As filed with the Securities and Exchange Commission on January 25, 2005
Securities Act Registration No. 333-112584
Investment Company Registration No. 811-21504
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 /X/
PRE-EFFECTIVE AMENDMENT NO. 5 /X/
POST-EFFECTIVE AMENDMENT NO.
AND/OR
REGISTRATION STATEMENT UNDER
THE INVESTMENT COMPANY ACT OF 1940 /X/
AMENDMENT NO. 5 /X/
ADVENT/CLAYMORE
ENHANCED GROWTH & INCOME FUND
(Exact Name of Registrant as Specified in Declaration of Trust)
2455 Corporate West Drive
Lisle, Illinois 60532
(Address of Principal Executive Offices)
(630) 505-3700
(Registrant's Telephone Number, Including Area Code)
Nicholas Dalmaso
Advent/Claymore Enhanced Growth & Income Fund
2455 Corporate West Drive
Lisle, Illinois 60532
(Name and Address of Agent for Service)
COPY TO:
Philip H. Harris Rodd Baxter Leonard B. Mackey, Jr.
Michael K. Hoffman Advent Capital Management, Clifford Chance US LLP
Skadden, Arps, Slate, Meagher & LLC 31 West 52nd Street
Flom LLP 1065 Avenue of the Americas, New York, New York
Four Times Square 31st Floor 10019
New York, New York 10036 New York, New York 10018
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING: As soon as practicable after
the effective date of this Registration Statement.
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
AMOUNT BEING PROPOSED PROPOSED MAXIMUM AMOUNT OF
TITLE OF SECURITIES BEING REGISTERED REGISTERED(1) PRICE PER UNIT OFFERING PRICE(1) REGISTRATION FEE(2)
------------------------------------ ----------------- ------------------ --------------------- -------------------
Common Shares, $.001 par value 15,750,000 shares $ 20.00 $ 315,000,000 $ 37,076
(1) Estimated solely for the purpose of calculating the registration fee.
(2) $2,534 previously paid.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THE REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
ADVENT/CLAYMORE ENHANCED GROTH & INCOME FUND
CROSS REFERENCE SHEET
ITEMS IN PART A OF FORM N-2 LOCATION IN PROSPECTUS
--------------------------- ----------------------
PART A -- PROSPECTUS
Item 1. Outside Front Cover Cover page
Item 2. Inside Front and Outside Back Cover Page Cover page
Item 3. Fee Table and Synopsis Prospectus Summary; Summary of Fund Expenses
Item 4. Financial Highlights Not Applicable
Item 5. Plan of Distribution Cover Page; Prospectus Summary; Underwriting
Item 6. Selling Shareholders Not Applicable
Item 7. Use of Proceeds Use of Proceeds; The Fund's Investments
Item 8. General Description of the Registrant The Fund; The Fund's Investments; Risks;
Description of Shares; Certain Provisions in the
Agreement and Declaration of Trust; Closed-End Fund
Structure
Item 9. Management Management of the Fund; Administrator, Custodian
and Transfer Agent; Summary of Fund Expenses
Item 10. Capital Stock, Long-Term Debt, and Other Description of Shares; Distributions; Dividend
Securities Reinvestment Plan; Certain Provisions in the
Agreement and Declaration of Trust; Tax Matters
Item 11. Defaults and Arrears on Senior Securities Not Applicable
Item 12. Legal Proceedings Legal Opinions
Item 13. Table of Contents of the Statement of Table of Contents for the Statement of Additional
Additional Information Information
PART B -- STATEMENT OF ADDITIONAL INFORMATION
Item 14. Cover Page Cover Page
Item 15. Table of Contents Cover Page
Item 16. General Information and History Not Applicable
Item 17. Investment Objective and Policies Investment Objectives and Policies;
Investment Policies and Techniques; Other
Investment Policies and Techniques;
Portfolio Transactions
Item 18. Management Management of the Fund; Portfolio
Transactions and Brokerage
Item 19. Control Persons and Principal Holders of Not Applicable
Securities
Item 20. Investment Advisory and Other Services Management of the Fund; Experts
Item 21. Brokerage Allocation and Other Practices Portfolio Transactions and Brokerage
Item 22. Tax Status Tax Matters; Distributions
Item 23. Financial Statements Financial Statements; Report of
Independent Accountants
PART C -- OTHER INFORMATION
Items 24-33 have been answered in Part C of this Registration Statement
2
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED.
WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS 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.
SUBJECT TO COMPLETION
PROSPECTUS
ADVENT CAPITAL MANAGEMENT, LLC [CLAYMORE(R) LOGO]
SHARES
ADVENT/CLAYMORE
ENHANCED GROWTH & INCOME FUND
COMMON SHARES
$20.00 PER SHARE
----------
Advent/Claymore Enhanced Growth & Income Fund (the "Fund") is a newly
organized, diversified, closed-end management investment company. The Fund's
primary investment objective is to provide current income and current gains from
trading in securities, with a secondary objective of long-term capital
appreciation. There can be no assurance that the Fund will achieve its
investment objectives.
PORTFOLIO CONTENTS. Under normal market conditions, the Fund will invest at
least 70% of its Managed Assets in a diversified portfolio of equity securities
and convertible securities of U.S. and non-U.S. issuers. It is anticipated that
up to 30% of the Fund's Managed Assets will be invested in non-convertible high
yield securities and that, initially, approximately 20% of the Fund's Managed
Assets will be invested in securities issued by non-U.S. issuers. The portion of
the Fund's Managed Assets invested in convertible securities, equity securities
and non-convertible high yield securities, as well as the portion invested in
securities issued by U.S. and non-U.S. issuers, will vary from time to time
consistent with the Fund's investment objectives, changes in equity prices and
changes in interest rates and other economic and market factors. All of the
Fund's Managed Assets may from time to time be invested in lower grade
securities.
In furtherance of the Fund's primary investment objectives of generating
current income and current gains from trading in securities, under current
market conditions the Fund intends to engage in an option strategy of writing
(selling) covered call options on at least 50% of the securities held in the
portfolio of the Fund, thus generating option writing premiums. A secondary
source of current income to the Fund will be the receipt of dividends and
interest on the securities held in the Fund's portfolio.
"Managed Assets" means the total assets of the Fund (including any assets
attributable to any preferred shares that may be outstanding or otherwise
attributable to the use of leverage, if any) minus the sum of accrued
liabilities (other than debt representing financial leverage, if any). For
purposes of determining Managed Assets, the liquidation preference of any
outstanding preferred shares is not treated as a liability.
(CONTINUED ON FOLLOWING PAGE)
INVESTING IN THE COMMON SHARES INVOLVES CERTAIN RISKS. SEE "RISKS"
BEGINNING ON PAGE 25 OF THIS PROSPECTUS.
----------
PER SHARE(3) TOTAL(3)
------------ --------
Public offering price $ 20.00 $
Sales load(1) $ .90 $
Estimated offering expenses(2) $ .04 $
Proceeds, after expenses, to the Fund $ 19.06 $
(NOTES ON FOLLOWING PAGE)
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The common shares will be ready for delivery on or about , 2005.
----------
MERRILL LYNCH & CO.
ADVEST, INC. ROBERT W. BAIRD & CO. CLAYMORE SECURITIES, INC.
FERRIS, BAKER WATTS FIXED INCOME SECURITIES, L.P. J.J.B. HILLIARD, W.L. LYONS, INC.
INCORPORATED LEGG MASON WOOD WALKER RBC CAPITAL MARKETS
KEYBANC CAPITAL MARKETS INCORPORATED
WEDBUSH MORGAN SECURITIES INC.
WELLS FARGO SECURITIES
----------
The date of this prospectus is , 2005.
(CONTINUED FROM PREVIOUS PAGE)
ADVISOR AND INVESTMENT MANAGER. Claymore Advisors, LLC (the "Advisor") is
the Fund's investment advisor. Advent Capital Management, LLC (the "Investment
Manager") is the Fund's investment manager and is responsible for the management
of the Fund's portfolio of securities. Advent Capital Management, LLC had
approximately $3.8 billion in assets under management as of September 30, 2004.
