information is available
along with other Fund-related materials at the SEC's internet web site
(http://www.sec.gov). The Fund's address is The Eaton Vance Building, 255 State
Street, Boston, Massachusetts 02109, and its telephone number is 1-800-225-6265.
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 authorized any other person to provide you
with different information. The Fund is not making an offer of these securities
in any state where the offer is not permitted.
--------------------------------------------------------------------------------
TABLE OF CONTENTS
--------------------------------------------------------------------------------
Prospectus Summary.................... 1
Financial highlights.................. 8
The Fund.............................. 9
Use of proceeds....................... 9
Capitalization........................ 10
Portfolio composition................. 10
Investment objectives, policies and
risks............................... 11
Management of the Fund................ 25
Description of APS.................... 26
The Auctions.......................... 36
Taxes................................. 43
Description of capital structure...... 48
Certain provisions of the Declaration
of Trust............................ 50
Underwriting.......................... 52
Shareholder Servicing Agent, custodian
and transfer agent.................. 52
Legal opinions........................ 54
Independent auditors.................. 54
Additional information................ 54
Table of contents for the Statement of
Additional Information.............. 55
The Fund's privacy policy............. 55
Glossary.............................. 56
--------------------------------------------------------------------------------
[This page intentionally left blank]
Prospectus Summary
This is only a summary. You should review the more detailed information
contained in this Prospectus and in the Fund's Statement of Additional
Information.
THE FUND
Eaton Vance Tax-Advantaged Dividend Income Fund (the "Fund") is a recently
organized, diversified, closed-end management investment company. The Fund was
organized as a Massachusetts business trust on July 10, 2003. The Fund has
registered under the Investment Company Act of 1940, as amended (the "1940
Act"). The Fund's principal office is located at The Eaton Vance Building, 255
State Street, Boston, Massachusetts 02109, and its telephone number is
1-800-225-6265. The Fund commenced operations on September 30, 2003 upon the
closing of an initial public offering of its common shares of beneficial
interest, par value $0.01 per share ("Common Shares"). The Common Shares of the
Fund are traded on the New York Stock Exchange ("NYSE") under the symbol "EVT."
In connection with the initial public offering of the Fund's Common Shares, the
underwriters were granted an option to purchase additional shares to cover
over-allotments.
Certain of the capitalized terms used in this Prospectus are defined in the
Glossary that appears at the end of this Prospectus.
THE OFFERING
The Fund is offering, pursuant to this Prospectus, preferred shares of
beneficial interest, par value $0.01 per share, which have been designated
Auction Preferred Shares, Series A, Series B, Series C, Series D, Series E,
Series F, and Series G (collectively, the "APS"). Issuance of the APS represents
the leveraged financing contemplated in connection with the offering of the
Common Shares of the Fund.
The Fund is offering 4,000 Auction Preferred Shares, Series A, 4,000 Auction
Preferred Shares, Series B, 4,000 Auction Preferred Shares, Series C, 4,000
Auction Preferred Shares, Series D, 4,000 Auction Preferred Shares, Series E,
4,000 Auction Preferred Shares, Series F, and 4,000 Auction Preferred Shares,
Series G, 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 (collectively, the "Underwriters") led by UBS Securities
LLC, Merrill Lynch, Pierce, Fenner & Smith Incorporated and Citigroup Global
Markets Inc. See "Underwriting."
INVESTMENT OBJECTIVES AND POLICIES
The Fund's investment objective is to provide a high level of after-tax total
return consisting primarily of tax-advantaged dividend income and capital
appreciation. The Fund pursues its objective by investing its assets primarily
in dividend-paying common and preferred stocks.
Under normal market conditions, the Fund will invest at least 80% of its total
managed assets in dividend-paying common and preferred stocks that Eaton Vance
believes at the time of investment are eligible to pay dividends that qualify
for federal income taxation at rates applicable to long-term capital gains
("tax-advantaged dividends").The Fund will invest primarily in common and
preferred stocks that pay dividends that qualify for federal income taxation at
rates applicable to long-term capital gains ("tax-advantaged dividends").
Initially, the Fund expects to invest approximately 65%-70% of its total assets
in common stocks and approximately 30%-35% of its total assets in preferred
stocks. The Adviser retains broad discretion to allocate the Fund's investments
between common and preferred stocks in a manner that it believes will best
effectuate the Fund's objective. The Fund may invest in common and preferred
stocks of both domestic and foreign issuers. Under normal market conditions, the
Fund expects, with respect to that portion of its total assets invested in
preferred stocks, to invest primarily in preferred stocks of investment grade
quality (which is at least BBB- as determined by Standard & Poor's Ratings Group
("S&P") or Fitch Ratings ("Fitch"), Baa3 as
1
determined by Moody's Investors Service, Inc. ("Moody's") or, if unrated,
determined to be of comparable quality by Eaton Vance). However, the Fund may
from time to time purchase preferred stocks of below investment grade quality
that, at the time of purchase, are rated at least B as determined by S&P, Fitch
or Moody's or, if unrated, are determined to be of comparable quality by Eaton
Vance. Securities of below investment grade quality commonly are referred to as
"junk" preferred stocks and bonds as the case may be. The foregoing credit
quality policies apply only at the time a security is purchased, and the Fund is
not required to dispose of a security in the event of a downgrade of an
assessment of credit quality or the withdrawal of a rating. Below investment
grade quality securities are considered to be predominantly speculative because
of the credit risk of the issuers. See "Prospectus Summary--Special Risk
Considerations--Non-investment grade securities risk."
The Fund seeks dividend income that qualifies for favorable federal income tax
treatment. Under federal income tax law enacted on May 28, 2003, tax-advantaged
dividends received by individual shareholders are taxed at rates equivalent to
long-term capital gain tax rates, which reach a maximum of 15%. 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 holders of the Fund's shares of beneficial interest ("Shareholders").
For the Fund to receive tax-advantaged dividend income, the Fund must hold stock
paying an otherwise tax-advantaged dividend for more than 60 days during the
120-day period beginning 60 days before the ex-dividend date (or more than 90
days during the associated 180-day period, in the case of certain preferred
stocks). In addition, the Fund cannot be obligated to make related payments
(pursuant to a short sale or otherwise) with respect to substantially similar or
related property. Similar provisions apply to each Shareholder's investment in
the Fund. Corporate shareholders of the Fund are not eligible for this favorable
federal income tax treatment. In order for otherwise tax-advantaged dividends
from the Fund received by an individual Shareholder to be taxable at long-term
capital gains rates, the Shareholder must hold his or her Fund shares for more
than 60 days during the 120-day period surrounding the ex-dividend date (or more
than 90 days during the associated 180-day period, in the case of dividends
attributable to periods in excess of 360 days paid with respect to preferred
stock). The provisions of the Internal Revenue Code of 1986, as amended (the
"Code"), applicable to tax-advantaged dividends are effective through 2008.
Thereafter, higher tax rates will apply unless further legislative action is
taken.
In addition to investing in stocks that pay tax-advantaged dividends, the Fund
may also invest a portion of its assets in stocks and other securities that
generate fully taxable ordinary income (i.e., income other than tax-advantaged
dividends). For any year, so long as the Fund's fully taxable ordinary income
and net realized short-term gains are offset by expenses of the Fund, all of the
Fund's income distributions would be characterized as tax-advantaged dividends.
There can be no assurance that a portion of the Fund's income distributions will
not be fully taxable as ordinary income.
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 stock on or shortly after the stock's ex-dividend date and uses the sale
proceeds to purchase one or more other stocks that are expected to pay dividends
before the next dividend payment on the stock being sold. Through this practice,
the Fund may receive more dividend payments over a given period of time than if
it held a single stock. Receipt of a greater number of dividend payments during
a given time period could augment the total amount of dividend income the Fund
receives over this period. 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 with respect to Fund assets attributable to dividend
capture trading where it may only have received four payments in a hold only
strategy. In order for dividends received by the Fund to qualify as
tax-advantaged dividends, the Fund must comply with the holding period
requirements described herein. Dividend capture trading by the Fund will take
account of this consideration. The use of dividend capture strategies will
expose the Fund to increased trading costs and potential for capital
2
loss or gain, particularly in the event of significant short-term price
movements of stocks subject to dividend capture trading.
The Fund may invest up to 25% of its assets in securities of issuers in any
single industry, if companies in that industry meet the Fund's investment
criteria. The Fund may invest more than 25% of its assets in any single sector
of the economy if companies in that sector meet the Fund's investment criteria.
In current market conditions, the Fund initially expects to invest more than 25%
of its assets in each of the utilities and financial services sectors. The
utilities sector includes companies engaged in the manufacture, production,
generation, transmission, sale or distribution of water, gas, and electric
energy as well as companies that provide communication services. Companies in
the financial services sector include, for example, commercial banks, savings
and loan associations, brokerage and investment companies, insurance companies,
and consumer and industrial finance companies. If the Fund is focused in an
industry or sector, it may present more risks than if it were broadly
diversified over numerous industries or sectors of the economy. To the extent
that the Fund's portfolio is composed significantly of stocks in the utilities
and financial services sectors, the Fund will be more exposed to the particular
risks associated with those sectors. However, if market conditions change, the
Fund's portfolio would not necessarily be so composed of stocks in these
sectors, but could be composed significantly of stocks of issuers in other
market sectors.
For federal income tax purposes, income generated by bonds and other
fixed-income securities and most derivative investments would be taxable at
rates applicable to ordinary income and would not be eligible for treatment as
taxed-advantaged dividends. See "Investment objective, policies and risks--
Additional Risk Considerations--Sector risk."
INVESTMENT STRATEGY
A team of Eaton Vance investment professionals is responsible for the overall
management of the Fund's investments, including the allocation between common
and preferred stocks. Individual members of this team with specialized expertise
are responsible for the day-to-day management of different portions of the
Fund's portfolio. The Fund's investments are actively managed, and securities
may be bought or sold on a daily basis.
In selecting securities, the Fund invests primarily in dividend-paying common
and preferred stocks of U.S. and non-U.S. companies that produce attractive
levels of tax-advantaged dividend income and are, in the opinion of the Adviser,
undervalued or inexpensive relative to the overall market. Stocks may be
undervalued in relation to other investments due to adverse economic or other
near-term difficulties that cause them not to achieve their expected financial
potential. Undervaluation may also arise because companies are misunderstood by
investors or because they are out of step with favored market themes. For its
investments in common stocks, the Fund also seeks to invest in positions that
the Adviser believes have the potential for growth of income and capital
appreciation over time. For its investments in preferred stocks, the Fund will
also take into consideration the interest rate sensitivity of the investments
and the Adviser's interest rate expectations.
Investment decisions are made primarily on the basis of fundamental research.
The portfolio managers utilize information provided by, and the expertise of,
the Adviser's research staff in making investment decisions. In selecting
stocks, the portfolio managers consider (among other factors) a company's
earnings or cash flow capabilities, dividend prospects and tax treatment of a
company's dividends, the strength of the company's business franchises and
estimates of the company's net value. Many of these considerations are
subjective.
The Fund seeks to achieve high after-tax returns in part by minimizing the taxes
incurred by individual Shareholders in connection with the Fund's investment
income and realized capital gains. Fund distributions that are taxed as ordinary
income are sought to be minimized by the Fund by investing principally in common
and preferred stocks that pay tax-advantaged dividends and generally by avoiding
net realized short-term capital gains and fully taxable ordinary income in
excess of the Fund's
3
expenses. Fund distributions taxed as long-term capital gains are sought to be
minimized by the Fund by avoiding or minimizing the sale of portfolio securities
with large accumulated capital gains. When a decision is made to sell a
particular appreciated security, the portfolio managers will select for sale the
share lots resulting in the most favorable tax treatment, generally those with
holding periods sufficient to qualify for long-term capital gains treatment that
have the highest cost basis. The portfolio managers may sell securities to
realize capital losses that can be used to offset realized gains but not
tax-advantaged dividends or other ordinary income.
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 stocks and stock indices and options thereon, the
purchase of put options and the sale of call options on securities held, equity
swaps, covered short sales, forward sales of stocks and the purchase and sale of
forward currency exchange contracts and currency futures). By using these
techniques rather than selling appreciated securities, the Fund can, with
certain limitations, reduce its exposure to price declines in the securities
without realizing substantial capital gains under current tax law. These
derivative instruments may also be used by the Fund to enhance returns or as a
substitute for the purchase or sale of securities. Dividends received on
securities with respect to which the Fund is obligated to make related payments
(pursuant to short sales or otherwise) will be treated as fully taxable ordinary
income (i.e., income other than tax-advantaged dividends).
In addition to its primary investment policies involving investments in common
and preferred stocks, the Fund may invest, to a limited extent, in bonds and
other debt securities and engage in certain other investment practices. See
"Investment objective, policies and risks--Additional investment practices."
INVESTMENT ADVISER AND ADMINISTRATOR
Eaton Vance, an indirect wholly-owned subsidiary of Eaton Vance Corp., is the
Fund's investment adviser and administrator. See "Management of the Fund." As of
October 31, 2003, Eaton Vance and its subsidiaries managed approximately $75.0
billion on behalf of funds, institutional clients and individuals, including
approximately $23.2 billion in tax-managed equity fund assets.
RISK FACTORS SUMMARY
Risk is inherent in all investing. Therefore, before investing in the Fund you
should consider certain risks carefully. The primary risks of investing in APS
are:
+ If an auction fails, you may not be able to sell some or all of your APS;
+ 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 APS, which could affect liquidity;
+ The Fund may be forced to redeem your APS to meet regulatory or rating agency
requirements or may elect to redeem your APS in certain circumstances;
+ In extraordinary circumstances, the Fund may not earn sufficient income from
its investments to pay dividends;
+ If long-term interest rates rise, the value of the Fund's investment in
preferred stock, paying fixed dividends and debt securities will decline,
reducing the asset coverage for its APS;
+ Due to market fluctuations, the value of the Fund's investments in common
stock may fall, reducing the asset coverage for its APS;
+ The Fund may invest up to 25% of its assets in securities of issuers in any
single industry, if companies in that industry meet the Fund's investment
criteria. The Fund may invest more than 25% of its assets in any single
sector of the economy if companies in that sector meet the Fund's
4
investment criteria. If the Fund is focused in an industry or sector, it may
present more risks than if it were broadly diversified over numerous
industries or sectors of the economy. In current market conditions, the Fund
initially expects to invest more than 25% of its assets in each of the
utilities and financial services sectors. This may make the Fund more
susceptible to adverse economic, political, or regulatory occurrences
affecting these sectors. As the percentage of the Fund's assets invested in a
particular sector increases, so does the potential for fluctuation in Fund's
investments and therefore reduced asset coverage for its APS;
+ If an issuer of an obligation in which the Fund invests is downgraded or
defaults, there may be a negative impact on the income and/or asset value of
the Fund's portfolio; and
+ The Fund's investments in preferred stock and bonds of below investment grade
quality are predominantly speculative because of the credit risk of their
issuers. While offering a greater potential opportunity for capital
appreciation and higher yields, non-investment grade quality securities
typically entail greater potential price volatility and may be less liquid
than higher-rated securities. Issuers of non-investment grade quality
securities are more likely to default on their payments of interest and
principal owed to the Fund, and such defaults will reduce the Fund's net
asset value and income distributions. The prices of these lower rated
obligations are more sensitive to negative developments than higher rated
securities. Adverse business conditions, such as a decline in the issuer's
revenues or an economic downturn, generally lead to a higher non-payment
rate. In addition, a security may lose significant value before a default
occurs as the market adjusts to expected higher non-payment rates.
For additional general risks of investing in APS of the Fund, see "Investment
objectives, policies and risks--Risk considerations."
TRADING MARKET
APS are not listed on an exchange. Instead, you may buy or sell APS at an
auction that normally is held on the dates set forth below by submitting orders
to a broker-dealer that has entered into an agreement with the auction agent and
the Fund (a "Broker-Dealer") or to a broker-dealer that has entered into a
separate agreement with a Broker-Dealer. In addition to the auctions,
Broker-Dealers and other broker-dealers may maintain a secondary trading market
in APS outside of auctions but may discontinue this activity at any time. There
is no assurance that a secondary market will develop, or if it does develop,
that it 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.
The table below shows the first auction date for each series of APS of the Fund
and the day on which each subsequent auction will normally be held for each such
series. The first auction date for each series of APS of the Fund will be the
Business Day before the dividend payment date for the initial dividend period
for each such series. The start date for subsequent dividend periods normally
will be the Business Day following the auction date 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.
5
FIRST AUCTION SUBSEQUENT
DATE* AUCTION*
------------------------------------------------------------------------------------------
Series A.................................................... December 15 December 22
Series B.................................................... December 16 December 23
Series C.................................................... December 18 December 24
Series D.................................................... December 19 December 26
Series E.................................................... January 6 February 3
Series F.................................................... January 16 February 13
Series G.................................................... February 11 April 14
---------------
* All dates are 2003 except for Series E, Series F, and Series G which will have
an Initial Dividend Period of 28 days, 41 days, and 64 days, respectively. The
Fund will pay the Series G accumulated dividends on the first Business Day of
each month and the final dividend payment will be made on February 12, 2004.
DIVIDENDS AND DIVIDEND PERIODS
The table below shows the dividend rate for the initial dividend period of the
APS offered in this Prospectus. For subsequent dividend periods, APS will pay
dividends based on a rate set at auctions. For Series A, Series B, Series C,
Series D, Series E and Series F APS, dividends are generally paid on the day
following the end of the dividend period. For Series G APS, dividends are
generally paid on the first Business Day of each month and on the day following
the end of the dividend period. The rate set at auction will not exceed the
Maximum Rate. See "The Auction--Auction procedures."
Finally, the table below shows the numbers of days of the initial dividend
period for the APS. Subsequent dividend periods generally will be 7 days for
Series A, Series B, Series C and Series D APS, 28 days for Series E and Series F
APS and 63 days for Series G APS. The dividend payment date for Special Dividend
Periods of more than 28 days will be set out in the notice designating a Special
Dividend Period. See "Description of APS--Dividends and dividend periods."
DIVIDEND NUMBER OF
PAYMENT DATE DAYS OF
INITIAL DATE OF FOR INITIAL SUBSEQUENT INITIAL
DIVIDEND ACCUMULATION DIVIDEND DIVIDEND DIVIDEND
RATE OF INITIAL RATE* PERIOD* PAYMENT DATE* PERIOD
---------------------------------------------------------------------------------------------------
Series A................. 1.20% December 10 December 16 December 23 6
Series B................. 1.20% December 10 December 17 December 24 7
Series C................. 1.20% December 10 December 19 December 26 9
Series D................. 1.20% December 10 December 22 December 29 12
Series E................. 1.22% December 10 January 7 February 4 28
Series F................. 1.22% December 10 January 20 February 17 41
Series G................. 1.25% December 10 February 12 monthly 64
---------------
* All dates are 2003 except for Series E, Series F, and Series G which will have
an Initial Dividend Period of 28 days, 41 days, and 64 days, respectively. The
Fund will pay the Series G accumulated dividends on the first Business Day of
each month and the final dividend payment will be made on February 12, 2004.
TAXATION
Dividends paid with respect to APS should constitute dividends for federal
income tax purposes to the extent attributable to the Fund's current or
accumulated earnings and profits. For a further discussion of the tax treatment
of dividends paid by the Fund see "Taxes--General." Distributions of net capital
gain, to the extent so designated, will be treated as long-term capital gains.
6
REDEMPTION
Although the Fund will not ordinarily redeem APS, it may be required to redeem
APS if, for example, the Fund does not meet an asset coverage ratio required by
law or in order to correct a failure to meet a rating agency guideline in a
timely manner. See "Description of APS--Redemption--Mandatory redemption." The
Fund may voluntarily redeem APS in certain circumstances. See "Description of
APS--Redemption--Optional redemption."
LIQUIDATION PREFERENCE
The liquidation preference of the APS of each series is $25,000 per share, plus
an amount equal to accumulated but unpaid dividends (whether or not earned or
declared). See "Description of APS--Liquidation rights."
RATING
Shares of APS of the Fund will be issued with a credit quality rating of AAA or
Aaa from both Fitch and Moody's. The Fund may at some future time look to have
its APS rated by additional or substitute rating agencies. Because the Fund is
required to maintain at least two ratings, it must own portfolio securities of
sufficient value with adequate credit quality to meet the rating agency's
guidelines. See "Description of APS--Rating agency guidelines and asset
coverage."
VOTING RIGHTS
The 1940 Act requires that the holders of APS and any other Preferred Shares of
the Fund, voting as a separate class, have the right to elect at least two
Trustees of the Fund at all times and to elect a majority of the Trustees at any
time when two years' dividends on the APS or any other Preferred Shares are
unpaid. The holders of APS and any other Preferred Shares of the Fund will vote
as a separate class on certain other matters as required under the Fund's
Agreement and Declaration of Trust ("Declaration of Trust") and the 1940 Act.
See "Description of APS--Voting rights" and "Certain provisions of the
Declaration of Trust."
7
Financial highlights
Information contained in the tables below under the headings "Income (loss) from
operations" and "Ratios/Supplemental data" shows the unaudited operating
performance of the Fund from the commencement of the Fund's investment
operations on September 30, 2003 until October 31, 2003. Since the Fund
commenced operations on September 30, 2003, the tables cover approximately five
weeks of operations, during which a substantial portion of the Fund's assets
were invested in high-quality, short-term debt securities. Accordingly, the
information presented may not provide a meaningful picture of the Fund's
operating performance.
FINANCIAL STATEMENTS (UNAUDITED)
FINANCIAL HIGHLIGHTS
AS OF OCTOBER 31, 2003
PERIOD ENDED
OCTOBER 31, 2003(2)(3)
------------------------------------------------------------------------------------
Net asset value--Beginning of period(4)..................... $ 19.10
INCOME (LOSS) FROM OPERATIONS
Net investment income....................................... $ 0.074
Net realized and unrealized gain............................ $ 0.519
----------
Total income from operations................................ $ 0.593
----------
Common share offering costs................................. $ (0.013)
----------
Net asset value--End of period.............................. $ 19.68
----------
Market value--End of period................................. $ 20.60
----------
Total Investment Return on Net Asset Value(5)............... 3.04%
Total Investment Return on Market Value(5).................. 7.85%
RATIOS/SUPPLEMENTAL DATA(1)
Net assets, end of period (000's omitted)................... $1,298,909
Ratios (As a percentage of average daily net assets):
Net expenses.............................................. 0.72%(6)
Net investment income..................................... 4.34%(6)
Portfolio Turnover.......................................... 7%
------------
(1) The operating expenses of the Fund reflect a reduction of the investment
adviser fee and a reimbursement of expenses by the Adviser. Had such
action not been taken, the ratios and net investment income per share
would have been as follows:
Ratios (As a percentage of average daily net assets):
Expenses................................................. 0.92%(6)
Net investment income.................................... 4.14%(6)
Net investment income per share............................. $ 0.071
(2) For the period from the start of business, September 30, 2003, to October
31, 2003.
(3) Computed using average common shares outstanding.
(4) Net asset value at beginning of period reflects the deduction of the sales
load of $0.90 per share paid by the shareholder from the $20.00 offering
price.
(5) Total investment return on net asset value is calculated assuming a
purchase at the offering price of $20.00 less the sales load of $0.90 per
share paid by the shareholder on the first day and a sale at the net asset
value on the last day of the period reported. Total investment return on
market value is calculated assuming a purchase at the offering price of
$20.00 less the sales load of $0.90 per share paid by the shareholder on
the first day and a sale at the current market price on the last day of the
period reported. Total investment return on net asset value and total
investment return on market value are not computed on an annualized basis.
(6) Annualized.
8
--------------------------------------------------------------------------------
The Fund
Eaton Vance Tax-Advantaged Dividend Income Fund (the "Fund") is a diversified,
closed-end management investment company. The Fund was organized as a
Massachusetts business trust on July 10, 2003. The Fund has registered under the
Investment Company Act of 1940, as amended (the "1940 Act"). The Fund's
principal office is The Eaton Vance Building, 255 State Street, Boston,
Massachusetts 02109, and its telephone number is 1-800-225-6265.
The Fund commenced operations on September 30, 2003 upon the closing of an
initial public offering of shares of its common shares of beneficial interest,
$0.01 par value (the "Common Shares"). The proceeds of such offering were
$1,259,750,000 after the payment of offering expenses. In connection with the
initial public offering of the Fund's Common Shares, the underwriters were
granted an option to purchase, at a price of $20.00 per Common Share, 9,900,000
additional Common Shares to cover over-allotments. On November 10, 2003, the
underwriters partially exercised the over-allotment option and purchased
6,784,761 Common Shares.
Certain of the capitalized terms used in this Prospectus are defined in the
Glossary that appears at the end of this Prospectus.
Use of proceeds
The net proceeds of this offering will be approximately $692,550,000 after the
payment of the sales load and expected offering costs. See "Underwriting." The
Fund will invest the net proceeds of the offering in accordance with its
investment objective and policies stated below. It is presently anticipated that
the Fund will be able to invest substantially all of the net proceeds in
obligations that meet those investment objectives and policies during a period
estimated not to exceed three months from the completion of the offering of the
APS depending on market conditions and the availability of appropriate
securities. Pending such investment, the proceeds may be invested in high
quality, short-term debt securities.
--------------------------------------------------------------------------------
9
--------------------------------------------------------------------------------
Capitalization
The following table sets forth the unaudited capitalization of the Fund as of
October 31, 2003 and as adjusted to give effect to the issuance of the APS
offered hereby.
ACTUAL AS ADJUSTED
--------------------------------------------------------------------------------------------
(unaudited) (unaudited)
Preferred shares, par value, $0.01 per share (no shares
issued; 28,000, as adjusted, at $25,000 per share
liquidation preference).................................. $ -- $ 700,000,000
============== ==============
SHAREHOLDERS' EQUITY:
Common Shares, par value, $0.01 per share (66,005,000
shares issued and outstanding)........................... $ 660,050 $ 660,050
Capital in excess of par value attributable to Common
Shares................................................... 1,259,189,950 1,251,748,320
Net undistributed investment income........................ 4,883,453 4,883,453
Net accumulated realized gain (loss)....................... (3,430,954) (3,430,954)
Net unrealized appreciation on investments................. 37,606,848 37,606,848
-------------- --------------
Net Assets................................................. $1,298,909,347 $1,291,467,717
============== ==============
Portfolio composition
As of October 31, 2003, the following table indicates the approximate percentage
of the Fund's portfolio invested in common stock, preferred stock and short-term
obligations. Also included in the table is other information with respect to the
portion of the Fund's investment portfolio invested in preferred stock as of the
same date.
NUMBER OF
INVESTMENT S&P(1) MOODY'S(1) FITCH(1) ISSUES VALUE PERCENT
----------------------------------------------------------------------------------------------------
Common Stock -- -- -- -- $ 957,362.421 73%
Preferred Stock AA Aa AA 3 23,970,266 2%
A A A 18 125,574,850 10%
BBB Baa BBB 14 76,848,251 6%
BB Ba BB 3 28,552,930 2%
-- -- 0%
Unrated
Cash and cash equivalents -- -- -- -- 92,985,365 7%
-------------- ---
Total...................... 38 $1,305,294,083 100%
============== ===
------------
(1) Ratings: Using the higher of S&P's, Moody's or Fitch's ratings on the
Fund's investments. S&P and Fitch rating categories may be modified further
by a plus (+) or minus (--) in AA, A, BBB, BB, B, and CCC ratings. Moody's
rating categories may be modified further by a 1, 2 or 3 in Aa, A, Baa, Ba,
B, and Caa ratings.
--------------------------------------------------------------------------------
10
--------------------------------------------------------------------------------
Investment objective, policies and risks
INVESTMENT OBJECTIVE
Eaton Vance Tax-Advantaged Dividend Income Fund's (the "Fund") investment
objective is to provide a high level of after-tax total return consisting
primarily of tax-advantaged dividend income and capital appreciation. The Fund
pursues its objective by investing its assets primarily in dividend-paying
common and preferred stocks. The Fund's investment objective is fundamental and
cannot be changed without the approval of the Shareholders as required under the
1940 Act.
PRIMARY INVESTMENT POLICIES
GENERAL COMPOSITION OF THE FUND
Under normal market conditions, the Fund will invest at least 80% of its total
managed assets in dividend-paying common and preferred stocks that Eaton Vance
believes at the time of investment are eligible to pay dividends that qualify
for federal income taxation at rates applicable to long-term capital gains
("tax-advantaged dividends"). The Fund will invest primarily in common and
preferred stocks that pay dividends that qualify for federal income taxation at
rates applicable to long-term capital gains ("tax-advantaged dividends").
Initially, the Fund expects to invest approximately 65%-70% of its total assets
in common stocks and approximately 30%-35% of its total assets in preferred
stocks. The Fund's policy of investing, in normal market conditions, at least
80% of its total managed assets in dividend-paying common and preferred stocks
that Eaton Vance believes at the time of investment are eligible to pay
tax-advantaged dividends may only be changed by the Fund's Board following the
provision of 60 days prior written notice to holders of common shares of
beneficial interest of the Fund ("Common Shareholders"). The Adviser retains
broad discretion to allocate the Fund's investments between common and preferred
stocks in a manner that it believes will best effectuate the Fund's objective.
The Fund may invest in common and preferred stocks of both domestic and foreign
issuers. Under normal market conditions, the Fund expects to invest primarily in
preferred stocks of investment grade quality (which is at least BBB- as
determined by Standard & Poor's Ratings Group ("S&P") or Fitch Ratings
("Fitch"), Baa3 as determined by Moody's Investors Service, Inc. ("Moody's") or,
if unrated, are determined to be of comparable quality by Eaton Vance). However,
the Fund may from time to time purchase preferred stocks of below investment
grade quality that at the time of purchase are rated at least B as determined by
S&P, Fitch or Moody's or, if unrated, as determined to be of comparable quality
by Eaton Vance. Securities of below investment grade quality commonly are
referred to as "junk" preferred stocks and bonds, as the case may be. The Fund
will not invest more than 10% of its total assets in securities of below
investment grade quality. The foregoing credit quality policies apply only at
the time a security is purchased, and the Fund is not required to dispose of a
security in the event of a downgrade of an assessment of credit quality or the
withdrawal of a rating. Below investment grade quality securities are considered
to be predominantly speculative because of the credit risk of the issuers. See
"Investment objective, policies and risks--Additional risk
considerations--Non-investment grade securities risk."
The Fund seeks dividend income that qualifies for favorable federal income tax
treatment. Under federal income tax law enacted on May 28, 2003, tax-advantaged
dividends received by individual shareholders are taxed at rates equivalent to
long-term capital gain tax rates, which reach a maximum of 15%. 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 Shareholders. For the Fund to receive tax-advantaged dividend income,
the Fund must hold stock paying an otherwise tax-advantaged dividend for more
than 60 days during the 120-day period beginning 60 days before the ex-dividend
date (or more than 90 days during the associated 180-day period, in the case of
certain preferred
--------------------------------------------------------------------------------
11
INVESTMENT OBJECTIVES, POLICIES AND RISKS
--------------------------------------------------------------------------------
stocks). In addition, the Fund cannot be obligated to make related payments
(pursuant to a short sale or otherwise) with respect to substantially similar or
related property. Similar provisions apply to each Shareholder's investment in
the Fund. Corporate shareholders of the Fund are not eligible for this favorable
federal income tax treatment. In order for otherwise tax-advantaged dividends
from the Fund received by an individual Shareholder to be taxable at long-term
capital gains rates, the Shareholder must hold his or her Fund shares for more
than 60 days during the 120-day period surrounding the ex-dividend date (or more
than 90 days during the associated 180-day period, in the case of dividends
attributable to periods in excess of 360 days paid with respect to preferred
stock). The provisions of the Code applicable to tax-advantaged dividends are
effective through 2008. Thereafter, higher tax rates will apply unless further
legislative action is taken.
In addition to investing in stocks that pay tax-advantaged dividends, the Fund
may also invest a portion of its assets in stocks and other securities that
generate fully taxable ordinary income. For any year, so long as the Fund's
fully taxable ordinary income and net realized short-term gains are offset by
expenses of the Fund, all of the Fund's income distributions would be
characterized as tax-advantaged dividends. There can be no assurance that a
portion of the Fund's income distributions will not be fully taxable as ordinary
income.
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 stock on or shortly after the stock's ex-dividend date and uses the sale
proceeds to purchase one or more other stocks that are expected to pay dividends
before the next dividend payment on the stock being sold. Through this practice,
the Fund may receive more dividend payments over a given period of time than if
it held a single stock. Receipt of a greater number of dividend payments during
a given time period could augment the total amount of dividend income the Fund
receives over this period. 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 with respect to Fund assets attributable to dividend
capture trading where it may only have received four payments in a hold only
strategy. In order for dividends received by the Fund to qualify as
tax-advantaged dividends, the Fund must comply with the holding period
requirements described herein. Dividend capture trading by the Fund will take
account of this consideration. The use of dividend capture strategies will
expose the Fund to increased trading costs and potential for capital loss or
gain, particularly in the event of significant short-term price movements of
stocks subject to dividend capture trading.
INVESTMENT STRATEGY
A team of Eaton Vance investment professionals is responsible for the overall
management of the Fund's investments, including the allocation between common
and preferred stocks. Individual members of this team with specialized expertise
are responsible for the day-to-day management of different portions of the
Fund's portfolio. The Fund's investments are actively managed and securities may
be bought or sold on a daily basis.
In selecting securities, the Fund invests primarily in dividend-paying common
and preferred stocks of U.S. and non-U.S. companies that produce attractive
levels of tax-advantaged dividend income and are, in the opinion of the Adviser,
undervalued or inexpensive relative to the overall market. Stocks may be
undervalued in relation to other investments due to adverse economic or other
near-term difficulties that cause them not to achieve their expected financial
potential. Undervaluation may also arise because companies are misunderstood by
investors or because they are out of step with favored market themes. For its
investments in common stock, the Fund also seeks to invest in positions that the
Adviser believes have the potential for growth of income and capital
appreciation over time. For its investment in preferred stocks, the Fund will
also take into consideration the interest rate sensitivity of the investments
and the Adviser's interest rate expectations.
--------------------------------------------------------------------------------
12
INVESTMENT OBJECTIVES, POLICIES AND RISKS
--------------------------------------------------------------------------------
Investment decisions are made primarily on the basis of fundamental research.
The portfolio managers utilize information provided by, and the expertise of,
the Adviser's research staff in making investment decisions. In selecting
stocks, the portfolio managers consider (among other factors) a company's
earnings or cash flow capabilities, dividend prospects and tax treatment of a
company's dividends, the strength of the company's business franchises and
estimates of the company's net value. Many of these considerations are
subjective.
In current market conditions, the Fund initially expects to invest more than 25%
of its assets in each of the utilities and financial services sectors. The
utilities sector includes companies engaged in the manufacture, production,
generation, transmission, sale and distribution of water, gas and electric
energy, as well as companies engaged in the communication field. Companies in
the financial services sector include, for example, commercial banks, savings
and loan associations, brokerage and investment companies, insurance companies,
and consumer and industrial finance companies. See "Investment objective,
policies and risks--Additional Risk Considerations--Sector risk."
TAX-MANAGED INVESTING
The Fund seeks to achieve high after-tax returns in part by minimizing the taxes
incurred by Common Shareholders in connection with the Fund's investment income
and realized capital gains. Fund distributions that are taxed as ordinary income
are sought to be minimized by the Fund by investing principally in common and
preferred stocks that pay tax-advantaged dividends and generally by avoiding net
realized short-term capital gains and fully taxable ordinary income in excess of
the Fund's expenses. Fund distributions taxed as long-term capital gains are
sought to be minimized by the Fund by avoiding or minimizing the sale of
portfolio securities with large accumulated capital gains. When a decision is
made to sell a particular appreciated security, the portfolio managers will
select for sale the share lots resulting in the most favorable tax treatment,
generally those with holding periods sufficient to qualify for long-term capital
gains treatment that have the highest cost basis. The portfolio managers may
sell securities to realize capital losses that can be used to offset realized
gains but not tax-advantaged dividends or other ordinary income.
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 stocks and stock indices and options thereon, the
purchase of put options and the sale of call options on securities held, equity
swaps, covered short sales, forward sales of stocks and the purchase and sale of
forward currency exchange contracts and currency futures). By using these
techniques rather than selling appreciated securities, the Fund can, with
certain limitations, reduce its exposure to price declines in the securities
without realizing substantial capital gains under current tax law. These
derivative instruments may also be used by the Fund to enhance returns or as a
substitute for the purchase or sale of securities. As a general matter,
dividends received on hedged stock positions are characterized as ordinary
income and are not eligible for favorable tax treatment. Dividends received on
securities with respect to which the Fund is obligated to make related payments
(pursuant to short sales or otherwise) will be treated as fully taxable ordinary
income. In addition, use of derivatives may give rise to short-term capital
gains and other income that would not qualify for payments by the Fund of
tax-advantaged dividends.
Taxes are a major influence on the net returns that investors receive on their
taxable investments. There are five components of the returns of a regulated
investment company that invests in equities--price appreciation, distributions
of tax-advantaged dividends, distributions of other investment income and
distributions of realized short-term and long-term capital gains--which are
treated differently for federal income tax purposes. Distributions of income
other than tax-advantaged dividends and distributions of net realized short-term
gains (on stocks held for one year or less) are taxed as ordinary income, at
rates as high as 35%. Distributions of tax-advantaged dividends and net
--------------------------------------------------------------------------------
13
INVESTMENT OBJECTIVES, POLICIES AND RISKS
--------------------------------------------------------------------------------
realized long-term gains (on stocks held for more than one year) are taxed at
rates up to 15%. Returns derived from price appreciation are untaxed until the
shareholder sells his or her shares. Upon sale, a capital gain or loss
(short-term, if the shareholder has held his or her shares for one year or less,
otherwise long-term) equal to the difference between the net proceeds of such
sale and the shareholder's adjusted tax basis is realized. As described above,
the Fund seeks to achieve favorable after-tax returns in part by minimizing the
taxes incurred by shareholders in connection with the Fund's net investment
income and net realized gains.
COMMON STOCKS
Common stock represents an equity ownership interest in an issuer. The Fund will
have substantial exposure to common stocks. Although common stocks have
historically generated higher average returns than fixed-income securities over
the long term, common stocks also have experienced significantly more volatility
in returns. An adverse event, such as an unfavorable earnings report, may
depress the value of a particular common stock held by the Fund. Also, the price
of common stocks are sensitive to general movements in the stock market and a
drop in the stock market may depress the price of common stocks to which the
Fund has exposure. Common stock prices fluctuate for many reasons, including
changes in investors' perceptions of the financial condition of an issuer or the
general condition of the relevant stock market, or when political or economic
events affecting the issuers occur. In addition, common stock prices may be
sensitive to rising interest rates, as the costs of capital rise and borrowing
costs increase.
PREFERRED STOCKS
Preferred stock, like common stock, represents an equity ownership in an issuer.
Generally, preferred stock has a priority of claim over common stock in dividend
payments and upon liquidation of the issuer. Unlike common stock, preferred
stock does not usually have voting rights. Preferred stock in some instances is
convertible into common stock.
Although they are equity securities, preferred stocks have certain
characteristics of both debt and common stock. They are debt-like in that their
promised income is contractually fixed. They are common stock-like in that they
do not have rights to precipitate bankruptcy proceedings or collection
activities in the event of missed payments. Furthermore, they 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.
In order to be payable, dividends on preferred stock must be declared by the
issuer's board of directors. In addition, distributions on preferred stock may
be subject to deferral and thus may not be automatically payable. Income
payments on some preferred stocks are cumulative, causing dividends and
distributions to accrue even if not declared by the board of directors or
otherwise made payable. Other preferred stocks are non-cumulative, meaning that
skipped dividends and distributions do not continue to accrue. There is no
assurance that dividends on preferred stocks in which the Fund invests will be
declared or otherwise made payable. The Fund may invest in non-cumulative
preferred stock, although the Adviser would consider, among other factors, their
non-cumulative nature in making any decision to purchase or sell such
securities.
Shares of preferred stock have a liquidation value that generally equals the
original purchase price at the date of issuance. The market values of preferred
stock may be affected by favorable and unfavorable changes impacting the
issuers' industries or sectors, including companies in the utilities and
financial services sectors, which are prominent issuers of preferred stock. See
"Investment objective, policies and risks--Additional Risk
Considerations--Sector risk." They may also be affected by actual and
anticipated changes or ambiguities in the tax status of the security and by
actual and
--------------------------------------------------------------------------------
14
INVESTMENT OBJECTIVES, POLICIES AND RISKS
--------------------------------------------------------------------------------
anticipated changes or ambiguities in tax laws, such as changes in corporate and
individual income tax rates and in the dividends received deduction or the
characterization of dividends as tax-advantaged as described herein.
Because the claim on an issuer's earnings represented by preferred stock may
become onerous when interest rates fall below the rate payable on the stock or
for other reasons, the issuer may redeem preferred stock, generally after an
initial period of call protection in which the stock is not redeemable. Thus, in
declining interest rate environments in particular, the Fund's holdings of
higher dividend-paying preferred stocks may be reduced and the Fund may be
unable to acquire securities paying comparable rates with the redemption
proceeds.
ADDITIONAL INVESTMENT PRACTICES
FOREIGN SECURITIES
The Fund may invest in securities of foreign issuers. The Fund generally will
not invest in issuers located in emerging market countries. The value of foreign
securities is affected by changes in currency rates, foreign tax laws (including
withholding tax), government policies (in this country or abroad), relations
between nations and trading, settlement, custodial and other operational risks.
In addition, the costs of investing abroad are generally higher than in the
United States, and foreign securities markets may be less liquid, more volatile
and less subject to governmental supervision than markets in the United States.
Foreign investments also could be affected by other factors not present in the
United States, including expropriation, armed conflict, confiscatory taxation,
lack of uniform accounting and auditing standards, less publicly available
financial and other information and potential difficulties in enforcing
contractual obligations. As an alternative to holding foreign-traded securities,
the Fund may invest in dollar-denominated securities of foreign companies that
trade on U.S. exchanges or in the U.S. over-the-counter market (including
depositary receipts, which evidence ownership in underlying foreign securities).
Because foreign companies are not subject to uniform accounting, auditing and
financial reporting standards, practices and requirements comparable to those
applicable to U.S. companies, there may be less publicly available information
about a foreign company than about a domestic company. Volume and liquidity in
most foreign debt markets is less than in the United States and securities of
some foreign companies are less liquid and more volatile than securities of
comparable U.S. companies. There is generally less government supervision and
regulation of securities exchanges, broker-dealers and listed companies than in
the United States. Mail service between the United States and foreign countries
may be slower or less reliable than within the United States, thus increasing
the risk of delayed settlements of portfolio transactions or loss of
certificates for portfolio securities. Payment for securities before delivery
may be required. In addition, with respect to certain foreign countries, there
is the possibility of expropriation or confiscatory taxation, political or
social instability, or diplomatic developments, which could affect investments
in those countries. Moreover, individual foreign economics may differ favorably
or unfavorably from the U.S. economy in such respects as growth of gross
national product, rate of inflation, capital reinvestment, resource
self-sufficiency and balance of payments position. Foreign securities markets,
while growing in volume and sophistication, are generally not as developed as
those in the United States, and securities of some foreign issuers (particularly
those located in developing countries) may be less liquid and more volatile than
securities of comparable U.S. companies.
American Depositary Receipts (ADRs), European Depositary Receipts (EDRs) and
Global Depositary Receipts (GDRs) may be purchased. ADRs, EDRs and GDRs are
certificates evidencing ownership of shares of foreign issuers and are
alternatives to purchasing directly the underlying foreign securities in their
national markets and currencies. However, they continue to be subject to many of
the risks associated with investing directly in foreign securities. These risks
include foreign exchange risk as well
--------------------------------------------------------------------------------
15
INVESTMENT OBJECTIVES, POLICIES AND RISKS
--------------------------------------------------------------------------------
as the political and economic risks of the underlying issuer's country. ADRs,
EDRs and GDRs may be sponsored or unsponsored. Unsponsored receipts are
established without the participation of the issuer. Unsponsored receipts may
involve higher expenses, they may not pass-though voting or other shareholder
rights, and they may be less liquid.
REAL ESTATE INVESTMENT TRUSTS
The Fund may invest in companies that are treated as real estate investment
trusts for federal income tax purposes ("REITs"). REITs are financial vehicles
that pool investors' capital to purchase or finance real estate. REITs may
concentrate their investments in specific geographic areas or in specific
property types, i.e., hotels, shopping malls, residential complexes and office
buildings. The market value of REIT shares and the ability of REITs to
distribute income may be adversely affected by numerous factors, including
rising interest rates, changes in the national, state and local economic climate
and real estate conditions, perceptions of prospective tenants of the safety,
convenience and attractiveness of the properties, the ability of the owners to
provide adequate management, maintenance and insurance, the cost of complying
with the Americans with Disabilities Act, increasing competition and compliance
with environmental laws, changes in real estate taxes and other operating
expenses, adverse changes in governmental rules and fiscal policies, adverse
changes in zoning laws, and other factors beyond the control of the issuers. In
addition, distributions received by the Fund from REITs may consist of
dividends, capital gains and/or return of capital. As REITs generally pay a
higher rate of dividends than most other operating companies, to the extent
application of the Fund's investment strategy results in the Fund investing in
REIT shares, the percentage of the Fund's dividend income received from REIT
shares will likely exceed the percentage of the Fund's portfolio, which is
comprised of REIT shares. Generally, REIT income distributions received by the
Fund will not be treated as tax-advantaged dividends and will not be eligible
for the Dividends Received Deduction. (See "Taxes--General")
CORPORATE BONDS AND OTHER DEBT SECURITIES
In addition to its investments in common and preferred stocks, the Fund may
invest in a wide variety of bonds, debentures and similar debt securities of
varying maturities and durations issued by corporations and other business
entities, including limited liability companies. Debt securities in which the
Fund may invest may pay fixed or variable rates of interest. Bonds and other
debt securities generally are issued by corporations and other issuers to borrow
money from investors. The issuer pays the investor a fixed or variable rate of
interest and normally must repay the amount borrowed on or before maturity.
Certain debt securities are "perpetual" in that they have no maturity date. For
its investments in bonds and other debt securities, the Fund will only invest in
securities that are rated at least B by S&P, Fitch or Moody's or, if unrated,
determined to be of comparable quality by Eaton Vance. Debt securities of below
investment grade quality, commonly known as "junk bonds," are considered to be
predominantly speculative in nature because of the credit risk of the issuers.
See "Investment objective, policies and risks--Additional Risk
Considerations--Non-investment grade securities risk." Income payments on debt
securities received by the Fund will be fully taxable as ordinary income.
WARRANTS
The Fund may invest in equity and index warrants of domestic and international
issuers. Equity warrants are securities that give the holder the right, but not
the obligation, to subscribe for equity issues of the issuing company or a
related company at a fixed price either on a certain date or during a set
period. Changes in the value of a warrant do not necessarily correspond to
changes in the value of its underlying security. The price of a warrant may be
more volatile than the price of its underlying security, and a warrant may offer
greater potential for capital appreciation as well as capital loss. Warrants do
not entitle a holder to dividends or voting rights with respect to the
underlying security
--------------------------------------------------------------------------------
16
INVESTMENT OBJECTIVES, POLICIES AND RISKS
--------------------------------------------------------------------------------
and do not represent any rights in the assets of the issuing company. A warrant
ceases to have value if it is not exercised prior to its expiration date. These
factors can make warrants more speculative than other types of investments. The
sale of a warrant results in a long or short term capital gain or loss depending
on the period for which a warrant is held.
CONVERTIBLE SECURITIES AND BONDS WITH WARRANTS ATTACHED
The Fund may invest in preferred stocks and fixed-income obligations that are
convertible into common stocks of domestic and foreign issuers and bonds issued
as a unit with warrants. Convertible securities in which the Fund may invest,
comprised of both convertible debt and convertible preferred stock, may be
converted at either a stated price or at a stated rate into underlying shares of
common stock. Because of this feature, convertible securities generally enable
an investor to benefit from increases in the market price of the underlying
common stock. Convertible securities often provide higher yields than the
underlying equity securities, but generally offer lower yields than
non-convertible securities of similar quality. The value of convertible
securities fluctuates in relation to changes in interest rates like bonds, and,
in addition, fluctuates in relation to the underlying common stock. Income
payments on convertible fixed-income obligations will be taxable as ordinary
income; dividend payments on convertible preferred stocks may be tax-advantaged
dividends depending on the nature of the preferred stock.
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 Fund expects normally
to close its short sales against-the-box by delivering newly acquired 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 thirty days of the end of the Fund's
taxable year and the underlying appreciated securities position is held unhedged
for at least the next sixty days after the hedging transaction is closed. 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 (pursuant to short sales or
otherwise) will be treated as fully taxable ordinary income (i.e., other than
tax-advantaged dividends).
TEMPORARY INVESTMENTS
During unusual market circumstances, the Fund may invest temporarily in cash or
cash equivalents, which may be inconsistent with the Fund's investment
objective. Cash equivalents are highly liquid, short-term securities such as
commercial paper, time deposits, certificates of deposit, short-term notes and
short-term U.S. Government obligations.
FOREIGN CURRENCY TRANSACTIONS
The value of foreign assets as measured in U.S. dollars may be affected
favorably or unfavorably by changes in foreign currency rates and exchange
control regulations. Currency exchange rates can also be affected unpredictably
by intervention by U.S. or foreign governments or central banks, or the failure
to intervene, or by currency controls or political developments in the U.S. or
abroad. Foreign currency exchange transactions may be conducted on a spot (i.e.,
cash) basis at the spot rate prevailing in the foreign currency exchange market
or through entering into derivative currency transactions.
--------------------------------------------------------------------------------
17
INVESTMENT OBJECTIVES, POLICIES AND RISKS
--------------------------------------------------------------------------------
Currency futures contracts are exchange-traded and change in value to reflect
movements of a currency or a basket of currencies. Settlement must be made in a
designated currency.
Forward foreign currency exchange contracts are individually negotiated and
privately traded so they are dependent upon the creditworthiness of the
counterparty. Such contracts may be used when a security denominated in a
foreign currency is purchased or sold, or when the receipt in a foreign currency
of dividend or interest payments on such a security is anticipated. A forward
contract can then "lock in" the U.S. dollar price of the security or the U.S.
dollar equivalent of such dividend or interest payment, as the case may be.
Additionally, when the Adviser believes that the currency of a particular
foreign country may suffer a substantial decline against the U.S. dollar, it may
enter into a forward contract to sell, for a fixed amount of dollars, the amount
of foreign currency approximating the value of some or all of the securities
held that are denominated in such foreign currency. The precise matching of the
forward contract amounts and the value of the securities involved will not
generally be possible. In addition, it may not be possible to hedge against
long-term currency changes. Cross-hedging may be performed by using forward
contracts in one currency (or basket of currencies) to hedge against
fluctuations in the value of securities denominated in a different currency if
the Adviser determines that there is an established historical pattern of
correlation between the two currencies (or the basket of currencies and the
underlying currency). Use of a different foreign currency magnifies exposure to
foreign currency exchange rate fluctuations. Forward contracts may also be used
to shift exposure to foreign currency exchange rate changes from one currency to
another. Short-term hedging provides a means of fixing the dollar value of only
a portion of portfolio assets.
Currency transactions are subject to the risk of a number of complex political
and economic factors applicable to the countries issuing the underlying
currencies. Furthermore, unlike trading in most other types of instruments,
there is no systematic reporting of last sale information with respect to the
foreign currencies underlying the derivative currency transactions. As a result,
available information may not be complete. In an over-the-counter trading
environment, there are no daily price fluctuation limits. There may be no liquid
secondary market to close out options purchased or written, or forward contracts
entered into, until their exercise, expiration or maturity. There is also the
risk of default by, or the bankruptcy of, the financial institution serving as a
counterparty.
WHEN-ISSUED SECURITIES AND FORWARD COMMITMENTS
Securities may be purchased on a "forward commitment" or "when-issued" basis
(meaning securities are purchased or sold with payment and delivery taking place
in the future) in order to secure what is considered to be an advantageous price
and yield at the time of entering into the transaction. However, the return on a
comparable security when the transaction is consummated may vary from the return
on the security at the time that the forward commitment or when-issued
transaction was made. From the time of entering into the transaction until
delivery and payment is made at a later date, the securities that are the
subject of the transaction are subject to market fluctuations. In forward
commitment or when-issued transactions, if the seller or buyer, as the case may
be, fails to consummate the transaction, the counterparty may miss the
opportunity of obtaining a price or yield considered to be advantageous. Forward
commitment or when-issued transactions may be expected to occur a month or more
before delivery is due. However, no payment or delivery is made until payment is
received or delivery is made from the other party to the transaction. Forward
commitment or when-issued transactions are not entered into for the purpose of
investment leverage.
ILLIQUID SECURITIES
The Fund may invest in securities for which there is no readily available
trading market or are otherwise illiquid. Illiquid securities include securities
legally restricted as to resale, such as commercial paper issued pursuant to
Section 4(2) of the Securities Act of 1933, as amended, and securities eligible
for resale pursuant to Rule 144A thereunder. Section 4(2) and Rule 144A
securities may, however, be
--------------------------------------------------------------------------------
18
INVESTMENT OBJECTIVES, POLICIES AND RISKS
--------------------------------------------------------------------------------
treated as liquid by the Adviser pursuant to procedures adopted by the Board,
which require consideration of factors such as trading activity, availability of
market quotations and number of dealers willing to purchase the security. If the
Fund invests in Rule 144A securities, the level of portfolio illiquidity may be
increased to the extent that eligible buyers become uninterested in purchasing
such securities.
It may be difficult to sell such securities at a price representing their fair
value until such time as such securities may be sold publicly. Where
registration is required, a considerable period may elapse between a decision to
sell the securities and the time when it would be permitted to sell. Thus, the
Fund may not be able to obtain as favorable a price as that prevailing at the
time of the decision to sell. The Fund may also acquire securities through
private placements under which it may agree to contractual restrictions on the
resale of such securities. Such restrictions might prevent their sale at a time
when such sale would otherwise be desirable.
SWAPS
Swap contracts may be purchased or sold to hedge against fluctuations in
securities prices, interest rates or market conditions, to change the duration
of the overall portfolio, to mitigate non-payment or default risk, or to gain
exposure to particular securities, baskets of securities, indices or currencies.
In a standard "swap" transaction, two parties agree to exchange the returns (or
differentials in rates of return) to be exchanged or "swapped" between the
parties, which returns are calculated with respect to a "notional amount," i.e.,
the return on or increase in value of a particular dollar amount invested at a
particular interest rate or in a "basket" of securities representing a
particular index. The Fund will enter into swaps only 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. If the other party to a
swap defaults, the Fund's risk of loss consists of the net amount of payments
that the Fund is contractually entitled to receive. The net amount of the
excess, if any, of the Fund's obligations over its entitlements will be
maintained in a segregated account by the Fund's custodian. The Fund will not
enter into any swap unless the claims-paying ability of the other party thereto
is considered to be investment grade by the Adviser. 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. These instruments are
traded in the over-the-counter market. The use of swaps is a highly specialized
activity, which involves investment techniques and risks different from those
associated with ordinary portfolio securities transactions. If the Adviser is
incorrect in its forecasts of market values, interest rates and other applicable
factors, the investment performance of the Fund would be unfavorably affected.
Interest Rate Swaps. Interest rate swaps involve the exchange by the Fund with
another party of their respective commitments to pay or receive interest (e.g.,
an exchange of fixed rate payments for floating rate payments). Income payments
on interest rate swaps are taxable as ordinary income.
Total Return Swaps. Total return swaps are contracts in which one party agrees
to make payments of the total return from the underlying asset(s) which may
include securities, baskets of securities, or securities indices during the
specified period, in return for payments equal to a fixed or floating rate of
interest or the total return from other underlying asset(s). Amounts realized on
total return swaps may be taxable as ordinary income, capital gain or a
combination thereof depending on the nature of the swap contract.
FUTURES AND OPTIONS ON FUTURES
The Fund may purchase and sell various kinds of financial futures contracts and
options thereon to seek to hedge against changes in stock prices, interest
rates, for other risk management purposes or to gain exposure to certain
securities, indices and currencies. Futures contracts may be based on various
securities indices and securities. Such transactions involve a risk of loss or
depreciation due to
--------------------------------------------------------------------------------
19
INVESTMENT OBJECTIVES, POLICIES AND RISKS
--------------------------------------------------------------------------------
unanticipated adverse changes in securities prices, which may exceed the Fund's
initial investment in these contracts. The Fund will only purchase or sell
futures contracts or related options in compliance with the rules of the
Commodity Futures Trading Commission. These transactions involve transaction
costs. There can be no assurance that Eaton Vance's use of futures will be
advantageous to the Fund. Nationally recognized statistical rating organizations
(each a "Rating Agency") guidelines on any preferred shares issued by the Fund,
including the APS, or covenants on Fund borrowings may limit use of these
transactions. Sales of futures contracts and related options generally result in
realization of short-term or long-term capital gain depending on the period for
which the investment is held. To the extent that any futures contract or foreign
currency contract held by the Fund is a Section 1256 contract, the contract will
be marked-to-market and any gain or loss will be treated as 60% long-term and
40% short-term, regardless of the holding period for such contract.
SECURITIES LENDING
The Fund may seek to earn income by lending portfolio securities to
broker-dealers or other institutional borrowers. As with other extensions of
credit, there are risks of delay in recovery or even loss of rights in the
securities loaned if the borrower of the securities fails financially. In the
judgment of the Adviser, the loans will be made only to organizations whose
credit quality or claims paying ability is considered to be at least investment
grade and when the expected returns, net of administrative expenses and any
finders' fees, justifies the attendant risk. Securities loans currently are
required to be secured continuously by collateral in cash, cash equivalents
(such as money market instruments) or other liquid securities held by the
custodian and maintained in an amount at least equal to the market value of the
securities loaned. The financial condition of the borrower will be monitored by
the Adviser on an ongoing basis. Income realized from securities lending and
payments in lieu of dividends on loaned stock will generally be fully taxable as
ordinary income.
BORROWINGS
The Fund may borrow money to the extent permitted under the 1940 Act as
interpreted, modified or otherwise permitted by the regulatory authority having
jurisdiction. The Fund may from time to time borrow money to add leverage to the
portfolio. The Fund may also borrow money for temporary administrative purposes.
REVERSE REPURCHASE AGREEMENTS
The Fund may enter into reverse repurchase agreements. Under a reverse
repurchase agreement, the Fund temporarily transfers possession of a portfolio
instrument to another party, such as a bank or broker-dealer, in return for
cash. At the same time, the Fund agrees to repurchase the instrument at an
agreed upon time (normally within seven days) and price, which reflects an
interest payment. The Fund may enter into such agreements when it is able to
invest the cash acquired at a rate higher than the cost of the agreement, which
would increase earned income. Income realized on reverse repurchase agreements
will be fully taxable as ordinary income.
When the Fund enters into a reverse repurchase agreement, any fluctuations in
the market value of either the securities transferred to another party or the
securities in which the proceeds may be invested would affect the market value
of the Fund's assets. As a result, such transactions may increase fluctuations
in the market value of the Fund's assets. While there is a risk that large
fluctuations in the market value of the Fund's assets could affect net asset
value, this risk is not significantly increased by entering into reverse
repurchase agreements, in the opinion of the Adviser. Because reverse repurchase
agreements may be considered to be the practical equivalent of borrowing funds,
they constitute a form of leverage. Such agreements will be treated as subject
to investment restrictions regarding "borrowings." If the Fund reinvests the
proceeds of a reverse repurchase agreement at a rate lower than the cost of the
agreement, entering into the agreement will lower the Fund's yield.
--------------------------------------------------------------------------------
20
INVESTMENT OBJECTIVES, POLICIES AND RISKS
--------------------------------------------------------------------------------
PORTFOLIO TURNOVER
As noted above, the Adviser may sell securities to realize capital losses that
can be used to offset capital gains (but not tax-advantaged dividends or other
ordinary income) or in connection with dividend recapture strategies. Use of
these tax management strategies will increase portfolio turnover. Although the
Fund cannot accurately predict its portfolio turnover rate, it may exceed 100%
(excluding turnover of securities having a maturity of one year or less). A high
turnover rate (100% or more) necessarily involves greater expenses to the Fund
and may result in realization of net short-term capital gains.
RISK CONSIDERATIONS
Risk is inherent in all investing. Investing in any investment company security
involves risk, including the risk that you may receive little or no return on
your investment or even 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.
INTEREST RATE RISK
The Fund issues APS, which pay dividends based on short-term interest rates, and
uses the proceeds to buy obligations, which pay interest based on longer-term
yields. Longer-term bond obligation yields are typically, although not always,
higher than short-term interest rates. Both long-term and short-term interest
rates may fluctuate. If short-term interest rates rise, APS rates may rise such
that the amount of dividends paid to APS holders exceeds the income from the
portfolio securities purchased with the proceeds from the sale of APS. Because
income from the Fund's entire investment portfolio (not just the portion
purchased with the proceeds of the APS offering) is available to pay APS
dividends, however, APS dividend rates would need to exceed greatly the Fund's
net portfolio income before the Fund's ability to pay APS dividends would be
jeopardized. If long-term rates rise, the value of the Fund's investment
portfolio will decline, reducing the amount of assets serving as asset coverage
for the APS.
AUCTION RISK
Holders of APS may not be able to sell APS at an Auction if the Auction fails;
that is, if there are more APS offered for sale than there are buyers for those
APS. Also, if a hold order is placed at an Auction (an order to retain APS) only
at a specified rate, and that bid rate exceeds the rate set at the Auction, the
APS will not be retained. Finally, if you elect to buy or retain APS without
specifying a rate below which you would not wish to continue to hold those APS,
and the auction sets a below market rate, you may receive a lower rate of return
on your APS then the market rate. See "Description of APS" and "The
Auction--Auction procedures."
SECONDARY MARKET RISK
It may not be possible to sell APS between auctions or it may only be possible
to sell them for a price of less than $25,000 per share plus any accumulated
dividends. If the Fund has designated a Special Dividend Period (a dividend
period of more than 7 days in the cases of Series A APS, Series B APS, Series C
APS and Series D APS, 28 days in the cases of Series E APS and Series F APS, and
63 days in the case of Series G APS), changes in interest rates could affect the
price of APS sold in the secondary market. 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 is subject to variables to be
determined at the time of the trade by the broker-dealers). The APS will not be
registered on any stock exchange or on any automated quotation system. An
increase in the level of interest rates, particularly during any Long-Term
Dividend Period, likely will have an adverse effect on
--------------------------------------------------------------------------------
21
INVESTMENT OBJECTIVES, POLICIES AND RISKS
--------------------------------------------------------------------------------
the secondary market price of the APS, and a selling Shareholder may sell APS
between Auctions at a price per share of less than $25,000. Accrued APS
dividends, however, should at least partially compensate for the increased
market interest rate.
RATINGS AND ASSET COVERAGE RISK
While Fitch and Moody's assign a rating of "AAA" or "Aaa" to the APS, the
ratings do not eliminate or necessarily mitigate the risks of investing in APS.
A rating agency could downgrade APS, which may make APS less liquid at an
Auction or in the secondary market, although the downgrade would probably result
in higher dividend rates. If a rating agency downgrades APS of the Fund, the
Fund will alter its portfolio or redeem APS. The Fund may voluntarily redeem APS
under certain circumstances. A preferred stock rating is an assessment of the
capacity and willingness of an issuer to pay preferred stock obligations. The
ratings on the Preferred Shares are not recommendations to purchase, hold, or
sell those shares, inasmuch as the ratings do not comment as to market price or
suitability for a particular investor. The rating agency guidelines described
above also do not address the likelihood that an owner of the Preferred Shares
will be able to sell such shares in an auction or otherwise. See "Description of
APS--Rating agency guidelines and asset coverage" for a description of the asset
maintenance tests the Fund must meet.
ISSUER RISK
The value of common and preferred stocks held by the Fund may decline for a
number of reasons, which directly relate to the issuer, such as management
performance, financial leverage and reduced demand for the issuer's goods and
services.
INCOME RISK
The income investors receive from the Fund is based primarily on the dividends
and interest it earns from its investments, which can vary widely over the short
and long-term. If prevailing market interest rates drop, distribution rates of
the Fund's preferred stock holdings and any bond holdings could drop as well,
which could reduce the amount of income available to pay dividends with respect
to the APS.
VALUE INVESTING RISK
The Fund focuses its investments on dividend-paying common and preferred stocks
that the Adviser believes are undervalued or inexpensive relative to other
investments. These types of securities may present risks in addition to the
general risks associated with investing in common and preferred stocks. These
securities generally are selected on the basis of an issuer's fundamentals
relative to current market price. Such securities are subject to the risk of
misestimation of certain fundamental factors. In addition, during certain time
periods market dynamics may favor "growth" stocks of issuers that do not display
strong fundamentals relative to market price based upon positive price momentum
and other factors. Disciplined adherence to a "value" investment mandate during
such periods can result in significant underperformance relative to overall
market indices and other managed investment vehicles that pursue growth style
investments and/or flexible equity style mandates.
NON-INVESTMENT GRADE SECURITIES RISK
The Fund's investments in preferred stocks and bonds of below investment grade
quality, if any, are predominantly speculative because of the credit risk of
their issuers. While offering a greater potential opportunity for capital
appreciation and higher yields, preferred stocks and bonds of below investment
grade quality entail greater potential price volatility and may be less liquid
than higher-rated securities. Issuers of below investment grade quality
preferred stocks and bonds are more likely to default on their payments of
dividends/interest and liquidation value/principal owed to the Fund, and such
defaults will reduce the Fund's net asset value and income distributions. The
prices of these lower quality preferred stocks and bonds are more sensitive to
negative developments than higher rated
--------------------------------------------------------------------------------
22
INVESTMENT OBJECTIVES, POLICIES AND RISKS
--------------------------------------------------------------------------------
securities. Adverse business conditions, such a decline in the issuer's revenues
or an economic downturn, generally lead to a higher non-payment rate. In
addition, such a security may lose significant value before a default occurs as
the market adjusts to expected higher non-payment rates. The Fund will not
invest in preferred stocks or bonds that are rated, at the time of purchase,
below B as determined by S&P, Moody's or Fitch, or, if unrated, determined to be
of comparable quality by Eaton Vance. The Fund will not invest more than 10% of
its gross assets in securities rated below investment grade. The foregoing
credit quality policies apply only at the time a security is purchased, and the
Fund is not required to dispose of securities already owned by the Fund in the
event of a change in assessment of credit quality or the removal of a rating.
SECTOR RISK
The Fund may invest up to 25% of its assets in securities of issuers in any
single industry, if companies in that industry meet the Fund's investment
criteria. The Fund may invest more than 25% of its assets in any single sector
of the economy if companies in that sector meet the Fund's investment criteria.
If the Fund is focused in an industry or sector, it may present more risks than
if it were broadly diversified over numerous industries or sectors of the
economy. In current market conditions, the Fund initially expects to invest more
than 25% of its assets in each of the utilities and financial services sectors.
This may make the Fund more susceptible to adverse economic, political, or
regulatory occurrences affecting these sectors. As concentration in a sector
increases, so does the potential for fluctuation in the net asset value of the
Fund.
The utilities sector generally includes companies engaged in the manufacture,
production, generation, transmission, sale or distribution of electric energy,
gas, or water, or, in certain instances, the providing of communications
services. Certain segments of this sector and individual companies within such
segments may not perform as well as the sector as a whole. Many utility
companies historically have been subject to risks of increases in fuel,
purchased power and other operating costs, high interest costs on borrowings
needed for capital improvement programs and costs associated with compliance
with and changes in environmental and other governmental regulations. In
particular, regulatory changes with respect to nuclear and conventionally fueled
power generating and transmission facilities could increase costs or impair the
ability of the utility companies to operate and utilize such facilities, thus
reducing the utility companies' earnings or resulting in losses. Rates of return
on investment of certain utility companies are subject to review by government
regulators. There can be no assurance that changes in regulatory policies or
accounting standards will not negatively affect utility companies' earnings or
dividends. Costs incurred by utilities, such as fuel and purchased power costs,
often are subject to immediate market action resulting from such things as
political or military forces operating in geographic regions where oil
production is concentrated or global or regional weather conditions, such as
droughts, while the rate of return of utility companies generally is subject to
review and limitation by state public utility commissions, which often results
in a lag or an absence of correlation between costs and return. It is also
possible that costs may not be offset by return. Utilities have, in recent
years, been affected by increased competition, which could adversely affect the
profitability or viability of such utilities. Electric utilities may also be
subject to increasing economic pressures due to deregulation of generation,
transmission and other aspects of their business.
The industries within the financial services sector are subject to extensive
government regulation which can limit both the amounts and types of loans and
other financial commitments they can make, and the interest rates and fees they
can charge. Profitability can be largely dependent on the availability and cost
of capital funds and the rate of corporate and consumer debt defaults, and can
fluctuate significantly when interest rates change. Credit losses resulting from
financial difficulties of borrowers can negatively affect the financial services
industries. Insurance companies can be subject to severe price competition. The
financial services industries are currently undergoing relatively rapid change
as existing distinctions between financial service segments become less clear.
For example, recent business
--------------------------------------------------------------------------------
23
INVESTMENT OBJECTIVES, POLICIES AND RISKS
--------------------------------------------------------------------------------
combinations have included insurance, finance, and securities brokerage under
single ownership. Some primarily retail corporations have expanded into
securities and insurance industries.
The banking industry can be significantly affected by the adoption of
legislation that has reduced the separation between commercial and investment
banking businesses and changed the laws governing capitalization and the savings
and loan industry. While providing diversification, this legislation could
expose banks to well-established competitors, particularly as the historical
distinctions between banks and other financial institutions erode. Increased
competition can also result from the broadening of regional and national
interstate banking powers, which has already reduced the number of publicly
traded banks. In addition, general economic conditions are important to banks
that face exposure to credit losses and can be significantly affected by changes
in interest rates.
The brokerage and investment management industries can be significantly affected
by changes in regulations, brokerage commission structure, and a competitive
environment combined with the high operating leverage inherent in companies in
this industry. The performance of companies in these industries can be closely
tied to the stock and bond markets and can suffer during market declines.
Revenues can depend on overall market activity.
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, liability for
the coverage of environmental clean-up costs from past years, and as yet
unanticipated liabilities. Also, insurance companies are subject to extensive
government regulation, including the imposition of maximum rate levels, and can
be adversely affected by proposed or potential tax law changes.
DERIVATIVES RISK
Derivative transactions (such as futures contracts and options thereon, options,
swaps and short sales) subject the Fund to increased risk of principal loss due
to imperfect correlation or unexpected price or interest rate movements. The
Fund also will be subject to credit risk with respect to the counterparties to
the derivatives contracts purchased by the Fund. If a counterparty becomes
bankrupt or otherwise fails to perform its obligations under a derivative
contract due to financial difficulties, the Fund may experience significant
delays in obtaining any recovery under the derivative contract in a bankruptcy
or other reorganization proceeding. The Fund may obtain only a limited recovery
or may obtain no recovery in such circumstances. As a general matter, dividends
received on hedged stock positions are characterized as ordinary income and are
not eligible for favorable tax treatment. In addition, use of derivatives may
give rise to short-term capital gains and other income that would not qualify
for payments by the Fund of tax-advantaged dividends.
INFLATION RISK
Inflation risk is the risk that the purchasing power of assets or income from
investment will be worth less in the future as inflation decreases the value of
money. As inflation increases, the real value of the APS and distributions
thereon can decline. In addition, during any periods of rising inflation,
dividend rates of preferred shares of the Fund would likely increase, which
would tend to further reduce returns to Common Shareholders.
MANAGEMENT RISK
The Fund is subject to management risk because it is an actively managed
portfolio. Eaton Vance and the individual portfolio managers will apply
investment techniques and risk analyses in making investment decisions for the
Fund, but there can be no guarantee that these will produce the desired results.
--------------------------------------------------------------------------------
24
INVESTMENT OBJECTIVES, POLICIES AND RISKS
--------------------------------------------------------------------------------
MARKET DISRUPTION
The terrorist attacks in the United States on September 11, 2001 had a
disruptive effect on the securities markets. The Fund cannot predict the effects
of similar events in the future on the U.S. economy and securities markets.
These terrorist attacks and related events, including the war in Iraq and the
continuing occupation of Iraq by coalition forces, have led to increased
short-term market volatility and may have long-term effects on U.S. and world
economies and markets. A similar disruption of the financial markets could
impact interest rates, auctions, secondary trading, ratings, credit risk,
inflation and other factors relating to the Common Shares and the APS.
Management of the Fund
BOARD OF TRUSTEES
The management of the Fund, including general supervision of the duties
performed by the Adviser under the Advisory Agreement (as defined below), is the
responsibility of the Fund's Board under the laws of The Commonwealth of
Massachusetts and the 1940 Act.
THE ADVISER
Eaton Vance acts as the Fund's investment adviser under an Investment Advisory
Agreement (the "Advisory Agreement"). The Adviser's principal office is located
at The Eaton Vance Building, 255 State Street, Boston, MA 02109. Eaton Vance,
its affiliates and predecessor companies have been managing assets of
individuals and institutions since 1924 and of investment companies since 1931.
Eaton Vance (or its affiliates) currently serves as the investment adviser to
investment companies and various individual and institutional clients with
combined assets under management of approximately $75.0 billion as of October
31, 2003, including approximately $23.2 billion in tax-managed equity fund
assets. Eaton Vance is an indirect, wholly-owned subsidiary of Eaton Vance
Corp., a publicly-held holding company, which through its subsidiaries and
affiliates engages primarily in investment management, administration and
marketing activities.
Under the general supervision of the Fund's Board, the Adviser will carry out
the investment and reinvestment of the assets of the Fund, will furnish
continuously an investment program with respect to the Fund, will determine
which securities should be purchased, sold or exchanged, and will implement such
determinations. The Adviser will furnish to the Fund investment advice and
office facilities, equipment and personnel for servicing the investments of the
Fund. The Adviser will compensate all Trustees and officers of the Fund who are
members of the Adviser's organization and who render investment services to the
Fund, and will also compensate all other Adviser personnel who provide research
and investment services to the Fund. In return for these services, facilities
and payments, the Fund has agreed to pay the Adviser as compensation under the
Advisory Agreement a fee in the amount of 0.85% of the average daily gross
assets of the Fund, subject to the expense reimbursement arrangements described
above. Gross assets of the Fund means total assets of the Fund, including any
form of investment leverage, minus all accrued expenses incurred in the normal
course of operations, but not excluding any liabilities or obligations
attributable to investment leverage obtained through (i) indebtedness of any
type (including, without limitation, borrowing through a credit facility or the
issuance debt securities), (ii) the issuance of preferred stock or other similar
preference securities, (iii) the reinvestment of collateral received for
securities loaned in accordance with the Fund's investment objectives and
policies, and/or (iv) any other means. During periods in which the Fund is using
leverage, the fees paid to Eaton Vance for investment advisory services will be
higher than if the Fund did not use leverage because the fees paid will be
calculated on the basis of the Fund's gross assets, including proceeds from any
borrowings and from the issuance of preferred shares.
--------------------------------------------------------------------------------
25
MANAGEMENT OF THE FUND
--------------------------------------------------------------------------------
Thomas E. Faust Jr. (Executive Vice President and Chief Investment Officer of
Eaton Vance), Michael R. Mach, Judith A. Saryan, and Thomas H. Luster and other
Eaton Vance investment professionals comprise the investment team responsible
for the overall management of the Fund's investments as well as allocations of
the Fund's assets between common and preferred stocks. Mr. Mach, Ms. Saryan, and
Mr. Luster are the portfolio managers responsible for the day-to-day management
of specific segments of the Fund's investment portfolio.
Mr. Mach has been an Eaton Vance portfolio manager since 1999 and is a Vice
President of Eaton Vance and Boston Management and Research, an Eaton Vance
subsidiary ("BMR"). He also manages other Eaton Vance value equity portfolios.
Prior to joining Eaton Vance, Mr. Mach was a Managing Director and Senior
Analyst for Robertson Stephens (1998-1999). Additionally, he served as managing
director and senior analyst of Piper Jaffray's Industrial Select research
product (1996-1998). Mr. Mach served as a Senior Vice President at Putnam
Investments, with responsibilities that included equity analysis, mutual fund
management and institutional account management (1989-1996).
Ms. Saryan has been an Eaton Vance portfolio manager since 1999 and is a Vice
President of Eaton Vance and BMR. She also manages Eaton Vance's utilities
portfolio. Prior to joining Eaton Vance, Ms. Saryan was a portfolio manager and
equity analyst for State Street Global Advisors (1980-1999).
Mr. Luster has been an Eaton Vance portfolio manager and analyst since 1994 and
is a Vice President of Eaton Vance and BMR. He is co-head of Eaton Vance's
Investment Grade Fixed Income Group. Prior to joining Eaton Vance, Mr. Luster
consulted for Deloitte & Touche (1990-1994).
The Fund and the Adviser have adopted a Code of Ethics relating to personal
securities transactions. The Code permits Adviser personnel to invest in
securities (including securities that may be purchased or held by the Fund) for
their own accounts, subject to certain pre-clearance, reporting and other
restrictions and procedures contained in such Code.
Eaton Vance serves as administrator of the Fund but currently receives no
compensation for providing administrative services to the Fund. Under an
Administration Agreement with the Fund ("Administration Agreement"), Eaton Vance
is responsible for managing the business affairs of the Fund, subject to the
supervision of the Fund's Board. Eaton Vance will furnish to the Fund all office
facilities, equipment and personnel for administering the affairs of the Fund.
Eaton Vance's administrative services include recordkeeping, preparation and
filing of documents required to comply with federal and state securities laws,
supervising the activities of the Fund's custodian and transfer agent, providing
assistance in connection with the Trustees' and shareholders' meetings,
providing service in connection with any repurchase offers and other
administrative services necessary to conduct the Fund's business.
Description of APS
The following is a brief description of the 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 Fund's Declaration of Trust and Amended By-Laws, including
the provisions thereof establishing the APS. The Fund's Declaration of Trust and
the form of Amended By-Laws establishing the terms of the APS have been filed as
exhibits to or incorporated by reference in the Registration Statement of which
this Prospectus is a part. Amendment No. 1 to the Fund's By-Laws (creating the
APS) may be found in Appendix B to the Fund's Statement of Additional
Information.
--------------------------------------------------------------------------------
26
DESCRIPTION OF APS
--------------------------------------------------------------------------------
GENERAL
The Declaration of Trust authorizes the issuance of an unlimited number of
shares of beneficial interest with preference rights, including Preferred
Shares, having a par value of $0.01 per share, in one or more series, with
rights as determined by the Board of Trustees, by action of the Board of
Trustees without the approval of the Shareholders. The Fund's Amended By-Laws
currently authorize the number of shares of APS of each series set forth below
in "Description of Capital Structure." The APS will have a liquidation
preference of $25,000 per share plus an amount equal to accumulated but unpaid
dividends (whether or not earned or declared). See "Description of
APS--Liquidation rights."
The APS of each series will rank on parity with shares of any other series of
APS and with shares of other series of Preferred Shares of the Fund, as to the
payment of dividends and the distribution of assets upon liquidation. All shares
of APS carry one vote per share on all matters on which such shares are entitled
to be voted. APS, when issued, will be fully paid and, subject to matters
discussed in "Certain provisions of the Declaration of Trust," non-assessable
and have no preemptive, conversion or cumulative voting rights. The APS will not
be convertible into Common Shares or other capital stock of the Fund, and the
holders thereof will have no preemptive or cumulative voting rights.
DIVIDENDS AND DIVIDEND PERIODS
GENERAL
After the Initial Dividend Period, each Subsequent Dividend Period for the APS
will generally consist of seven days, in the cases of Series A, Series B, Series
C and Series D APS (a "7-Day Dividend Period"), twenty-eight days, in the cases
of Series E and Series F APS (a "28-Day Dividend Period") and sixty-three days,
in the case of Series G APS (a "63-Day Dividend Period"); provided, however,
that prior to any Auction, the Fund may elect, subject to certain limitations
described herein, upon giving notice to holders thereof, a Special Dividend
Period as discussed below. The holders of the Fund's APS will be entitled to
receive, when, as and if declared by that Fund's Board of Trustees, out of funds
legally available therefor, cumulative cash dividends on their APS, at the
Applicable Rate determined as set forth below under "Determination of Dividend
Rate," payable on the dates set forth below. Dividends on the APS of the Fund so
declared and payable shall be paid in preference to and in priority over any
dividends declared and payable on the Fund's Common Shares.
Dividends on the APS will accumulate from the date on which the Fund originally
issues the APS (the "Date of Original Issue") and will be payable on the APS on
the dates described below. Dividends on the APS with respect to the Initial
Dividend Period shall be payable on the applicable Initial Dividend Payment
Date. Following the Initial Dividend Payment Date, dividends on the APS will
generally be payable either (i) with respect to any 7-Day Dividend Period, any
28-Day Dividend Period and any Special Dividend Period of 28 or fewer days, on
the day next succeeding the last day thereof or (ii) with respect to any 63-Day
Dividend Period and any Special Dividend Period of more than 28 days, monthly on
the first Business Day of each calendar month and on the day next succeeding the
last day thereof (each such date referred to in clause (i) or (ii) being
referred to herein as a "Normal Dividend Payment Date"), except that if such
Normal Dividend Payment Date is not a Business Day, the Dividend Payment Date
shall be the first Business Day next succeeding such Normal Dividend Payment
Date. Although any particular Dividend Payment Date may not occur on the
originally scheduled date because of the exceptions discussed above, the next
succeeding Dividend Payment Date, subject to such exceptions, will occur on the
next Business Day following originally scheduled date. If for any reason a
Dividend Payment Date cannot be fixed as described above, then the Board of
Trustees shall fix the Dividend Payment Date. The Board of Trustees by
resolution prior to authorization of a dividend by the Board of Trustees may
change a Dividend Payment Date if such change does not adversely affect the
contract rights of the holders of APS set forth in the Amended By-Laws. The
Initial Dividend Period, 7-Day Dividend Periods, 28-Day Dividend Periods, 63-Day
--------------------------------------------------------------------------------
27
DESCRIPTION OF APS
--------------------------------------------------------------------------------
Dividend Periods and Special Dividend Periods are hereinafter sometimes referred
to as "Dividend Periods." Each dividend payment date determined as provided
above is hereinafter referred to as a "Dividend Payment Date."
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.
Each dividend will be paid to the record holder of the APS, which holder is
expected to be the nominee of the Securities Depository. See "The
Auctions--General--Securities Depository." The Securities Depository will credit
the accounts of the Agent Members of the Existing Holders in accordance with the
Securities Depository's normal procedures which provide for payment in same-day
funds. The Agent Member of an Existing Holder will be responsible for holding or
disbursing such payments on the applicable Dividend Payment Date to such
Existing Holder in accordance with the instructions of such Existing Holder.
Dividends in arrears for any past Dividend Period may be declared and paid at
any time, without reference to any regular Dividend Payment Date, to the nominee
of the Securities Depository. Any dividend payment made on the APS first shall
be credited against the earliest declared but unpaid dividends accumulated with
respect to such shares.
Holders of the APS will not be entitled to any dividends, whether payable in
cash, property or stock, in excess of full cumulative dividends except as
described under "Non-payment period; late charge" below. No interest will be
payable in respect of any dividend payment or payments on the APS which may be
in arrears.
The amount of cash dividends per share of APS payable (if declared) on each
Dividend Payment Date shall 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 360, multiplying the amount so obtained by $25,000,
and rounding the amount so obtained to the nearest cent.
NOTIFICATION OF DIVIDEND PERIOD
With respect to each Dividend Period that is a Special Dividend Period, the
Fund, at its sole 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 will be a number of days (other than seven, in the cases of Series
A, Series B, Series C and Series D APS, other than twenty-eight, in the cases of
Series E and Series F APS, and other than sixty-three, in the case of Series G
APS), evenly divisible by seven, and not fewer than seven 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 of greater than 28 days (and any such request shall be null and void)
unless, for any Auction occurring after the initial Auction, Sufficient Clearing
Bids were made in the last occurring Auction and unless full cumulative
dividends and any amounts due with respect to redemptions prior to such date
have been paid in full. 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
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. Upon receiving such Request for Special Dividend Period, the
Broker-Dealers jointly shall determine whether, given the factors set forth
below, it is advisable that the Fund issue a Notice of Special Dividend Period
as contemplated by such Request for Special Dividend Period and the Optional
Redemption Price of the APS during such Special Dividend Period and the Specific
Redemption Provisions and shall give the
--------------------------------------------------------------------------------
28
DESCRIPTION OF APS
--------------------------------------------------------------------------------
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, (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.
If the Broker-Dealers shall not give the Fund and the Auction Agent a Response
by such second Business Day or if the Response states that given the factors set
forth above it is not advisable that the Fund give a Notice of Special Dividend
Period for the APS, the Fund may not give a Notice of Special Dividend Period in
respect of such Request for Special Dividend Period. In the event the Response
indicates that it is advisable that the Fund give a Notice of Special Dividend
Period for the APS, 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 (i) the duration of the Special Dividend Period, (ii) the
Optional Redemption Price as specified in the related Response and (iii) the
Specific Redemption Provisions, if any, as specified in the related Response.