NO PRIOR TRADING HISTORY. Because the Fund is newly organized, its shares
have no history of public trading. Shares of closed-end investment companies
frequently trade at a discount from their net asset value. This risk may be
greater for investors expecting to sell their shares in a relatively short
period of time after completion of the public offering. The Fund has applied for
the listing of its common shares on the New York Stock Exchange under the symbol
"LCM."
You should read this prospectus, which contains important information about
the Fund, before deciding whether to invest in the common shares, and retain it
for future reference. A Statement of Additional Information, dated , 2005,
containing additional information about the Fund, has been filed with the
Securities and Exchange Commission and is incorporated by reference in its
entirety into this prospectus. You may request a free copy of the Statement of
Additional Information, the table of contents of which is on page 46 of this
prospectus, by calling (800) 345-7999 or by writing to the Fund's Advisor at
Claymore Advisors, LLC, 2455 Corporate West Drive, Lisle, Illinois 60532, or
obtain a copy (and other information regarding the Fund) from the Securities and
Exchange Commission's web site (http://www.sec.gov).
The Fund's common shares do not represent a deposit or obligation of, and
are not guaranteed or endorsed by, any bank or other insured depository
institution, and are not federally insured by the Federal Deposit Insurance
Corporation, the Federal Reserve Board or any other government agency.
(NOTES FROM PREVIOUS PAGE)
----------
(1) The Fund has also agreed to pay the underwriters $.00667 per common
share as a partial reimbursement of expenses incurred in connection
with the offering. Separately, Claymore Advisors, LLC has retained
Merrill Lynch, Pierce, Fenner & Smith Incorporated to provide, as may
reasonably be requested by Claymore Advisors, LLC from time to time,
certain consulting and after-market shareholder support services. In
connection with these services, Merrill Lynch, Pierce, Fenner & Smith
Incorporated will receive from Claymore Advisors, LLC a quarterly fee
equal to an annual rate of .15% of the Fund's Managed Assets;
provided, however, that such fee, together with the partial
reimbursement of expenses to the underwriters discussed above and the
fee paid to Claymore Securities, Inc. discussed in footnote 2 below,
shall not exceed 4.5% of the total price to the public of the common
shares sold in this offering. See "Underwriting."
(2) Aggregate offering expenses (exclusive of the sales load) are expected
to be $ , which will be borne by the Fund. Claymore Advisors, LLC
has agreed to pay the organizational expenses of the Fund. Claymore
Advisors, LLC and Advent Capital Management, LLC have agreed to
reimburse offering expenses (other than sales load, but including the
$.00667 reimbursement of expenses to the underwriters referred to in
footnote (1)) in excess of $.04 per common share. To the extent that
aggregate offering expenses are less than $.04 per common share, up to
.15% of the amount of the offering up to such expense limit will be
paid to Claymore Securities, Inc. as compensation for the distribution
services it provides to the Fund. See "Underwriting."
(3) The underwriters may also purchase up to additional common
shares at the public offering price, less the sales load, within
45 days from the date of this prospectus to cover overallotments.