The Fund also shall provide a copy of such Notice of Special Dividend Period to
Fitch and Moody's. The Fund shall not give a Notice of Special Dividend Period,
and, if such Notice of Special Dividend Period shall have been given already,
shall 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 APS Asset Coverage is not satisfied or the Fund shall
fail to maintain Fitch Eligible Assets or Moody's Eligible Assets with an
aggregate Discounted Value at least equal to the APS Basic Maintenance Amount,
on each of the two Valuation Dates immediately preceding the Business Day prior
to the relevant Auction Date on an actual basis and on a pro forma basis giving
effect to the proposed Special Dividend Period (using as a pro forma dividend
rate with respect to such Special Dividend Period the dividend rate which the
Broker-Dealers shall advise the Fund is an approximately equal rate for
securities similar to the APS with an equal dividend period), (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 related Auction
Date or (z) the Broker-Dealers jointly advise the Fund that, after consideration
of the factors listed above, they have concluded that it is advisable to give a
Notice of Revocation. The Fund also shall provide a copy of such Notice of
Revocation to Fitch and Moody's. If the Fund is prohibited from giving a Notice
of Special Dividend Period as a result of the factors enumerated in clause (x),
(y) or (z) 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 7-Day Dividend Period, in the cases of Series A, Series B,
Series C and Series D APS, a 28-Day Dividend Period in the cases of Series E and
Series F APS or a 63-Day Dividend Period in the case of Series G APS. In
addition, in the event Sufficient Clearing Bids are not made in any Auction or
an Auction is not held for any reason, the next succeeding Dividend Period will
be a 7-Day Dividend Period, in the cases of Series A, Series B, Series C and
Series D APS, a 28-Day Dividend Period in the cases of Series E and Series F APS
or a 63-Day Dividend Period in the case of Series G APS, and the Fund may not
again give a Notice of Special Dividend Period (and any such attempted notice
shall be null and void) until Sufficient Clearing Bids have been made in an
Auction with respect to a 7-Day Dividend Period, in the cases of Series A,
Series B, Series C and Series D APS, a 28-Day Dividend Period in the cases of
Series E and Series F APS or a 63-Day Dividend Period in the case of Series G
APS.
--------------------------------------------------------------------------------
29
DESCRIPTION OF APS
--------------------------------------------------------------------------------
DETERMINATION OF DIVIDEND RATE
The dividend rate on the APS during the period from and including the Date of
Original Issue for the APS to but excluding the Initial Dividend Payment Date
for the APS (the "Initial Dividend Period") will be the rate per annum set forth
on the inside cover page hereof. Commencing on the Initial Dividend Payment Date
for the APS, the Applicable Rate on the APS for each Subsequent Dividend Period,
which Subsequent Dividend Period shall be a period commencing on and including a
Dividend Payment Date and ending on and including the calendar day prior to the
next Dividend Payment Date (or last Dividend Payment Date in a Dividend Period
if there is more than one Dividend Payment Date), shall be equal to the rate per
annum that results from the Auction with respect to such Subsequent Dividend
Period. The Initial Dividend Period and Subsequent Dividend Period for the APS
is referred to herein as a "Dividend Period." Cash dividends shall be calculated
as set forth above under "Dividends--General."
NON-PAYMENT PERIOD; LATE CHARGE
A Non-Payment Period will commence if the Fund fails to (i) declare, prior to
the close of business on the second Business Day preceding any Dividend Payment
Date, for payment on or (to the extent permitted as described below) within
three Business Days after such Dividend Payment Date to the persons who held
such shares as of 12:00 noon, New York City time, on the Business Day preceding
such Dividend Payment Date, the full amount of any dividend on the APS payable
on such Dividend Payment Date or (ii) deposit, irrevocably in trust, in same-day
funds, with the Auction Agent by 12:00 noon, New York City time, (A) on such
Dividend Payment Date the full amount of any cash dividend on such shares (if
declared) payable on such Dividend Payment Date or (B) on any redemption date
for the APS called for redemption, the Mandatory Redemption Price per share of
such APS or, in the case of an optional redemption, the Optional Redemption
Price per share. Such Non-Payment Period will consist of the period commencing
on and including the aforementioned Dividend Payment Date or redemption date, as
the case may be, and ending on and including the Business Day on which, by 12:00
noon, New York City time, all unpaid cash dividends and unpaid redemption prices
shall have been so deposited or otherwise shall have been made available to the
applicable holders in same-day funds, provided that a Non-Payment Period for the
APS will not end unless the Fund shall have given at least five days' but no
more than 30 days' written notice of such deposit or availability to the Auction
Agent, the Securities Depository and all holders of the APS of such series.
Notwithstanding the foregoing, the failure by the Fund to deposit funds as
provided for by clauses (ii) (A) or (ii) (B) above within three Business Days
after any Dividend Payment Date or redemption date, as the case may be, in each
case to the extent contemplated below, shall not constitute a "Non-Payment
Period." The Applicable Rate for each Dividend Period for the APS of any series,
commencing during a Non-Payment Period, will be equal to the Non-Payment Period
Rate; and each Dividend Period commencing after the first day of, and during, a
Non-Payment Period shall be a 7-Day Dividend Period, in the cases of Series A,
Series B, Series C and Series D APS, a 28-Day Dividend Period in the cases of
Series E and Series F APS or a 63-Day Dividend Period in the case of Series G
APS. Any dividend on the APS due on any Dividend Payment Date for such shares
(if, prior to the close of business on the second Business Day preceding such
Dividend Payment Date, the Fund has declared such dividend payable on such
Dividend Payment Date to the persons who held such shares as of 12:00 noon, New
York City time, on the Business Day preceding such Dividend Payment Date) or
redemption price with respect to such shares not paid to such persons when due
may be paid to such persons in the same form of funds by 12:00 noon, New York
City time, on any of the first three Business Days after such Dividend Payment
Date or due date, as the case may be, provided that such amount is accompanied
by a late charge calculated for such period of non-payment at the Non-Payment
Period Rate applied to the amount of such non-payment based on the actual number
of days comprising such period divided by 360. In the case of a willful failure
of the Fund to pay a dividend on a Dividend Payment Date or to redeem any APS on
the date set for such redemption, the preceding
--------------------------------------------------------------------------------
30
DESCRIPTION OF APS
--------------------------------------------------------------------------------
sentence shall not apply and the Applicable Rate for the Dividend Period
commencing during the Non-Payment Period resulting from such failure shall be
the Non-Payment Period Rate. For the purposes of the foregoing, payment to a
person in same-day funds on any Business Day at any time will be considered
equivalent to payment to that person in New York Clearing House (next-day) funds
at the same time on the preceding Business Day, and any payment made after 12:00
noon, New York City time, on any Business Day shall be considered to have been
made instead in the same form of funds and to the same person before 12:00 noon,
New York City time, on the next Business Day.
The Non-Payment Period Rate initially will be 200% of the applicable Reference
Rate, provided that the Board of Trustees of the Fund shall have the authority
to adjust, modify, alter or change from time to time the initial Non-Payment
Period Rate if the Board of Trustees of the Fund determines and Fitch and
Moody's (or any Substitute Rating Agency in lieu of Fitch and Moody's in the
event such party shall not rate the APS) advises the Fund in writing that such
adjustment, modification, alteration or change will not adversely affect its
then-current rating on the APS.
RESTRICTIONS ON DIVIDENDS AND OTHER PAYMENTS
Under the 1940 Act, the Fund may not declare dividends or make other
distributions on Common Shares or purchase any such shares if, at the time of
the declaration, distribution or purchase, as applicable (and after giving
effect thereto), asset coverage (as defined in the 1940 Act) with respect to the
outstanding APS would be less than 200% (or such other percentage as in the
future may be required by law). Under the Code, the Fund must, among other
things, distribute each year at least 90% of the sum of its investment company
taxable income and certain other income in order to maintain its qualification
for tax treatment as a regulated investment company. The foregoing limitations
on dividends, other distributions and purchases in certain circumstances may
impair the Fund's ability to maintain such qualification. See "Taxes."
Upon any failure to pay dividends on the APS for two years or more, the holders
of the APS will acquire certain additional voting rights. See "Voting rights"
below.
For so long as any APS are outstanding, the Fund will not declare, pay or set
apart for payment any dividend or other distribution (other than a dividend or
distribution paid in shares of, or options, warrants or rights to subscribe for
or purchase, Common Shares or other stock, if any, ranking junior to the APS as
to dividends or upon liquidation) in respect of Common Shares or any other
shares of the Fund ranking junior to or on a parity with the APS as to dividends
or upon liquidation, or call for redemption, redeem, purchase or otherwise
acquire for consideration any Common Shares or any other such junior shares
(except by conversion into or exchange for shares of the Fund ranking junior to
APS as to dividends and upon liquidation) or any such parity shares (except by
conversion into or exchange for stock of the Fund ranking junior to or on a
parity with APS as to dividends and upon liquidation), unless (A) immediately
after such transaction, the Fund would have Fitch Eligible Assets and Moody's
Eligible Assets with an aggregate Discounted Value equal to or greater than the
APS Basic Maintenance Amount, and the 1940 Act APS Asset Coverage (see "Rating
agency guidelines and asset coverage" and "Redemption" below) would be
satisfied, (B) full cumulative dividends on the 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, and
(C) the Fund has redeemed the full number of APS required to be redeemed by any
provision for mandatory redemption contained in the Amended By-Laws.
REDEMPTION
MANDATORY REDEMPTION
The Fund will be required to redeem, out of funds legally available therefor, at
the Mandatory Redemption Price per share, the APS to the extent permitted under
the 1940 Act and Massachusetts
--------------------------------------------------------------------------------
31
DESCRIPTION OF APS
--------------------------------------------------------------------------------
law, on a date fixed by the Board of Trustees, if the Fund fails to maintain
Fitch Eligible Assets or Moody's Eligible Assets with an aggregate Discounted
Value equal to or greater than the APS Basic Maintenance Amount or to satisfy
the 1940 Act APS Asset Coverage and such failure is not cured on or before the
APS Basic Maintenance Cure Date or the 1940 Act Cure Date (herein collectively
referred to as a "Cure Date"), as the case may be. "Mandatory Redemption Price"
of APS means $25,000 per share plus an amount equal to accumulated but unpaid
dividends (whether or not earned or declared) to the date fixed for redemption.
Any such redemption will be limited to the lesser number of APS necessary to
restore the Discounted Value or the 1940 Act APS Asset Coverage, as the case may
be, or the maximum number that can be redeemed with funds legally available
under the Declaration of Trust and applicable law.
OPTIONAL REDEMPTION
To the extent permitted under the 1940 Act and under Massachusetts law, upon
giving a Notice of Redemption, as provided below, the Fund, at its option, may
redeem the APS, in whole or in part, out of funds legally available therefor, at
the Optional Redemption Price per share on any Dividend Payment Date; provided
that no APS may be redeemed at the option of the Fund during (a) the Initial
Dividend Period with respect to the APS or (b) a Non-Call Period to which such
share is subject. "Optional Redemption Price" means $25,000 per share of APS
plus an amount equal to accumulated but unpaid dividends (whether or not earned
or declared) to the date fixed for redemption plus any applicable redemption
premium, if any, attributable to the designation of a Premium Call Period. The
Fund has the authority to redeem the APS for any reason and may redeem all or
part of the outstanding APS if it anticipates that the Fund's leveraged capital
structure will result in a lower rate of return to holders of Common Shares for
any significant period of time than that obtainable if the Common Shares were
unleveraged.
Notwithstanding the provisions for redemption described above, no APS shall be
subject to optional redemption (i) unless all dividends in arrears on all
remaining outstanding APS, and all capital shares of the Fund ranking on a
parity with the APS with respect to the payment of dividends or upon
liquidation, have been or are being contemporaneously paid or declared and set
aside for payment and (ii) if redemption thereof would result in the Fund's
failure to maintain Fitch Eligible Assets and Moody's Eligible Assets with an
aggregate Discounted Value equal to or greater than the APS Basic Maintenance
Amount; provided, however, that the foregoing shall not prevent the purchase or
acquisition of all outstanding APS of such series pursuant to a successful
completion of an otherwise lawful purchase or exchange offer made on the same
terms to, and accepted by, holders of all outstanding APS of such series.
LIQUIDATION RIGHTS
Upon any liquidation, dissolution or winding up of the Fund, whether voluntary
or involuntary, the holders of APS will be entitled to receive, out of the
assets of the Fund available for distribution to Shareholders, before any
distribution or payment is made upon any Common Shares or any other shares of
beneficial interest of the Fund ranking junior in right of payment upon
liquidation of APS, $25,000 per share together with the amount of any dividends
accumulated but unpaid (whether or not earned or declared) thereon to the date
of distribution, and after such payment the holders of APS will be entitled to
no other payment. If such assets of the Fund shall be insufficient to make the
full liquidation payment on outstanding APS and liquidation payments on any
other outstanding class or series of Preferred Shares of the Fund ranking on a
parity with the APS as to payment upon liquidation, then such assets will be
distributed among the holders of APS and the holders of shares of such other
class or series ratably in proportion to the respective preferential amounts to
which they are entitled. After payment of the full amount of liquidation
distribution to which they are entitled, the holders of APS will not be entitled
to any further participation in any distribution of assets by the
--------------------------------------------------------------------------------
32
DESCRIPTION OF APS
--------------------------------------------------------------------------------
Fund. A consolidation, merger or share exchange of the Fund with or into any
other entity or entities or a sale, whether for cash, shares of stock,
securities or properties, of all or substantially all or any part of the assets
of the Fund shall not be deemed or construed to be a liquidation, dissolution or
winding up of the Fund.
RATING AGENCY GUIDELINES AND ASSET COVERAGE
The Fund will be required to satisfy two separate asset maintenance requirements
under the terms of the Amended By-Laws. These requirements are summarized below.
1940 ACT APS ASSET COVERAGE
The Fund will be required under the Amended 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 beneficial interests 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 beneficial interests of a
closed-end investment company as a condition of paying dividends on its common
shares) ("1940 Act APS Asset Coverage"). If the Fund fails to maintain 1940 Act
APS 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 APS 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
October 31, 2003 and the APS had been issued as of such date will be as follows:
Value of Fund assets less liabilities not
constituting senior securities $1,991,467,717
--------------------------------------------- -------------- = 284%
Senior securities representing indebtedness $ 700,000,000
plus liquidation value of APS
APS BASIC MAINTENANCE AMOUNT
The Fund intends that, so long as APS are outstanding, the composition of its
portfolio will reflect guidelines established by Fitch and Moody's in connection
with the Fund's receipt of a rating for such shares on or prior to their Date of
Original Issue of at least AAA/Aaa from Fitch and Moody's. Fitch and Moody's,
which are rating agencies, issue ratings for various securities reflecting the
perceived creditworthiness of such securities. The guidelines described below
have been developed by Fitch and Moody's in connection with issuances of
asset-backed and similar securities, including debt obligations and variable
rate preferred shares, generally on a case-by-case basis through discussions
with the issuers of these securities. The guidelines are designed to ensure that
assets underlying outstanding debt or preferred shares will be varied
sufficiently and will be of sufficient quality and amount to justify investment
grade ratings. The guidelines do not have the force of law but have been adopted
by the Fund in order to satisfy current requirements necessary for Fitch and
Moody's to issue the above-described ratings for APS, which ratings generally
are relied upon by institutional investors in purchasing such securities. The
guidelines provide a set of tests for portfolio composition and asset coverage
that supplement (and in some cases are more restrictive than) the applicable
requirements under the 1940 Act.
The Fund intends to maintain a Discounted Value for its portfolio at least equal
to the APS Basic Maintenance Amount. Both Fitch and Moody's have established
guidelines for determining Discounted Value. These guidelines define eligible
portfolio assets ("Fitch Eligible Assets" and "Moody's Eligible Assets"). To the
extent any particular portfolio holding does not satisfy these guidelines, all
or a
--------------------------------------------------------------------------------
33
DESCRIPTION OF APS
--------------------------------------------------------------------------------
portion of such holding's value will not be included in the calculation of
Discounted Value of the Fund's portfolio assets. The Fitch and Moody's
guidelines do not impose any limitations on the percentage of Fund 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 of the Fund at any time may vary depending upon the rating,
diversification and other characteristics of eligible assets included in the
portfolio, although it is not anticipated in the normal course of business the
value of such assets will exceed 20% of the Fund's total assets. The APS basic
maintenance amount includes the sum of (a) the aggregate liquidation preference
of APS then outstanding and (b) certain accrued and projected payment
obligations of the Fund.
Upon any failure to maintain the required aggregate Discounted Value, the Fund
will seek to alter the composition of its portfolio to retain a Discounted Value
at least equal to the APS Basic Maintenance Amount on or prior to the APS Basic
Maintenance Cure Date, thereby incurring additional transaction costs and
possible losses and/or gains on dispositions of portfolio securities. To the
extent any such failure is not cured in a timely manner, the APS will be subject
to mandatory redemption. See "Description of APS--Redemption." The APS Basic
Maintenance Amount includes the sum of (i) the aggregate liquidation value of
APS then outstanding and (ii) certain accrued and projected payment obligations
of the Fund.
The Fund may, but is not required to, adopt any modifications to these
guidelines that hereafter may be established by Fitch and Moody's. Failure to
adopt any such modifications, however, may result in a change in the ratings
described above or a withdrawal of ratings altogether. In addition, any rating
agency providing a rating for the APS, at any time, may change or withdraw any
such rating. As set forth in the Amended By-Laws, the Fund's Board of Trustees,
without Shareholder approval, may modify certain definitions or restrictions
that have been adopted by the Fund pursuant to the Rating Agency guidelines,
provided the Board of Trustees has obtained written confirmation from Fitch or
Moody's that any such change would not impair the ratings then assigned by Fitch
or Moody's to the APS as applicable.
As recently described by Fitch and Moody's, a preferred shares rating is an
assessment of the capacity and willingness of an issuer to pay preferred shares
obligations. The ratings on the APS are not recommendations to purchase, hold or
sell APS, inasmuch as the ratings do not comment as to market price or
suitability for a particular investor, nor do the rating agency guidelines
described above address the likelihood that a holder of APS will be able to sell
such shares in an Auction. The ratings are based on current information
furnished to Fitch and Moody's by the Fund and the Adviser and information
obtained from other sources. The ratings may be changed, suspended or withdrawn
as a result of changes in, or the unavailability of, such information. The
Common Shares have not been rated by a Rating Agency.
A Rating Agency's guidelines will apply to the Fund's APS only so long as such
agency is rating such shares. The Fund will pay certain fees to each rating
agency that rates the Fund's APS.
VOTING RIGHTS
Except as otherwise indicated in this Prospectus and except as otherwise
required by applicable law, holders of APS of the Fund will be entitled to one
vote per share on each matter submitted to a vote of Shareholders and will vote
together with holders of Common Shares and other Preferred Shares of that Fund
as a single class.
In connection with the election of the Fund's Trustees, holders of the APS and
any other Preferred Shares, voting as a separate class, shall be entitled at all
times to elect two of the Fund's Trustees, and the remaining Trustees will be
elected by holders of Common Shares and APS and any other Preferred Shares,
voting together as a single class. In addition, if at any time dividends on
outstanding APS shall
--------------------------------------------------------------------------------
34
DESCRIPTION OF APS
--------------------------------------------------------------------------------
be unpaid in an amount equal to at least two full years' dividends thereon or if
at any time holders of any Preferred Shares are entitled, together with the
holders of APS, to elect a majority of the Trustees of the Fund under the 1940
Act, then the number of Trustees constituting the Board of Trustees
automatically shall be increased by the smallest number that, when added to the
two Trustees elected exclusively by the holders of APS and any other Preferred
Shares as described above, would constitute a majority of the Board of Trustees
as so increased by such smallest number, and at a special meeting of
Shareholders which will be called and held as soon as practicable, and at all
subsequent meetings at which Trustees are to be elected, the holders of the APS
and any other Preferred Shares, voting as a separate class, will be entitled to
elect the smallest number of additional Trustees that, together with the two
Trustees which such holders in any event will be entitled to elect, constitutes
a majority of the total number of Trustees of the Fund as so increased. 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 APS and any other
Preferred Shares for all past Dividend Periods, the additional voting rights of
the holders of APS and any other Preferred Shares as described above shall
cease, and the terms of office of all of the additional Trustees elected by the
holders of APS and any other Preferred Shares (but not of the Trustees with
respect to whose election the holders of Common Shares were entitled to vote or
the two Trustees the holders of APS and any other Preferred Shares have the
right to elect in any event) will terminate automatically.
The affirmative vote of a majority of the votes entitled to be cast by holders
of outstanding APS and any other Preferred Shares, voting as a separate class,
will be required to (i) authorize, create or issue any class or series of shares
ranking prior to the APS or any other series of Preferred Shares with respect to
the payment of dividends or the distribution of assets on liquidation; provided,
however, that no vote is required to authorize the issuance of another class of
Preferred Shares which are substantially identical in all respects to the APS or
(ii) amend, alter or repeal the provisions of the Declaration of Trust or the
Amended By-Laws, whether by merger, consolidation or otherwise, so as adversely
to affect any of the contract rights expressly set forth in the Declaration of
Trust or the Amended By-Laws of holders of APS or any other Preferred Shares. To
the extent permitted under the 1940 Act, in the event shares of more than one
series of APS are outstanding, the Fund shall not approve any of the actions set
forth in clause (i) or (ii) which adversely affects the contract rights
expressly set forth in the Declaration of Trust of a holder of shares of a
series of APS differently than those of a holder of shares of any other series
of APS without the affirmative vote of at least a majority of votes entitled to
be cast by holders of APS of each series adversely affected and outstanding at
such time (each such adversely affected series voting separately as a class).
The Board of Trustees, however, without Shareholder approval, may amend, alter
or repeal any or all of the various Rating Agency guidelines described herein in
the event the Fund receives confirmation from the Rating Agencies that any such
amendment, alteration or repeal would not impair the ratings then assigned to
the APS. Unless a higher percentage is provided for under "Certain provisions in
the Declaration of Trust," the affirmative vote of a majority of the votes
entitled to be cast by holders of outstanding APS and any other Preferred
Shares, voting as a separate 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 including, among other things, changes in the Fund's investment
objective or changes in the investment restrictions described as fundamental
policies under "Investment objectives and policies." The class vote of holders
of APS and any other Preferred Shares described above in each case will be in
addition to a separate vote of the requisite percentage of Common Shares and APS
and any other Preferred Shares, voting together as a single class, necessary to
authorize the action in question.
The foregoing voting provisions will not apply to the APS if, at or prior to the
time when the act with respect to which such vote otherwise would be required
shall be effected, such shares shall have been
--------------------------------------------------------------------------------
35
DESCRIPTION OF APS
--------------------------------------------------------------------------------
(i) redeemed or (ii) called for redemption and sufficient funds shall have been
deposited in trust to effect such redemption.
The Auctions
GENERAL
Holders of the APS will be entitled to receive cumulative cash dividends on
their shares when, as and if declared by the Board of Trustees of the Fund, out
of the funds legally available therefor, on the Initial Dividend Payment Date
with respect to the Initial Dividend Period and, thereafter, on each Dividend
Payment Date with respect to a Subsequent Dividend Period at the rate per annum
equal to the Applicable Rate for each such Dividend Period.
The provisions of the Amended 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 therefor 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 Amended By-Laws (the "Auction Procedures") in which persons
determine to hold or offer to purchase or sell the APS. The Amended Bylaws,
which contain the Auction Procedures, are attached as Appendix B to the Fund's
Statement of Additional Information. Each periodic operation of such procedures
with respect to the APS is referred to hereinafter 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 APS--Dividends
and Dividend Periods--Determination of dividend rate."
AUCTION AGENT AGREEMENT
The Fund will enter into an agreement (the "Auction Agent Agreement") with
Deutsche Bank Trust Company Americas ("Auction Agent" and together with any
successor bank or trust company or other entity entering into a similar
agreement with the Fund, 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 for the APS. The Fund will pay the
Auction Agent compensation for its services under the Auction Agent Agreement.
The Auction Agent may terminate the Auction Agent Agreement upon notice to the
Fund, which termination may be no earlier than 60 days following delivery of
such notice. If the Auction Agent resigns, 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 Agent Agreement. The Fund may
terminate the Auction Agent Agreement, provided that prior to such termination
the Fund shall have entered into such an agreement with respect thereto with a
successor Auction Agent.
In addition to serving as the Auction Agent, the Auction Agent will be the
transfer agent, registrar, dividend disbursing agent and redemption agent for
the APS. The Auction Agent, however, will serve merely as the agent of the Fund,
acting in accordance with the Fund's instructions and will not be responsible
for any evaluation or verification of any matters certified to it.
BROKER-DEALER AGREEMENTS
The Auctions require the participation of one or more broker-dealers. The
Auction Agent will enter into agreements with UBS Securities LLC, Merrill Lynch,
Pierce, Fenner & Smith Incorporated, Citigroup Global Markets Inc., Wachovia
Capital Markets, LLC and A.G. Edwards & Sons, Inc. with respect to the Fund and
may enter into similar agreements (collectively, the "Broker-Dealer Agreements")
with one or more other broker-dealers (collectively, the "Broker-Dealers")
selected by
--------------------------------------------------------------------------------
36
THE AUCTIONS
--------------------------------------------------------------------------------
the Fund, which provide for the participation of such Broker-Dealers in
Auctions. A Broker-Dealer Agreement may be terminated by the Auction Agent or a
Broker-Dealer on five days' notice to the other party, provided that the
Broker-Dealer Agreement with UBS Securities LLC, Merrill Lynch, Pierce, Fenner &
Smith Incorporated and Citigroup Global Markets Inc. may not be terminated
without the prior written consent of the Fund, which consent may not be
unreasonably withheld.
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
7-Day Dividend Period, 28-Day Dividend Period or 63-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 shares as a result of the Auction, (B)
a Submitted Bid of a Potential Beneficial Owner that resulted in such Potential
Beneficial Owner purchasing such shares 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.
SECURITIES DEPOSITORY
The Depository Trust Company initially will act as the Securities Depository for
the Agent Members with respect to the APS. One or more registered certificates
for all of the shares of each series of APS initially will be registered in the
name of Cede & Co., as nominee of the Securities Depository. The certificate
will bear a legend to the effect that such certificate is issued subject to the
provisions restricting transfers of the APS contained in the Amended By-Laws.
Cede & Co. initially will be the holder of record of all APS, and Beneficial
Owners will not be entitled to receive certificates representing their ownership
interest in such shares. 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 Amended By-Laws set
forth in Appendix B to the Fund's Statement of Additional Information.
--------------------------------------------------------------------------------
37
THE AUCTIONS
--------------------------------------------------------------------------------
AUCTION DATE
An Auction to determine the Applicable Rate for the APS offered hereby for each
Dividend Period for such shares (other than the Initial Dividend Period
therefor) will be held on the last Business Day preceding the first day of such
Dividend Period, which first day is also the Dividend Payment Date for the
preceding Dividend Period (the date of each Auction being referred to herein as
an "Auction Date").
The Auction Date and the first day of the related Dividend Period (both of which
must be Business Days) need not be consecutive calendar days. See "Description
of APS -- Dividends and Dividend Periods" for information concerning the
circumstances under which a Dividend Payment Date may fall on a date other than
the days specified above, which may affect the Auction Date.
ORDERS BY BENEFICIAL OWNERS, POTENTIAL BENEFICIAL OWNERS, EXISTING HOLDERS AND
POTENTIAL HOLDERS
On or prior to each Auction Date for a series of APS:
(a) each Beneficial Owner may submit to its Broker-Dealer by telephone
orders ("Orders") with respect to a series of APS as follows:
(i) Hold Order--indicating the number of outstanding APS, if any, that
such Beneficial Owner desires to continue to hold without regard to
the Applicable Rate for the next Dividend Period for such shares;
(ii) Bid--indicating the number of outstanding APS, if any, that such
Beneficial Owner desires to continue to hold, provided that the
Applicable Rate for the next Dividend Period for such shares is
not less than the rate per annum then specified by such Beneficial
Owner; and/or
(iii) Sell Order--indicating the number of outstanding APS, if any, that
such Beneficial Owner offers to sell without regard to the
Applicable Rate for the next Dividend Period for such shares; and
(b) Broker-Dealers will contact customers who are Potential Beneficial
Owners of APS to determine whether such Potential Beneficial Owners
desire to submit Bids indicating the number of APS which they offer to
purchase provided that the Applicable Rate for the next Dividend Period
for such shares is not less than the rates per annum specified in such
Bids.
A Beneficial Owner or a Potential Beneficial Owner placing an Order, including a
Broker-Dealer acting in such capacity for its own account, is hereinafter
referred to as a "Bidder" and collectively as "Bidders." 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.
In an Auction, a Beneficial Owner may submit different types of Orders with
respect to APS then held by such Beneficial Owner, as well as Bids for
additional APS. For information concerning the priority given to different types
of Orders placed by Beneficial Owners, see "Submission of Orders by Broker-
Dealers to Auction Agent" below.
The Maximum Applicable Rate for the APS will be the Applicable Percentage of the
Reference Rate. 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. The Auction Agent will not
round the applicable Reference Rate as part of its calculation of the Maximum
Applicable Rate.
--------------------------------------------------------------------------------
38
THE AUCTIONS
--------------------------------------------------------------------------------
The Maximum Applicable Rate for the APS will depend on the credit rating or
ratings assigned to such shares. The Maximum Applicable Rate for any Dividend
Period will be the higher of the Applicable Percentage of the Reference Rate or
the Applicable Spread Over the Reference Rate. The Applicable Percentage of the
Reference Rate or Applicable Spread Over the Reference Rate will be determined
based on the credit rating assigned on such date to such shares by Fitch and
Moody's (or if Fitch or Moody's shall not make such rating available, the
equivalent of such rating by a Substitute Rating Agency) as follows:
CREDIT RATINGS
---------------------------- APPLICABLE PERCENTAGE APPLICABLE SPREAD
MOODY'S S&P/FITCH OF REFERENCE RATE OVER REFERENCE RATE
------------- ------------- --------------------- -------------------
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
There is no minimum Applicable Rate in respect of any Dividend Period.
The Fund will take all reasonable action necessary to enable Fitch and Moody's
to provide a rating for the APS. If Fitch or Moody's shall not make such a
rating available, the Underwriters or their affiliates and successors, after
consultation with the Fund, will select another rating agency (a "Substitute
Rating Agency") to act as a Substitute Rating Agency.
Any Bid by a Beneficial Owner specifying a rate per annum higher than the
Maximum Applicable Rate will be treated as a Sell Order, and any Bid by a
Potential Beneficial Owner specifying a rate per annum higher than the Maximum
Applicable Rate will not be considered. See "Determination of Sufficient
Clearing Bids, Winning Bid Rate and Applicable Rate" and "Acceptance and
rejection of Submitted Bids and Submitted Sell Orders and allocation of Shares."
Neither the Fund nor the Auction Agent will be responsible for a Broker-Dealer's
failure to comply with the foregoing. A Broker-Dealer also may hold APS in its
own account as a Beneficial Owner. A Broker-Dealer thus may submit Orders to the
Auction Agent as a Beneficial Owner or a Potential Beneficial Owner and
therefore participate in an Auction as an Existing Holder or Potential Holder on
behalf of both itself and its customers. Any Order placed with the Auction Agent
by a Broker-Dealer as or on behalf of a Beneficial Owner or a Potential
Beneficial Owner will be treated in the same manner as an Order placed with a
Broker-Dealer by a Beneficial Owner or a Potential Beneficial Owner. Similarly,
any failure by a Broker-Dealer to submit to the Auction Agent an Order in
respect of any APS held by it or its customers who are Beneficial Owners will be
treated in the same manner as a Beneficial Owner's failure to submit to its
Broker-Dealer an Order in respect to APS held by it, as described in the next
paragraph. Inasmuch as a Broker-Dealer participates in an Auction as an Existing
Holder or a Potential Holder only to represent the interests of a Beneficial
Owner or Potential Beneficial Owner, whether it be its customers or itself, all
discussion herein relating to the consequences of an Auction for Existing
Holders and Potential Holders also applies to the underlying beneficial
ownership interests represented thereby. For information concerning the priority
given to different types of Orders placed by Existing Holders, see "Submission
of Orders by Broker-Dealers to Auction Agent." Each purchase or sale in an
Auction will be settled on the Business Day next succeeding the Auction Date at
a price per share equal to $25,000. See "Notification of results; settlement."
If one or more Orders covering in the aggregate all of the outstanding APS held
by a Beneficial Owner are not submitted to the Auction Agent prior to the
Submission Deadline, either because a Broker-Dealer failed to contact such
Beneficial Owner or otherwise, the Auction Agent shall deem a Hold Order (in the
case of an Auction relating to a Dividend Period of 91 days or less) and a Sell
Order (in
--------------------------------------------------------------------------------
39
THE AUCTIONS
--------------------------------------------------------------------------------
the case of an Auction relating to a Special Dividend Period of longer than 91
days) to have been submitted on behalf of such Beneficial Owner covering the
number of outstanding APS held by such Beneficial Owner and not subject to
Orders submitted to the Auction Agent.
If all of the outstanding APS are subject to Submitted Hold Orders, the Dividend
Period next succeeding the Auction automatically shall be the same length as the
immediately preceding Dividend Period, and the Applicable Rate for the next
Dividend Period for all the APS will be 60% of the Reference Rate on the date of
the applicable Auction.
For the purposes of an Auction, the APS for which the Fund shall have given
notice of redemption and deposited moneys therefor with the Auction Agent in
trust or segregated in an account at the Fund's custodian bank for the benefit
of the Auction Agent, as set forth under "Description of APS--Redemption," will
not be considered as outstanding and will not be included in such Auction.
Pursuant to the Amended By-Laws of the Fund, the Fund will be prohibited from
reissuing and its affiliates (other than the underwriters) will be prohibited
from transferring (other than to the Fund) any APS they may acquire. Neither the
Fund nor any affiliate of the Fund (other than the Underwriters) may submit an
Order in any Auction, except that an affiliate of the Fund that is a
Broker-Dealer may submit an Order.
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 all
Orders obtained by it for the Auction 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 on 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 (0.001) of 1%. 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 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 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,
--------------------------------------------------------------------------------
40
THE AUCTIONS
--------------------------------------------------------------------------------
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.
DETERMINATION OF SUFFICIENT CLEARING BIDS, WINNING BID RATE AND APPLICABLE RATE
Not earlier than the Submission Deadline for each Auction, the Auction Agent
will assemble all Orders submitted or deemed submitted to it by the
Broker-Dealers (each such "Hold Order," "Bid" or "Sell Order" as submitted or
deemed submitted by a Broker-Dealer hereinafter being referred to as a
"Submitted Hold Order," a "Submitted Bid" or a "Submitted Sell Order," as the
case may be, or as a "Submitted Order") and will determine the excess of the
number of outstanding APS over the number of outstanding APS subject to
Submitted Hold Orders (such excess being referred to as the "Available APS") and
whether Sufficient Clearing Bids have been made in such Auction. Sufficient
Clearing Bids will have been made if the number of outstanding APS that are the
subject of Submitted Bids of Potential Holders with rates per annum not higher
than the Maximum Applicable Rate equals or exceeds the number of outstanding
shares that are the subject of Submitted Sell Orders (including the number of
shares subject to Bids of Existing Holders specifying rates per annum higher
than the Maximum Applicable Rate). If Sufficient Clearing Bids have been made,
the Auction Agent will determine the lowest rate per annum specified in the
Submitted Bids (the "Winning Bid Rate") which would result in the number of
shares subject to Submitted Bids specifying such rate per annum or a lower rate
per annum being at least equal to the available APS. If Sufficient Clearing Bids
have been made, the Winning Bid Rate will be the Applicable Rate for the next
Dividend Period for the APS then outstanding. If Sufficient Clearing Bids have
not been made (other than because all outstanding APS are the subject of
Submitted Hold Orders), the Dividend Period next following the Auction
automatically will be a 7-Day Dividend Period, in the cases of Series A, Series
B, Series C and Series D APS, a 28-Day Dividend Period, in the cases of Series E
and Series F APS, and a 63-Day Dividend Period, in the case of Series G APS, and
the Applicable Rate for such Dividend Period will be equal to the Maximum
Applicable Rate.
If Sufficient Clearing Bids have not been made, Beneficial Owners that have
Submitted Sell Orders will not be able to sell in the Auction all, and may not
be able to sell any, of the APS subject to such Submitted Sell Orders. See
"Acceptance and rejection of Submitted Bids and Submitted Sell Orders and
allocation of Shares." Thus, under some circumstances, Beneficial Owners may not
have liquidity of investment.
ACCEPTANCE AND REJECTION OF SUBMITTED BIDS AND SUBMITTED SELL ORDERS AND
ALLOCATION OF SHARES
Based on the determinations described under "Determination of Sufficient
Clearing Bids, Winning Bid Rate and Applicable Rate" and subject to the
discretion of the Auction Agent to round, 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 shares of
--------------------------------------------------------------------------------
41
THE AUCTIONS
--------------------------------------------------------------------------------
a series of APS that is fewer than the number of shares of such series 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. See the Fund's Amended
By-Laws set forth in Appendix B to the Fund's Statement of Additional
Information.
NOTIFICATION OF RESULTS; 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 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.
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.
The following is a simplified example of how a typical Auction works. Assume
that the Fund has 1,000 outstanding APS and three current holders. The three
current holders and three potential holders submit orders through Broker-Dealers
at the Auction:
Current Holder A....................... Owns 500 shares, wants to sell Bid order of 2.1% rate for all
all 500 shares if Applicable 500 shares
Rate is less than 2.1%
Current Holder B....................... Owns 300 shares, wants to hold Hold Order--will take the
Applicable Rate
Current Holder C....................... Owns 200 shares, wants to sell Bid order of 1.9% rate for all
all 200 shares if Applicable 200 shares
Rate is less than 1.9%
Potential Holder D..................... Wants to buy 200 shares Places order to buy at or above
2.0%
Potential Holder E..................... Wants to buy 300 shares Places order to buy at or above
1.9%
Potential Holder F..................... Wants to buy 200 shares Places 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). Therefore, the Applicable Rate will be 2.0%. Current
Holders B and C will continue to own their shares. Current Holder A will sell
its shares because A's dividend rate bid was higher than the
--------------------------------------------------------------------------------
42
THE AUCTIONS
--------------------------------------------------------------------------------
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 shares because its bid rate was above the
Applicable Rate.
SECONDARY MARKET TRADING AND TRANSFER OF APS
The 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 is subject to variables to be determined at the time of the trade
by the Broker-Dealers). The APS will not be registered on any stock exchange or
on any automated quotation system. An increase in the level of interest rates,
particularly during any Long-Term Dividend Period, likely will have an adverse
effect on the secondary market price of the APS, and a selling Shareholder may
sell APS between Auctions at a price per share of less than $25,000.
Taxes
GENERAL
The Fund intends to elect and to qualify for the special tax treatment afforded
regulated investment companies ("RICs") under the Code. As long as the Fund so
qualifies, in any taxable year in which it distributes at least 90% of the sum
of its investment company taxable income (consisting generally of taxable net
investment income, net short-term capital gain and net realized gains from
certain hedging transactions) and certain other income the Fund (but not its
Shareholders) will not be subject to federal income tax to the extent that it
distributes its investment company taxable income and net capital gain (the
excess of net long-term capital gain over net short-term capital loss). The Fund
intends to distribute substantially all of such income and gain each year.
The APS will constitute stock of the Fund, and distributions by the Fund with
respect to its APS (other than distributions in redemption of APS that are
treated as exchanges of stock under Section 302(b) of the Code) thus will
constitute dividends to the extent of the Fund's current and accumulated
earnings and profits as calculated for federal income tax purposes. It is
possible, however, that the Internal Revenue Service (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 they exceeded the
earnings and profits of the Fund, would be included in full in the income of the
recipient and would be taxed as ordinary income. Kirkpatrick & Lockhart LLP,
counsel to the Fund, believes that such a position, if asserted by the IRS,
would be unlikely to prevail if the issue were properly litigated.
Distributions of any taxable net investment income and net short-term capital
gain will be taxable as ordinary income (except to the extent that a reduced
capital gains tax rate applies to qualified dividend income). Distributions of
the Fund's net capital gain, if any, will be taxable to shareholders as long-
term capital gains, regardless of the length of time they held their shares.
Distributions, if any, in excess of the Fund's earnings and profits will first
reduce the adjusted tax basis of a holder's shares and, after that basis has
been reduced to zero, will constitute capital gains to the shareholder (assuming
the shares are held as a capital asset).
Subject to certain conditions and limitations, under applicable federal income
tax provisions, a corporation receiving dividends with respect to stock it owns
in another corporation is allowed a deduction against a portion of such dividend
income received (the "Dividends Received Deduction"). The Fund expects to
receive dividends with respect to some or all of the stocks in other
corporations held by the Fund, and the Fund may designate such dividends as
eligible for the Dividends Received
--------------------------------------------------------------------------------
43
TAXES
--------------------------------------------------------------------------------
Deduction only to the extent that the Fund receives dividends for which the Fund
would be entitled to the Dividends Received Deduction if the Fund were a regular
corporation and not a RIC. A corporation that owns Common Shares or APS
generally will be entitled to a Dividends Received Deduction with respect to a
designated portion of the dividends it receives from the Fund.
For dividends received by the Fund to be eligible for designation for the
Dividends Received Deduction, the dividends must be paid by a domestic
corporation that is subject to U.S. income tax and the Fund must hold the stock
of such corporation for at least 46 days during the 90-day period beginning 45
days before the ex-dividend date for the stock (91 days during the 180-day
period for certain preferred stock). The Fund's holding period for stock will in
general not include any period for which the Fund holds an option to sell or is
the writer of an option to buy substantially identical stock, although there
exists an exception for certain options written by the Fund, the exercise prices
of which are not substantially below the market prices of the underlying
securities at the times the options are written. The Dividends Received
Deduction is reduced for dividends received from debt-financed portfolio stock
by a percentage related to the amount of debt incurred to purchase such stock.
To the extent that the source of dividends or distributions with respect to the
APS is dividends received by the Fund that would be eligible for the Dividends
Received Deduction, a corporate holder of Common Shares or APS (collectively,
the "Shares") in the Fund will be allowed a deduction equal to 70% of the
dividends paid to it by the Fund and designated by the Fund as eligible for the
Dividends Received Deduction. The aggregate amount of Dividends Received
Deductions that may be taken by a corporation is limited to 70% of its taxable
income, computed without regard to any net operating loss deduction.