TABLE OF CONTENTS
PAGE
----
Prospectus Summary 4
Summary of Fund Expenses 17
The Fund 18
Use of Proceeds 18
The Fund's Investments 18
Risks 25
Management of the Fund 33
Net Asset Value 34
Distributions 34
Dividend Reinvestment Plan 35
Description of Shares 36
Certain Provisions In the Agreement and Declaration of Trust 37
Closed-End Fund Structure 39
Repurchase of Common Shares 39
Tax Matters 40
Underwriting 42
Administrator, Custodian and Transfer Agent 44
Legal Opinions 44
Privacy Principles of the Fund 45
Table of Contents For the Statement of Additional Information 46
----------
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED OR INCORPORATED BY
REFERENCE IN THIS PROSPECTUS. WE HAVE NOT, AND THE UNDERWRITERS HAVE NOT,
AUTHORIZED ANY OTHER PERSON TO PROVIDE YOU WITH DIFFERENT INFORMATION. IF ANYONE
PROVIDES YOU WITH DIFFERENT OR INCONSISTENT INFORMATION, YOU SHOULD NOT RELY ON
IT. WE ARE NOT, AND THE UNDERWRITERS ARE NOT, MAKING AN OFFER TO SELL THESE
SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED. YOU
SHOULD ASSUME THAT THE INFORMATION IN THIS PROSPECTUS IS ACCURATE ONLY AS OF THE
DATE OF THIS PROSPECTUS. OUR BUSINESS, FINANCIAL CONDITION AND PROSPECTS MAY
HAVE CHANGED SINCE THAT DATE. THE FUND WILL NOTIFY INVESTORS IF THERE ARE ANY
MATERIAL CHANGES.
3
PROSPECTUS SUMMARY
THIS FOLLOWING IS ONLY A SUMMARY. THIS SUMMARY MAY NOT CONTAIN ALL OF THE
INFORMATION THAT YOU SHOULD CONSIDER BEFORE INVESTING IN THE FUND'S COMMON
SHARES. YOU SHOULD REVIEW THE MORE DETAILED INFORMATION CONTAINED IN THIS
PROSPECTUS AND IN THE STATEMENT OF ADDITIONAL INFORMATION PRIOR TO MAKING AN
INVESTMENT IN THE FUND.
THE FUND Advent/Claymore Enhanced Growth & Income
Fund is a newly organized, diversified,
closed-end management investment company.
See "The Fund." Throughout the prospectus,
we refer to Advent/Claymore Enhanced Growth
& Income Fund simply as the "Fund" or as
"we," "us" or "our."
THE OFFERING The Fund is offering common shares of
beneficial interest at $20.00 per share
through a group of underwriters led by
Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill Lynch"). The common
shares of beneficial interest are called
"common shares" in the rest of this
prospectus. You must purchase at least 100
common shares ($2,000) in order to
participate in this offering. The Fund has
given the underwriters an option to
purchase up to additional common
shares to cover orders in excess of
common shares. Claymore Advisors, LLC has
agreed to pay the organizational expenses
of the Fund. Claymore Advisors, LLC and
Advent Capital Management, LLC have agreed
to pay offering expenses (other than the
sales load, but including a $.00667
reimbursement of expenses to the
underwriters) that exceed $.04 per common
share. See "Underwriting."
INVESTMENT OBJECTIVES AND POLICIES The Fund's primary investment objective is
to provide current income and current gains
from trading in securities, with a
secondary objective of long-term capital
appreciation. There can be no assurance
that the Fund will achieve its investment
objectives. See "The Fund's Investments."
Under normal market conditions, the Fund
will invest at least 70% of its Managed
Assets in a diversified portfolio of equity
securities and convertible securities of
U.S. and non-U.S. issuers. It is
anticipated that up to 30% of the Fund's
Managed Assets will be invested in
non-convertible high yield securities and
that, initially, approximately 20% of the
Fund's Managed Assets will be invested in
securities issued by non-U.S. issuers. The
portion of the Fund's Managed Assets
invested in convertible securities, equity
securities and non-convertible high yield
securities, as well as the portion invested
in securities issued by U.S. and non-U.S.
issuers, will vary from time to time
consistent with the Fund's investment
objectives, changes in equity prices and
changes in interest rates and other
economic and market factors. All of the
Fund's Managed Assets may from time to time
be invested in lower grade securities.
In furtherance of the Fund's primary
investment objective of generating current
income and current gains from trading in
securities, under current market conditions
the Fund intends to engage in an option
strategy of writing (selling) covered call
options on at least 50% of the securities
held in the portfolio of the Fund, thus
generating option writing premiums. A
secondary source of current income to the
Fund will be the receipt of dividends and
interest on the securities held in the
Fund's portfolio.