In order for dividends effectively designated by the Fund as eligible for the
Dividends Received Deduction to qualify for the Dividends Received Deduction
when received by a particular Shareholder, the Shareholder must, among other
things, be a corporation meeting the 46-day (or 91-day) holding period
requirement described above with respect to its Fund Shares. The Dividends
Received Deduction will be reduced in the case of a Shareholder who has incurred
indebtedness, or is treated as having incurred indebtedness, that is "directly
attributable" to the acquisition or carrying of the Shares. The basis of a
Shareholder's Shares may be reduced in the case of certain "extraordinary
dividends" eligible for the Dividends Received Deduction by an amount equal to
the non-taxed portion of such dividends, although it is expected that such
extraordinary dividends will be paid only in unusual circumstances.
Dividends and other distributions declared by the Fund in October, November or
December of any year and payable to shareholders of record on a date in any of
those months will be deemed to have been paid by the Fund and received by the
shareholders on December 31 of that year if the distributions are paid by the
Fund during the following January. Accordingly, those distributions will be
taxed to shareholders for the year in which that December 31 falls.
The Fund will inform Shareholders of the source and tax status of all
distributions promptly after the close of each calendar year. The IRS has taken
the position that if a RIC has more than one class of shares, it may designate
distributions made to each class in any year as consisting of no more than that
class's proportionate share of particular types of income for that year,
including ordinary income and net capital gain. A class's proportionate share of
a particular type of income for a year is determined according to the percentage
of total dividends paid by the RIC during that year to the class. Accordingly,
the Fund intends to designate a portion of its distributions as capital gain
dividends in compliance with the IRS position.
Although the matter is not free from doubt, due to the absence of direct
regulatory or judicial authority, in the opinion of Kirkpatrick & Lockhart LLP,
counsel to the Fund, under current law the manner in which the Fund intends to
allocate items of ordinary income and net capital gain among the
--------------------------------------------------------------------------------
44
TAXES
--------------------------------------------------------------------------------
Fund's Common Shares and APS will be respected for federal income tax purposes.
It is possible that the IRS could disagree with counsel's opinion and attempt to
reallocate the Fund's net capital gain or other taxable income.
If at any time when APS are outstanding the Fund does not meet the asset
coverage requirements of the 1940 Act, the Fund will be required to suspend
distributions to holders of Common Shares until the asset coverage is restored.
See "Description of APS--Dividends and Dividend Periods--Restrictions on
Dividends and other payments." Such a suspension may prevent the Fund from
distributing at least 90% of the sum of its investment company taxable income
and certain other income and may, therefore, jeopardize the Fund's qualification
for taxation as a RIC. Upon any failure to meet the asset coverage requirements
of the 1940 Act, the Fund, in its sole discretion, may 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 qualify for
treatment as a RIC. See "Description of APS-- Redemption." There can be no
assurance, however, that any such action would achieve that objective.
Certain of the Fund's investment practices are subject to special Code
provisions that, among other things, may defer the use of certain losses of the
Fund and affect the holding period of securities held by the Fund and the
character of the gains or losses realized by the Fund. These provisions may also
require the Fund to recognize income or gain without receiving cash with which
to make distributions in the amounts necessary to satisfy the requirements for
maintaining RIC status and for avoiding income and excise taxes. The Fund will
monitor its transactions and may make certain tax elections in order to mitigate
the effect of these rules and prevent disqualification of the Fund as a RIC.
Under the recently enacted "Jobs and Growth Tax Relief Reconciliation Act of
2003" (the "Tax Act"), the U.S. federal income tax rate on long-term capital
gains recognized by individuals has been reduced to 15% (or 5% for individuals
in the 10% or 15% tax brackets), and "qualified dividend income" received by
individuals from certain domestic and foreign corporations will also be taxed at
this reduced capital gains tax rate. The reduced long-term capital gains tax
rate will apply to capital gains realized by shareholders who sell common shares
of the Fund that they have held for more than one year. The reduced rates, which
do not apply to short-term capital gains, generally apply to long-term capital
gains from sales or exchanges recognized on or after May 6, 2003 (and to Fund
distributions of such gain), and will cease to apply for taxable years beginning
after December 31, 2008. Distributions from the Fund designated as capital gain
dividends should be eligible for the reduced rate applicable to long-term
capital gains. Ordinary income dividends paid by the Fund would be eligible to
be treated by individual Fund shareholders as qualified dividend income taxed at
the reduced capital gains rate to the extent that some portion of the Fund's
dividends were attributable to such qualified dividend income received by the
Fund and to the extent that the Fund were to designate such portion as qualified
dividend income. The tax treatment applies only if certain holding period and
other requirements are satisfied by the Shareholder. For this purpose,
"qualified dividends" means dividends received by the Fund from United States
corporations and "qualified foreign corporations," provided that the Fund
satisfies certain holding period and other requirements in respect of the Stock
of such corporations.
In the case of securities lending transactions, payments in lieu of dividends
are not qualified dividends. Dividends received by the Fund from REITs are
qualified dividend eligible for this lower tax rate only in limited
circumstances. These special rules relating to the taxation of ordinary income
dividends from regulated investment companies generally apply to taxable years
beginning after December 31, 2002 and beginning before January 1, 2009.
Thereafter, the Fund's dividends, other than capital gain dividends, will be
fully taxable at ordinary income tax rates unless further Congressional
legislative action is taken.
A dividend paid by the Fund to a Shareholder will not be treated as qualified
dividend income of the Shareholder if (1) the dividend is received with respect
to any share held for fewer than 61 days during the 120-day period beginning on
the date which is 60 days before the date on which such share
--------------------------------------------------------------------------------
45
TAXES
--------------------------------------------------------------------------------
becomes ex-dividend with respect to such dividend (or more than 90 days during
the associated 180-day period, in the case of dividends attributable to periods
in excess of 366 days paid with respect to preferred stock) (2) to the extent
that the recipient 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) if the recipient elects to have the dividend
treated as investment income for purposes of the limitation on deductibility of
investment interest.
Subject to certain exceptions, a "qualified foreign corporation" is any foreign
corporation that is either (i) incorporated in a possession of the United States
(the "possessions test"), or (ii) eligible for benefits of a comprehensive
income tax treaty with the United States, which the Secretary of the Treasury
determines is satisfactory for these purposes and which includes an exchange of
information program (the "treaty test"). The Secretary of the Treasury has
identified tax treaties between the United States and 52 other countries that
satisfy the treaty test.
Subject to the same exceptions, a foreign corporation that does not satisfy
either the possessions test or the treaty test will still be considered a
"qualified foreign corporation" with respect to any dividend paid by such
corporation if the stock with respect to which such dividend is paid is readily
tradable on an established securities market in the United States. The Treasury
Department has issued a notice stating that common or ordinary stock, or an
American depositary receipt in respect of such stock, is considered readily
tradable on an established securities market in the United States if it is
listed on a national securities exchange that is registered under section 6 of
the Securities Exchange Act of 1934 or on the NASDAQ Stock Market.
A qualified foreign corporation does not include any foreign corporation which
for the taxable year of the corporation in which the dividend is paid, or the
preceding taxable year, is a foreign personal holding company, a foreign
investment company or a passive foreign investment company.
Dividends and interest received, and gains realized, by the Fund on foreign
securities may be subject to income, withholding or other taxes imposed by
foreign countries and U.S. possessions (collectively "foreign taxes") that would
reduce the return on its securities. Tax conventions between certain countries
and the United States, however, may reduce or eliminate foreign taxes, and many
foreign countries do not impose taxes on capital gains in respect of investments
by foreign investors. If more than 50% of the value of the Fund's total assets
at the close of its taxable year consists of securities of foreign corporations,
it will be eligible to, and may, file an election with the Internal Revenue
Service that will enable its shareholders, in effect, to receive the benefit of
the foreign tax credit with respect to any foreign taxes paid by it. Pursuant to
the election, the Fund would treat those taxes as dividends paid to its
shareholders and each shareholder (1) would be required to include in gross
income, and treat as paid by such shareholder, a proportionate share of those
taxes, (2) would be required to treat such share of those taxes and of any
dividend paid by the fund that represents income from foreign or U.S.
possessions sources as such shareholder's own income from those sources, and (3)
could either deduct the foreign taxes deemed paid in computing taxable income
or, alternatively, use the foregoing information in calculating the foreign tax
credit against federal income tax. The Fund will report to its shareholders
shortly after each taxable year their respective shares of foreign taxes paid
and the income from sources within, and taxes paid to, foreign countries and
U.S. possessions if it makes this election.
The Fund will inform Shareholders of the source and tax status of all
distributions promptly after the close of each calendar year.
Selling Shareholders will generally recognize gain or loss in an amount equal to
the difference between the Shareholder's adjusted tax basis in the shares sold
and the amount received. If the Shares are held as a capital asset, the gain or
loss will be a capital gain or loss. The maximum tax rate applicable to net
capital gains recognized by individuals and other non-corporate taxpayers is (i)
the same as the maximum ordinary income tax rate for gains recognized on the
sale of capital assets held for one year
--------------------------------------------------------------------------------
46
TAXES
--------------------------------------------------------------------------------
or less or (ii) 15% for gains recognized on the sale of capital assets held for
more than one year (as well as certain capital gain dividends) (5% for
individuals in the 10% or 15% tax brackets). Any loss on a disposition of Shares
held for six months or less will be treated as a long-term capital loss to the
extent of any capital gain dividends received with respect to those Shares. For
purposes of determining whether Shares have been held for six months or less,
the holding period is suspended for any periods during which the Shareholder's
risk of loss is diminished as a result of holding one or more other positions in
substantially similar or related property, or through certain options or short
sales. Any loss realized on a sale or exchange of Shares will be disallowed to
the extent those Shares are replaced by other Shares within a period of 61 days
beginning 30 days before and ending 30 days after the date of disposition of the
Common Shares (whether through the reinvestment of distributions, which could
occur, for example, if the Shareholder is a participant in the Plan (as defined
below) or otherwise). In that event, the basis of the replacement Shares will be
adjusted to reflect the disallowed loss.
An investor should also be aware that the benefits of the reduced 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 foregoing briefly summarizes some of the important federal income tax
consequences to Shareholders of investing in Shares, reflects the federal tax
law as of the date of this Prospectus, and does not address special tax rules
applicable to certain types of investors, such as corporate and foreign
investors. Investors should consult their tax advisors regarding other federal,
state or local tax considerations that may be applicable in their particular
circumstances, as well as any proposed tax law changes.
SALES OF APS
The sale of APS (including transfers in connection with a redemption or
repurchase of APS) will be a taxable transaction for federal income tax
purposes. A selling shareholder generally will recognize gain or loss equal to
the difference between the amount received and the holder's adjusted tax basis
in the APS. If the APS are held as a capital asset, the gain or loss will be a
capital gain or loss and will be long-term if the APS have been held for more
than one year. Any loss realized on a disposition of APS held for six months or
less will be treated as a long-term, rather than a short-term, capital loss to
the extent of any capital gain distributions received with respect to those APS.
A shareholder's holding period for APS is suspended for any periods during which
the shareholder's risk of loss is diminished as a result of holding one or more
other positions in substantially similar or related property, or through certain
options, sales contracts or short sales. Any loss realized on a sale or exchange
of APS will be disallowed to the extent those APS are replaced by other APS
within a period of 61 days beginning 30 days before and ending 30 days after the
date of disposition of the original APS. In that event, the basis of the
replacement APS will be adjusted to reflect the disallowed loss.
BACKUP WITHHOLDING
The Fund is required to withhold a percentage of all taxable dividends, capital
gain distributions and repurchase proceeds payable to any individuals and
certain other non-corporate shareholders who do not provide the Fund with a
correct taxpayer identification number. Such withholding from taxable dividends
and capital gain distributions is also required for such shareholders who fail
to provide certain certifications or otherwise are 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 the
shareholder's U.S. federal income tax liability, provided that the required
information is furnished to the IRS.
--------------------------------------------------------------------------------
47
--------------------------------------------------------------------------------
Description of capital structure
The Fund is an unincorporated business trust established under the laws of the
Commonwealth of Massachusetts by an Agreement and Declaration of Trust dated
July 10, 2003 ("Declaration of Trust"). The Declaration of Trust provides that
the Trustees of the Fund may authorize separate classes of shares of beneficial
interest. The Trustees of the Fund have authorized an unlimited number of shares
of beneficial interest stock, par value $0.01 per share, all of which shares
were initially classified as Common Shares. The Declaration of Trust also
authorizes the issuance of an unlimited number of shares of beneficial interest
with preference rights, including Preferred Shares, having a par value of $0.01
per share, in one or more series, with rights as determined by the Board of
Trustees, by action of the Board of Trustees without the approval of the
Shareholders. For a description of the APS, see "Description of APS." The
following table shows the amount of (i) shares authorized, (ii) shares held by
the Fund for its own account and (iii) shares outstanding, for each class of
authorized securities of the Fund as of November 21, 2003.
AMOUNT
OUTSTANDING
(EXCLUSIVE OF
AMOUNT HELD BY AMOUNT HELD BY
FUND FOR ITS OWN FUND FOR ITS OWN
TITLE OF CLASS AMOUNT AUTHORIZED ACCOUNT ACCOUNT)
----------------------------------------------------------------------------------------------------
Common Shares.............................. Unlimited -0- 72,789,761
Auction Preferred Shares
Series A................................. 4,000 -0- -0-
Series B................................. 4,000 -0- -0-
Series C................................. 4,000 -0- -0-
Series D................................. 4,000 -0- -0-
Series E................................. 4,000 -0- -0-
Series F................................. 4,000 -0- -0-
Series G................................. 4,000 -0- -0-
Holders of Common Shares are entitled to share equally in dividends declared by
a Board of Trustees payable to holders of Common Shares and in the net assets of
the Fund available for distribution to holders of Common Shares after payment of
the preferential amounts payable to holders of any outstanding Preferred Shares.
Neither holders of Common Shares nor holders of Preferred Shares have
pre-emptive or conversion rights and Common Shares are not redeemable. Upon
liquidation of the Fund, after paying or adequately providing for the payment of
all liabilities of the Fund and the liquidation preference with respect to any
outstanding Preferred Shares, and upon receipt of such releases, indemnities and
refunding agreements as they deem necessary for their protection, the Trustees
may distribute the remaining assets of the Fund among the holders of the Common
Shares. The Declaration of Trust provides that Shareholders are not liable for
any liabilities of the Fund, requires inclusion of a clause to that effect in
every agreement entered into by the Fund and indemnifies shareholders against
any such liability. Although shareholders of an unincorporated business trust
established under Massachusetts law, in certain limited circumstances, may be
held personally liable for the obligations of the Fund as though they were
general partners, the provisions of the Declaration of Trust described in the
foregoing sentence make the likelihood of such personal liability remote.
Holders of Common Shares are entitled to one vote for each share held and will
vote with the holders of any outstanding APS or other Preferred Shares on each
matter submitted to a vote of holders of Common Shares, except as described
under "Description of APS--Voting rights."
--------------------------------------------------------------------------------
48
DESCRIPTION OF CAPITAL STRUCTURE
--------------------------------------------------------------------------------
Shareholders are entitled to one vote for each share held. The Common Shares,
APS and any other Preferred Shares do not have cumulative voting rights, which
means that the holders of more than 50% of the Common Shares, APS and any other
Preferred Shares voting for the election of Trustees can elect all of the
Trustees standing for election by such holders, and, in such event, the holders
of the remaining Common Shares, APS and any other Preferred Shares will not be
able to elect any of such Trustees.
So long as any APS or any other Preferred Shares are outstanding, holders of
Common Shares will not be entitled to receive any dividends of or other
distributions from the Fund, unless at the time of such declaration, (1) all
accrued dividends on Preferred Shares or accrued interest on borrowings has been
paid and (2) the value of the Fund's total assets (determined after deducting
the amount of such dividend or other distribution), less all liabilities and
indebtedness of the Fund not represented by senior securities, is at least 300%
of the aggregate amount of such securities representing indebtedness and at
least 200% of the aggregate amount of securities representing indebtedness plus
the aggregate liquidation value of the outstanding Preferred Shares (expected to
equal the aggregate original purchase price of the outstanding Preferred Shares
plus redemption premium, if any, together with any accrued and unpaid dividends
thereon, whether or not earned or declared and on a cumulative basis). In
addition to the requirements of the 1940 Act, the Fund is required to comply
with other asset coverage requirements as a condition of the Fund obtaining a
rating of the Preferred Shares from a rating agency. These requirements include
an asset coverage test more stringent than under the 1940 Act. See "Description
of APS--Dividends and Dividend Periods--Restrictions on Dividends and other
payments."
The Fund will send unaudited reports at least semi-annually and audited
financial statements annually to all of its Shareholders.
The Common Shares of the Fund commenced trading on the NYSE on September 30,
2003. As of November 11, 2003, the net asset value per share of Common Shares
and the closing price per share of Common Shares on the NYSE were $19.65, and
$20.30, respectively.
PREFERRED SHARES
Under the 1940 Act, the Fund is permitted to have outstanding more than one
series of Preferred Shares as long as no single series has priority over another
series as to the distribution of assets of the Fund or the payment of dividends.
Neither holders of Common Shares nor holders of Preferred Shares have
pre-emptive rights to purchase any APS or any other Preferred Shares that might
be issued. It is anticipated that the net asset value per share of the APS will
equal its original purchase price per share plus accumulated dividends per
share.
--------------------------------------------------------------------------------
49
--------------------------------------------------------------------------------
Certain provisions of the Declaration of Trust
ANTI-TAKEOVER PROVISIONS IN THE DECLARATION OF TRUST
The Declaration of Trust includes provisions that could have the effect of
limiting the ability of other entities or persons to acquire control of the Fund
or to change the composition of its Board, and could have the effect of
depriving holders of Common Shares of an opportunity to sell their shares at a
premium over prevailing market prices by discouraging a third party from seeking
to obtain control of the Fund. These provisions may have the effect of
discouraging attempts to acquire control of the Fund, which attempts could have
the effect of increasing the expenses of the Fund and interfering with the
normal operation of the Fund. The Board is divided into three classes, with the
term of one class expiring at each annual meeting of holders of Common Shares
and Preferred Shares. At each annual meeting, one class of Trustees is elected
to a three-year term. This provision could delay for up to two years the
replacement of a majority of the Board of Trustees. A Trustee may be removed
from office only for cause by a written instrument signed by the remaining
Trustees or by a vote of the holders of at least two-thirds of the class of
shares of the Fund that elected such Trustee and is entitled to vote on the
matter.
In addition, the Declaration of Trust requires the favorable vote of the holders
of at least 75% of the outstanding shares of each class of the Fund, voting as a
class, then entitled to vote to approve, adopt or authorize certain transactions
with 5%-or-greater holders of a class of shares and their associates, unless the
Board shall by resolution have approved a memorandum of understanding with such
holders, in which case normal voting requirements would be in effect. For
purposes of these provisions, a 5%-or-greater holder of a class of shares (a
"Principal Shareholder") refers to any person who, whether directly or
indirectly and whether alone or together with its affiliates and associates,
beneficially owns 5% or more of the outstanding shares of any class of
beneficial interest of the Fund. The transactions subject to these special
approval requirements are: (i) the merger or consolidation of the Fund or any
subsidiary of the Fund with or into any Principal Shareholder; (ii) the issuance
of any securities of the Fund to any Principal Shareholder for cash; (iii) the
sale, lease or exchange of all or any substantial part of the assets of the Fund
to any Principal Shareholder (except assets having an aggregate fair market
value of less than $1,000,000, aggregating for the purpose of such computation
all assets sold, leased or exchanged in any series of similar transactions
within a twelve-month period); or (iv) the sale, lease or exchange to the Fund
or any subsidiary thereof, in exchange for securities of the Fund, of any assets
of any Principal Shareholder (except assets having an aggregate fair market
value of less than $1,000,000, aggregating for the purposes of such computation
all assets sold, leased or exchanged in any series of similar transactions
within a twelve-month period).
The Board has determined that provisions with respect to the Board and the 75%
voting requirements described above, which voting requirements are greater than
the minimum requirements under Massachusetts law or the 1940 Act, are in the
best interest of holders of Common Shares and Preferred Shares generally.
Reference should be made to the Declaration of Trust on file with the SEC for
the full text of these provisions.
CONVERSION TO OPEN-END FUND
The Fund may be converted to an open-end investment company at any time if
approved by the lesser of (i) two-thirds or more of the Fund's then outstanding
Common Shares and Preferred Shares (if any), each voting separately as a class,
or (ii) more than 50% of the then outstanding Common Shares and Preferred Shares
(if any), voting separately as a class if such conversion is recommended by at
least 75% of the Trustees then in office. If approved in the foregoing manner,
conversion of the Fund could not occur until 90 days after the Shareholders'
meeting at which such conversion was approved and would also require at least 30
days' prior notice to all Shareholders. The composition of the Fund's
--------------------------------------------------------------------------------
50
CERTAIN PROVISIONS OF THE DECLARATION OF TRUST
--------------------------------------------------------------------------------
portfolio likely would prohibit it from complying with regulations of the SEC
applicable to open-end investment companies. Accordingly, conversion likely
would require significant changes in the Fund's investment policies and
liquidation of a substantial portion of its relatively illiquid portfolio.
Conversion of the Fund to an open-end investment company also would require the
redemption of any outstanding Preferred Shares and could require the repayment
of borrowings. The Board believes, however, that the closed-end structure is
desirable, given the Fund's investment objective and policies. Investors should
assume, therefore, that it is unlikely that a Board would vote to convert the
Fund to an open-end investment company.
--------------------------------------------------------------------------------
51
--------------------------------------------------------------------------------
Underwriting
The underwriters named below (the "Underwriters"), acting through UBS Securities
LLC, 299 Park Avenue, New York, New York, Merrill Lynch, Pierce, Fenner & Smith
Incorporated, 4 World Financial Center, New York, New York and Citigroup Global
Markets Inc., 388 Greenwich Street, New York, New York as lead managers and
Wachovia Capital Markets, LLC and A.G. Edwards & Sons, Inc. as their
representatives (together with the lead managers, the "Representatives"), have
severally agreed, subject to the terms and conditions of the Underwriting
Agreement with the Fund and the Adviser, to purchase from the Fund the number of
APS set forth below their respective names. The Underwriters are committed to
purchase and pay for all of the Fund's APS if any are purchased.
UNDERWRITERS NUMBER OF SHARES
------------------------------------------------------------------------------
UBS Securities LLC.......................................... 9,100
Merrill Lynch, Pierce, Fenner & Smith
Incorporated................................... 9,100
Citigroup Global Markets Inc................................ 4,900
Wachovia Capital Markets, LLC............................... 3,500
A.G. Edwards & Sons, Inc.................................... 1,400
----------------
Total..................................................... 28,000
================
The Underwriters have advised the Fund that they propose initially to offer the
APS of the Fund 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 discount 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
on or before December 10, 2003.
The Underwriters will act in Auctions as Broker-Dealers as set forth under "The
Auctions--General--Broker-Dealer Agreements" and will be entitled to fees for
services as Broker-Dealers as set forth therein. The Underwriters also may
provide information to be used in ascertaining the Reference Rate.
The Fund anticipates that the Representatives and certain other Underwriters 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 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 of 1933, as
amended.
Shareholder Servicing Agent, custodian and transfer agent
Pursuant to a shareholder servicing agreement ("Shareholder Servicing
Agreement") between UBS Securities LLC (the "Shareholder Servicing Agent") and
Eaton Vance, the Shareholder Servicing Agent will (i) at the request of and as
specified by Eaton Vance, undertake to make available 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 arranging
periodic seminars or conference calls for Eaton Vance to communicate to
investors, responding to questions from current or prospective Shareholders and
contacting specific Shareholders, where appropriate), provided that
--------------------------------------------------------------------------------
52
SHAREHOLDER SERVICING AGENT, CUSTODIAN AND TRANSFER AGENT
--------------------------------------------------------------------------------
services shall not include customary market research information provided by the
Shareholder Servicing Agent or its registered broker-dealer affiliates in the
ordinary course of their business; (ii) at the request of and as specified by
Eaton Vance, make available to investors and prospective investors market price,
net asset value, yield and other information regarding the Fund (provided that
services shall not include customary market research information provided by the
Shareholder Servicing Agent or its registered broker-dealer affiliates in the
ordinary course of their business), if reasonably obtainable, for the purpose of
maintaining the visibility of the Fund in the investor community; (iii) at the
request of Eaton Vance or the Fund, provide certain economic research and
statistical information and reports, if reasonably obtainable, to Eaton Vance or
the Fund and consult with representatives of Eaton Vance and/or 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 shares, (2) the respective market performance of the
Fund and such other companies, and (3) other relevant performance indicators.
Except as legally required, such information and reports may not be quoted or
referred to, orally or in writing, reproduced or disseminated by the Fund or any
of its affiliates or any of their agents, without the prior written consent of
the Shareholder Servicing Agent, which consent will not be unreasonably
withheld; and (iv) at the request of Eaton Vance or the Fund, provide
information to and consult with Eaton Vance and/or the Board of Trustees of the
Fund with respect to applicable strategies designed to address market value
discounts, which may include share repurchases, tender offers, modifications to
dividend policies or capital structure, repositioning or restructuring of the
Fund, conversion of the Fund to an open-end investment company, liquidation or
merger; including providing information concerning the use and impact of the
above strategic alternatives by other market participants provided, however,
that under the terms of the Shareholder Servicing Agreement, the Shareholder
Servicing Agent is not obligated to render any opinions, valuations or
recommendations of any kind or to perform any such similar services. For these
services, Eaton Vance will pay the Shareholder Servicing Agent a fee computed
daily and payable quarterly equal, on an annual basis, to 0.10% of the Fund's
average daily gross assets. Under the terms of the Shareholder Servicing
Agreement, the Shareholder Servicing Agent is relieved from liability to Eaton
Vance for any act or omission to act by the Shareholder Servicing Agent in the
course of its performances under the Shareholder Servicing Agreement in the
absence of gross negligence or willful misconduct on the part of the Shareholder
Servicing Agent. The Shareholder Servicing Agreement will continue 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.
Investors Bank & Trust Company ("IBT"), 200 Clarendon Street, Boston, MA 02116
is the custodian of the Fund and will maintain custody of the securities and
cash of the Fund. IBT maintains the Fund's general ledger and computes net asset
value per share at least weekly. IBT also attends to details in connection with
the sale, exchange, substitution, transfer and other dealings with the Fund's
investments, and receives and disburses all funds. IBT also assists in
preparation of shareholder reports and the electronic filing of such reports
with the SEC.
PFPC Inc., P.O. Box 43027, Providence, RI 02940-3027 is the transfer agent and
dividend disbursing agent of the Fund.
--------------------------------------------------------------------------------
53
--------------------------------------------------------------------------------
Legal opinions
Certain legal matters in connection with the APS will be passed upon for the
Fund by Kirkpatrick & Lockhart LLP, Boston, Massachusetts, and for the
Underwriters by Skadden, Arps, Slate, Meagher & Flom (Illinois), Chicago,
Illinois and its affiliated entities. Skadden, Arps, Slate, Meagher & Flom
(Illinois) and its affiliated entities may rely as to certain matters of
Massachusetts law on the opinion of Kirkpatrick & Lockhart LLP.
Independent auditors
Deloitte & Touche LLP, Boston, Massachusetts, are the independent auditors for
the Fund and will audit the Fund's financial statements.
Additional information
The Prospectus and the Statement of Additional Information do not contain all of
the information set forth in the Registration Statement that the Fund has filed
with the SEC. The complete Registration Statement may be obtained from the SEC
upon payment of the fee prescribed by its rules and regulations. The Statement
of Additional Information can be obtained without charge by calling
1-800-225-6265.
Statements contained in this Prospectus 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 of which this Prospectus forms a part,
each such statement being qualified in all respects by such reference.
--------------------------------------------------------------------------------
54
--------------------------------------------------------------------------------
Table of contents for the
Statement of Additional Information
Additional investment information and restrictions.......... 2
Trustees and officers....................................... 7
Investment advisory and other services...................... 14
Determination of net asset value............................ 16
Portfolio trading........................................... 17
Taxes....................................................... 20
Other information........................................... 24
Independent auditors........................................ 25
Independent auditors' report................................ 26
Financial statements........................................ 27
Appendix A: Ratings......................................... A-1
Appendix B: Amended By-Laws................................. B-1
The Fund's privacy policy
The Fund is committed to ensuring your financial privacy. This notice is being
sent to comply with privacy regulations of the Securities and Exchange
Commission. The Fund has in effect the following policy with respect to
nonpublic personal information about its customers:
- Only such information received from you, through application forms or
otherwise, and information about your Fund transactions will be collected.
- None of such information about you (or former customers) will be disclosed to
anyone, except as permitted by law (which includes disclosure to employees
necessary to service your account).
- Policies and procedures (including physical, electronic and procedural
safeguards) are in place that are designed to protect the confidentiality of
such information.
For more information about the Fund's privacy policies call 1-800-262-1122.
--------------------------------------------------------------------------------
55
--------------------------------------------------------------------------------
Glossary
"7-Day Dividend Period" means a Dividend Period consisting of seven days.
"28-Day Dividend Period" means a Dividend Period consisting of twenty-eight
days.
"63-Day Dividend Period" means a Dividend Period consisting of sixty-three days.
"1940 Act" means the Investment Company Act of 1940, as amended from time to
time.
"1940 Act APS Asset Coverage" has the meaning set forth on page 29 of this
Prospectus.
"1940 Act Cure Date" has the meaning set forth on page 33 of this Prospectus.
"Adviser" means Eaton Vance Management.
"Agent Member" means the member of 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.
"Amended By-Laws" means the By-laws of the Fund, as amended November 17, 2003,
specifying the powers, preferences and rights of the APS. The Fund's Amended
By-Laws are contained in Appendix B to the Fund's Statement of Additional
Information.
"Applicable Percentage" has the meaning set forth on pages 38 and 39 of this
Prospectus.
"Applicable Rate" means the rate per annum at which cash dividends are payable
on APS for any Dividend Period.
"Applicable Spread" has the meaning set forth on page 39 of this Prospectus.
"APS" means the Auction Preferred Shares with a par value of $0.01 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.
"APS Basic Maintenance Amount" has the meaning set forth on pages 33 and 34 of
this Prospectus.
"APS Basic Maintenance Cure Date" has the meaning set forth on page 32 of this
Prospectus.
"Auction" means a periodic operation of the Auction Procedures.
"Auction Agent" means Deutsche Bank Trust Company Americas, unless and until
another commercial bank, trust company or other financial institution appointed
by a resolution of the Board of Trustees of the Fund or a duly authorized
committee thereof enters into an agreement with each 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.
"Auction Agent 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 Date" has the meaning set forth on page 38 of this Prospectus.
"Auction Procedures" means the procedures for conducting Auctions set forth in
Section 9 of the Fund's Amended By-Laws contained in Appendix B to the Fund's
Statement of Additional Information.
"Available APS" has the meaning specified in Paragraph 9(d)(i) of the Auction
Procedures.
"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.
"Bid" has the meaning specified in Subsection 9(b)(i) of the Auction Procedures.
"Bidder" has the meaning specified in Subsection 9(b)(i) of the Auction
Procedures.
--------------------------------------------------------------------------------
56
GLOSSARY
--------------------------------------------------------------------------------
"Board of Trustees" or "Board" means the Board of Trustees of the Fund.
"Broker-Dealer" means any broker-dealer, or other entity permitted by law to
perform the functions required of a Broker-Dealer in the Auction Procedures,
that has been selected by the Fund and has entered into a Broker-Dealer
Agreement with the Auction Agent that remains effective.
"Broker-Dealer Agreement" means an agreement entered into between the Auction
Agent and a Broker-Dealer pursuant to which such Broker-Dealer agrees to follow
the Auction Procedures.
"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.
"Cede & Co." means the nominee of DTC, and in whose name the shares of APS
initially will be registered.
"Code" means the Internal Revenue Code of 1986, as amended.
"Common Shares" means the Common Shares, par value $0.01 per share, of the Fund.
"Date of Original Issue" means, with respect to each series of APS, the date on
which such share first is issued by the Fund.
"Declaration of Trust" means the Agreement and Declaration of Trust of the Fund.
"Discounted Value" of any asset of each means with respect to a Fitch Eligible
Asset and Moody's Eligible Asset, the quotient of the market value thereof
divided by the applicable Fitch Discount Factor and Moody's Discount Factor.
"Dividend Payment Date" has the meaning set forth on page 27 of this Prospectus.
"Dividend Periods" has the meaning set forth on pages 27 and 28 of this
Prospectus.
"DTC" means The Depository Trust Company.
"Eligible Assets" means Fitch Eligible Assets and Moody's Eligible Assets.
"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 APS in the
records of the Auction Agent.
"Fitch" means Fitch Ratings or its successors.
"Fitch Eligible Assets" has the meaning set forth on page 33 of this Prospectus.
"Fund" means Eaton Vance Tax-Advantaged Dividend Income Fund, a Massachusetts
business trust that is the issuer of APS.
"Hold Order" has the meaning specified in Subsection 9(b)(i) of the Auction
Procedures.
"IBT" means Investors Bank & Trust Company, the custodian of the Fund's assets.
"Initial Dividend Payment Date" has the meaning set forth on the inside cover
page of this Prospectus.
"Initial 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 of the APS.
"IRS" means the Internal Revenue Service.
"LIBOR" means the London Interbank Offered Rate.
"Long-Term Dividend Period" has the meaning set forth on page 28 of this
Prospectus.
"Mandatory Redemption Price" has the meaning set forth on page 32 of this
Prospectus.
--------------------------------------------------------------------------------
57
GLOSSARY
--------------------------------------------------------------------------------
"Marginal Tax Rate" means the maximum marginal federal income tax rate
applicable to an individual's or a corporation's ordinary income, whichever is
greater.
"Maximum Applicable Rate" has the meaning specified under "The Auction--Orders
by Beneficial Owners, Potential Beneficial Owners, Existing Holders and
Potential Holders" in this Prospectus.
"Moody's" means Moody's Investors Service, Inc. or its successors.
"Moody's Eligible Assets" has the meaning set forth on page 33 of this
Prospectus.
"Non-Call Period" has the meaning set forth under "Specific Redemption
Provisions" below.
"Non-Payment Period" has the meaning set forth on page 30 of this Prospectus.
"Non-Payment Period Rate" has the meaning set forth on page 31 of this
Prospectus.
"Notice of Revocation" has the meaning set forth on page 29 of this Prospectus.
"Notice of Special Dividend Period" has the meaning set forth on page 29 of this
Prospectus.
"Optional Redemption Price" has the meaning set forth on page 32 of this
Prospectus.
"Order" has the meaning specified in Subsection 9(b)(i) of the Auction
Procedures.
"Potential Beneficial Owner" means a customer of a Broker-Dealer or a
Broker-Dealer that is not a Beneficial Owner of APS but that wishes to purchase
such shares, or that is a Beneficial Owner that wishes to purchase additional
APS.
"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 APS (or, in the case of an Existing Holder, additional APS).
"Preferred Shares" means preferred shares of beneficial interest, par value
$0.01 per share, of the Fund.
"Premium Call Period" has the meaning set forth under "Specific Redemption
Provisions" below.
"Reference Rate" means (i) with respect to a dividend period having 364 or fewer
days, LIBOR and (ii) with respect to a dividend period having 365 or more days,
the applicable U.S. Treasury Note Rate.
"Request for Special Dividend Period" has the meaning set forth on page 28 of
this Prospectus.
"Response" has the meaning set forth on page 29 of this Prospectus.
"S&P" means Standard & Poor's, or its successors.
"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 APS.
"Sell Order" has the meaning specified in Subsection 9(b)(i) of the Auction
Procedures.
"Short-Term Dividend Period" has the meaning set forth on page 28 this
Prospectus.
"Special Dividend Period" has the meaning set forth on page 27 of this
Prospectus.
"Specific Redemption Provisions" means, with respect to a Special Dividend
Period, either, or any combination of, (i) a period (a "Non-Call Period")
determined by the Board of Trustees of 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 Board of Trustees of the Fund, after consultation with the
Auction Agent and the Broker-Dealers, during each
--------------------------------------------------------------------------------
58
GLOSSARY
--------------------------------------------------------------------------------
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 Board of Trustees of the Fund after consultation with the Auction Agent and
the Broker-Dealers.
"Submission Deadline" has the meaning specified in Subsection 9(a)(x) of the
Auction Procedures.
"Submitted Bid" has the meaning specified in Subsection 9(d)(i) of the Auction
Procedures.
"Submitted Hold Order" has the meaning specified in Subsection 9(d)(i) of the
Auction Procedures.
"Submitted Order" has the meaning specified in Subsection 9(d)(i) of the Auction
Procedures.
"Submitted Sell Order" has the meaning specified in Subsection 9(d)(i) of the
Auction Procedures.
"Subsequent Dividend Period" means each Dividend Period after the Initial
Dividend Period.
"Substitute Rating Agency" and "Substitute Rating Agencies" shall mean a
nationally recognized statistical rating organization or two nationally
recognized statistical rating organizations, respectively, selected by Eaton
Vance, or its respective affiliates and successors, after consultation with the
Fund, to act as a substitute rating agency or substitute rating agencies, as the
case may be, to determine the credit ratings of the APS.
"Sufficient Clearing Bids" has the meaning specified in Subsection 9(d)(i) of
the Auction Procedures.
"U.S. Treasury Note Rate" on any date means (i) the yield as calculated by
reference to the bid price quotation of the actively traded, current coupon
Treasury Note with a maturity most nearly comparable to the length of the
related Dividend Period, as such bid price quotation is published on the
Business Day immediately preceding such date by the Federal Reserve Bank of New
York in its Composite 3:30 p.m. Quotations for U.S. Government Securities report
for such Business Day, or (ii) if such yield as so calculated is not available,
the Alternate Treasury Note Rate on such date. "Alternate Treasury Note Rate" on
any date means the yield as calculated by reference to the arithmetic average of
the bid price quotations of the actively traded, current coupon Treasury Note
with a maturity most nearly comparable to the length of the related Dividend
Period, as determined by the bid price quotations as of any time on the Business
Day immediately preceding such date, obtained from at least three recognized
primary U.S. Government securities dealers selected by the Auction Agent.
"Valuation Date" means, for purposes of determining whether the Fund is
maintaining the APS Basic Maintenance Amount, each Business Day commencing with
December 10, 2003.
"Winning Bid Rate" has the meaning specified in Subsection 9(d)(i) of the
Auction Procedures.
--------------------------------------------------------------------------------
59
(EATON VANCE LOGO)
STATEMENT OF ADDITIONAL INFORMATION
DECEMBER 5, 2003
EATON VANCE TAX-ADVANTAGED DIVIDEND INCOME FUND
THE EATON VANCE BUILDING
255 STATE STREET
BOSTON, MASSACHUSETTS 02109
(800) 225-6265
TABLE OF CONTENTS
--------------------------------------------------------------------------------
PAGE
----
Additional investment information and restrictions.......... 2
Trustees and officers....................................... 7
Investment advisory and other services...................... 14
Determination of net asset value............................ 16
Portfolio trading........................................... 17
Taxes....................................................... 20
Other information........................................... 24
Independent auditors........................................ 25
Independent auditors' report................................ 26
Financial statements........................................ 27
APPENDIX A: Ratings......................................... A-1
APPENDIX B: Amended By-laws................................. B-1
THIS STATEMENT OF ADDITIONAL INFORMATION ("SAI") IS NOT A PROSPECTUS AND IS
AUTHORIZED FOR DISTRIBUTION TO PROSPECTIVE INVESTORS ONLY IF PRECEDED OR
ACCOMPANIED BY THE PROSPECTUS OF EATON VANCE TAX-ADVANTAGED DIVIDEND INCOME FUND
(THE "FUND") DATED DECEMBER 5, 2003, AS SUPPLEMENTED FROM TIME TO TIME, WHICH IS
INCORPORATED HEREIN BY REFERENCE. THIS SAI SHOULD BE READ IN CONJUNCTION WITH
SUCH PROSPECTUS, A COPY OF WHICH MAY BE OBTAINED WITHOUT CHARGE BY CONTACTING
YOUR FINANCIAL INTERMEDIARY OR CALLING THE FUND AT 1-800-225-6265.
THE INFORMATION IN THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT COMPLETE AND
MAY BE CHANGED. THESE SECURITIES MAY NOT BE SOLD UNTIL THE REGISTRATION
STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS
STATEMENT OF ADDITIONAL INFORMATION, WHICH IS NOT A PROSPECTUS, IS NOT AN OFFER
TO SELL THESE SECURITIES AND IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES
IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
Capitalized terms used in this SAI and not otherwise defined have the meanings
given them in the Fund's Prospectus.
Additional investment information and restrictions
Primary investment strategies are described in the Prospectus. The following is
a description of the various investment policies that may be engaged in, whether
as a primary or secondary strategy, and a summary of certain attendant risks.
Eaton Vance may not buy any of the following instruments or use any of the
following techniques unless it believes that doing so will help to achieve the
Fund's investment objectives.
Tax-managed investing. Taxes are a major influence on the net returns that
investors receive on their taxable investments. There are five components of the
returns of a regulated investment company that invests in equities -- price
appreciation, distributions of tax-advantaged dividends, distributions of other
investment income and distributions of realized short-term and long-term capital
gains -- which are treated differently for federal income tax purposes.
Distributions of income other than tax-advantaged dividends and distributions of
net realized short-term gains (on stocks held for one year or less) are taxed as
ordinary income, at rates currently as high as 35%. Distributions of
tax-advantaged dividends and net realized long-term gains (on stocks held for
more than one year) are currently taxed at rates up to 15%. Returns derived from
price appreciation are untaxed until the shareholder redeems his or her shares.
Upon redemption, a capital gain (short-term if the shareholder has held his or
her shares for one year or less, otherwise long-term) equal to the difference
between the net proceeds of the redemption and the shareholder's adjusted tax
basis is realized. As described in the Prospectus, the Fund seeks to achieve
favorable after-tax returns in part by minimizing the taxes incurred by
Shareholders in connection with the Fund's net investment income and net
realized gains.
Equity investments. The Fund invests primarily in dividend-paying common stocks
and preferred stocks. The Fund also may invest in debt securities, warrants and
other securities and instruments.
Derivative instruments. Derivative instruments (which are instruments that
derive their value from another instrument, security, index or currency) may be
purchased or sold to enhance return (which may be considered speculative) to
hedge against fluctuations in securities prices, market conditions or currency
exchange rates, or as a substitute for the purchase or sale of securities or
currencies. Such transactions may be in the U.S. or abroad and may include the
purchase or sale of futures contracts on indices and options on stock index
futures, the purchase of put options and the sale of call options on securities
held, equity swaps and the purchase and sale of currency futures and forward
foreign currency exchange contracts. Transactions in derivative instruments
involve a risk of loss or depreciation due to: unanticipated adverse changes in
securities prices, interest rates, indices, the other financial instruments'
prices or currency exchange rates; the inability to close out a position;
default by the counterparty; imperfect correlation between a position and the
desired hedge; tax constraints on closing out positions; and portfolio
management constraints on securities subject to such transactions. The loss on
derivative instruments (other than purchased options) may substantially exceed
an investment in these instruments. In addition, the entire premium paid for
purchased options may be lost before than can be profitably exercised.
Transaction costs are incurred in opening and closing positions. Derivative
instruments may sometimes increase or leverage exposure to a particular market
risk, thereby increasing price volatility. Over-the-counter ("OTC") derivative
instruments, equity swaps and forward sales of stocks involve an enhanced risk
that the issuer or counterparty will fail to perform its contractual
obligations. Some derivative instruments are not readily marketable or may
become illiquid under adverse market conditions. In addition, during periods of
market volatility, a commodity exchange may suspend or limit trading in an
exchange-traded derivative instrument, which may make the contract temporarily
illiquid and difficult to price. Commodity exchanges may also establish daily
limits on the amount that the price of a futures contract or futures 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
closing out of positions to limit losses. The staff
--------------------------------------------------------------------------------
2
ADDITIONAL INVESTMENT INFORMATION AND RESTRICTIONS
--------------------------------------------------------------------------------
of the SEC takes the position that certain purchased OTC options, and assets
used as cover for written OTC options, are illiquid. The ability to terminate
OTC derivative instruments may depend on the cooperation of the counterparties
to such contracts. For thinly traded derivative instruments, the only source of
price quotations may be the selling dealer or counterparty. In addition, certain
provisions of the Code limit the use of derivative instruments. Under
regulations of the CFTC, the use of futures transactions for non-hedging
purposes is limited. There can be no assurance that the use of derivative
instruments will be advantageous.
Foreign exchange traded futures contracts and options thereon may be used only
if the Adviser determines that trading on such foreign exchange does not entail
risks, including credit and liquidity risks, that are materially greater than
the risks associated with trading on CFTC-regulated exchanges.
A put option on a security may be written only if the Adviser intends to acquire
the security. Call options written on securities will be covered by ownership of
the securities subject to the call option or an offsetting option.
CORPORATE BONDS AND OTHER DEBT SECURITIES
The Fund may invest in corporate bonds including below investment grade quality,
commonly known as "junk bonds" ("Non-Investment Grade Bonds"). Investments in
Non-Investment Grade Bonds generally provide greater income and increased
opportunity for capital appreciation than investments in higher quality
securities, but they also typically entail greater price volatility and
principal and income risk, including the possibility of issuer default and
bankruptcy. Non-Investment Grade Bonds are regarded as predominantly speculative
with respect to the issuer's continuing ability to meet principal and interest
payments. Debt securities in the lowest investment grade category also may be
considered to possess some speculative characteristics by certain rating
agencies. In addition, analysis of the creditworthiness of issuers of
Non-Investment Grade Bonds may be more complex than for issuers of higher
quality securities.
Non-Investment Grade Bonds may be more susceptible to real or perceived adverse
economic and competitive industry conditions than investment grade securities. A
projection of an economic downturn or of a period of rising interest rates, for
example, could cause a decline in Non-Investment Grade Bond prices because the
advent of recession could lessen the ability of an issuer to make principal and
interest payments on its debt obligations. If an issuer of Non-Investment Grade
Bonds defaults, in addition to risking payment of all or a portion of interest
and principal, the Fund may incur additional expenses to seek recovery. In the
case of Non-Investment Grade Bonds structured as zero-coupon, step-up or
payment-in-kind securities, their market prices will normally be affected to a
greater extent by interest rate changes, and therefore tend to be more volatile
than securities which pay interest currently and in cash. Eaton Vance seeks to
reduce these risks through diversification, credit analysis and attention to
current developments in both the economy and financial markets.
The secondary market on which Non-Investment Grade Bonds are traded may be less
liquid than the market for investment grade securities. Less liquidity in the
secondary trading market could adversely affect the net asset value of the
shares. Adverse publicity and investor perceptions, whether or not based on
fundamental analysis, may decrease the values and liquidity of Non-Investment
Grade Bonds, especially in a thinly traded market. When secondary markets for
Non-Investment Grade Bonds are less liquid than the market for investment grade
securities, it may be more difficult to value the securities because such
valuation may require more research, and elements of judgment may play a greater
role in the valuation because there is no reliable, objective data available.
During periods of thin trading in these markets, the spread between bid and
asked prices is likely to increase significantly and the Fund may have greater
difficulty selling these securities. The Fund will be more dependent on Eaton
Vance's research and analysis when investing in Non-Investment Grade Bonds.
Eaton Vance
--------------------------------------------------------------------------------
3
ADDITIONAL INVESTMENT INFORMATION AND RESTRICTIONS
--------------------------------------------------------------------------------
seeks to minimize the risks of investing in all securities through in-depth
credit analysis and attention to current developments in interest rate and
market conditions.
A general description of the ratings of securities by S&P, Fitch and Moody's is
set forth in Appendix A to this SAI. Such ratings represent these rating
organizations' opinions as to the quality of the securities they rate. It should
be emphasized, however, that ratings are general and are not absolute standards
of quality. Consequently, debt obligations with the same maturity, coupon and
rating may have different yields while obligations with the same maturity and
coupon may have the same yield. For these reasons, the use of credit ratings as
the sole method of evaluating Non-Investment Grade Bonds can involve certain
risks. For example, credit ratings evaluate the safety or principal and interest
payments, not the market value risk of Non-Investment Grade Bonds. Also, credit
rating agencies may fail to change credit ratings in a timely fashion to reflect
events since the security was last rated. Eaton Vance does not rely solely on
credit ratings when selecting securities for the Fund, and develops its own
independent analysis of issuer credit quality.
In the event that a rating agency or Eaton Vance downgrades its assessment of
the credit characteristics of a particular issue, the Fund is not required to
dispose of such security. In determining whether to retain or sell a downgraded
security, Eaton Vance may consider such factors as Eaton Vance's assessment of
the credit quality of the issuer of such security, the price at which such
security could be sold and the rating, if any, assigned to such security by
other rating agencies. However, analysis of the creditworthiness of issuers of
Non-Investment Grade Bonds may be more complex than for issuers of high quality
debt securities.
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 Fund expects normally
to close its short sales against-the-box by delivering newly-acquired 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 thirty days of the end of the Fund's
taxable year and the underlying appreciated securities position is held unhedged
for at least the next sixty days after the hedging transaction is closed. 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.
Purchasing securities to close out the short position can itself cause the price
of the securities to rise further, thereby exacerbating the loss. Short-selling
exposes the Fund to unlimited risk with respect to that security due to the lack
of an upper limit on the price to which an instrument can rise. Although the
Fund reserves the right to utilize short sales, the Adviser is under no
obligation to utilize short sales at all.
SECURITIES LENDING
As described in the Prospectus, the Fund may lend a portion of its portfolio
securities to broker-dealers or other institutional borrowers. Loans will be
made only to organizations whose credit quality or claims paying ability is
considered by the Adviser to be at least investment grade. All securities loans
will be collateralized on a continuous basis by cash or U.S. government
securities having a value, marked to market daily, of at least 100% of the
market value of the loaned securities. The Fund may receive loan fees in
connection with loans that are collateralized by securities or on loans of
securities
--------------------------------------------------------------------------------
4
ADDITIONAL INVESTMENT INFORMATION AND RESTRICTIONS
--------------------------------------------------------------------------------
for which there is special demand. The Fund may also seek to earn income on
securities loans by reinvesting cash collateral in securities consistent with
its investment objective and policies, seeking to invest at rates that are
higher than the "rebate" rate that it normally will pay to the borrower with
respect to such cash collateral. Any such reinvestment will be subject to the
investment policies, restrictions and risk considerations described in the
Prospectus and in this SAI.
Securities loans may result in delays in recovering, or a failure of the
borrower to return, the loaned securities. The defaulting borrower ordinarily
would be liable to the Fund for any losses resulting from such delays or
failures, and the collateral provided in connection with the loan normally would
also be available for that purpose. Securities loans normally may be terminated
by either the Fund or the borrower at any time. Upon termination and the return
of the loaned securities, the Fund would be required to return the related cash
or securities collateral to the borrower and it may be required to liquidate
longer term portfolio securities in order to do so. To the extent that such
securities have decreased in value, this may result in the Fund realizing a loss
at a time when it would not otherwise do so. The Fund also may incur losses if
it is unable to reinvest cash collateral at rates higher than applicable rebate
rates paid to borrowers and related administrative costs. These risks are
substantially the same as those incurred through investment leverage and will be
subject to the investment policies, restrictions and risk considerations
described in the Prospectus and in this SAI.
The Fund will receive amounts equivalent to any interest or other distributions
paid on securities while they are on loan, and the Fund will not be entitled to
exercise voting or other beneficial rights on loaned securities. The Fund will
exercise its right to terminate loans and thereby regain these rights whenever
the Adviser considers it to be in the Fund's interest to do so, taking into
account the related loss of reinvestment income and other factors.
TEMPORARY INVESTMENTS
The Fund may invest temporarily in cash or cash equivalents. Cash equivalents
are highly liquid, short-term securities such as commercial paper, time
deposits, certificates of deposit, short-term notes and short-term U.S.
government obligations.
INVESTMENT RESTRICTIONS
The following investment restrictions of the Fund are designated as fundamental
policies and as such cannot be changed without the approval of the holders of a
majority of the Fund's outstanding voting securities, which as used in this SAI
means the lesser of (a) 67% of the shares of the Fund present or represented by
proxy at a meeting if the holders of more than 50% of the outstanding shares are
present or represented at the meeting or (b) more than 50% of outstanding shares
of the Fund. As a matter of fundamental policy the Fund may not:
(1) Borrow money, except as permitted by the Investment Company Act of 1940
(the "1940 Act"). The 1940 Act currently requires that any indebtedness
incurred by a closed-end investment company have an asset coverage of at
least 300%;
(2) Issue senior securities, as defined in the 1940 Act, other than (a)
preferred shares which immediately after issuance will have asset coverage
of at least 200%, (b) indebtedness which immediately after issuance will
have asset coverage of at least 300%, or (c) the borrowings permitted by
investment restriction (1) above. The 1940 Act currently defines "senior
security" as any bond, debenture, note or similar obligation or instrument
constituting a security and evidencing indebtedness, and any stock of a
class having priority over any other class as to distribution of assets or
payment of dividends. Debt and equity securities issued by a closed-end
investment company meeting the foregoing asset coverage provisions are
excluded from the general 1940 Act prohibition on the issuance of senior
securities;
(3) Purchase securities on margin (but the Fund may obtain such short-term
credits as may be necessary for the clearance of purchases and sales of
securities). The purchase of investment assets
--------------------------------------------------------------------------------
5
ADDITIONAL INVESTMENT INFORMATION AND RESTRICTIONS
--------------------------------------------------------------------------------
with the proceeds of a permitted borrowing or securities offering will not
be deemed to be the purchase of securities on margin;
(4) Underwrite securities issued by other persons, except insofar as it may
technically be deemed to be an underwriter under the Securities Act of 1933
in selling or disposing of a portfolio investment;
(5) Make loans to other persons, except by (a) the acquisition of loan
interests, debt securities and other obligations in which the Fund is
authorized to invest in accordance with its investment objectives and
policies, (b) entering into repurchase agreements, and (c) lending its
portfolio securities;
(6) Purchase or sell real estate, although it may purchase and sell securities
which are secured by interests in real estate and securities of issuers
which invest or deal in real estate. The Fund reserves the freedom of
action to hold and to sell real estate acquired as a result of the
ownership of securities;
(7) Purchase or sell physical commodities or contracts for the purchase or sale
of physical commodities. Physical commodities do not include futures
contracts with respect to securities, securities indices, currencies,
interest or other financial instruments; and
(8) With respect to 75% of its total assets, invest more than 5% of its total
assets in the securities of a single issuer or purchase more than 10% of
the outstanding voting securities of a single issuer, except obligations
issued or guaranteed by the U.S. government, its agencies or
instrumentalities and except securities of other investment companies; or
invest 25% or more of its total assets in any single industry (other than
securities issued or guaranteed by the U.S. government or its agencies or
instrumentalities).
The Fund may borrow money as a temporary measure for extraordinary or emergency
purposes, including the payment of dividends and the settlement of securities
transactions which otherwise might require untimely dispositions of Fund
securities. The 1940 Act currently requires that the Fund have 300% asset
coverage with respect to all borrowings other than temporary borrowings.
For purposes of construing restriction (8), securities of the U.S. government,
its agencies, or instrumentalities are not considered to represent industries.
The Fund has adopted the following nonfundamental investment policy which may be
changed by the Board without approval of the Fund's shareholders. As a matter of
nonfundamental policy, the Fund may not make short sales of securities or
maintain a short position, unless at all times when a short position is open it
either owns an equal amount of such securities or owns securities convertible
into or exchangeable, without payment of any further consideration, for
securities of the same issuer as, and equal in amount to, the securities sold
short. Upon the Board's approval, the Fund may invest more than 10% of its total
assets in one or more other management investment companies (or may invest in
affiliated investment companies) to the extent permitted by the 1940 Act and
rules thereunder.
Whenever an investment policy or investment restriction set forth in the
Prospectus or this SAI states a maximum percentage of assets that may be
invested in any security or other assets or describes a policy regarding quality
standards, such percentage limitation or standard shall be determined
immediately after and as a result of the Fund's acquisition of such security or
asset. Accordingly, any later increase or decrease resulting from a change in
values, assets or other circumstances or any subsequent rating change made by a
rating service (or as determined by the Adviser if the security is not rated by
a rating agency) will not compel the Fund to dispose of such security or other
asset. Notwithstanding the foregoing, the Fund must always be in compliance with
the borrowing policies set forth above.
--------------------------------------------------------------------------------
6
--------------------------------------------------------------------------------
Trustees and officers
The Trustees of the Fund are responsible for the overall management and
supervision of the affairs of the Fund. The Trustees and officers of the Fund
are listed below. Except as indicated, each individual has held the office shown
or other offices in the same company for the last five years. The "noninterested
Trustees" consist of those Trustees who are not "interested persons" of the
Fund, as that term is defined under the 1940 Act. The business address of each
Trustee and officer is The Eaton Vance Building, 255 State Street, Boston,
Massachusetts 02109. As used in this SAI, "EVC" refers to Eaton Vance Corp.,
"EV" refers to Eaton Vance, Inc., "BMR" refers to Boston Management and
Research, and "EVD" refers to Eaton Vance Distributors Inc. EVC and EV are the
corporate parent and trustee, respectively, of Eaton Vance and BMR.
NUMBER OF
PORTFOLIOS IN
TERM OF OFFICE FUND COMPLEX OTHER
NAME AND POSITION(S) AND LENGTH PRINCIPAL OCCUPATION(S) OVERSEEN BY DIRECTORSHIPS
DATE OF BIRTH WITH THE FUND OF SERVICE DURING PAST FIVE YEARS TRUSTEE(1) HELD
-----------------------------------------------------------------------------------------------------------------
INTERESTED TRUSTEES
Jessica M. Bibliowicz Trustee(2) Since 08/1/03 President and Chief 192 None
11/28/59 Three Years Executive Officer of
National Financial
Partners (financial
services company)
(since April 1999).
President and Chief
Operating Officer of
John A. Levin & Co.
(registered investment
adviser) (July 1997 to
April 1999) and a
Director of Baker,
Fentress & Company
which owns John A.
Levin & Co. (July 1997
to April 1999). Ms.
Bibliowicz is an
interested person
because of her
affiliation with a
brokerage firm.
James B. Hawkes Trustee(3) and Since 07/10/03 Chairman, President and 194 Director of EVC
11/9/41 Vice President Three Years Chief Executive Officer
of BMR, Eaton Vance,
EVC and EV; Director of
EV; Vice President and
Director of EVD.
Trustee and/or officer
of 194 registered
investment companies in
the Eaton Vance Fund
Complex. Mr. Hawkes is
an interested person
because of his
positions with BMR,
Eaton Vance, EVC and
EV, which are
affiliates of the Fund.
--------------------------------------------------------------------------------
7
TRUSTEES AND OFFICERS
--------------------------------------------------------------------------------
NUMBER OF
PORTFOLIOS IN
TERM OF OFFICE FUND COMPLEX OTHER
NAME AND POSITION(S) AND LENGTH PRINCIPAL OCCUPATION(S) OVERSEEN BY DIRECTORSHIPS
DATE OF BIRTH WITH THE FUND OF SERVICE DURING PAST FIVE YEARS TRUSTEE(1) HELD
-----------------------------------------------------------------------------------------------------------------
NON-INTERESTED TRUSTEES
Samuel L. Hayes, Trustee(2) Since 08/1/03 Jacob H. Schiff 194 Director of
III(A) Three Years Professor of Investment Tiffany & Co.
2/23/35 Banking Emeritus, (specialty
Harvard University retailer) and
Graduate School of Telect, Inc.
Business (telecommu-
Administration. nication services
company)
William H. Park Trustee(3) Since 08/1/03 President and Chief 191 None
9/19/47 Three Years Executive Officer of
Asset Management
Finance Corp. (a
specialty finance
company serving the
investment management
industry) (since
October 2003).
President and Chief
Executive Officer,
Prizm Capital
Management, LLC
(investment management
firm) (since 2002).
Executive Vice
President and Chief
Financial Officer,
United Asset Management
Corporation (a holding
company owning
institutional
investment management
firms) (1982-2001).
Ronald A. Pearlman Trustee(4) Since 08/1/03 Professor of Law, 191 None
7/10/40 Three Years Georgetown University
Law Center (since
1999). Tax Partner,
Covington & Burling,
Washington, DC
(1991-2000).
--------------------------------------------------------------------------------
8
TRUSTEES AND OFFICERS
--------------------------------------------------------------------------------
NUMBER OF
PORTFOLIOS IN
TERM OF OFFICE FUND COMPLEX OTHER
NAME AND POSITION(S) AND LENGTH PRINCIPAL OCCUPATION(S) OVERSEEN BY DIRECTORSHIPS
DATE OF BIRTH WITH THE FUND OF SERVICE DURING PAST FIVE YEARS TRUSTEE(1) HELD
-----------------------------------------------------------------------------------------------------------------
Norton H. Reamer(A) Trustee(4) Since 08/1/03 President and Chief 194 None
9/21/35 Three Years Executive Officer of
Asset Management
Finance Corp. (a
specialty finance
company serving the
investment management
industry) (since
October 2003).
President, Unicorn
Corporation (an
investment and
financial advisory
services company)
(since September 2000).
Formerly, Chairman,
Hellman, Jordan
Management Co., Inc.
(an investment
management company)
(2000-2003). Formerly,
Advisory Director of
Berkshire Capital
Corporation (investment
banking firm)
(2002-2003). Formerly,
Chairman of the Board,
United Asset Management
Corporation (a holding
company owning
institutional
investment management
firms) and Chairman,
President and Director,
UAM Funds (mutual
funds).
Lynn A. Stout Trustee(4) Since 08/1/03 Professor of Law, 194 None
9/14/57 Three Years University of
California at Los
Angeles School of Law
(since July 2001).
Formerly, Professor of
Law, Georgetown
University Law Center.
------------
(1) Includes both master and feeder funds in master-feeder structure.
(2) Class I Trustees whose term expires in 2004.
(3) Class II Trustees whose term expires in 2005.
(4) Class III Trustees whose term expires in 2006.
(A) Auction Preferred Shares Trustee
--------------------------------------------------------------------------------
9
TRUSTEES AND OFFICERS
--------------------------------------------------------------------------------
PRINCIPAL OFFICERS WHO ARE NOT TRUSTEES
TERM OF OFFICE
POSITION(S) AND LENGTH
NAME AND DATE OF BIRTH WITH THE FUND OF SERVICE PRINCIPAL OCCUPATIONS DURING PAST FIVE YEARS
--------------------------------------------------------------------------------------------------------
Thomas E. Faust Jr. President Since 07/10/03 Executive Vice President of Eaton Vance,
5/31/58 BMR, EVC and EV; Chief Investment Officer of
Eaton Vance and BMR and Director of EVC.
Chief Executive Officer of Belair Capital
Fund LLC, Belcrest Capital Fund LLC, Belmar
Capital Fund LLC; Belport Capital Fund LLC
and Belrose Capital Fund LLC (private
investment companies sponsored by Eaton
Vance). Officer of 53 registered investment
companies managed by Eaton Vance or BMR.
Thomas H. Luster Vice President Since 07/10/03 Vice President of Eaton Vance or BMR.
4/8/62 Officer of 14 registered investment
companies managed by Eaton Vance or BMR.
Michael R. Mach Vice President Since 07/10/03 Vice President of Eaton Vance and BMR.
7/15/47 Previously, Managing Director and Senior
Analyst for Robertson Stephens (1998-1999).
Officer of 25 registered investment
companies managed by Eaton Vance or BMR.
Judith A. Saryan Vice President Since 07/10/03 Vice President of Eaton Vance and BMR.
8/21/54 Previously, Portfolio Manager and Equity
Analyst for State Street Global Advisors
(1980-1999). Officer of 24 registered
investment companies managed by Eaton Vance
or BMR.
James L. O'Connor Treasurer Since 07/10/03 Vice President of BMR, Eaton Vance and EVD.
4/1/45 Officer of 115 registered investment
companies managed by Eaton Vance or BMR.
Alan R. Dynner Secretary Since 07/10/03 Vice President, Secretary and Chief Legal
10/10/40 Officer of BMR, Eaton Vance, EVD, EV and
EVC. Officer of 194 registered investment
companies managed by Eaton Vance or BMR.
The Board of Trustees has several standing Committees, including the Governance
Committee, the Audit Committee, and the Special Committee. Each such Committee
is comprised of only noninterested Trustees.
The Governance Committee of the Board of Trustees of the Fund is comprised of
the noninterested Trustees. Ms. Stout currently serves as chairperson of the
Governance Committee. The purpose of the Committee is to undertake a periodic
review of, and make recommendations with respect to, the Board's performance;
Trustee compensation; appointment of new Trustees; identity, duties and
composition of the various Board committees; development and maintenance of the
Board's membership, structure and operations; policies and procedures adopted or
approved by the Board to comply with regulatory requirements that relate to fund
governance; and any other matters related to fund governance.
--------------------------------------------------------------------------------
10
TRUSTEES AND OFFICERS
--------------------------------------------------------------------------------
The Trustees will, when a vacancy exists or is anticipated, consider any nominee
for Trustee recommended by a shareholder if such recommendation is submitted to
the Trustees in writing and contains sufficient background information
concerning the individual to enable a proper judgment to be made as to such
individual's qualifications.
Messrs. Reamer (Chair), Hayes, and Park and Ms. Stout are members of the Audit
Committee of the Board of Trustees of the Fund. The Board of Trustees has
designated Messrs. Park, Hayes and Reamer, each a noninterested Trustee, as
audit committee financial experts. The Audit Committee's functions include
making recommendations to the Trustees regarding the selection and performance
of the independent accountants, and reviewing matters relative to accounting and
auditing practices and procedures, accounting records, and the internal
accounting controls of the Fund and certain service providers.
Messrs. Hayes (Chair), Park, Pearlman and Reamer are members of the Special
Committee of the Board of Trustees of the Fund. The purpose of the Special
Committee is to consider, evaluate and make recommendations to the full Board of
Trustees concerning (i) all contractual arrangements with service providers to
the Fund, including investment advisory, administrative, transfer agency,
custodial and fund accounting and distribution services, and (ii) all other
matters in which Eaton Vance or its affiliates has any actual or potential
conflict of interest with the Fund.
As of the date of this SAI, each of the Committees had held three meetings.
When considering approval of the Advisory Agreement between the Fund and the
Adviser, the Special Committee considered, among other things, the following:
+ A report comparing the fees and expenses of the Fund;
+ Information on the relevant peer group(s) of funds;
+ The economic outlook and the general investment outlook in the relevant
investment markets;
+ Eaton Vance's results and financial condition and the overall organization of
the Adviser;
+ Arrangements regarding the distribution of Fund shares;
+ The procedures used to determine the fair value of the Fund's assets;
+ The allocation of brokerage, including allocations to soft dollar brokerage
and allocations to firms that sell Eaton Vance fund shares;
+ Eaton Vance's management of the relationship with the custodian,
subcustodians and fund accountants;
+ The resources devoted to Eaton Vance's compliance efforts undertaken on
behalf of the funds it manages and the record of compliance with the
investment policies and restrictions and with policies on personal securities
transactions;
+ The quality, nature, cost and character of the administrative and other
non-investment management services provided by Eaton Vance and its
affiliates;
+ Investment management staffing;
+ Operating expenses (including transfer agency expenses) to be paid to third
parties; and
+ Information to be provided to investors, including the Fund's shareholders.
In evaluating the Advisory Agreement between the Fund and Eaton Vance, the
Special Committee reviewed material furnished by Eaton Vance at the initial
Board meeting held in August 2003, including the above referenced considerations
and information relating to the education, experience and number of investment
professionals and other personnel who would provide services under the Advisory
Agreement. The Special Committee also took into account the time and attention
to be devoted by senior management to the Fund and the other funds in the
complex. The Special
--------------------------------------------------------------------------------
11
TRUSTEES AND OFFICERS
--------------------------------------------------------------------------------
Committee evaluated the level of skill required to manage the Fund and concluded
that the human resources available at Eaton Vance were appropriate to fulfill
effectively the duties of the Adviser on behalf of the Fund. The Special
Committee also considered the business reputation of the Adviser, its financial
resources and professional liability insurance coverage and concluded that Eaton
Vance would be able to meet any reasonably foreseeable obligations under the
Advisory Agreement.
The Special Committee received information concerning the investment philosophy
and investment process to be applied by Eaton Vance in managing the Fund. In
this regard, the Special Committee considered Eaton Vance's in-house research
capabilities as well as other resources available to Eaton Vance personnel,
including research services that may be available to Eaton Vance as a result of
securities transactions effected for the Fund and other investment advisory
clients. The Special Committee concluded that Eaton Vance's investment process,
research capabilities and philosophy were well suited to the Fund, given the
Fund's investment objective and policies.
In addition to the factors mentioned above, the Special Committee also reviewed
the level of the Adviser's profits in respect of the management of the Eaton
Vance funds, including the Fund. The noninterested Trustees considered the
profits realized by Eaton Vance and its affiliates in connection with the
operation of the Fund. The noninterested Trustees also considered Eaton Vance's
profit margins in comparison with available industry data.
The Special Committee did not consider any single factor as controlling in
determining whether or not to approve the Advisory Agreement. Nor are the items
described herein all encompassing of the matters considered by the noninterested
Trustees. In assessing the information provided by Eaton Vance and its
affiliates, the Special Committee also took into consideration the benefits to
shareholders of investing in a fund that is part of a large family of funds
which provides a large variety of shareholder services.
Based on their consideration of all factors that it deemed material and assisted
by the advice of its independent counsel, the Special Committee concluded that
the approval of the Advisory Agreement, including the fee structure (described
herein) is in the interests of shareholders.
SHARE OWNERSHIP
The following table shows the dollar range of equity securities beneficially
owned by each Trustee in the Fund and all Eaton Vance Funds overseen by the
Trustee as of December 31, 2002.
AGGREGATE DOLLAR RANGE OF EQUITY
DOLLAR RANGE OF SECURITIES OWNED IN ALL REGISTERED
EQUITY SECURITIES FUNDS OVERSEEN BY TRUSTEE IN THE
NAME OF TRUSTEE OWNED IN THE FUND EATON VANCE FUND COMPLEX
-------------------------------------------------------------------------------------------------
INTERESTED TRUSTEES
Jessica M. Bibliowicz................. None $10,001--$50,000
James B. Hawkes....................... None over $100,000
NONINTERESTED TRUSTEES
Samuel L. Hayes, III.................. None over $100,000
William H. Park*...................... None None
Ronald A. Pearlman*................... None None
Norton H. Reamer...................... None over $100,000
Lynn A. Stout......................... None $10,001--$50,000
------------
* Messrs. Park and Pearlman were appointed as Trustees in 2003, and thus had no
beneficial ownership of securities in the Fund or in the Eaton Vance Fund
Complex as of December 31, 2002.
--------------------------------------------------------------------------------
12
TRUSTEES AND OFFICERS
--------------------------------------------------------------------------------
As of December 31, 2002, no noninterested Trustee or any of their immediate
family members owned beneficially or of record any class of securities of EVC,
EVD or any person controlling, controlled by or under common control with EVC or
EVD.
During the calendar years ended December 31, 2001 and December 31, 2002, no
noninterested Trustee (or their immediate family members) had:
1. Any direct or indirect interest in Eaton Vance, EVC, EVD or any person
controlling, controlled by or under common control with EVC or EVD;
2. Any direct or indirect material interest in any transaction or series of
similar transactions with (i) the Trust or any Fund; (ii) another fund
managed by EVC, distributed by EVD or a person controlling, controlled by or
under common control with EVC or EVD; (iii) EVC or EVD; (iv) a person
controlling, controlled by or under common control with EVC or EVD; or (v)
an officer of any of the above; or
3. Any direct or indirect relationship with (i) the Trust or any Fund; (ii)
another fund managed by EVC, distributed by EVD or a person controlling,
controlled by or under common control with EVC or EVD; (iii) EVC or EVD;
(iv) a person controlling, controlled by or under common control with EVC or
EVD; or (v) an officer of any of the above.
During the calendar years ended December 31, 2001 and December 31, 2002, no
officer of EVC, EVD or any person controlling, controlled by or under common
control with EVC or EVD served on the Board of Directors of a company where a
noninterested Trustee of the Fund or any of their immediate family members
served as an officer.
Trustees of the Fund who are not affiliated with the Adviser may elect to defer
receipt of all or a percentage of their annual fees in accordance with the terms
of a Trustees Deferred Compensation Plan (the "Trustees' Plan"). Under the
Trustees' Plan, an eligible Trustee may elect to have his deferred fees invested
by the Fund in the shares of one or more funds in the Eaton Vance Family of
Funds, and the amount paid to the Trustees under the Trustees' Plan will be
determined based upon the performance of such investments. Deferral of Trustees'
fees in accordance with the Trustees' Plan will have a negligible effect on the
Fund's assets, liabilities, and net income per share, and will not obligate the
Fund to retain the services of any Trustee or obligate the Fund to pay any
particular level of compensation to the Trustee. The Fund does not have a
retirement plan for its Trustees.
The fees and expenses of the Trustees of the Fund are paid by the Fund. (A
Trustee of the Fund who is a member of the Eaton Vance organization receives no
compensation from the Fund.) During the Fund's fiscal year ending August 31,
2004, it is anticipated that the Trustees of the Fund will earn the following
compensation in their capacities as Trustees. For the year ended December 31,
2002, the Trustees earned the compensation set forth below in their capacities
as Trustees from the funds in the Eaton Vance fund complex(1).
JESSICA M. SAMUEL L. WILLIAM H. RONALD A. NORTON H. LYNN A.
SOURCE OF COMPENSATION BIBLIOWICZ HAYES, III PARK PEARLMAN REAMER STOUT
---------------------------------------------------------------------------------------------------
Fund*..................... $ 1,000 $ 1,000 $1,000 $1,000 $ 1,000 $ 1,000
Fund Complex.............. $160,000 $180,000 None(3) None(3) $160,000 $160,000(2)
------------
* Estimated
(1) As of October 31, 2003, the Eaton Vance fund complex consisted of 195
registered investment companies or series thereof.
(2) Includes $16,000 of deferred compensation.
(3) Messrs. Park and Pearlman were appointed as Trustees in 2003, and thus did
not receive fees for the period.
--------------------------------------------------------------------------------
13
TRUSTEES AND OFFICERS
--------------------------------------------------------------------------------
PROXY VOTING POLICY
The Fund is subject to the Eaton Vance Funds Proxy Voting Policy and Procedures
(the "Fund Policy"), pursuant to which the Trustees have delegated proxy voting
responsibility to the Adviser and adopted the Adviser's proxy voting policies
and procedures (the "Policies") which are described below. The Trustees will
review the Fund's proxy voting records from time to time and will annually
consider approving the Policies for the upcoming year. In the event that a
conflict of interest arises between the Fund's shareholders and the Adviser or
any of its affiliates or any affiliate of the Fund, the Adviser will generally
refrain from voting the proxies related to the companies giving rise to such
conflict until it consults with the Board of the Fund except as contemplated
under the Fund Policy. The Board's Special Committee will instruct the Adviser
on the appropriate course of action.
The Policies are designed to promote accountability of a company's management to
its shareholders and to align the interests of management with those
shareholders. The Adviser will generally support company management on proposals
relating to environmental and social policy issues, on matters regarding the
state of organization of the company and routine matters related to corporate
administration which are not expected to have a significant economic impact on
the company or its shareholders. On all other matters, the Adviser will review
each matter on a case-by-case basis and reserves the right to deviate from the
Policies' guidelines when it believes the situation warrants such a deviation.
The Policies include voting guidelines for matters relating to, among other
things, the election of directors, approval of independent auditors, executive
compensation, corporate structure and anti-takeover defenses. The Adviser may
abstain from voting from time to time where it determines that the costs
associated with voting a proxy outweigh the benefits derived from exercising the
right to vote.
In addition, the Adviser will monitor situations that may result in a conflict
of interest between the Fund's shareholders and the Adviser or any of its
affiliates or any affiliate of the Fund by maintaining a list of significant
existing and prospective corporate clients. The Adviser's personnel responsible
for reviewing and voting proxies on behalf of the Fund will report any proxy
received or expected to be received from a company included on that list to
members of senior management of the investment adviser identified in the
Policies. Such members of senior management will determine if a conflict exists.
If a conflict does exist, the proxy will either be voted strictly in accordance
with the Policies or the Adviser will seek instruction on how to vote from the
Special Committee. Effective August 31, 2004, information on how the Fund voted
proxies relating to portfolio securities during the 12 month period ended June
30, 2004 will be available (1) without charge, upon request, by calling
1-800-262-1122, and (2) on the Securities and Exchange Commission's website at
http://www.sec.gov.
Investment advisory and other services
Eaton Vance, its affiliates and its predecessor companies have been managing
assets of individuals and institutions since 1924 and of investment companies
since 1931. They maintain a large staff of experienced fixed-income, senior loan
and equity investment professionals to service the needs of their clients. The
equity group covers stocks ranging from blue chip to emerging growth companies.
Eaton Vance and its affiliates act as adviser to a family of mutual funds, and
individual and various institutional accounts. The fixed-income group focuses on
all kinds of taxable investment-grade and high-yield securities, tax-exempt
investment-grade and high-yield securities, and U.S. government securities. The
senior loan group focuses on senior floating rate loans, unsecured loans and
other floating rate debt securities such as notes, bonds and asset backed
securities, including corporations, hospitals, retirement plans, universities,
foundations and trusts.
The Fund will be responsible for all of its costs and expenses not expressly
stated to be payable by Eaton Vance under the Advisory Agreement or
Administration Agreement. Such costs and expenses to
--------------------------------------------------------------------------------
14
INVESTMENT ADVISORY AND OTHER SERVICES
--------------------------------------------------------------------------------
be borne by the Fund include, without limitation: custody and transfer agency
fees and expenses, including those incurred for determining net asset value and
keeping accounting books and records; expenses of pricing and valuation
services; the cost of share certificates; membership dues in investment company
organizations; expenses of acquiring, holding and disposing of securities and
other investments; fees and expenses of registering under the securities laws,
stock exchange listing fees and governmental fees; rating agency fees and
preferred share remarketing expenses; expenses of reports to shareholders, proxy
statements and other expenses of shareholders' meetings; insurance premiums;
printing and mailing expenses; interest, taxes and corporate fees; legal and
accounting expenses; compensation and expenses of Trustees not affiliated with
Eaton Vance; expenses of conducting repurchase offers for the purpose of
repurchasing Fund shares; and investment advisory and administration fees. The
Fund will also bear expenses incurred in connection with any litigation in which
the Fund is a party and any legal obligation to indemnify its officers and
Trustees with respect thereto, to the extent not covered by insurance.
The Advisory Agreement with the Adviser continues in effect to August 11, 2005
and from year to year so long as such continuance is approved at least annually
(i) by the vote of a majority of the noninterested Trustees of the Fund or of
the Adviser cast in person at a meeting specifically called for the purpose of
voting on such approval and (ii) by the Board of Trustees of the Fund or by vote
of a majority of the outstanding Shares of the Fund. The Fund's Administration
Agreement continues in effect from year to year so long as such continuance is
approved at least annually by the vote of a majority of the Fund's Trustees.
Each agreement may be terminated at any time without penalty on sixty (60) days'
written notice by the Trustees of the Fund or Eaton Vance, as applicable, or by
vote of the majority of the outstanding shares of the Fund. Each agreement will
terminate automatically in the event of its assignment. Each agreement provides
that, in the absence of willful misfeasance, bad faith, gross negligence or
reckless disregard of its obligations or duties to the Fund under such
agreements on the part of Eaton Vance, Eaton Vance shall not be liable to the
Fund for any loss incurred, to the extent not covered by insurance.
Eaton Vance is a business trust organized under Massachusetts law. EV serves as
trustee of Eaton Vance. Eaton Vance and EV are subsidiaries of EVC, a Maryland
corporation and publicly-held holding company. EVC through its subsidiaries and
affiliates engages primarily in investment management, administration and
marketing activities. The Directors of EVC are James B. Hawkes, John G. L.
Cabot, Thomas E. Faust Jr., Leo I. Higdon, Jr., John M. Nelson, Vincent M.
O'Reilly and Ralph Z. Sorenson. All shares of the outstanding Voting Common
Stock of EVC are deposited in a voting trust, the voting trustees of which are
Messrs. James B. Hawkes, Jeffrey P. Beale, Alan R. Dynner, Thomas E. Faust Jr.,
Thomas J. Fetter, Scott H. Page, Duncan W. Richardson, William M. Steul, Payson
F. Swaffield, Michael W. Weilheimer and Wharton P. Whitaker (all of whom are
officers of Eaton Vance). The voting trustees have unrestricted voting rights
for the election of Directors of EVC. All of the outstanding voting trust
receipts issued under said voting trust are owned by certain of the officers of
BMR and Eaton Vance who are also officers, or officers and Directors of EVC and
EV. As indicated under "Trustees and Officers", all of the officers of the Fund
(as well as Mr. Hawkes who is also a Trustee) hold positions in the Eaton Vance
organization.
EVC and its affiliates and their officers and employees from time to time have
transactions with various banks, including the custodian of the Fund, IBT. It is
Eaton Vance's opinion that the terms and conditions of such transactions were
not and will not be influenced by existing or potential custodial or other
relationships between the Fund and such banks.
CODE OF ETHICS
The Adviser and the Fund have adopted a Code of Ethics governing personal
securities transactions. Under the Code, Eaton Vance employees may purchase and
sell securities (including securities held or
--------------------------------------------------------------------------------
15
INVESTMENT ADVISORY AND OTHER SERVICES
--------------------------------------------------------------------------------
eligible for purchase by the Fund) subject to certain pre-clearance and
reporting requirements and other procedures.
The Code can be reviewed and copied at the Securities and Exchange Commission's
public reference room in Washington, DC (call 1-202-942-8090 for information on
the operation of the public reference room); on the EDGAR Database on the SEC's
Internet site (http://www.sec.gov); or, upon payment of copying fees, by writing
the SEC's public reference section, Washington, DC 20549-0102, or by electronic
mail at publicinfo@sec.gov.
INVESTMENT ADVISORY SERVICES
Under the general supervision of the Fund's Board of Trustees, Eaton Vance will
carry out the investment and reinvestment of the assets of the Fund, will
furnish continuously an investment program with respect to the Fund, will
determine which securities should be purchased, sold or exchanged, and will
implement such determinations. Eaton Vance will furnish to the Fund investment
advice and provide related office facilities and personnel for servicing the
investments of the Fund. Eaton Vance will compensate all Trustees and officers
of the Fund who are members of the Eaton Vance organization and who render
investment services to the Fund, and will also compensate all other Eaton Vance
personnel who provide research and investment services to the Fund.
ADMINISTRATIVE SERVICES
Under the Administration Agreement, Eaton Vance is responsible for managing the
business affairs of the Fund, subject to the supervision of the Fund's Board of
Trustees. Eaton Vance will furnish to the Fund all office facilities, equipment
and personnel for administering the affairs of the Fund. Eaton Vance will
compensate all Trustees and officers of the Fund who are members of the Eaton
Vance organization and who render executive and administrative services to the
Fund, and will also compensate all other Eaton Vance personnel who perform
management and administrative services for the Fund. Eaton Vance's
administrative services include recordkeeping, preparation and filing of
documents required to comply with federal and state securities laws, supervising
the activities of the Fund's custodian and transfer agent, providing assistance
in connection with the Trustees and shareholders' meetings, providing services
in connection with repurchase offers, if any, and other administrative services
necessary to conduct the Fund's business.
Determination of net asset value
The net asset value per Share of the Fund is determined no less frequently than
daily, on each day that the New York Stock Exchange (the "Exchange") is open for
trading, as of the close of regular trading on the Exchange (normally 4:00 p.m.
New York time). The Fund's net asset value per Share is determined by IBT, in
the manner authorized by the Trustees of the Fund. Net asset value is computed
by dividing the value of the Fund's total assets, less its liabilities by the
number of shares outstanding.
The Trustees of the Fund have established the following procedures for fair
valuation of the Fund's assets under normal market conditions. Marketable
securities listed on foreign or U.S. securities exchanges generally are valued
at closing sale prices or, if there were no sales, at the mean between the
closing bid and asked prices therefor on the exchange where such securities are
principally traded (such prices may not be used, however, where an active
over-the-counter market in an exchange listed security better reflects current
market value). Marketable securities listed in the NASDAQ National Market System
are valued at the NASDAQ official closing price. Unlisted or listed securities
for which closing sale prices are not available are valued at the mean between
the latest bid and asked prices. An option is valued at the last sale price as
quoted on the principal exchange or board of trade on which such option or
contract is traded, or in the absence of a sale, at the mean between the last
bid and asked prices.
--------------------------------------------------------------------------------
16
DETERMINATION OF NET ASSET VALUE
--------------------------------------------------------------------------------
The Adviser and the Valuation Committee may implement new pricing methodologies
or expand mark-to-market valuation of debt securities whose market prices are
not readily available in the future, which may result in a change in the Fund's
net asset value per share. The Fund's net asset value per share will also be
affected by fair value pricing decisions and by changes in the market for such
debt securities. In determining the fair value of a debt security, the Adviser
will consider relevant factors, data, and information, including: (i) the
characteristics of and fundamental analytical data relating to the debt
security, including the cost, size, current interest rate, period until next
interest rate reset, maturity and base lending rate of the debt security, the
terms and conditions of the debt security and any related agreements, and the
position of the debt security in the Borrower's debt structure; (ii) the nature,
adequacy and value of the collateral, including the Fund's rights, remedies and
interests with respect to the collateral; (iii) the creditworthiness of the
Borrower, based on an evaluation of its financial condition, financial
statements and information about the Borrower's business, cash flows, capital
structure and future prospects; (iv) information relating to the market for the
debt security, including price quotations for and trading in the debt security
and interests in similar debt security and the market environment and investor
attitudes towards the debt security and interests in similar debt securities;
(v) the experience, reputation, stability and financial condition of the Agent
and any intermediate participants in the debt security; and (vi) general
economic and market conditions affecting the fair value of the debt security.
The fair value of each debt security is reviewed and approved by the Adviser's
Valuation Committee and the Fund's Trustees.
Debt securities for which the over-the-counter market is the primary market are
normally valued on the basis of prices furnished by one or more pricing services
at the mean between the latest available bid and asked prices. OTC options are
valued at the mean between the bid and asked prices provided by dealers.
Financial futures contracts listed on commodity exchanges and exchange-traded
options are valued at closing settlement prices. Short-term obligations having
remaining maturities of less than 60 days are valued at amortized cost, which
approximates value, unless the Trustees determine that under particular
circumstances such method does not result in fair value. As authorized by the
Trustees, debt securities (other than short-term obligations) may be valued on
the basis of valuations furnished by a pricing service which determines
valuations based upon market transactions for normal, institutional-size trading
units of such securities. Securities for which there is no such quotation or
valuation and all other assets are valued at fair value as determined in good
faith by or at the direction of the Fund's Trustees.
All other securities are valued at fair value as determined in good faith by or
at the direction of the Trustees.
Generally, trading in the foreign securities owned by the Fund is substantially
completed each day at various times prior to the close of the Exchange. The
values of these securities used in determining the net asset value of the Fund
generally are computed as of such times. Occasionally, events affecting the
value of foreign securities may occur between such times and the close of the
Exchange which will not be reflected in the computation of the Fund's net asset
value (unless the Fund deems that such events would materially affect its net
asset value, in which case an adjustment would be made and reflected in such
computation). The Fund may rely on an independent fair valuation service in
making any such adjustment. Foreign securities and currency held by the Fund
will be valued in U.S. dollars; such values will be computed by the custodian
based on foreign currency exchange rate quotations supplied by an independent
quotation service.
Portfolio trading
Decisions concerning the execution of portfolio security transactions, including
the selection of the market and the executing firm, are made by the Adviser. The
Adviser is also responsible for the execution of transactions for all other
accounts managed by it. The Adviser places the portfolio
--------------------------------------------------------------------------------
17
PORTFOLIO TRADING
--------------------------------------------------------------------------------
security transactions of the Fund and of all other accounts managed by it for
execution with many firms. The Adviser uses its best efforts to obtain execution
of portfolio security transactions at prices which are advantageous to the Fund
and at reasonably competitive spreads or (when a disclosed commission is being
charged) at reasonably competitive commission rates. In seeking such execution,
the Adviser will use its best judgment in evaluating the terms of a transaction,
and will give consideration to various relevant factors, including without
limitation the full range and quality of the executing firm's services, the
value of the brokerage and research services provided, the responsiveness of the
firm to the Adviser, the size and type of the transaction, the nature and
character of the market for the security, the confidentiality, speed and
certainty of effective execution required for the transaction, the general
execution and operational capabilities of the executing firm, the reputation,
reliability, experience and financial condition of the firm, the value and
quality of the services rendered by the firm in this and other transactions, and
the reasonableness of the spread or commission, if any.
Transactions on stock exchanges and other agency transactions involve the
payment of negotiated brokerage commissions. Such commissions vary among
different broker-dealer firms, and a particular broker-dealer may charge
different commissions according to such factors as the difficulty and size of
the transaction and the volume of business done with such broker-dealer.
Transactions in foreign securities often involve the payment of brokerage
commissions, which may be higher than those in the United States. There is
generally no stated commission in the case of securities traded in the over-the-
counter markets, but the price paid or received usually includes an undisclosed
dealer markup or markdown. In an underwritten offering, the price paid often
includes a disclosed fixed commission or discount retained by the underwriter or
dealer.
Fixed income obligations, which may be purchased and sold by the Fund, are
generally traded in the over-the-counter market on a net basis (i.e., without
commission) through broker-dealers or banks acting for their own account rather
than as brokers, or otherwise involve transactions directly with the issuers of
such obligations. The Fund may also purchase fixed income and other securities
from underwriters, the cost of which may include undisclosed fees and
concessions to the underwriters.
Although spreads or commissions paid on portfolio security transactions will, in
the judgment of the Adviser, be reasonable in relation to the value of the
services provided, commissions exceeding those which another firm might charge
may be paid to broker-dealers who were selected to execute transactions on
behalf of the Adviser's clients in part for providing brokerage and research
services to the Adviser.
As authorized in Section 28(e) of the Securities Exchange Act of 1934, a broker
or dealer who executes a portfolio transaction on behalf of the Fund may receive
a commission which is in excess of the amount of commission another broker or
dealer would have charged for effecting that transaction if the Adviser
determines in good faith that such compensation was reasonable in relation to
the value of the brokerage and research services provided. This determination
may be made on the basis of that particular transaction or on the basis of
overall responsibilities which the Adviser and its affiliates have for accounts
over which they exercise investment discretion. In making any such
determination, the Adviser will not attempt to place a specific dollar value on
the brokerage and research services provided or to determine what portion of the
commission should be related to such services. Brokerage and research services
may include advice as to the value of securities, the advisability of investing
in, purchasing, or selling securities, and the availability of securities or
purchasers or sellers of securities; furnishing analyses and reports concerning
issuers, industries, securities, economic factors and trends, portfolio strategy
and the performance of accounts; effecting securities transactions and
performing functions incidental thereto (such as clearance and settlement); and
the "Research Services" referred to in the next paragraph.
--------------------------------------------------------------------------------
18
PORTFOLIO TRADING
--------------------------------------------------------------------------------
It is a common practice of the investment advisory industry and of the advisers
of investment companies, institutions and other investors to receive research,
analytical, statistical and quotation services, data, information and other
services, products and materials which assist such advisers in the performance
of their investment responsibilities ("Research Services") from broker-dealer
firms which execute portfolio transactions for the clients of such advisers and
from third parties with which such broker-dealers have arrangements. Consistent
with this practice, the Adviser receives Research Services from many
broker-dealer firms with which the Adviser places the Fund's transactions and
from third parties with which these broker-dealers have arrangements. These
Research Services include such matters as general economic, political, business
and market information, industry and company reviews, evaluations of securities
and portfolio strategies and transactions, proxy voting data and analysis
services, technical analysis of various aspects of the securities market,
recommendations as to the purchase and sale of securities and other portfolio
transactions, financial, industry and trade publications, news and information
services, pricing and quotation equipment and services, and research oriented
computer hardware, software, data bases and services. Any particular Research
Service obtained through a broker-dealer may be used by the Adviser in
connection with client accounts other than those accounts which pay commissions
to such broker-dealer. Any such Research Service may be broadly useful and of
value to the Adviser in rendering investment advisory services to all or a
significant portion of its clients, or may be relevant and useful for the
management of only one client's account or of a few clients' accounts, or may be
useful for the management of merely a segment of certain clients' accounts,
regardless of whether any such account or accounts paid commissions to the
broker-dealer through which such Research Service was obtained. The advisory fee
paid by the Fund is not reduced because the Adviser receives such Research
Services. The Adviser evaluates the nature and quality of the various Research
Services obtained through broker-dealer firms and attempts to allocate
sufficient portfolio security transactions to such firms to ensure the continued
receipt of Research Services which the Adviser believes are useful or of value
to it in rendering investment advisory services to its clients.
The Fund and the Adviser may also receive Research Services from underwriters
and dealers in fixed-price offerings, which Research Services are reviewed and
evaluated by the Adviser in connection with its investment responsibilities. The
investment companies sponsored by the Adviser or its affiliates may allocate
trades in such offerings to acquire information relating to the performance,
fees and expenses of such companies and other mutual funds, which information is
used by the Trustees of such companies to fulfill their responsibility to
oversee the quality of the services provided by various entities, including the
Adviser, to such companies. Such companies may also pay cash for such
information.
Subject to the requirement that the Adviser shall use its best efforts to seek
and execute portfolio security transactions at advantageous prices and at
reasonably competitive spreads or commission rates, the Adviser is authorized to
consider as a factor in the selection of any broker-dealer firm with whom
portfolio orders may be placed the fact that such firm has sold or is selling
shares of the Fund or of other investment companies sponsored by the Adviser.
This policy is not inconsistent with a rule of the National Association of
Securities Dealers, Inc. ("NASD"), which rule provides that no firm which is a
member of the NASD shall favor or disfavor the distribution of shares of any
particular investment company or group of investment companies on the basis of
brokerage commissions received or expected by such firm from any source.
Securities considered as investments for the Fund may also be appropriate for
other investment accounts managed by the Adviser or its affiliates. Whenever
decisions are made to buy or sell securities by the Fund and one or more of such
other accounts simultaneously, the Adviser will allocate the security
transactions (including "hot" issues) in a manner which it believes to be
equitable under the circumstances. As a result of such allocations, there may be
instances where the Fund will not
--------------------------------------------------------------------------------
19
PORTFOLIO TRADING
--------------------------------------------------------------------------------
participate in a transaction that is allocated among other accounts. If an
aggregated order cannot be filled completely, allocations will generally be made
on a pro rata basis. An order may not be allocated on a pro rata basis where,
for example: (i) consideration is given to portfolio managers who have been
instrumental in developing or negotiating a particular investment; (ii)
consideration is given to an account with specialized investment policies that
coincide with the particulars of a specific investment; (iii) pro rata
allocation would result in odd-lot or de minimis amounts being allocated to a
portfolio or other client; or (iv) where the Adviser reasonably determines that
departure from a pro rata allocation is advisable. While these aggregation and
allocation policies could have a detrimental effect on the price or amount of
the securities available to the Fund from time to time, it is the opinion of the
Trustees of the Fund that the benefits from the Adviser's organization outweigh
any disadvantage that may arise from exposure to simultaneous transactions.
Taxes
The following discussion of federal income tax matters is based on the advice of
Kirkpatrick & Lockhart LLP, counsel to the Fund. The Fund intends to elect to be
treated and to qualify each year as a RIC under the Code. Accordingly, the Fund
intends to satisfy certain requirements relating to sources of its income and
diversification of its assets and to distribute substantially all of its net
income and net short-term and long-term capital gains (after reduction by any
available capital loss carryforwards) in accordance with the timing requirements
imposed by the Code, so as to maintain its RIC status and to avoid paying any
federal income or excise tax. To the extent it qualifies for treatment as a RIC
and satisfies the above-mentioned distribution requirements, the Fund will not
be subject to federal income tax on income paid to its shareholders in the form
of dividends or capital gain distributions.
In order to avoid incurring a federal excise tax obligation, the Code requires
that the Fund distribute (or be deemed to have distributed) by December 31 of
each calendar year an amount at least equal to the sum of (i) 98% of its
ordinary income for such year and (ii) 98% of its capital gain net income (which
is the excess of its realized net long-term capital gain over its realized net
short-term capital loss), generally computed on the basis of the one-year period
ending on October 31 of such year, after reduction by any available capital loss
carryforwards, plus 100% of any ordinary income and capital gain net income from
the prior year (as previously computed) that were not paid out during such year
and on which the Fund paid no federal income tax. Under current law, provided
that the Fund qualifies as a RIC for federal income tax purposes, the Fund
should not be liable for any income, corporate excise or franchise tax in The
Commonwealth of Massachusetts. If the Fund does not qualify as a RIC for any
taxable year, the Fund's taxable income will be subject to corporate income
taxes, and all distributions from earnings and profits, including distributions
of net capital gain (if any), will be taxable to the shareholder as ordinary
income. In addition, in order to requalify for taxation as a RIC, the Fund may
be required to recognize unrealized gains, pay substantial taxes and interest,
and make certain distributions.
Under the recently enacted "Jobs and Growth Tax Relief Reconciliation Act of
2003" (the "Tax Act"), certain income distributions paid by the Fund to
individual taxpayers are taxed at rates equal to those applicable to net
long-term capital gains (15%, or 5% for individuals in the 10% or 15% tax
brackets). This tax treatment applies only if certain holding period
requirements and other requirements are satisfied by the Shareholder and the
dividends are attributable to qualified dividends received by the Fund itself.
For this purpose, "qualified dividends" means dividends received by the Fund
from United States corporations and "qualified foreign corporations," provided
that the Fund satisfies certain holding period and other requirements in respect
of the stock of such corporations. In the case of securities lending
transactions, payments in lieu of dividends are not qualified dividends.
Dividends received by the Fund from REITs are qualified dividends eligible for
this lower tax rate only
--------------------------------------------------------------------------------
20
TAXES
--------------------------------------------------------------------------------
in limited circumstances. These special rules relating to the taxation of
ordinary income dividends from regulated investment companies generally apply to
taxable years beginning after December 31, 2002 and beginning before January 1,
2009. Thereafter, the Fund's dividends, other than capital gain dividends, will
be fully taxable at ordinary income tax rates unless further Congressional
legislative action is taken.
A dividend will not be treated as qualified dividend income (whether received by
the Fund or paid by the Fund to a shareholder) if (1) the dividend is received
with respect to any share held for fewer than 61 days during the 120-day period
beginning on the date which is 60 days before the date on which such share
becomes ex-dividend with respect to such dividend, (2) to the extent that the
recipient 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) if the recipient elects to have the dividend treated as
investment income for purposes of the limitation on deductibility of investment
interest.
Subject to certain exceptions, a "qualified foreign corporation" is any foreign
corporation that is either (i) incorporated in a possession of the United States
(the "possessions test"), or (ii) eligible for benefits of a comprehensive
income tax treaty with the United States, which the Secretary of the Treasury
determines is satisfactory for these purposes and which includes an exchange of
information program (the "treaty test"). The Secretary of the Treasury has
identified tax treaties between the United States and 52 other countries that
satisfy the treaty test.
Subject to the same exceptions, a foreign corporation that does not satisfy
either the possessions test or the treaty test will still be considered a
"qualified foreign corporation" with respect to any dividend paid by such
corporation if the stock with respect to which such dividend is paid is readily
tradable on an established securities market in the United States. The Treasury
Department has issued a notice stating that common or ordinary stock, or an
American depositary receipt in respect of such stock, is considered readily
tradable on an established securities market in the United States if it is
listed on a national securities exchange that is registered under section 6 of
the Securities Exchange Act of 1934 or on the Nasdaq Stock Market.
A qualified foreign corporation does not include any foreign corporation which
for the taxable year of the corporation in which the dividend is paid, or the
preceding taxable year, is a foreign personal holding company, a foreign
investment company or a passive foreign investment company.
The benefits of the reduced tax rates 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 Fund's investment in zero coupon and certain other securities will cause it
to realize income prior to the receipt of cash payments with respect to these
securities. Such income will be accrued daily by the Fund and, in order to avoid
a tax payable by the Fund, the Fund may be required to liquidate securities that
it might otherwise have continued to hold in order to generate cash so that the
Fund may make required distributions to its shareholders.
Investments in lower rated or unrated securities may present special tax issues
for the Fund to the extent that the issuers of these securities default on their
obligations pertaining thereto. The Code is not entirely clear regarding the
federal income tax consequences of the Fund's taking certain positions in
connection with ownership of such distressed securities.
Any recognized gain or income attributable to market discount on long-term debt
obligations (i.e., obligations with a term of more than one year except to the
extent of a portion of the discount attributable to original issue discount)
purchased by the Fund is taxable as ordinary income. A long-term debt obligation
is generally treated as acquired at a market discount if purchased after its
original issue at a price less than (i) the stated principal amount payable at
maturity, in the case of an
--------------------------------------------------------------------------------
21
TAXES
--------------------------------------------------------------------------------
obligation that does not have original issue discount or (ii) in the case of an
obligation that does have original issue discount, the sum of the issue price
and any original issue discount that accrued before the obligation was
purchased, subject to a de minimis exclusion.
The Fund's investments in options, futures contracts, hedging transactions,
forward contracts (to the extent permitted) and certain other transactions will
be subject to special tax rules (including mark-to-market, constructive sale,
straddle, wash sale, short sale and other rules), the effect of which may be to
accelerate income to the Fund, defer Fund losses, cause adjustments in the
holding periods of securities held by the Fund, convert capital gain into
ordinary income and convert short-term capital losses into long-term capital
losses. These rules could therefore affect the amount, timing and character of
distributions to shareholders. The Fund may be required to limit its activities
in options and futures contracts in order to enable it to maintain its RIC
status.
Any loss realized upon the sale or exchange of Fund shares with a holding period
of 6 months or less will be treated as a long-term capital loss to the extent of
any capital gain distributions received with respect to such shares. In
addition, all or a portion of a loss realized on a redemption or other
disposition of Fund shares may be disallowed under "wash sale" rules to the
extent the shareholder acquires other shares of the same Fund (whether through
the reinvestment of distributions or otherwise) within the period beginning 30
days before the redemption of the loss shares and ending 30 days after such
date. Any disallowed loss will result in an adjustment to the shareholder's tax
basis in some or all of the other shares acquired.
Sales charges paid upon a purchase of shares cannot be taken into account for
purposes of determining gain or loss on a sale of the shares before the 91st day
after their purchase to the extent a sales charge is reduced or eliminated in a
subsequent acquisition of shares of the Fund (or of another fund) pursuant to
the reinvestment or exchange privilege. Any disregarded amounts will result in
an adjustment to the shareholder's tax basis in some or all of any other shares
acquired.
Dividends and distributions on the Fund's shares are generally subject to
federal income tax as described herein to the extent they do not exceed the
Fund's realized income and gains, even though such dividends and distributions
may economically represent a return of a particular shareholder's investment.
Such distributions are likely to occur in respect of shares purchased at a time
when the Fund's net asset value reflects gains that are either unrealized, or
realized but not distributed. Such realized gains may be required to be
distributed even when the Fund's net asset value also reflects unrealized
losses. Certain distributions declared in October, November or December and paid
in the following January will be taxed to shareholders as if received on
December 31 of the year in which they were 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 4% 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.
Dividends and interest received, and gains realized, by the Fund on foreign
securities may be subject to income, withholding or other taxes imposed by
foreign countries and U.S. possessions (collectively "foreign taxes") that would
reduce the return on its securities. Tax conventions between certain countries
and the United States, however, may reduce or eliminate foreign taxes, and many
foreign countries do not impose taxes on capital gains in respect of investments
by foreign investors. If more than 50% of the value of the Fund's total assets
at the close of its taxable year consists of securities of foreign corporations,
it will be eligible to, and may, file an election with the Internal Revenue
Service that will enable its shareholders, in effect, to receive the benefit of
the foreign tax credit with respect to any foreign taxes paid by it. Pursuant to
the election, the Fund would treat those taxes as dividends paid to its
shareholders and each shareholder (1) would be required to include in gross
income, and treat as paid by such shareholder, a proportionate share of those
taxes, (2) would be required to treat
--------------------------------------------------------------------------------
22
TAXES
--------------------------------------------------------------------------------
such share of those taxes and of any dividend paid by the fund that represents
income from foreign or U.S. possessions sources as such shareholder's own income
from those sources, and (3) could either deduct the foreign taxes deemed paid in
computing taxable income or, alternatively, use the foregoing information in
calculating the foreign tax credit against federal income tax. The Fund will
report to its shareholders shortly after each taxable year their respective
shares of foreign taxes paid and the income from sources within, and taxes paid
to, foreign countries and U.S. possessions if it makes this election. An
individual who has no more than $300 ($600 for married persons filing jointly)
of creditable foreign taxes included on Forms 1099 and all of whose foreign
source income is "qualified passive income" may elect each year to be exempt
from the complicated foreign tax credit limitation, in which event such
individual would be able to claim a foreign tax credit without needing to file
the detailed Form 1116 that otherwise is required.
The Fund may invest in the stock of "passive foreign investment companies"
("PFICs"). A PFIC is any foreign corporation (with certain exceptions) that, in
general, meets either of the following tests: (1) at least 75% of its gross
income is passive or (2) an average of at least 50% of its assets produce, or
are held for the production of, passive income. Under certain circumstances, the
Fund will be subject to federal income tax on a portion of any "excess
distribution" received on the stock of a PFIC or of any gain from disposition of
that stock (collectively "PFIC income"), plus interest thereon, even if the Fund
distributes the PFIC income as a taxable dividend to its shareholders. The
balance of the PFIC income will be included in the Fund's investment company
taxable income and, accordingly, will not be taxable to it to the extent it
distributes that income to its shareholders.
If the Fund invests in a PFIC and elects to treat the PFIC as a "qualified
electing fund" ("QEF"), then in lieu of the foregoing tax and interest
obligation, the Fund will be required to include in income each year its pro
rata share of the QEF's annual ordinary earnings and net capital gain--which it
may have to distribute to satisfy the Distribution Requirement and avoid
imposition of the Excise Tax--even if the QEF does not distribute those earnings
and gain to the fund. In most instances it will be very difficult, if not
impossible, to make this election because of certain of its requirements.
The Fund may elect to "mark to market" its stock in any PFIC.
"Marking-to-market," in this context, means including in ordinary income each
taxable year the excess, if any, of the fair market value of a PFIC's stock over
a fund's adjusted basis therein as of the end of that year. Pursuant to the
election, the Fund also would be allowed to deduct (as an ordinary, not capital,
loss) the excess, if any, of its adjusted basis in PFIC stock over the fair
market value thereof as of the taxable year-end, but only to the extent of any
net mark-to-market gains with respect to that stock included by the Fund for
prior taxable years under the election. The Fund's adjusted basis in each PFIC's
stock with respect to which it has made this election will be adjusted to
reflect the amounts of income included and deductions taken thereunder.
Amounts paid by the Fund to individuals and certain other shareholders who have
not provided the Fund with their correct taxpayer identification number ("TIN")
and certain certifications required by the Internal Revenue Service (the "IRS")
as well as shareholders with respect to whom the Fund has received certain
information from the IRS or a broker may be subject to "backup" withholding of
federal income tax arising from the Fund's taxable dividends and other
distributions as well as the gross proceeds of sales of shares, at a rate of 28%
for amounts paid during 2003. An individual's TIN is generally his or her social
security number. Backup withholding is not an additional tax. Any amounts
withheld under the backup withholding rules 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 discussion does not address the special tax rules applicable to
certain classes of investors, such as tax-exempt entities, foreign investors,
insurance companies and financial institutions.
--------------------------------------------------------------------------------
23
TAXES
--------------------------------------------------------------------------------
Shareholders should consult their own tax advisers with respect to special tax
rules that may apply in their particular situations, as well as the state,
local, and, where applicable, foreign tax consequences of investing in the Fund.
The Fund will inform Shareholders of the source and tax status of all
distributions promptly after the close of each calendar year. The IRS has taken
the position that if a RIC has more than one class of shares, it may designate
distributions made to each class in any year as consisting of no more than that
class's proportionate share of particular types of income for that year,
including ordinary income and net capital gain. A class's proportionate share of
a particular type of income for a year is determined according to the percentage
of total dividends paid by the RIC during that year to the class. Accordingly,
the Fund intends to designate a portion of its distributions as capital gain
dividends in accordance with the IRS position.
Although the matter is not free from doubt, due to the absence of direct
regulatory or judicial authority, in the opinion of Kirkpatrick & Lockhart LLP,
counsel to the Fund, under current law the manner in which the Fund intends to
allocate items of ordinary income and net capital gain among the Fund's Common
Shares and auction preferred shares will be respected for federal income tax
purposes. It is possible that the IRS could disagree with counsel's opinion and
attempt to reallocate the Fund's net capital gain or other taxable income.
STATE AND LOCAL TAXES
Shareholders should consult their own tax advisers as the state or local tax
consequences of investing in the Fund.
Other information
The Fund is an organization of the type commonly known as a "Massachusetts
business trust." Under Massachusetts law, shareholders of such a trust may, in
certain circumstances, be held personally liable as partners for the obligations
of the trust. The Declaration of Trust contains an express disclaimer of
shareholder liability in connection with the Fund property or the acts,
obligations or affairs of the Fund. The Declaration of Trust also provides for
indemnification out of the Fund property of any shareholder held personally
liable for the claims and liabilities to which a shareholder may become subject
by reason of being or having been a shareholder. Thus, the risk of a shareholder
incurring financial loss on account of shareholder liability is limited to
circumstances in which the Fund itself is unable to meet its obligations. The
Fund has been advised by its counsel that the risk of any shareholder incurring
any liability for the obligations of the Fund is remote.
The Declaration of Trust provides that the Trustees will not be liable for
errors of judgment or mistakes of fact or law; but nothing in the Declaration of
Trust protects a Trustee against any liability to the Fund or its shareholders
to which he would otherwise be subject by reason of willful misfeasance, bad
faith, gross negligence, or reckless disregard of the duties involved in the
conduct of his office. Voting rights are not cumulative, which means that the
holders of more than 50% of the shares voting for the election of Trustees can
elect 100% of the Trustees and, in such event, the holders of the remaining less
than 50% of the shares voting on the matter will not be able to elect any
Trustees.
The Declaration of Trust provides that no person shall serve as a Trustee if
shareholders holding two-thirds of the outstanding shares have removed him from
that office either by a written declaration filed with the Fund's custodian or
by votes cast at a meeting called for that purpose. The Declaration of Trust
further provides that the Trustees of the Fund shall promptly call a meeting of
the shareholders
--------------------------------------------------------------------------------
24
OTHER INFORMATION
--------------------------------------------------------------------------------
for the purpose of voting upon a question of removal of any such Trustee or
Trustees when requested in writing to do so by the record holders of not less
than 10 per centum of the outstanding shares.
The Fund's Prospectus and this SAI do not contain all of the information set
forth in the Registration Statement that the Fund has filed with the SEC. The
complete Registration Statement may be obtained from the SEC upon payment of the
fee prescribed by its Rules and Regulations.
Independent auditors
Deloitte & Touche LLP, Boston, Massachusetts are the independent auditors for
the Fund, providing audit services, tax return preparation, and assistance and
consultation with respect to the preparation of filings with the SEC.
--------------------------------------------------------------------------------
25
--------------------------------------------------------------------------------
INDEPENDENT AUDITORS' REPORT
To the Trustees and Shareholder of
Eaton Vance Tax-Advantaged Dividend Income Fund:
We have audited the accompanying statement of assets and liabilities of Eaton
Vance Tax-Advantaged Dividend Income Fund (the "Fund") as of September 10, 2003
and the related statement of operations for the period from July 10, 2003 (date
of organization) through September 10, 2003. 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, the financial statements referred to above present fairly, in
all material respects, the financial position of Eaton Vance Tax-Advantaged
Dividend Income Fund as of September 10, 2003, and the result of its operations
for the period from July 10, 2003 (date of organization) through September 10,
2003 in conformity with accounting principles generally accepted in the United
States of America.
Deloitte & Touche LLP
Boston, Massachusetts
September 11, 2003
--------------------------------------------------------------------------------
26
--------------------------------------------------------------------------------
Eaton Vance Tax-Advantaged Dividend Income Fund
STATEMENT OF ASSETS AND LIABILITIES
SEPTEMBER 10, 2003
ASSETS
Cash...................................................... $100,000
Offering costs............................................ 800,000
Receivable from Adviser................................... 7,500
--------
Total assets.............................................. $907,500
========
LIABILITIES
Accrued offering costs.................................... $800,000
Accrued organizational costs.............................. 7,500
--------
Total liabilities......................................... $807,500
========
Net assets applicable to 5,000 common shares of beneficial
interest issued and outstanding........................... $100,000
========
NET ASSET VALUE AND OFFERING PRICE PER SHARE................ $ 20.00
========
STATEMENT OF OPERATIONS
PERIOD FROM JULY 10, 2003 (DATE OF ORGANIZATION) THROUGH SEPTEMBER 10, 2003
INVESTMENT INCOME........................................... $ --
--------
EXPENSES
Organization costs........................................ $ 7,500
Expense reimbursement..................................... (7,500)
--------
Net expenses........................................... $ --
--------
NET INVESTMENT INCOME....................................... $ --
========
See notes to financial statements.
--------------------------------------------------------------------------------
27
Notes to financial statements
NOTE 1: ORGANIZATION
The Fund was organized as a Massachusetts business trust on July 10, 2003, and
has been inactive since that date except for matters relating to its
organization and registration as a diversified, closed-end management investment
company under the Investment Company Act of 1940, as amended, and the Securities
Act of 1933, as amended, and the sale of 5,000 common shares to Eaton Vance
Management, the Fund's Investment Adviser.
Eaton Vance Management, or an affiliate, has agreed to reimburse all
organizational costs, estimated at approximately $7,500.
Eaton Vance Management, or an affiliate, has agreed to pay all offering costs
(other than sales loads) that exceed $0.04 per common share.
The Fund's investment objective is to provide a high level of after-tax total
return consisting primarily of tax-advantaged dividend income and capital
appreciation.
NOTE 2: ACCOUNTING POLICIES
The Fund's financial statements are prepared in accordance with accounting
principles generally accepted in the United States of America which require the
use of management estimates. Actual results may differ from those estimates.
The Fund's share of offering costs will be recorded within paid in capital as a
reduction of the proceeds from the sale of common shares upon the commencement
of Fund operations. The offering costs reflected above assume the sale of
20,000,000 common shares.
NOTE 3: INVESTMENT MANAGEMENT AGREEMENT
Pursuant to an investment advisory agreement between the Adviser and the Fund,
the Fund has agreed to pay an investment advisory fee, payable on a monthly
basis, at an annual rate of 0.85% of the average daily gross assets of the Fund.
Gross assets of the Fund shall be calculated by deducting accrued liabilities of
the Fund not including the amount of any preferred shares outstanding or the
principal amount of any indebtedness for money borrowed.
In addition, Eaton Vance has contractually agreed to reimburse the Fund for fees
and other expenses in the amount of 0.20% of the average daily gross assets for
the first 5 full years of the Fund's operations, 0.15% of average daily gross
assets in year 6, 0.10% in year 7 and 0.05% in year 8.
NOTE 4: FEDERAL INCOME TAXES
The Fund intends to comply with the requirements of the Internal Revenue Code
applicable to regulated investment companies and to distribute all of its
taxable income, including any net realized gain on investments.
--------------------------------------------------------------------------------
28
Portfolio of investments (unaudited) as of October 31, 2003
COMMON STOCKS--73.7%
SECURITY SHARES VALUE
-----------------------------------------------------------------------------------------
APPAREL--0.8%
VF Corp. ................................................... 250,000 $ 10,612,500
--------------
$ 10,612,500
==============
BROADCASTING AND PUBLISHING--0.5%
Gruppo Editoriale L'Espresso SPA(1)......................... 1,200,000 $ 6,414,354
--------------
$ 6,414,354
==============
BUILDING MATERIALS--0.8%
Stanley Works (The)......................................... 330,000 $ 11,002,200
--------------
$ 11,002,200
==============
CHEMICALS--0.8%
DuPont (E.I.)............................................... 167,500 $ 6,767,000
RPM, Inc. .................................................. 250,000 3,612,500
--------------
$ 10,379,500
==============
COMMERCIAL BANKS--10.3%
Associated Banc-Corp. ...................................... 175,000 $ 7,203,000
Bank of America Corp. ...................................... 150,000 11,359,500
Bank of Hawaii Corp. ....................................... 100,000 3,940,000
Charter One Financial, Inc. ................................ 250,000 7,990,000
Comerica, Inc. ............................................. 140,000 7,207,200
FleetBoston Financial Corp. ................................ 450,000 18,175,500
National City Corp.......................................... 125,000 4,082,500
PNC Bank Corp. ............................................. 275,000 14,731,750
U.S. Bancorp................................................ 250,000 6,805,000
Wachovia Corp. ............................................. 315,000 14,449,050
Washington Mutual, Inc. .................................... 600,000 26,250,000
Wells Fargo & Co. .......................................... 200,000 11,264,000
--------------
$ 133,457,500
==============
COMMERCIAL SERVICES & SUPPLIES--1.0%
Donnelley (R.R.) & Sons Co. ................................ 300,000 $ 7,800,000
Landauer, Inc. ............................................. 25,000 977,750
ServiceMaster Co. .......................................... 310,000 3,555,700
--------------
$ 12,333,450
==============
DISTRIBUTORS--0.5%
Genuine Parts Co............................................ 207,000 $ 6,586,740
--------------
$ 6,586,740
==============
--------------------------------------------------------------------------------
29
PORTFOLIO OF INVESTMENTS (UNAUDITED)
--------------------------------------------------------------------------------
SECURITY SHARES VALUE
-----------------------------------------------------------------------------------------
DIVERSIFIED TELECOMMUNICATION SERVICES--11.9%
BCE, Inc.(1) ............................................... 800,000 $ 18,088,000
BellSouth Corp. ............................................ 550,000 14,470,500
BT Group PLC(1)............................................. 2,000,000 6,290,676
SBC Communications, Inc. ................................... 1,500,000 35,970,000
Sprint Corp. (FON Group).................................... 700,000 11,200,000
TDC A/S(1).................................................. 250,000 8,016,571
Telefonos de Mexico SP ADR.................................. 850,000 27,327,500
Verizon Communications, Inc. ............................... 1,000,000 33,600,000
--------------
$ 154,963,247
==============
ELECTRICAL/ELECTRONIC MANUFACTURER--0.3%
Hubbell, Inc. .............................................. 100,000 $ 4,284,000
--------------
$ 4,284,000
==============
FINANCIAL SERVICES--2.2%
Citigroup, Inc. ............................................ 325,000 $ 15,405,000
J.P. Morgan Chase & Co. .................................... 375,000 13,462,500
--------------
$ 28,867,500
==============
FOOD PRODUCTS--1.6%
ConAgra Foods, Inc. ........................................ 275,000 $ 6,556,000
Sara Lee Corp. ............................................. 700,000 13,951,000
--------------
$ 20,507,000
==============
HEALTH CARE EQUIPMENT AND SUPPLIES--0.5%
Baxter International, Inc. ................................. 250,000 $ 6,645,000
--------------
$ 6,645,000
==============
HOTELS, RESTAURANTS AND LEISURE--1.6%
Harrah's Entertainment, Inc. ............................... 150,000 $ 6,525,000
McDonald's Corp. ........................................... 570,000 14,255,700
--------------
$ 20,780,700
==============
HOUSEHOLD PRODUCTS--0.6%
Kimberly-Clark Corp. ....................................... 135,000 $ 7,129,350
--------------
$ 7,129,350
==============
INDUSTRIAL CONGLOMERATES--1.8%
ALLETE, Inc. ............................................... 160,000 $ 4,833,600
General Electric Co. ....................................... 325,000 9,428,250
Honeywell International, Inc. .............................. 275,000 8,417,750
--------------
$ 22,679,600
==============
--------------------------------------------------------------------------------
30
PORTFOLIO OF INVESTMENTS (UNAUDITED)
--------------------------------------------------------------------------------
SECURITY SHARES VALUE
-----------------------------------------------------------------------------------------
INSURANCE--1.3%
Allstate Corp. (The)........................................ 180,000 $ 7,110,000
Mercury General Corp. ...................................... 75,000 3,564,750
St. Paul Cos., Inc. (The)................................... 175,000 6,672,750
--------------
$ 17,347,500
==============
METALS & MINING--0.7%
Cia Vale do Rio Doce ADR.................................... 162,500 $ 7,434,375
Worthington Industries, Inc. ............................... 100,000 1,458,000
--------------
$ 8,892,375
==============
MULTILINE RETAIL--0.5%
May Department Stores Co. (The)............................. 250,000 $ 6,990,000
--------------
$ 6,990,000
==============
OIL AND GAS--4.4%
BP PLC ADR.................................................. 310,000 $ 13,137,800
ChevronTexaco Corp. ........................................ 160,000 11,888,000
ConocoPhillips.............................................. 100,000 5,715,000
Kerr-McGee Corp. ........................................... 300,000 12,450,000
Marathon Oil Corp. ......................................... 470,000 13,897,900
--------------
$ 57,088,700
==============
PAPER AND FOREST PRODUCTS--0.5%
MeadWestvaco Corp. ......................................... 250,000 $ 6,480,000
--------------
$ 6,480,000
==============
PHARMACEUTICALS--0.8%
GlaxoSmithKline PLC ADR..................................... 250,000 $ 10,822,500
--------------
$ 10,822,500
==============
REITS--6.8%
AMB Property Corp. ......................................... 450,000 $ 13,495,500
AvalonBay Communities, Inc. ................................ 218,000 9,956,060
Colonial Properties Trust................................... 100,000 3,700,000
Crescent Real Estate Equities Co. .......................... 300,000 4,605,000
General Growth Properties, Inc. ............................ 200,000 15,300,000
Health Care Property Investors, Inc. ....................... 176,400 8,225,532
Mack-Cali Realty Corp. ..................................... 66,200 2,495,078
Mills Corp. (The)........................................... 210,000 8,568,000
United Dominion Realty Trust, Inc. ......................... 210,000 3,664,500
Vornado Realty Trust........................................ 350,000 17,692,500
--------------
$ 87,702,170
==============
RETAIL-SPECIALTY AND APPAREL--0.6%
Limited, Inc. (The)......................................... 475,000 $ 8,360,000
--------------
$ 8,360,000
==============
--------------------------------------------------------------------------------
31
PORTFOLIO OF INVESTMENTS (UNAUDITED)
--------------------------------------------------------------------------------
SECURITY SHARES VALUE
-----------------------------------------------------------------------------------------
TELECOMMUNICATIONS-EQUIPMENT--0.1%
Nokia Oyj ADR............................................... 90,000 $ 1,529,100
--------------
$ 1,529,100
==============
TOBACCO--1.6%
Altria Group, Inc. ......................................... 450,000 $ 20,925,000
--------------
$ 20,925,000
==============
UTILITIES-ELECTRICAL AND GAS--20.6%
AGL Resources, Inc. ........................................ 125,000 $ 3,518,750
Alliant Energy Corp. ....................................... 150,000 3,609,000
Ameren Corp. ............................................... 150,000 6,697,500
American Electric Power Co., Inc. .......................... 1,000,000 28,190,000
Centerpoint Energy, Inc. ................................... 200,000 1,962,000
Cinergy Corp. .............................................. 300,000 10,893,000
Dominion Resources, Inc. ................................... 300,000 18,480,000
Endesa SA(1)................................................ 200,000 3,165,435
Energy East Corp. .......................................... 400,000 8,980,000
Entergy Corp. .............................................. 180,000 9,702,000
Exelon Corp. ............................................... 100,000 6,345,000
FirstEnergy Corp. .......................................... 350,000 12,036,500
FPL Group, Inc. ............................................ 100,000 6,374,000
KeySpan Corp. .............................................. 300,000 10,491,000
National Grid Transco PLC(1)................................ 1,000,000 6,379,695
NSTAR....................................................... 100,000 4,670,000
OGE Energy Corp. ........................................... 300,000 6,843,000
ONEOK, Inc. ................................................ 150,000 2,983,500
Pepco Holdings, Inc. ....................................... 1,000,000 17,600,000
Pinnacle West Capital Corp. ................................ 400,000 14,624,000
Public Service Enterprise Group, Inc. ...................... 633,300 25,882,971
Scottish Power PLC(1)....................................... 3,700,000 21,958,020
Southern Co. (The).......................................... 1,000,000 29,800,000
TransAlta Corp.(1).......................................... 100,000 1,437,000
United Utilities PLC(1)..................................... 300,000 2,397,155
Vectren Corp. .............................................. 100,000 2,360,000
--------------
$ 267,379,526
==============
WATER UTILITIES--0.6%
Severn Trent PLC(1)......................................... 600,000 $ 7,202,909
--------------
$ 7,202,909
==============
TOTAL COMMON STOCKS (IDENTIFIED COST, $920,004,393)..................... $ 957,362,421
==============
--------------------------------------------------------------------------------
32
PORTFOLIO OF INVESTMENTS (UNAUDITED)
--------------------------------------------------------------------------------
PREFERRED STOCKS--19.6%
SECURITY SHARES VALUE
-----------------------------------------------------------------------------------------
COMMERCIAL BANKS--7.6%
Abbey National PLC, 7.375%(1)............................... 344,900 $ 9,277,810
Abbey National Capital Trust I, 8.963%(1)................... 10,000 13,311,870
Barclays Bank PLC, 6.86%(1)................................. 7,500 8,121,562
Barclays Bank PLC, 8.55%(1)................................. 9,600 11,796,259
BSCH Finance Ltd., 8.625%(1)................................ 35,000 962,500
CA Preferred Funding Trust, 7.00%(1)........................ 13,700 13,748,964
CA Preferred Funding Trust II, 7.00%(1)..................... 2,000 2,015,138
HSBC Capital Funding LP, 10.176%(1)......................... 10,000 14,566,050
Lloyds TSB Bank PLC, 6.90%(1)............................... 4,000 4,052,444
Royal Bank of Scotland Group PLC, 7.648%(1)................. 7,500 8,914,897
Royal Bank of Scotland Group PLC, 8.50%(1).................. 3,500 92,750
Royal Bank of Scotland Group PLC, 9.00%(1).................. 31,000 877,920
Royal Bank of Scotland Group PLC, 9.118%(1)................. 7,500 9,350,423
Standard Chartered PLC, 8.90%(1)............................ 1,800 1,998,000
--------------
$ 99,086,587
==============
FINANCIAL SERVICES--1.4%
BBVA Preferred Capital Ltd., 7.75%(1)....................... 73,900 $ 2,047,769
Lehman Brothers Holdings, Inc., 6.50%....................... 140,000 3,724,000
Prudential PLC, 6.50%(1).................................... 12,500 11,803,975
--------------
$ 17,575,744
==============
FOOD PRODUCTS--1.6%
Dairy Farmers of America, 7.875%............................ 175,000 $ 17,713,290
Ocean Spray Cranberries, Inc., 6.25%........................ 47,500 3,362,112
--------------
$ 21,075,402
==============
INSURANCE--3.8%
Ace Ltd., 7.80%(1).......................................... 490,000 $ 13,058,500
AXA, 7.10%(1)............................................... 15,000 14,889,000
ING Groep NV, 7.05%(1)...................................... 200,100 5,252,625
ING Groep NV, 7.20%(1)...................................... 222,155 5,909,323
PartnerRe Ltd., 6.75%(1).................................... 30,000 771,000
RenaissanceRe Holdings Ltd., 7.30%(1)....................... 22,000 592,900
XL Capital Ltd., 7.625%(1).................................. 218,040 5,834,750
XL Capital Ltd. Series A, 8.00%(1).......................... 110,765 2,995,086
--------------
$ 49,303,184
==============
--------------------------------------------------------------------------------
33
PORTFOLIO OF INVESTMENTS (UNAUDITED)
--------------------------------------------------------------------------------
SECURITY SHARES VALUE
-----------------------------------------------------------------------------------------
REITS--4.0%
CarrAmerica Realty Corp., 7.50%............................. 435,000 $ 11,266,500
Colonial Properties Trust, 8.125%........................... 477,000 12,564,180
Developers Diversified Realty Corp., 7.375%................. 90,000 2,277,000
Developers Diversified Realty Corp., 8.00%.................. 250,000 6,717,500
Federal Realty Investment Trust, 8.50%...................... 50,000 1,346,500
Health Care Reit, Inc., 7.875%.............................. 125,000 3,243,750
Prologis Trust, 6.75%....................................... 540,000 13,500,000
Regency Centers Corp., 7.45%................................ 5,000 133,550
Shurgard Storage Centers, Inc., 8.75%....................... 20,000 547,000
--------------
$ 51,595,980
==============
UTILITIES-ELECTRICAL AND GAS--1.2%
Interstate Power & Light Co., 7.10%......................... 134,000 $ 3,564,400
Southern Union Co., 7.55%................................... 500,000 12,745,000
--------------
$ 16,309,400
==============
TOTAL PREFERRED STOCKS (IDENTIFIED COST, $254,697,477).................. $ 254,946,297
==============
SHORT-TERM INVESTMENTS--7.2%
PRINCIPAL
AMOUNT
(000'S
SECURITY OMITTED) VALUE
-----------------------------------------------------------------------------------------
INVESTORS BANK & TRUST COMPANY--TIME DEPOSIT, 1.08%,
11/3/03................................................... 92,985 $ 92,985,000
--------------
TOTAL SHORT-TERM INVESTMENTS (AT AMORTIZED COST, $92,985,000)........... $ 92,985,000
==============
TOTAL INVESTMENTS--100.5% (IDENTIFIED COST, $1,267,686,870)............. $1,305,293,718
==============
OTHER ASSETS, LESS LIABILITIES--(0.5)%.................................. $ (6,384,371)
==============
NET ASSETS--100.0%...................................................... $1,298,909,347
==============
------------
ADR -- American Depositary Receipt
(1) Foreign security.
See notes to financial statements.
--------------------------------------------------------------------------------
34
Financial statements (unaudited)
STATEMENT OF ASSETS AND LIABILITIES
AS OF OCTOBER 31, 2003
ASSETS
Investments, at value (identified cost, $1,267,686,870)... $1,305,293,718
Cash...................................................... 365
Receivable for investments sold........................... 23,529,925
Receivable from the Investment Adviser.................... 7,500
Dividends and interest receivable......................... 5,662,897
--------------
TOTAL ASSETS................................................ $1,334,494,405
==============
LIABILITIES
Payable for investments purchased......................... $ 34,861,935
Payable to affiliate for Trustees' fees................... 2,400
Accrued expenses.......................................... 720,723
--------------
TOTAL LIABILITIES........................................... $ 35,585,058
==============
NET ASSETS FOR 66,005,000 COMMON SHARES OUTSTANDING......... $1,298,909,347
==============
SOURCES OF NET ASSETS
Paid-in capital........................................... $1,259,850,000
Accumulated net realized loss (computed on the basis of
identified cost)....................................... (3,430,954)
Accumulated undistributed net investment income........... 4,883,453
Net unrealized appreciation (computed on the basis of
identified cost)....................................... 37,606,848
--------------
TOTAL....................................................... $1,298,909,347
==============
NET ASSET VALUE PER COMMON SHARE
($1,298,909,347 / 66,005,000 COMMON SHARES ISSUED AND
OUTSTANDING).............................................. $ 19.68
==============
See notes to financial statements.
--------------------------------------------------------------------------------
35
FINANCIAL STATEMENTS (UNAUDITED)
--------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
FOR THE PERIOD ENDED OCTOBER 31, 2003(1)
INVESTMENT INCOME
Dividends (net of foreign taxes, $7,504).................. $ 5,472,015
Interest.................................................. 219,886
-----------
TOTAL INVESTMENT INCOME..................................... $ 5,691,901
===========
EXPENSES
Investment adviser fee.................................... $ 952,473
Trustees' fees and expenses............................... 2,400
Custodian fee............................................. 44,822
Legal and accounting services............................. 9,856
Organization expenses..................................... 7,500
Printing and postage...................................... 6,720
Transfer and dividend disbursing agent fees............... 5,248
Miscellaneous............................................. 11,040
-----------
TOTAL EXPENSES.............................................. $ 1,040,059
===========
Deduct--
Reduction of investment adviser fee....................... $ 224,111
Expense reimbursement..................................... 7,500
-----------
TOTAL EXPENSE REDUCTIONS.................................... $ 231,611
===========
NET EXPENSES................................................ $ 808,448
===========
NET INVESTMENT INCOME....................................... $ 4,883,453
===========
REALIZED AND UNREALIZED GAIN (LOSS)
Net realized gain (loss)--
Investment transactions (identified cost basis)........ $(3,436,455)
Foreign currency transactions.......................... 5,501
-----------
NET REALIZED LOSS........................................... $(3,430,954)
===========
Change in unrealized appreciation (depreciation)--
Investments (identified cost basis).................... $37,606,848
-----------
NET CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION)........ $37,606,848
===========
NET REALIZED AND UNREALIZED GAIN............................ $34,175,894
===========
NET INCREASE IN NET ASSETS FROM OPERATIONS.................. $39,059,347
===========
------------
(1) For the period from the start of business, September 30, 2003, to October
31, 2003.
See notes to financial statements.
--------------------------------------------------------------------------------
36
FINANCIAL STATEMENTS (UNAUDITED)
--------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
PERIOD ENDED
OCTOBER 31, 2003(1)
-------------------
INCREASE (DECREASE) IN NET ASSETS
From operations--
Net investment income..................................... $ 4,883,453
Net realized loss......................................... (3,430,954)
Net change in unrealized appreciation (depreciation)...... 37,606,848
---------------
NET INCREASE IN NET ASSETS FROM OPERATIONS.................. $ 39,059,347
===============
Transactions in shares of beneficial interest--
Proceeds from sale of shares(2)........................... $ 1,260,600,000
Offering Costs............................................ (850,000)
---------------
NET INCREASE IN NET ASSETS FROM FUND SHARE TRANSACTIONS..... $ 1,259,750,000
===============
NET INCREASE IN NET ASSETS.................................. $ 1,298,809,347
===============
NET ASSETS
At beginning of period...................................... $ 100,000
---------------
AT END OF PERIOD............................................ $ 1,298,909,347
===============
ACCUMULATED UNDISTRIBUTED NET INVESTMENT INCOME INCLUDED IN
NET ASSETS
AT END OF PERIOD............................................ $ 4,883,453
===============
------------
(1) For the period from the start of business, September 30, 2003, to October
31, 2003.
(2) Proceeds from sales of shares net of sales load paid of $59,400,000.
See notes to financial statements.
--------------------------------------------------------------------------------
37
FINANCIAL HIGHLIGHTS (UNAUDITED)
PERIOD ENDED
OCTOBER 31,
2003(2)(3)
----------------
Net asset value--Beginning of period(4)..................... $ 19.100
----------
INCOME (LOSS) FROM OPERATIONS
Net investment income....................................... $ 0.074
Net realized and unrealized gain............................ 0.519
----------
TOTAL INCOME FROM OPERATIONS................................ $ 0.593
==========
OFFERING COSTS.............................................. $ (0.013)
==========
NET ASSET VALUE--END OF PERIOD.............................. $ 19.680
==========
MARKET VALUE--END OF PERIOD................................. $ 20.600
==========
TOTAL INVESTMENT RETURN ON NET ASSET VALUE(5)............... 3.04%
==========
TOTAL INVESTMENT RETURN ON MARKET VALUE(5).................. 7.85%
==========
RATIOS/SUPPLEMENTAL DATA(1)
Net assets, end of period (000's omitted)................... $1,298,909
Ratios (as a percentage of average daily net assets):
Net expenses.............................................. 0.72%(6)
Net investment income..................................... 4.34%(6)
Portfolio turnover.......................................... 7%
------------
(1) The operating expenses of the Fund reflect a reduction of the investment
adviser fee and a reimbursement of expenses by the Adviser. Had such
actions not been taken, the ratios and net investment income per share
would have been as follows:
Ratios (as a percentage of average daily net assets):
Expenses.................................................. 0.92%(6)
Net investment income..................................... 4.14%(6)
Net investment income per share............................. $0.071
(2) For the period from the start of business, September 30, 2003, to October
31, 2003.
(3) Computed using average common shares outstanding.
(4) Net asset value at beginning of period reflects the deduction of the sales
load of $0.90 per share paid by the shareholder from the $20.00 offering
price.
(5) Total investment return on net asset value is calculated assuming a
purchase at the offering price of $20.00 less the sales load of $0.90 per
share paid by the shareholder on the first day and a sale at the net asset
value on the last day of the period reported. Total investment return on
market value is calculated assuming a purchase at the offering price of
$20.00 less the sales load of $0.90 per share paid by the shareholder on
the first day and a sale at the current market price on the last day of the
period reported. Total investment return on net asset value and total
investment return on market value are not computed on an annualized basis.
(6) Annualized.
See notes to financial statements.
--------------------------------------------------------------------------------
38
Notes to financial statements (unaudited)
1: SIGNIFICANT ACCOUNTING POLICIES
Eaton Vance Tax-Advantaged Dividend Income Fund (the Fund) is registered under
the Investment Company Act of 1940 (the 1940 Act), as amended, as a diversified,
closed-end management investment company. The Fund was organized under the laws
of the Commonwealth of Massachusetts by an Agreement and Declaration of Trust
dated July 10, 2003. The Fund's investment objective is to provide a high level
of after-tax total return consisting primarily of tax-advantaged dividend income
and capital appreciation. The Fund seeks to achieve its objective by investing
primarily in dividend-paying common and preferred stocks. The following is a
summary of significant accounting policies consistently followed by the Fund in
the preparation of its financial statements. The policies are in conformity with
accounting principles generally accepted in the United States of America.
A: INVESTMENT VALUATION
Marketable securities that are listed on foreign or U.S. securities exchanges
are valued at closing sale prices on the exchange where such securities are
principally traded. Marketable securities listed in the NASDAQ National Market
System are valued at the NASDAQ official closing price. Unlisted or listed
securities for which closing sale prices are not available are generally valued
at the mean between the latest bid and asked prices. Other fixed income and debt
securities, including listed securities and securities for which price
quotations are available, will normally be valued on the basis of valuations
furnished by a pricing service. Options are valued at the last sale price on a
U.S. exchange or board of trade or, in the absence of a sale, at the mean
between the last bid and asked price. Short-term debt securities with a
remaining maturity of 60 days or less are valued at amortized cost, which
approximates fair value. Investments for which valuations or market quotations
are unavailable are valued at fair value using methods determined in good faith
by or at the direction of the Trustees.
B: INCOME
Dividend income is recorded on the ex-dividend date for dividends received in
cash and/or securities. However, if the ex-dividend date has passed, certain
dividends from foreign securities are recorded as the Fund is informed of the
ex-dividend date. Interest income is recorded on the accrual basis.
C: FEDERAL TAXES
The Fund's policy is to comply with the provisions of the Internal Revenue Code
applicable to regulated investment companies and to distribute to shareholders
each year all of its taxable income, including any net realized gain on
investments. Accordingly, no provision for federal income or excise tax is
necessary.
D: OFFERING COSTS
Costs incurred by the Fund in connection with the offering of the common shares
were recorded as a reduction of capital paid in excess of par applicable to
common shares.
E: WRITTEN OPTIONS
Upon the writing of a call or a put option, an amount equal to the premium
received by the Fund is included in the Statement of Assets and Liabilities as a
liability. The amount of the liability is subsequently marked-to-market to
reflect the current value of the option written in accordance with the Fund's
policies on investment valuations discussed above. Premiums received from
writing options which expire are treated as realized gains. Premiums received
from writing options which are exercised or are closed are added to or offset
against the proceeds or amount paid on the transaction to determine the realized
gain or loss. If a put option is exercised, the premium reduces the cost basis
of
--------------------------------------------------------------------------------
39
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
--------------------------------------------------------------------------------
the securities purchased by the Fund. The Fund, as writer of an option, may have
no control over whether the underlying securities may be sold (call) or
purchased (put) and, as a result, bears the market risk of an unfavorable change
in the price of the securities underlying the written option.
F: PURCHASED OPTIONS
Upon the purchase of a call or put option, the premium paid by the Fund is
included in the Statement of Assets and Liabilities as an investment. The amount
of the investment is subsequently marked-to-market to reflect the current market
value of the option purchased, in accordance with the Fund's policies on
investment valuations discussed above. If an option which the Fund has purchased
expires on the stipulated expiration date, the Fund will realize a loss in the
amount of the cost of the option. If the Fund enters into a closing sale
transaction, the Fund will realize a gain or loss, depending on whether the
sales proceeds from the closing sale transaction are greater or less than the
cost of the option. If a Fund exercises a put option, it will realize a gain or
loss from the sale of the underlying security, and the proceeds from such sale
will be decreased by the premium originally paid. If the Fund exercises a call
option, the cost of the security which the Fund purchases upon exercise will be
increased by the premium originally paid.
G: SWAP AGREEMENTS
The Fund may enter into swap agreements to hedge against fluctuations in
securities prices, interest rates or market conditions, to change the duration
of the overall portfolio, to mitigate non-payment or default risk, or to gain
exposure to particular securities, baskets of securities, indices or currencies.
In a standard swap transaction, two parties agree to exchange the returns (or
differentials in rates of return) to be exchanged or swapped between the
parties, which returns are calculated with respect to a notional amount (i.e.,
the return on or increase in value of a particular dollar amount invested at a
particular interest rate or in a "basket" of securities representing a
particular index). The Fund will enter into swaps on a net basis. If the other
party to a swap defaults, the Fund's risk of loss consists of the net amount of
payments that the Fund is contractually entitled to receive. The Fund will not
enter into any swap unless the claims-paying ability of the other party thereto
is considered to be investment grade by the Adviser. These instruments are
traded in the over-the-counter market. If the Adviser is incorrect in its
forecasts of market values, interest rates and other applicable factors, the
investment performance of the Fund would be unfavorably affected.
H: USE OF ESTIMATES
The preparation of the financial statements in conformity with accounting
principles generally accepted in the United States of America requires
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 income and expense during the reporting period. Actual results could
differ from those estimates.
I: OTHER
Investment transactions are accounted for on a trade date basis. Realized gains
and losses are computed on the specific identification of the securities sold.
J: FOREIGN CURRENCY TRANSLATION
Investment valuations, other assets, and liabilities initially expressed in
foreign currencies are converted each business day into U.S. dollars based upon
current exchange rates. Purchases and sales of foreign investment securities and
income and expenses are converted into U.S. dollars based upon currency
--------------------------------------------------------------------------------
40
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
--------------------------------------------------------------------------------
exchange rates prevailing on the respective dates of such transactions.
Recognized gains or losses on investment transactions attributable to foreign
currency exchange rates are recorded for financial statement purposes as net
realized gains and losses on investments. That portion of unrealized gains and
losses on investments that results from fluctuations in foreign currency
exchange rates is not separately disclosed.
K: INTERIM FINANCIAL STATEMENTS
The interim financial statements relating to October 31, 2003 and for the period
then ended have not been audited by independent certified public accountants,
but in the opinion of the Fund's management reflect all adjustments, consisting
only of normal recurring adjustments, necessary for the fair presentation of the
financial statements.
2: DISTRIBUTION TO SHAREHOLDERS
The Fund intends to make monthly distributions of net investment income.
Distributions are recorded on the ex-dividend date. In addition, at least
annually, the Funds intends to distribute net capital gain, if any.
3: INVESTMENT ADVISER FEE AND OTHER TRANSACTIONS WITH AFFILIATES
The investment adviser fee is earned by Eaton Vance Management (EVM), as
compensation for management and investment advisory services rendered to the
Fund. Under the advisory agreement, EVM receives a monthly advisory fee in the
amount equal to 0.85% annually of average daily gross assets of the Fund. For
the period from the start of business, September 30, 2003 to October 31, 2003,
the advisory fee amounted to $952,473. EVM serves as the administrator of the
Fund, but currently receives no compensation for providing administrative
services to the Fund.
The Adviser has contractually agreed to reimburse the Fund for fees and other
expenses in the amount of 0.20% of the average daily gross assets for the first
five years of the Fund's operations, 0.15% of average daily gross assets in year
six, 0.10% in year seven and 0.05% in year eight. For the period from the start
of business, September 30, 2003 to October 31, 2003 the Investment Adviser
waived $224,111 of its advisory fee. In addition, the Adviser has agreed to
reimburse the Fund for all organizational costs, estimated at $7,500, which is
payable by the Adviser at October 31, 2003.
Trustees of the Fund who are not affiliated with EVM may elect to defer receipt
of all or a percentage of their annual fees in accordance with the terms of the
Trustees Deferred Compensation Plan. For the period from the start of business,
September 30, 2003, to October 31, 2003, no significant amounts have been
deferred.
Certain officers and Trustees of the Fund are officers of the above
organization.
4: PURCHASES AND SALES OF INVESTMENTS
Purchases and sales of investments, other than short-term obligations,
aggregated $1,241,199,811 and $63,059,721 respectively, for the period from the
start of business, September 30, 2003, to October 31, 2003.
--------------------------------------------------------------------------------
41
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
--------------------------------------------------------------------------------
5: FEDERAL INCOME TAX BASIS OF UNREALIZED APPRECIATION (DEPRECIATION)
The cost and unrealized appreciation (depreciation) in value of investments
owned by the Fund at October 31, 2003, as computed on a federal income tax
basis, were as follows:
AGGREGATE COST.............................................. $1,267,686,870
==============
Gross unrealized appreciation............................... $ 44,402,908
Gross unrealized depreciation............................... (6,796,060)
--------------
NET UNREALIZED APPRECIATION................................. $ 37,606,848
==============
6: COMMON SHARES OF BENEFICIAL INTEREST
The Declaration of Trust permits the Fund to issue an unlimited number of full
and fractional $0.01 par value common shares of beneficial interest.
Transactions in common shares were as follows:
PERIOD ENDED
OCTOBER 31, 2003
(UNAUDITED)(1)
------------------------------------------------------------------------------
Sales....................................................... 66,000,000
-----------
NET INCREASE................................................ 66,000,000
===========
------------
(1) For the period from the start of business, September 30, 2003, to October
31, 2003.
7: FINANCIAL INSTRUMENTS
The Fund may trade in financial instruments with off-balance sheet risk in the
normal course of its investing activities to assist in managing exposure to
various market risks. These financial instruments include written options,
forward foreign currency exchange contracts, and financial futures contracts and
may involve, to a varying degree, elements of risk in excess of the amounts
recognized for financial statement purposes. The notional or contractual amounts
of these instruments represent the investment the Fund has in particular classes
of financial instruments and does not necessarily represent the amounts
potentially subject to risk. The measurement of the risks associated with these
instruments is meaningful only when all related and offsetting transactions are
considered. The Fund did not have any open obligations under these financial
instruments at October 31, 2003.
--------------------------------------------------------------------------------
42
APPENDIX A: RATINGS
--------------------------------------------------------------------------------
Description of securities ratings+
Moody's Investors Service, Inc.
LONG-TERM DEBT SECURITIES AND PREFERRED STOCK RATINGS
AAA: Bonds and preferred stock which are rated Aaa are judged to be of the best
quality. They carry the smallest degree of investment risk and are generally
referred to as "gilt edged." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
AA: Bonds and preferred stock which are rated Aa are judged to be of high
quality by all standards. Together with the Aaa group they comprise what are
generally known as high grade bonds. They are rated lower than the best bonds
because margins of protection may not be as large as in Aaa securities or
fluctuation of protective elements may be of greater amplitude or there may be
other elements present which make the long term risk appear somewhat larger than
the Aaa securities.
A: Bonds and preferred stock which are rated A possess many favorable
investment attributes and are to be considered as upper-medium-grade
obligations. Factors giving security to principal and interest are considered
adequate, but elements may be present which suggest a susceptibility to
impairment sometime in the future.
BAA: Bonds and preferred stock which are rated Baa are considered as
medium-grade obligations (i.e., they are neither highly protected nor poorly
secured). Interest payments and principal security appear adequate for the
present but certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. Such bonds and
preferred stock lack outstanding investment characteristics and in fact have
speculative characteristics as well.
BA: Bonds and preferred stock which are rated Ba are judged to have speculative
elements; their future cannot be considered as well-assured. Often the
protection of interest and principal payments may be very moderate and thereby
not well safeguarded during other good and bad times over the future.
Uncertainty of position characterizes bonds in this class.
B: Bonds and preferred stock which are rated B generally lack characteristics
of the desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
CAA: Bonds and preferred stock which are rated Caa are of poor standing. Such
issues may be in default or there may be present elements of danger with respect
to principal or interest.
CA: Bonds and preferred stock which are rated Ca represent obligations which
are speculative in a high degree. Such issues are often in default or have other
marked shortcomings.
C: Bonds and preferred stock which are rated C are the lowest rated class of
bonds, and issues so rated can be regarded as having extremely poor prospects of
ever attaining any real investment standing.
---------------
+ The ratings indicated herein are believed to be the most recent ratings
available at the date of this SAI for the securities listed. Ratings are
generally given to securities at the time of issuance. While the rating
agencies may from time to time revise such ratings, they undertake no
obligation to do so, and the ratings indicated do not necessarily represent
ratings which would be given to these securities on the date of the Fund's
fiscal year end.
--------------------------------------------------------------------------------
A-1
DESCRIPTION OF SECURITIES RATINGS
--------------------------------------------------------------------------------
Absence of Rating: Where no rating has been assigned or where a rating has been
suspended or withdrawn, it may be for reasons unrelated to the quality of the
issue.
Should no rating be assigned, the reason may be one of the following:
1. An application for rating was not received or accepted.
2. The issue or issuer belongs to a group of securities or companies that are
not rated as a matter of policy.
3. There is a lack of essential data pertaining to the issue or issuer.
4. The issue was privately placed, in which case the rating is not published in
Moody's publications.
Suspension or withdrawal may occur if new and material circumstances arise, the
effects of which preclude satisfactory analysis; if there is no longer available
reasonable up-to-date data to permit a judgment to be formed; if a bond is
called for redemption; or for other reasons.
Note: Moody's applies numerical modifiers, 1, 2 and 3 in each generic rating
classification from Aa through B in its bond rating system. The modifier 1
indicates that the security ranks in the higher end of its generic rating
category; the modifier 2 indicates a mid-range ranking; and the modifier 3
indicates that the issue ranks in the lower end of its generic rating category.
SHORT-TERM DEBT SECURITIES RATINGS
Moody's short-term debt ratings are opinions of the ability of issuers to repay
punctually senior debt obligations. These obligations have an original maturity
not exceeding one year, unless explicitly noted.
Moody's employs the following three designations, all judged to be investment
grade, to indicate the relative repayment ability of rated issuers:
PRIME-1: Issuers rated Prime-1 (or supporting institutions) have a superior
ability for repayment of senior short-term debt obligations. Prime-1 repayment
ability will often be evidenced by many of the following characteristics:
leading market positions in well-established industries; high rates of return on
funds employed; conservative capitalization structure with moderate reliance on
debt and ample asset protection; broad margins in earnings coverage of fixed
financial charges and high internal cash generation; and well-established access
to a range of financial markets and assured sources of alternate liquidity.
PRIME-2: Issuers rated Prime-2 (or supporting institutions) have a strong
ability for repayment of senior short-term debt obligations. This will normally
be evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
PRIME-3: Issuers rated Prime-3 (or supporting institutions) have an acceptable
ability for repayment of senior short-term obligations. The effect of industry
characteristics and market compositions may be more pronounced. Variability in
earnings and profitability may result in changes in the level of debt protection
measurements and may require relatively high financial leverage. Adequate
alternate liquidity is maintained.
NOT PRIME: Issuers rated Not Prime do not fall within any of the Prime rating
categories.
--------------------------------------------------------------------------------
A-2
DESCRIPTION OF SECURITIES RATINGS
--------------------------------------------------------------------------------
STANDARD & POOR'S RATINGS GROUP
INVESTMENT GRADE
AAA: Debt and preferred stock rated AAA have the highest rating assigned by
S&P. Capacity to pay interest and repay principal is extremely strong.
AA: Debt rated AA have a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in small degree.
A: Debt and preferred stock rated A have 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 and preferred stock rated BBB are 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.
SPECULATIVE GRADE
Debt and preferred stock rated BB, B, CCC, CC and C are regarded as having
predominantly speculative characteristics with respect to capacity to pay
interest and repay principal. BB indicates the least degree of speculation and C
the highest. While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major exposures
to adverse conditions.
BB: Debt and preferred stock rated BB have less near-term vulnerability to
default than other speculative issues. However, it faces major ongoing
uncertainties or exposure to adverse business, financial, or economic conditions
which could lead to inadequate capacity to meet timely interest and principal
payments. The BB rating category is also used for debt subordinated to senior
debt that is assigned an actual or implied BBB- rating.
B: Debt and preferred stock rated B have a greater vulnerability to default but
currently has the capacity to meet interest payments and principal repayments.
Adverse business, financial, or economic conditions will likely impair capacity
or willingness to pay interest and repay principal. The B rating category is
also used for debt subordinated to senior debt that is assigned an actual or
implied BB or BB- rating.
CCC: Debt and preferred stock rated CCC have 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.
CC: The rating CC is typically applied to debt subordinated to senior debt and
preferred stock which is assigned an actual or implied CCC debt rating.
C: The rating C is typically applied to debt subordinated to senior debt and
preferred stock which is assigned an actual or implied CCC- debt rating. The C
rating may be used to cover a situation where a bankruptcy petition has been
filed, but debt service payments are continued.
C1: The Rating C1 is reserved for income bonds on which no interest is being
paid.
D: Debt and preferred stock rated D is in payment default. The D rating
category is used when interest payments or principal payments are not made on
the date due even if the applicable grace period has not expired, unless S&P
believes that such payments will be made during such grace period.
--------------------------------------------------------------------------------
A-3
DESCRIPTION OF SECURITIES RATINGS
--------------------------------------------------------------------------------
The D rating also will be used upon the filing of a bankruptcy petition if debt
service payments are jeopardized.
PLUS (+) OR MINUS (-): The ratings from AA to CCC may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
P: The letter "p" indicates that the rating is provisional. A provisional
rating assumes the successful completion of the project being financed by the
debt being rated and indicates that payment of debt service requirements is
largely or entirely dependent upon the successful and timely completion of the
project. This rating, however, while addressing credit quality subsequent to
completion of the project, makes no comment on the likelihood of, or the risk of
default upon failure of such completion. The investor should exercise his own
judgment with respect to such likelihood and risk.
L: The letter "L" indicates that the rating pertains to the principal amount of
those bonds to the extent that the underlying deposit collateral is insured by
the Federal Deposit Insurance Corp. and interest is adequately collateralized.
In the case of certificates of deposit, the letter "L" indicates that the
deposit, combined with other deposits being held in the same right and capacity,
will be honored for principal and accrued pre-default interest up to the federal
insurance limits within 30 days after closing of the insured institution or, in
the event that the deposit is assumed by a successor insured institution, upon
maturity.
NR: NR indicates no rating has been requested, that there is insufficient
information on which to base a rating, or that S&P does not rate a particular
type of obligation as a matter of policy.
COMMERCIAL PAPER
COMMERCIAL PAPER RATING DEFINITIONS
S&P's commercial paper rating is a current assessment of the likelihood of
timely payment of debt having an original maturity of no more than 365 days.
Ratings are graded into several categories, ranging from A for the highest
quality obligations to D for the lowest. These categories are as follows:
A-1: A short-term obligation rated A-1 is rated in the highest category by S&P.
The obligor's capacity to meet its financial commitment on the obligation is
strong. Within this category, certain obligations are designated with a plus
sign (+). This indicates that the obligor's capacity to meet its financial
commitment on these obligations is extremely strong.
A-2: A short-term obligation rated A-2 is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than
obligations in higher rating categories. However, the obligor's capacity to meet
its financial commitment on the obligation is satisfactory.
A-3: A short-term obligation rated A-3 exhibits adequate protection parameters.
However, adverse economic conditions or changing circumstances are more likely
to lead to a weakened capacity of the obligor to meet its financial commitment
on the obligation.
B: A short-term obligation rated B is regarded as having significant
speculative characteristics. The obligor currently has the capacity to meet its
financial commitment on the obligation; however, it faces major ongoing
uncertainties which could lead to the obligor's inadequate capacity to meet its
financial commitment on the obligation.
C: A short-term obligation rated C is currently vulnerable to nonpayment and is
dependent upon favorable business, financial, and economic conditions for the
obligor to meet its financial commitment on the obligation.
D: A short-term obligation rated D is in payment default. The D rating category
is used when payments on an obligation are not made on the date due even if the
applicable grace period has not expired, unless S&P believes that such payments
will be made during such grace period. The D rating
--------------------------------------------------------------------------------
A-4
DESCRIPTION OF SECURITIES RATINGS
--------------------------------------------------------------------------------
also will be used upon the filing of a bankruptcy petition or the taking of a
similar action if payments on an obligation are jeopardized.
A commercial paper rating is not a recommendation to purchase, sell or hold a
security inasmuch as it does not comment as to market price or suitability for a
particular investor. The ratings are based on current information furnished to
S&P by the issuer or obtained from other sources it considers reliable. S&P does
not perform an audit in connection with any rating and may, on occasion, rely on
unaudited financial information. The ratings may be changed, suspended, or
withdrawn as a result of changes in or unavailability of such information.
FITCH RATINGS
INVESTMENT GRADE RATINGS
AAA: Bonds and preferred stocks are considered to be investment grade and of
the highest credit quality. The obligor has an exceptionally strong ability to
pay interest and repay principal, which is unlikely to be affected by reasonably
foreseeable events.
AA: Bonds and preferred stocks are considered to be investment grade and of
very high credit quality. The obligor's ability to pay interest and repay
principal is very strong, although not quite as strong as bonds rated 'AAA'.
Because bonds rated in the 'AAA' and 'AA' categories are not significantly
vulnerable to foreseeable future developments, short-term debt of these issuers
is generally rated 'F-1+'.
A: Bonds and preferred stocks are considered to be investment grade and of high
credit quality. The obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse changes in
economic conditions and circumstances than bonds with higher ratings.
BBB: Bonds and preferred stocks are considered to be investment grade and of
satisfactory credit quality. The obligor's ability to pay interest and repay
principal is considered to be adequate. Adverse changes in economic conditions
and circumstances, however, are more likely to have adverse impact on these
bonds, and therefore, impair timely payment. The likelihood that the ratings of
these bonds will fall below investment grade is higher than for bonds with
higher ratings.
BELOW INVESTMENT GRADE RATINGS
BB: Bonds and preferred stocks are considered speculative. The obligor's
ability to pay interest and repay principal may be affected over time by adverse
economic changes. However, business and financial alternatives can be identified
that could assist the obligor in satisfying its debt service requirements.
B: Bonds and preferred stocks are considered highly speculative. While bonds in
this class are currently meeting debt service requirements, the probability of
continued timely payment of principal and interest reflects the obligor's
limited margin of safety and the need for reasonable business and economic
activity throughout the life of the issue.
CCC: Bonds and preferred stocks have certain identifiable characteristics
which, if not remedied, may lead to default. The ability to meet obligations
requires an advantageous business and economic environment.
CC: Bonds and preferred stocks are minimally protected. Default in payment of
interest and/or principal seems probable over time.
C: Bonds and preferred stocks are in imminent default in payment of interest or
principal.
--------------------------------------------------------------------------------
A-5
DESCRIPTION OF SECURITIES RATINGS
--------------------------------------------------------------------------------
DDD, DD AND D: Bonds and preferred stocks are in default on interest and/or
principal payments. Such bonds are extremely speculative and should be valued on
the basis of their ultimate recovery value in liquidation or reorganization of
the obligor. 'DDD' represents the highest potential for recovery on these bonds,
and 'D' represents the lowest potential for recovery.
PLUS (+) OR MINUS (-): The ratings from AA to C may be modified by the addition
of a plus or minus sign to indicate the relative position of a credit within the
rating category.
NR: Indicates that Fitch does not rate the specific issue.
CONDITIONAL: A conditional rating is premised on the successful completion of a
project or the occurrence of a specific event.
INVESTMENT GRADE SHORT-TERM RATINGS
Fitch's short-term ratings apply to debt obligations that are payable on demand
or have original maturities of generally up to three years, including commercial
paper, certificates of deposit, medium-term notes, and municipal and investment
notes.
F-1+: Exceptionally Strong Credit Quality. Issues assigned this rating are
regarded as having the strongest degree of assurance for timely payment.
F-1: Very Strong Credit Quality. Issues assigned this rating reflect an
assurance of timely payment only slightly less in degree than issues rated
'F-1+'.
F-2: Good Credit Quality. Issues carrying this rating have a satisfactory
degree of assurance for timely payment, but the margin of safety is not as great
as the 'F-1+' and 'F-1' categories.
F-3: Fair Credit Quality. Issues carrying this rating have characteristics
suggesting that the degree of assurance for timely payment is adequate, however,
near-term adverse change could cause these securities to be rated below
investment grade.
* * * * * * * *
Notes: Bonds which are unrated expose the investor to risks with respect to
capacity to pay interest or repay principal which are similar to the risks of
lower-rated speculative bonds. The Fund is dependent on the Adviser's judgment,
analysis and experience in the evaluation of such bonds.
Investors should note that the assignment of a rating to a bond by a rating
service may not reflect the effect of recent developments on the issuer's
ability to make interest and principal payments.
--------------------------------------------------------------------------------
A-6
APPENDIX B: AMENDED BY-LAWS
--------------------------------------------------------------------------------
EATON VANCE TAX-ADVANTAGED DIVIDEND INCOME FUND
AMENDMENT NO. 1 TO BY-LAWS--STATEMENT
CREATING SEVEN SERIES OF
AUCTION PREFERRED SHARES
WHEREAS, Section 5.1 of Article VI of the Agreement and Declaration of Trust
dated July 10, 2003 of Eaton Vance Tax-Advantaged Dividend Income Fund (the
"Declaration of Trust"), a copy of which is on file in the office of the
Secretary of the Commonwealth of The Commonwealth of Massachusetts, provides
that the Trustees may, without shareholder approval, authorize one or more
classes of shares (which classes may be divided into two or more series), shares
of each such class or series having such preferences, voting powers,
restrictions, limitations as to dividends, qualifications, and terms and
conditions of redemption, as the Trustees may determine and as shall be set
forth in the By-laws; and
WHEREAS, pursuant to authority expressly vested in the Trustees of the Fund by
Section 5.1 of Article VI of the Declaration of Trust, the Trustees have
authorized, in addition to that Fund's common shares, a class of preferred
shares which are now to be issued divided into one series of 4,000 shares, one
series of 4,000 shares, one series of 4,000 shares, one series of 4,000 shares,
one series of 4,000 shares, one series of 4,000 shares and one series of 4,000
shares of its authorized preferred shares, $0.01 par value, liquidation
preference $25,000 per share plus accumulated but unpaid dividends thereon, if
any (whether or not earned or declared), plus the premium, if any, resulting
from the designation of a Premium Call Period, designated respectively Series A
Auction Preferred Shares, Series B Auction Preferred Shares, Series C Auction
Preferred Shares, Series D Auction Preferred Shares, Series E Auction Preferred
Shares, Series F Auction Preferred Shares and Series G Auction Preferred Shares.
NOW, THEREFORE, the By-laws of Eaton Vance Tax-Advantaged Dividend Income Fund
are hereby amended as follows:
1. ARTICLES VII through XIII shall be redesignated as ARTICLES VIII
through XIV and all affected cross references therein hereby are
amended accordingly.
2. A new ARTICLE VII shall be added as follows:
ARTICLE VII
STATEMENT CREATING SEVEN SERIES OF AUCTION PREFERRED SHARES
DESIGNATION
Auction Preferred Shares, Series A: 4,000 shares of beneficial interest of
Preferred Shares, par value $0.01 per share, liquidation preference $25,000 per
share plus an amount equal to accumulated but unpaid dividends (whether or not
earned or declared) thereon, is hereby designated "Auction Preferred Shares,
Series A." Each share of Auction Preferred Shares, Series A (sometimes referred
to herein as "Series A APS") may be issued on a date to be determined by the
Board of Trustees of the Fund 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
Fund or pursuant to their delegated authority; and have such other preferences,
voting powers, limitations as to dividends, qualifications and terms and
conditions of redemption as are set forth in these Amended By-Laws. The Series A
APS shall constitute a separate series of Preferred Shares of the Fund, and each
share of Series A APS shall be identical.
--------------------------------------------------------------------------------
B-1
Auction Preferred Shares, Series B: 4,000 shares of beneficial interest of
Preferred Shares, par value $0.01 per share, liquidation preference $25,000 per
share plus an amount equal to accumulated but unpaid dividends (whether or not
earned or declared) thereon, is hereby designated "Auction Preferred Shares,
Series B." Each share of Auction Preferred Shares, Series B (sometimes referred
to herein as "Series B APS") may be issued on a date to be determined by the
Board of Trustees of the Fund 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
Fund or pursuant to their delegated authority; and have such other preferences,
voting powers, limitations as to dividends, qualifications and terms and
conditions of redemption as are set forth in these Amended By-Laws. The Series B
APS shall constitute a separate series of Preferred Shares of the Fund, and each
share of Series B APS shall be identical.
Auction Preferred Shares, Series C: 4,000 shares of beneficial interest of
Preferred Shares, par value $0.01 per share, liquidation preference $25,000 per
share plus an amount equal to accumulated but unpaid dividends (whether or not
earned or declared) thereon, is hereby designated "Auction Preferred Shares,
Series C." Each share of Auction Preferred Shares, Series C (sometimes referred
to herein as "Series C APS") may be issued on a date to be determined by the
Board of Trustees of the Fund 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
Fund or pursuant to their delegated authority; and have such other preferences,
voting powers, limitations as to dividends, qualifications and terms and
conditions of redemption as are set forth in these Amended By-Laws. The Series C
APS shall constitute a separate series of Preferred Shares of the Fund, and each
share of Series C APS shall be identical.
Auction Preferred Shares, Series D: 4,000 shares of beneficial interest of
Preferred Shares, par value $0.01 per share, liquidation preference $25,000 per
share plus an amount equal to accumulated but unpaid dividends (whether or not
earned or declared) thereon, is hereby designated "Auction Preferred Shares,
Series D." Each share of Auction Preferred Shares, Series D (sometimes referred
to herein as "Series D APS") may be issued on a date to be determined by the
Board of Trustees of the Fund 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
Fund or pursuant to their delegated authority; and have such other preferences,
voting powers, limitations as to dividends, qualifications and terms and
conditions of redemption as are set forth in these Amended By-Laws. The Series D
APS shall constitute a separate series of Preferred Shares of the Fund, and each
share of Series D APS shall be identical.
Auction Preferred Shares, Series E: 4,000 shares of beneficial interest of
Preferred Shares, par value $0.01 per share, liquidation preference $25,000 per
share plus an amount equal to accumulated but unpaid dividends (whether or not
earned or declared) thereon, is hereby designated "Auction Preferred Shares,
Series E." Each share of Auction Preferred Shares, Series E (sometimes referred
to herein as "Series E APS") may be issued on a date to be determined by the
Board of Trustees of the Fund 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
Fund or pursuant to their delegated authority; and have such other preferences,
voting powers, limitations as to dividends, qualifications and terms and
conditions of redemption as are set forth in these Amended By-Laws. The Series E
APS shall constitute a separate series of Preferred Shares of the Fund, and each
share of Series E APS shall be identical.
Auction Preferred Shares, Series F: 4,000 shares of beneficial interest of
Preferred Shares, par value $0.01 per share, liquidation preference $25,000 per
share plus an amount equal to accumulated but unpaid dividends (whether or not
earned or declared) thereon, 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 Fund or pursuant to their delegated authority; have an
Initial Dividend Rate and an Initial Dividend Payment
--------------------------------------------------------------------------------
B-2
Date as shall be determined in advance of the issuance thereof by the Board of
Trustees of the Fund or pursuant to their delegated authority; and have such
other preferences, voting powers, limitations as to dividends, qualifications
and terms and conditions of redemption as are set forth in these Amended By-
Laws. The Series F APS shall constitute a separate series of Preferred Shares of
the Fund, and each share of Series F APS shall be identical.
Auction Preferred Shares, Series G: 4,000 shares of beneficial interest of
Preferred Shares, par value $0.01 per share, liquidation preference $25,000 per
share plus an amount equal to accumulated but unpaid dividends (whether or not
earned or declared) thereon, is hereby designated "Auction Preferred Shares,
Series G." Each share of Auction Preferred Shares, Series G (sometimes referred
to herein as "Series G APS") may be issued on a date to be determined by the
Board of Trustees of the Fund 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
Fund or pursuant to their delegated authority; and have such other preferences,
voting powers, limitations as to dividends, qualifications and terms and
conditions of redemption as are set forth in these Amended By-Laws. The Series G
APS shall constitute a separate series of Preferred Shares of the Fund, and each
share of Series G APS shall be identical. The Series A APS, the Series B APS,
the Series C APS, the Series D APS, the Series E APS, the Series F APS and the
Series G APS are sometimes collectively referred to herein as the "APS."
1. DEFINITIONS. (a) Unless the context or use indicates another or different
meaning or intent, in these Amended By-Laws the following terms have the
following meanings, whether used in the singular or plural:
"7-Day Dividend Period" means a Dividend Period consisting of seven days.
"28-Day Dividend Period" means a Dividend Period consisting of twenty-eight
days.
"63-Day Dividend Period" means a Dividend Period consisting of sixty-three days.
"1940 Act" means the Investment Company Act of 1940, as amended from time to
time.
"1940 Act APS Asset Coverage" means asset coverage, as defined in section 18(h)
of the 1940 Act, of at least 200% with respect to all outstanding senior
securities of the Fund which are shares of beneficial interest, including all
outstanding shares of APS and Other APS (or such other asset coverage as may in
the future 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 Shares).
"1940 Act Cure Date," with respect to the failure by the Fund to maintain the
1940 Act APS Asset Coverage (as required by paragraph 6 of these Amended
By-Laws) as of the last Business Day of each month, means the last Business Day
of the following month.
"Accountant's Confirmation" has the meaning set forth in paragraph 7(c) of these
Amended By-Laws.
"Adviser" means the Fund's investment adviser, which initially shall be Eaton
Vance Management.
"Affiliate" means any person known to the Auction Agent to be controlled by, in
control of or under common control with the Fund; provided that Eaton Vance
Management shall not be deemed to be an Affiliate nor shall any corporation or
any person controlled by, in control of or under common control with such
entity, one of the trustees, directors or executive officers of which is also a
trustee, director or executive officer of the Fund, be deemed to be an
Affiliate.
"Agent Member" means a member of the Securities Depository that will act on
behalf of a Beneficial Owner of one or more shares of APS or a Potential
Beneficial Owner.
"Amended By-Laws" means the By-Laws of the Fund, as amended by this Statement
creating the APS and as may otherwise be amended from time-to-time.
--------------------------------------------------------------------------------
B-3
"Applicable Percentage" has the meaning set forth in paragraph 9(a)(vii) of
these Amended By-Laws.
"Applicable Rates" means the rates per annum at which cash dividends are payable
on each Series of APS or Other APS, as the case may be, for any Dividend Period.
"Approved Price" means the "fair value" as determined by the Fund in accordance
with the valuation procedures adopted from time to time by the Board of Trustees
of the Fund and for which the Fund receives a marked-to-market price (which, for
the purpose of clarity, shall not mean Market Value) from an independent source
at least semi-annually.
"APS" means, as the case may be, the Auction Preferred Shares.
"APS Basic Maintenance Amount," as of any Valuation Date, shall mean the dollar
amount equal to the sum of (i)(A) the product of the number of Outstanding
shares of each Series of APS on such date by the Liquidation Preference (and
redemption premium, if any) per share of such Series; (B) the aggregate amount
of dividends that will have accumulated at the respective Applicable Rates
(whether or not earned or declared) to (but not including) the first respective
Dividend Payment Dates for each Series of APS outstanding that follows such
Valuation Date; (C) the aggregate amount of dividends that would accumulate on
Outstanding Preferred Shares from such first Dividend Payment Dates therefor
referenced in (B) of this paragraph through the 45th day after such Valuation
Date at the respective Applicable Rates referenced in (B) of this paragraph; (D)
the amount of anticipated non-interest expenses of the Fund for the 90 days
subsequent to such Valuation Date; (E) the amount of the current outstanding
balances of any indebtedness or obligations of the Fund senior in right of
payment to the Preferred Shares plus interest actually accrued together with 30
days additional interest on the current outstanding balances calculated at the
current rate; and (F) any other current liabilities payable during the 30 days
subsequent to such Valuation Date, including, without limitation, indebtedness
due within one year and any redemption premium due with respect to the Preferred
Shares for which a Notice of Redemption has been sent, as of such Valuation
Date, to the extent not reflected in any of (i)(A) through (i)(E) (including,
without limitation, any liabilities incurred for the purpose of clearing
securities transactions) less (ii) the sum of any cash plus the value of any of
the Fund's assets irrevocably deposited by the Fund for the payment of any of
(i)(A) through (i)(F) ("value," for purposes of this clause (ii), means the
Discounted Value of the security, except that if the security matures prior to
the relevant redemption payment date and is either fully guaranteed by the U.S.
Government or is rated P2 by Moody's and A2 by Fitch, it will be valued at its
face value).
"APS Basic Maintenance Amount Test" means a test which is met if: (a) the
aggregate Discounted Values of the Moody's Eligible Assets meets or exceeds 1.0
times the APS Basic Maintenance Amount and (b) the aggregate Discounted Values
of the Fitch Eligible Assets meets or exceeds 1.0 times the APS Basic
Maintenance Amount.
"APS Basic Maintenance Cure Date," with respect to the failure by the Fund to
satisfy the APS Basic Maintenance Amount (as required by paragraph 7(a) of these
Amended By-Laws) as of a given Valuation Date, means the 7th Business Day
following such Valuation Date.
"APS Basic Maintenance Report" means a report signed by any of the President,
Treasurer, any Senior Vice President or any Vice President of the Fund which
sets forth, as of the related Valuation Date, the assets of the Fund, the Market
Value and the Discounted Value thereof (seriatim and in aggregate), and the APS
Basic Maintenance Amount.
"Auction" means a periodic operation of the Auction Procedures.
"Auction Agent" means Deutsche Bank Trust Company Americas unless and until
another commercial bank, trust company or other financial institution appointed
by a resolution of the Board of Trustees of the Fund or a duly authorized
committee thereof enters into an agreement with the Fund to follow the Auction
Procedures for the purpose of determining the Applicable Rate and to act as
transfer agent, registrar, dividend disbursing agent and redemption agent for
the APS and Other APS.
--------------------------------------------------------------------------------
B-4
"Auction Procedures" means the procedures for conducting Auctions set forth in
paragraph 9 of this Article VII, of these Amended By-Laws.
"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 shares of APS or a Broker-Dealer that holds APS for its own account.
"Bi-Monthly Valuation Date" means the fifteenth day of each month if such day is
a Business Day or the first Business Day preceding the fifteenth and the last
Business Day of each month in each fiscal year of the Fund, commencing from the
Date of Original Issue.
"Broker-Dealer" means any broker-dealer, or other entity permitted by law to
perform the functions required of a Broker-Dealer in paragraph 9 of this Article
VII, of these Amended By-Laws, that has been selected by the Fund and has
entered into a Broker-Dealer Agreement with the Auction Agent that remains
effective.
"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 paragraph 9 of this Article VII, of these Amended
By-Laws.
"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 The
City of New York are authorized or obligated by law to close.
"Code" means the Internal Revenue Code of 1986, as amended.
"Commercial Paper Dealers" means UBS Securities LLC or Merrill Lynch, Pierce,
Fenner & Smith Incorporated and such other commercial paper dealer or dealers as
the Fund may from time to time appoint, or, in lieu of any thereof, their
respective affiliates or successors.
"Common Shares" means the shares of beneficial interest designated as common
shares, par value $0.01 per share, of the Fund.
"Date of Original Issue" means, with respect to any share of APS or Other APS,
the date on which the Fund originally issues such share.
"Declaration of Trust" means the Agreement and Declaration of Trust , as amended
and supplemented (including these Amended By-Laws), of the Fund.
"Deposit Securities" means cash and 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), F-1+ by Fitch.
"Discounted Value" as of any Valuation Date, means (i) with respect to an Fitch
Eligible Asset, the quotient of the Market Value thereof divided by the
applicable Fitch Discount Factor and (ii)(a) with respect to a Moody's Eligible
Asset that is not currently callable as of such Valuation Date at the option of
the issuer thereof, the quotient of the Market Value thereof divided by the
applicable Moody's Discount Factor, or (b) with respect to a Moody's Eligible
Asset that is currently callable as of such Valuation Date at the option of the
issuer thereof, the quotient of (1) the lesser of the Market Value or call price
thereof, including any call premium, divided by (2) the applicable Moody's
Discount Factor.
"Dividend Payment Date," with respect to APS, has the meaning set forth in
paragraph 2(b)(i) of these Amended By-Laws and, with respect to Other APS, has
the equivalent meaning.
"Dividend Period" means the Initial Dividend Period, any 7-Day Dividend Period
and any Special Dividend Period.
"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 shares of APS in
the Share Books.
--------------------------------------------------------------------------------
B-5
"Fitch" means Fitch Ratings and its successors at law.
"Fitch Discount Factor" means for purposes of determining the Discounted Value
of any Fitch Eligible Asset, the percentage determined as follows. The Fitch
Discount Factor for any Fitch Eligible Asset other than the securities set forth
below will be the percentage provided in writing by Fitch.
(i) Corporate Debt Securities: The percentage determined by reference to the
rating on such asset with reference to the remaining term to maturity of such
asset, in accordance with the table set forth below.
DISCOUNT FACTORS FOR CORPORATE DEBT SECURITIES INCLUDING NON-INVESTMENT GRADE
BONDS
(NON-CONVERTIBLES)
TERMS TO MATURITY AAA AA A BBB BB B NR(1)
----------------- --- --- --- --- --- --- -----
1 year or less................................... 106 108 110 112 130 152 152
2 years or less (but longer than 1 year)......... 106 108 110 112 130 152 152
3 years or less (but longer than 2 years)........ 106 108 110 112 130 152 152
4 years or less (but longer than 3 years)........ 111 113 115 117 134 152 152
5 years or less (but longer than 4 years)........ 111 113 115 117 134 152 152
7 years or less (but longer than 5 years)........ 114 116 118 120 136 152 152
10 years or less (but longer than 7 years)....... 116 118 120 122 137 152 152
15 years or less (but longer than 10 years)...... 120 122 124 124 139 152 152
30 years or less (but longer than 15 years)...... 124 127 129 129 145 152 152
Greater than 30 years............................ 124 127 129 129 145 152 152
------------
(1) If a security is not rated by Fitch but is rated by two other Rating
Agencies, then the lower of the ratings on the security from the two other
Rating Agencies will be used to determine the Fitch Discount Factor (e.g.,
where the S&P rating is A and the Moody's rating is Baa, a Fitch rating of
BBB will be used). If a security is not rated by Fitch but is rated by only
one other Rating Agency, then the rating on the security from the other
Rating Agency will be used to determine the Fitch Discount Factor (e.g.,
where the only rating on a security is an S&P rating of AAA, a Fitch rating
of AAA will be used, and where the only rating on a security is a Moody's
rating of Ba, a Fitch rating of BB will be used). If a security is not rated
by any Rating Agency, the Fund will use the percentage set forth under "not
rated" in this table. Securities rated below B by Fitch shall be treated the
same as securities not rated by Fitch.
The Fitch Discount Factors presented in the immediately preceding table apply to
corporate debt securities that are Performing and have a Market Value determined
by a Pricing Service or an Approved Price. The Fitch Discount Factor noted in
the table above for a debt security rated B by Fitch shall apply to any
non-Performing debt security with a price equal to or greater than $0.90. The
Fitch Discount Factor noted in the table above for a debt security rated below B
by Fitch shall apply to any non-Performing debt security with a price less than
$0.90 but equal to or greater than $0.20. If a debt security does not have a
Market Value determined by a Pricing Service or an Approved Price, a rating two
rating categories below the actual rating on the debt security will be used
(e.g., where the actual rating is A-, the rating for Debt Securities rated BB-
will be used). The Fitch Discount Factor for a debt security issued by a limited
partnership that is not a Rule 144A Security shall be the Discount Factor
determined in accordance with the table set forth above multiplied by 105%.
The Fitch Discount Factors presented in the immediately preceding table will
also apply to corporate obligations backed by a guaranty, a letter of credit or
insurance issued by a third party. If the third-party credit rating is the basis
for the rating on the obligation, then the rating on the third party will be
used to determine the Fitch Discount Factor in the table.
--------------------------------------------------------------------------------
B-6
(ii) Common stock and warrants: The Fitch Discount Factor applied to Common
Stock will be:
Large-cap stocks: 200%
Mid-cap stocks: 233%
Small-cap stocks: 286%
Others: 370%
See "Fitch Eligible Assets--common stocks" for definitions of Large-cap, Mid-cap
and Small-cap.
(iii) Preferred stock: The percentage determined by references to the rating
of a preferred stock in accordance with the table set forth below.
PREFERRED STOCK(1) DISCOUNT FACTOR
------------------ ---------------
AAA......................................................... 130%
AA.......................................................... 133%
A........................................................... 135%
BBB......................................................... 139%
BB.......................................................... 154%
Not rated or below BB....................................... 161%
Investment Grade DRD........................................ 164%
Not rated or below Investment Grade DRD..................... 200%
------------
(1) If a security is not rated by Fitch but is rated by two other Rating
Agencies, then the lower of the ratings on the security from the two other
Rating Agencies will be used to determine the Fitch Discount Factor (e.g.,
where the S&P rating is A and the Moody's rating is Baa, a Fitch rating of
BBB will be used). If a security is not rated by Fitch but is rated by only
one other Rating Agency, then the rating on the security from the other
Rating Agency will be used to determine the Fitch Discount Factor (e.g.,
where the only rating on a security is an S&P rating of AAA, a Fitch rating
of AAA will be used, and where the only rating on a security is a Moody's
rating of Ba, a Fitch rating of BB will be used). If a security is not rated
by any Rating Agency, the Fund will use the percentage set forth under "not
rated" in this table.
(iv) Convertible securities: The Fitch Discount Factor applied to convertible
securities is (A) 200% for investment grade convertibles and (B) 222% for below
investment grade convertibles so long as such convertible debt securities have
neither (x) conversion premium greater than 100% nor (y) have a yield to
maturity or yield to worst of greater than 15.00% above the relevant Treasury
curve.
The Fitch Discount Factor applied to convertible debt securities which have
conversion premiums of greater than 100% is (A) 152% for investment grade
convertibles and (B) 179% for below investment grade convertibles so long as
such convertible debt securities do not have a yield to maturity or yield to
worst of greater than 15.00% above the relevant Treasury curve.
The Fitch Discount Factor applied to convertible debt securities which have a
yield to maturity or yield to worse of greater than 15.00% above the relevant
Treasury curve is 370%.
If a security is not rated by Fitch but is rated by two other Rating Agencies,
then the lower of the ratings on the security from the two other Rating Agencies
will be used to determine the Fitch Discount Factor (e.g., where the S&P rating
is A and the Moody's rating is Baa, a Fitch rating of BBB will be used). If a
security is not rated by Fitch but is rated by only one other Rating Agency,
then the rating on the security from the other Rating Agency will be used to
determine the Fitch Discount Factor (e.g., where the only rating on a security
is an S&P rating of AAA, a Fitch rating of AAA will be used, and where the only
rating on a security is a Moody's rating of Ba, a Fitch rating of BB will be
used). If a security is not rated by any Rating Agency, the Fund will treat the
security as if it were below investment grade.
--------------------------------------------------------------------------------
B-7
(v) U.S. Government Securities:
TIME REMAINING TO MATURITY DISCOUNT FACTOR
-------------------------- ---------------
1 year or less.............................................. 101.5%
2 years or less (but longer than 1 year).................... 103%
3 years or less (but longer than 2 years)................... 105%
4 years or less (but longer than 3 years)................... 107%
5 years or less (but longer than 4 years)................... 109%
7 years or less (but longer than 5 years)................... 112%
10 years or less (but longer than 7 years).................. 114%
15 years or less (but longer than 10 years)................. 122%
20 years or less (but longer than 15 years)................. 130%
25 years or less (but longer than 20 years)................. 146%
Greater than 30 years....................................... 154%
(vi) Short-Term Investments and Cash: The Fitch Discount Factor applied to
short-term portfolio securities, including without limitation Debt Securities,
Short Term Money Market Instruments and municipal debt obligations, will be (A)
100%, so long as such portfolio securities mature or have a demand feature at
par exercisable within the Fitch Exposure Period; (B) 115%, so long as such
portfolio securities mature or have a demand feature at par not exercisable
within the Fitch Exposure Period; and (C) 125%, so long as such portfolio
securities neither mature nor have a demand feature at par exercisable within
the Fitch Exposure Period. A Fitch Discount Factor of 100% will be applied to
cash.
(vii) Rule 144A Securities: The Fitch Discount Factor applied to Rule 144A
Securities shall be the Discount Factor determined in accordance with the table
above under Corporate Debt Securities in subsection (i) multiplied by 110% until
such securities are registered under the Securities Act.
(viii) Real Estate Investments Trusts:
(a) For common stock and preferred stock of REITs and other real estate
companies the Fitch Discount Factor applied shall be:
REIT or other real estate company preferred stock........... 154%
REIT or other real estate company common stock.............. 196%
(b) For corporate debt securities of REITs the Fitch Discount Factor applied
shall be:
TERM TO MATURITY AAA AA A BBB BB B CCC
---------------- ---- ---- ---- ---- ---- ---- ----
1 year.................................... 111% 114% 117% 120% 121% 127% 227%
2 year.................................... 116% 125% 125% 127% 132% 137% 137%
3 year.................................... 121% 123% 127% 131% 133% 140% 225%
4 year.................................... 126% 126% 129% 132% 136% 140% 164%
5 year.................................... 131% 132% 135% 139% 144% 149% 185%
7 year.................................... 140% 143% 146% 152% 159% 167% 228%
10 year................................... 141% 143% 147% 153% 160% 168% 232%
12 year................................... 144% 144% 150% 157% 165% 174% 249%
15 year................................... 148% 151% 155% 163% 172% 182% 274%
20-30 year................................ 152% 156% 160% 169% 180% 191% 306%
If a security is not rated by Fitch Ratings but is rated by two other Rating
Agencies, then the lower of the ratings on the security from the two other
Rating Agencies will be used to determine the Fitch Discount Factor (e.g., where
the S&P rating is A- and the Moody's rating is Baa1, a rating by Fitch Ratings
of BBB+ will be used). If a security is not rated by Fitch Ratings but is rated
by only one other
--------------------------------------------------------------------------------
B-8
Rating Agency, then the rating on the security from the other Rating Agency will
be used to determine the Fitch Discount Factor (e.g., where the only rating on a
security is an S&P rating of AAA, a rating by Fitch Ratings of AAA will be used,
and where the only rating on a security is a Moody's rating of Ba3, a rating by
Fitch Ratings of BB- will be used). If a security is not rated by any Rating
Agency, the Fund will treat the security as if it were below investment grade.
(ix) Futures and call options: For purposes of the APS Basic Maintenance
Amount, futures held by the Fund and call options sold by the Fund shall not be
included as Fitch Eligible Assets. However, such assets shall be valued at
Market Value by subtracting the good faith margin and the maximum daily trading
variance as of a Valuation Date. For call options purchased by the Fund, the
Market Value of the call option will be included as Fitch Eligible Asset subject
to a Fitch Discount Factor mutually agreed to between the Fund and Fitch based
on the characteristics of the option contract such as its maturity and the
underlying security of the contract.
(x) Securities lending: The Fund may engage in securities lending in an amount
not to exceed 10% of the Fund's total gross assets. For purposes of calculating
the APS Basic Maintenance Amount, such securities lent shall be included as
Fitch Eligible Assets with the appropriate Fitch Discount Factor applied to such
lent security. The obligation to return such collateral shall not be included as
an obligation/liability for purposes of calculating the APS Basic Maintenance
Amount. However, the Fund may reinvest cash collateral for securities lent in
conformity with its investment objectives and policies and the provisions of
these bylaws. In such event, to the extent that securities lending collateral
received is invested by the Fund in assets that otherwise would be Fitch
Eligible Assets and the value of such assets exceeds the amount of the Fund's
obligation to return the collateral on a Valuation Date, such excess amount
shall be included in the calculation of Fitch Eligible Assets by applying the
applicable Fitch Discount Factor to this amount and adding the product to total
Fitch Eligible Assets. Conversely, if the value of assets in which securities
lending collateral has been invested is less then the amount of the Fund's
obligation to return the collateral on a Valuation Date, such difference shall
be included as an obligation/liability of the Fund for purposes of calculating
the APS Basic Maintenance Amount. Collateral received by the Fund in a
securities lending transaction and maintained by the Fund in the form received
shall not be included as a Fitch Eligible Asset for purposes of calculating the
APS Basic Maintenance Amount.
(xi) Swaps (including Total Return Swaps and Interest Rate Swaps): Total
Return and Interest Rate Swaps are subject to the following provisions:
If the Fund has an outstanding gain from a swap transaction on a Valuation Date,
the gain will be included as a Fitch Eligible Asset subject to the Fitch
Discount Factor on the counterparty to the swap transaction. At the time a swap
is executed, the Fund will only enter into swap transactions where the
counterparty has at least a Fitch rating of A- or Moody's rating of A3.
(A) Only the cumulative unsettled profit and loss from a Total Return Swap
transaction will be calculated when determining the APS Basic Maintenance
Amount. If the Fund has an outstanding liability from a swap transaction on a
Valuation Date, the Fund count such liability as an outstanding liability from
the total Fitch Eligible Assets in calculating the APS Basic Maintenance Amount.
(B) In addition, for swaps other than Total Return Swaps, the Market Value of
the position (positive or negative) will be included as a Fitch Eligible Asset.
The aggregate notional value of all swaps will not exceed the Liquidation
Preference of the Outstanding APS.
(C) (1) The underlying securities subject to a Credit Default Swap sold by the
Fund will be subject to the applicable Fitch Discount Factor for each security
subject to the swap;
(2) If the Fund purchases a Credit Default Swap and holds the underlying
security, the Market Value of the Credit Default Swap and the underlying
security will be included as a Fitch Eligible Asset subject to the Fitch
Discount Factor assessed based on the counterparty risk; and
--------------------------------------------------------------------------------
B-9
(3) The Fund will not include a Credit Default Swap as a Fitch Eligible Asset
purchased by the Fund without the Fund holding the underlying security or when
the Fund buys a Credit Default Swap for a basket of securities without holding
all the securities in the basket.
"Fitch Eligible Asset" means:
(i) Cash (including interest and dividends due on assets rated (A) BBB or
higher by Fitch or the equivalent by another Rating Agency if the payment date
is within five (5) Business Days of the Valuation Date, (B) A or higher by Fitch
or the equivalent by another Rating Agency if the payment date is within thirty
days of the Valuation Date, and (C) A+ or higher by Fitch or the equivalent by
another Rating Agency if the payment date is within the Fitch Exposure Period)
and receivables for Fitch Eligible Assets sold if the receivable is due within
five (5) Business Days of the Valuation Date, and if the trades which generated
such receivables are settled within five (5) Business Days;
(ii) Short Term Money Market Instruments so long as (A) such securities are
rated at least F1+ by Fitch or the equivalent by another Rating Agency, (B) in
the case of demand deposits, time deposits and overnight funds, the supporting
entity is rated at least A by Fitch or the equivalent by another Rating Agency,
or (C) in all other cases, the supporting entity (1) is rated at least A by
Fitch or the equivalent by another Rating Agency and the security matures within
one month, (2) is rated at least A by Fitch or the equivalent by another Rating
Agency and the security matures within three months or (3) is rated at least AA
by Fitch or the equivalent by another Rating Agency and the security matures
within six months;
(iii) U.S. Government Securities;
(iv) debt securities if such securities have been registered under the
Securities Act or are restricted as to resale under federal securities laws but
are eligible for resale pursuant to Rule 144A under the Securities Act as
determined by the Fund's investment manager or portfolio manager acting pursuant
to procedures approved by the Board of Trustees of the Fund; and such securities
are issued by (1) a U.S. corporation, limited liability company or limited
partnership, (2) a corporation, limited liability company or limited partnership
domiciled in a member of the European Union, Argentina, Australia, Brazil,
Chile, Japan, Korea, and Mexico or other country if Fitch does not inform the
Fund that including debt securities from such foreign country will adversely
impact Fitch's rating of the APS (the "Approved Foreign Nations"), (3) the
government of any Approved Foreign Nation or any of its agencies,
instrumentalities or political subdivisions (the debt securities of Approved
Foreign Nation issuers being referred to collectively as "Foreign Bonds"), (4) a
corporation, limited liability company or limited partnership domiciled in
Canada or (5) the Canadian government or any of its agencies, instrumentalities
or political subdivisions (the debt securities of Canadian issuers being
referred to collectively as "Canadian Bonds"). Foreign Bonds held by the Fund
will qualify as Fitch Eligible Assets only up to a maximum of 20% of the
aggregate Market Value of all assets constituting Fitch Eligible Assets.
Similarly, Canadian Bonds held by the Fund will qualify as Fitch Eligible Assets
only up to a maximum of 20% of the aggregate Market Value of all assets
constituting Fitch Eligible Assets. Notwithstanding the limitations in the two
preceding sentences, Foreign Bonds and Canadian Bonds held by the Fund will
qualify as Fitch Eligible Assets only up to a maximum of 30% of the aggregate
Market Value of all assets constituting Fitch Eligible Assets. All debt
securities satisfying the foregoing requirements and restrictions of this
paragraph (iv) are herein referred to as "Debt Securities."
(v) Preferred stocks if (i) such securities provide for the periodic payment of
dividends thereon in cash in U.S. dollars or euros and do not provide for
conversion or exchange into, or have warrants attached entitling the holder to
receive equity capital at any time over the respective lives of such securities,
(ii) the issuer of such a preferred stock has common stock listed on either the
New York Stock Exchange, the American Stock Exchange or in the over-the-counter
market, and (iii) the issuer of such a preferred stock has a senior debt rating
or preferred stock rating from Fitch of BBB- or higher or the equivalent rating
by another Rating Agency. In addition, the preferred stocks issue must be at
least $50 million;
--------------------------------------------------------------------------------
B-10
(vi) common stocks (i) (A) which are traded on the New York Stock Exchange, the
American Stock Exchange or in the over-the-counter market, (B) which, if cash
dividend paying, pay cash dividends in U.S. dollars, and (C) which may be sold
without restriction by the Corporation; provided, however, that (1) common stock
which, while a Fitch Eligible Asset owned by the Corporation, ceases paying any
regular cash dividend will no longer be considered a Fitch Eligible Asset until
60 calendar days after the date of the announcement of such cessation, unless
the issuer of the common stock has senior debt securities rated at least A- by
Fitch and (2) the aggregate Market Value of the Corporation's holdings of the
common stock of any issuer in excess of 5% per US issuer of the number of
Outstanding shares times the Market Value of such common stock shall not be a
Fitch's Eligible Asset; (ii) securities denominated in any currency other than
the U.S. dollar and securities of issuers formed under the laws of jurisdictions
other than the United States, its states and the District of Columbia for which
there are dollar-denominated American Depository Receipts ("ADRs") which are
traded in the United States on exchanges or over-the-counter and are issued by
banks formed under the laws of the United States, its states or the District of
Columbia; provided, however, that the aggregate Market Value of the
Corporation's holdings of securities denominated in currencies other than the
U.S. dollar and ADRs in excess of 3% of the aggregate Market Value of the
Outstanding shares of common stock of such issuer or in excess of 10% of the
Market Value of the Corporation's Fitch Eligible Assets with respect to issuers
formed under the laws of any single such non-U.S. jurisdiction other than
Approved Foreign Nations shall not be a Fitch Eligible Asset; (iii) Small-cap
stocks refer to stocks with a market capitalization between $300 million to $2
billion. Mid-cap stocks refer to stocks with a market capitalization between $2
billion to $10 billion. Large-cap stocks are companies having a market
capitalization between $10 billion and $200 billion.
(vii) Rule 144A Securities;
(viii) warrants on common stocks described in (vi) above;
(ix) any common stock, preferred stock or any debt security of REITs or real
estate companies;
(x) Interest Rate Swaps entered into according to International Swap Dealers
Association ("ISDA") standards if (1) the counterparty to the swap transaction
has a short-term rating of not less than F1 by Fitch or the equivalent by
another Rating Agency, or, if the swap counterparty does not have a short-term
rating, the counterparty's senior unsecured long-term debt rating is AA or
higher by Fitch or the equivalent by another Rating Agency and (2) the original
aggregate notional amount of the Interest Rate Swap transaction or transactions
is not greater than the liquidation preference of the APS originally issued;
(xi) swaps, including total return swaps entered into according to ISDA;
(xii) Financial contracts, as such term is defined in Section 3(c)(2)(B)(ii) of
the 1940 Act, not otherwise provided for in this definition may be included in
Fitch Eligible Assets, but, with respect to any financial contract, only upon
receipt by the Fund of a writing from Fitch Ratings specifying any conditions on
including such financial contract in Fitch Eligible Assets and assuring the Fund
that including such financial contract in the manner so specified would not
affect the credit rating assigned by Fitch Ratings to the APS; and
(xiii) Fitch Hedging Transactions.
Financial contracts, as such term is defined in Section 3(c)(2)(B)(ii) of the
Investment Company Act, not otherwise provided for in this definition may be
included in Fitch Eligible Assets, but, with respect to any financial contract,
only upon receipt by the Fund of a writing from Fitch specifying any conditions
on including such financial contract in Fitch Eligible Assets and assuring the
Fund that including such financial contract in the manner so specified would not
affect the credit rating assigned by Fitch to the APS.
Where the Fund sells an asset and agrees to repurchase such asset in the future,
the Discounted Value of such asset will constitute a Fitch Eligible Asset and
the amount the Fund is required to pay upon
--------------------------------------------------------------------------------
B-11
repurchase of such asset will count as a liability for the purposes of the APS
Basic Maintenance Amount. Where the Fund purchases an asset and agrees to sell
it to a third party in the future, cash receivable by the Fund thereby will
constitute a Fitch Eligible Asset if the long-term debt of such other party is
rated at least A- by Fitch or the equivalent by another Rating Agency and such
agreement has a term of 30 days or less; otherwise the Discounted Value of such
purchased asset will constitute a Fitch Eligible Asset.
Notwithstanding the foregoing, an asset will not be considered a Fitch Eligible
Asset to the extent that it has been irrevocably deposited for the payment of
(i)(A) through (i)(E) under the definition of APS Basic Maintenance Amount or to
the extent it is subject to any liens, except for (A) liens which are being
contested in good faith by appropriate proceedings and which Fitch has indicated
to the Fund will not affect the status of such asset as a Fitch Eligible Asset,
(B) liens for taxes that are not then due and payable or that can be paid
thereafter without penalty, (C) liens to secure payment for services rendered or
cash advanced to the Fund by its investment manager or portfolio manager, the
Fund's custodian, transfer agent or registrar or the Auction Agent and (D) liens
arising by virtue of any repurchase agreement.
FITCH DIVERSIFICATION LIMITATIONS:
Portfolio holdings as described below must be within the following
diversification and issue size requirements in order to be included in Fitch's
Eligible Assets:
EQUITY SECURITIES
MAXIMUM SINGLE
TYPE ISSUER(%)(1)
---- --------------
Large-cap................................................... 5%
Mid-cap..................................................... 5%
Small-cap................................................... 5%
------------
(1) Percentages represent both a portion of the aggregate market value and
number of outstanding shares of the common stock portfolio.
DEBT SECURITIES
MAXIMUM SINGLE MAXIMUM SINGLE MINIMUM ISSUE SIZE
SECURITY RATED AT LEAST ISSUER(1) INDUSTRY(1),(2) ($ IN MILLION)(3)
----------------------- -------------- --------------- ------------------
AAA................................... 100% 100% $100
AA-................................... 20 75 100
A-.................................... 10 50 100
BBB-.................................. 6 25 100
BB-................................... 4 16 50
B- ................................... 3 12 50
CCC................................... 2 8 50
------------
(1) Percentages represent a portion of the aggregate Market Value of corporate
debt securities.
(2) Industries are determined according to Fitch's Industry Classifications, as
defined herein.
(3) Preferred stock has a minimum issue size of $50 million, and mortgage pass
throughs issued by the Federal Home Loan Mortgage Corporation ("FHLMC"), the
Federal National Mortgage Association ("FNMA") or the Government National
Mortgage Association ("GNMA"), which has no minimum issue size.
--------------------------------------------------------------------------------
B-12
If a security is not rated by Fitch but is rated by two other Rating Agencies,
then the lower of the ratings on the security from the two other Rating Agencies
will be used to determine the Fitch Discount Factor (e.g., where the S&P rating
is A and the Moody's rating is Baa, a Fitch rating of BBB will be used). If a
security is not rated by Fitch but is rated by only one other Rating Agency,
then the rating on the security from the other Rating Agency will be used to
determine the Fitch Diversification Limitations (e.g., where the only rating on
a security is an S&P rating of AAA, a Fitch rating of AAA will be used, and
where the only rating on a security is a Moody's rating of Ba, a Fitch rating of
BB will be used). If a security is not rated by any Rating Agency, the Trust
will use the percentage set forth under "not rated" in this table.
"Fitch Exposure Period" means the period commencing on (and including) a given
Valuation Date and ending 41 days thereafter.
"Fitch General Portfolio Requirements" means that the Fund's portfolio must meet
the following diversification requirements: (a) no more than 25% by par value of
the Fund's total assets can be invested in the securities of borrowers and other
issuers having their principal business activities in the same Fitch Industry
Classification; provided, that this limitation shall not apply with respect to
U.S. Government Securities and provided further that for purposes of this
subsection (a), the term "issuer" shall not include a lender selling a
participation to the Fund or any other person interpositioned between such
lender and the Fund with respect to a participation and (b) no more than 10% by
par value of the Fund's total assets can be invested in securities of a single
issuer, and provided further that for purposes of this subsection (b), the term
"issuer" includes both the borrower under a loan agreement and the lender
selling a participation to the Fund together with any other persons
interpositioned between such lender and the Fund with respect to such
participation.
"Fitch Hedging Transactions" means purchases or sales of exchange-traded
financial futures contracts based on any index approved by Fitch, LIBOR or
Treasury Bonds, and purchases, writings or sales of exchange-traded put options
on such futures contracts, and purchases, writings or sales of exchange-traded
call options on such financial futures contracts, and put and call options on
such financial futures contracts ("Fitch Hedging Transactions"), subject to the
following limitations:
(i) The Fund may not engage in any Fitch Hedging Transaction based on any index
approved by Fitch (other than transactions that terminate a futures contract or
option held by the Fund by the Fund's taking the opposite position thereto
("closing transactions")) that would cause the Fund at the time of such
transaction to own or have sold outstanding financial futures contracts based on
such index exceeding in number 10% of the average number of daily traded
financial futures contracts based on such index in the 30 days preceding the
time of effecting such transaction as reported by The Wall Street Journal.
(ii) The Fund will not engage in any Fitch Hedging Transaction based on
Treasury Bonds or LIBOR (other than closing transactions) that would cause the
Fund at the time of such transaction to own or have sold:
(A) Outstanding financial futures contracts based on Treasury Bonds or LIBOR
with such contracts having an aggregate Market Value exceeding 60% of the
aggregate Market Value of Fitch Eligible Assets owned by the Fund and at least
rated AA by Fitch (or, if not rated by Fitch Ratings, rated at least Aa by
Moody's; or, if not rated by Moody's, rated AAA by S&P); or
(B) Outstanding financial futures contracts based on Treasury Bonds or LIBOR
with such contracts having an aggregate Market Value exceeding 40% of the
aggregate Market Value of all Fitch Eligible Assets owned by the Fund (other
than Fitch Eligible Assets already subject to a Fitch Hedging Transaction) and
rated at least A or BBB by Fitch (or, if not rated by Fitch Ratings, rated at
least Baa by Moody's; or, if not rated by Moody's, rated at least A or AA by
S&P) (for purposes of the foregoing clauses (i) and (ii), the Fund shall be
deemed to own futures contracts that underlie any outstanding options written by
the Fund);
--------------------------------------------------------------------------------
B-13
(iii) The Fund may engage in closing transactions to close out any outstanding
financial futures contract based on any index approved by Fitch if the amount of
open interest in such index as reported by The Wall Street Journal is less than
an amount to be mutually determined by Fitch and the Fund.
(iv) The Fund may not enter into an option or futures transaction unless, after
giving effect thereto, the Fund would continue to have Fitch Eligible Assets
with an aggregate Discounted Value equal to or greater than the APS Shares Basic
Maintenance Amount.
"Fitch Industry Classification" means, for the purposes of determining Fitch
Eligible Assets, each of the following industry classifications:
FITCH INDUSTRY CLASSIFICATIONS SIC CODE (MAJOR GROUPS)
------------------------------ -----------------------
Aerospace and Defense....................................... 37, 45
Automobiles................................................. 37, 55
Banking, Finance and Real Estate............................ 60, 65, 67
Broadcasting and Media...................................... 27, 48
Building and Materials...................................... 15-17, 32, 52
Cable....................................................... 48
Chemicals................................................... 28, 30
Computers and Electronics................................... 35, 36
Consumer Products........................................... 23, 51
Energy...................................................... 13, 29, 49
Environmental Services...................................... 87
Farming and Agriculture..................................... 1-3, 7-9
Food, Beverage and Tobacco.................................. 20, 21, 54
Gaming, Lodging and Restaurants............................. 70, 58
Health Care and Pharmaceuticals............................. 38, 28, 80
Industrial/Manufacturing.................................... 35
Insurance................................................... 63, 64
Leisure and Entertainment................................... 78, 79
Metals and Mining........................................... 10, 12, 14, 33, 34
Miscellaneous............................................... 50, 72-76, 99
Paper and Forest Products................................... 8, 24, 26
Retail...................................................... 53, 56, 59
Sovereign................................................... NA
Supermarkets and Drug Stores................................ 54
Telecommunications.......................................... 48
Textiles and Furniture...................................... 22, 25, 31, 57
Transportation.............................................. 40, 42-47
Utilities................................................... 49
Structured Finance Obligations.............................. NA
Packaging and Containers.................................... 26, 32, 34
Business Services........................................... 73, 87
The Fund shall use its discretion in determining which industry classification
is applicable to a particular investment.
"Fund" means Eaton Vance Tax-Advantaged Dividend Income Fund, a Massachusetts
business trust.
--------------------------------------------------------------------------------
B-14
"Holder" means a Person identified as a holder of record of shares of APS in the
Share Register.
"Independent Accountant" means a nationally recognized accountant, or firm of
accountants, that is, with respect to the Fund, an independent public accountant
or firm of independent public accountants under the Securities Act of 1933, as
amended.
"Initial Dividend Payment Date" means the Initial Dividend Payment Date as
determined by the Board of Trustees of the Fund or their designee with respect
to each series of APS or Other APS, as the case may be.
"Initial Dividend Period" has the meaning set forth in paragraph 2(c)(i) of this
Article VII, of these Amended By-Laws and, with respect to Other APS, has the
equivalent meaning.
"Initial Dividend Rate" means the rate per annum established by the Board of
Trustees or their designee, applicable to the Initial Dividend Period for such
series of APS and, with respect to Other APS, has the equivalent meaning.
"Initial Margin" means the amount of cash or securities deposited with a broker
as a margin payment at the time of purchase or sale of a futures contract.
"Interest Equivalent" means a yield on a 360-day basis of a discount basis
security which is equal to the yield on an equivalent interest-bearing security.
"Interest Rate Swaps" means the exchange by the Fund with another party of their
respective commitments to pay or receive interest, e.g., an exchange of fixed
rate payments for floating rate payments.
"LIBOR" means the London Interbank Offered Rate.
"Long Term Dividend Period" means a Special Dividend Period consisting of a
specified period of one whole year or more but not greater than five years.
"Mandatory Redemption Price" means $25,000 per share of APS plus an amount equal
to accumulated but unpaid dividends (whether or not earned or declared) to the
date fixed for redemption and excluding Additional Dividends.
"Market Value" of any asset of the Fund shall be the market value thereof
determined by the Pricing Service or by the Fund in accordance with procedures
approved by the Board of Trustees. Market Value of any asset shall include any
interest accrued thereon. The Pricing Service shall value portfolio securities
at the quoted bid prices or the mean between the quoted bid and asked price or
the yield equivalent when quotations are not readily available. Securities for
which quotations are not readily available shall be valued at fair value as
determined by the Pricing Service using methods which include consideration of:
yields or prices of municipal obligations of comparable quality, type of issue,
coupon, maturity and rating; indications as to value from dealers; and general
market conditions. The Pricing Service or the Fund may employ electronic data
processing techniques and/or a matrix system to determine valuations. At the
Fund's discretion, in the event the Pricing Service is unable to value a
security, the security shall be valued at the lower of two dealer bids obtained
by the Fund from dealers who are members of the National Association of
Securities Dealers, Inc. and who make a market in the security, at least one of
which shall be in writing. Futures contracts and options are valued at closing
prices for such instruments established by the exchange or board of trade on
which they are traded, or if market quotations are not readily available, are
valued at fair value on a consistent basis using methods determined in good
faith by the Board of Trustees.
"Maximum Applicable Rate," with respect to APS, has the meaning set forth in
paragraph 9(a)(vii) of this Article VII, of these Amended By-Laws and, with
respect to Other APS, has the equivalent meaning.
"Moody's" means Moody's Investors Service, Inc., a Delaware corporation, and its
successors.
--------------------------------------------------------------------------------
B-15
"Moody's Discount Factor" means for purposes of determining the Discounted Value
of any Moody's Eligible Asset, the percentage determined as follows. The Moody's
Discount Factor for any Moody's Eligible Asset other than the securities set
forth below will be the percentage provided in writing by Moody's.
(i) Corporate debt securities: The percentage determined by reference to the
rating on such asset with reference to the remaining term to maturity of such
asset, in accordance with the table set forth below.
DISCOUNT FACTORS FOR CORPORATE DEBT SECURITIES INCLUDING NON-INVESTMENT GRADE
BONDS (NON-CONVERTIBLES)
TERMS TO MATURITY OF NON-INVESTMENT GRADE BONDS(2) AAA AA A BAA BA B NR(1)
-------------------------------------------------- --- --- --- --- --- --- -----
1 year or less................................. 109 112 115 118 137 150 250
2 years or less (but longer than 1 year)....... 115 118 122 125 146 160 250
3 years or less (but longer than 2 years)...... 120 123 127 131 153 168 250
4 years or less (but longer than 3 years)...... 126 129 133 138 161 176 250
5 years or less (but longer than 4 years)...... 132 135 139 144 168 185 250
7 years or less (but longer than 5 years)...... 139 143 147 152 179 197 250
10 years or less (but longer than 7 years)..... 145 150 155 160 189 208 250
15 years or less (but longer than 10 years).... 150 155 160 165 196 216 250
20 years or less (but longer than 15 years).... 150 155 160 165 196 228 250
30 years or less (but longer than 20 years).... 150 155 160 165 196 229 250
Greater than 30 years.......................... 165 173 181 189 205 240 250
------------
(1) Unless conclusions regarding liquidity risk as well as estimates of both the
probability and severity of default for the Fund's assets can be derived
from other sources, securities rated below B by Moody's and unrated
securities, which are securities rated by neither Moody's, S&P nor Fitch,
are limited to 10% of Moody's Eligible Assets. If a corporate, municipal or
other debt security is unrated by Moody's, S&P or Fitch, the Fund will use
the percentage set forth under "Below B and Unrated" in this table. Ratings
assigned by S&P or Fitch are generally accepted by Moody's at face value.
However, adjustments to face value may be made to particular categories of
credits for which the S&P and/or Fitch rating does not seem to approximate a
Moody's rating equivalent.
(2) The Moody's Discount Factors for debt securities shall also be applied to
any interest rate swap or cap, in which case the rating of the counterparty
shall determine the appropriate rating category.
The Moody's Discount Factors presented in the immediately preceding table will
also apply to corporate debt securities that do not pay interest in U.S. dollars
or euros, provided that the Moody's Discount Factor determined from the table
shall be multiplied by a factor of 1.2 for purposes of calculating the
Discounted Value of such securities.
(ii) Common stock: The Moody's Discount Factor applied to common stock will
be:
COMMON STOCKS UTILITY INDUSTRIAL FINANCIAL
------------- ------- ---------- ---------
Seven week exposure
period 170% 264% 241%
--------------------------------------------------------------------------------
B-16
(iii) 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%