4
"Managed Assets" means the total assets of
the Fund (including any assets attributable
to any preferred shares that may be
outstanding or otherwise attributable to
the use of leverage, if any) minus the sum
of accrued liabilities (other than debt
representing financial leverage, if any).
For purposes of determining Managed Assets,
the liquidation preference of any
outstanding preferred shares is not treated
as a liability.
CONVERTIBLE SECURITIES. Under normal market
conditions, the Fund will invest at least
70% of its Managed Assets in a combination
of convertible securities and equity
securities. However, the Fund is not
limited in the percentage of its assets
that can be invested in convertible
securities. A convertible security is a
debt security or preferred stock that is
exchangeable for an equity security of the
issuer at a predetermined price (the
"conversion price"). Depending upon the
relationship of the conversion price to the
market value of the underlying security, a
convertible security may trade more like an
equity security than a debt instrument. The
convertible securities in which the Fund
may invest may be investment grade or lower
grade securities. See "The Fund's
Investments--Investment Philosophy and
Process--Convertible Securities."
SYNTHETIC CONVERTIBLE SECURITIES. The Fund
may also create a "synthetic" convertible
security by combining separate securities
that possess the two principal
characteristics of a true convertible
security, i.e., an income security ("income
security component") and the right to
acquire an equity security ("convertible
component"). The income security component
is achieved by investing in non-convertible
income securities such as bonds, preferred
stocks and money market instruments. The
convertible component is achieved by
investing in warrants or options to buy
common stock at a certain exercise price,
or options on a stock index. The Fund may
also purchase synthetic securities created
by other parties, typically investment
banks, including convertible structured
notes. Different companies may issue the
income security and convertible components
which may be purchased separately, and at
different times. The Fund's holdings of
synthetic convertible securities are
considered convertible securities for
purposes of the Fund's policy to invest at
least 70% of its Managed Assets in
convertible securities and equity
securities. See "The Fund's
Investments--Investment Philosophy and
Process--Synthetic Convertible Securities."
EQUITY SECURITIES. Under normal market
conditions, the Fund will invest at least
70% of its Managed Assets in a combination
of convertible securities and equity
securities. However, the Fund is not
limited in the percentage of its assets
that can be invested in equity securities.
Equity securities are securities of a
corporation or other entity that, in the
case of common stocks, entitle the holder
to a pro rata interest in the profits of
the corporation, if any, without preference
over any other class of securities,
including the company's debt securities,
preferred stock and other senior equity
securities or, in the case of preferred
stocks, has a preference over common stock
in liquidation (and generally as to
dividends as well), but is subordinated to
the liabilities of the issuer in all
respects. In making equity
5
security selections, the Investment Manager
seeks to invest in equity securities that
have a history of paying dividends.
NON-CONVERTIBLE HIGH YIELD SECURITIES. The
Fund may invest up to 30% of its Managed
Assets in non-convertible high yield
securities, i.e., income securities that
are typically lower grade securities. The
Fund's investments in high yield securities
may have fixed or variable principal
payments and all types of interest rate and
dividend payment and reset terms, including
fixed rate, adjustable rate, zero coupon,
contingent, deferred, payment in kind and
auction rate features as well as a broad
range of maturities. See "The Fund's
Investments--Investment Philosophy and
Process--Non-Convertible High Yield
Securities."
CALL OPTIONS AND COVERED CALL WRITING. In
furtherance of the Fund's primary
investment objective of generating current
income and current gains from trading in
securities, under current market conditions
the Fund intends to engage in an option
strategy of writing (selling) covered call
options on at least 50% of the securities
held in the portfolio of the Fund, thus
generating option writing premiums.
Call options are contracts representing the
right to purchase a security at a specified
price (the "strike price") at or before a
specified future date (the "expiration
date"). For conventional listed call
options, the option's expiration date can
be up to nine months from the date the call
options are first listed for trading.
Longer-term call options can have
expiration dates up to three years from the
date of listing. The price of the option is
determined from trading activity in the
broad options market, and generally
reflects the relationship between the
current market price for the underlying
common stock and the strike price, as well
as the time remaining until the expiration
date.
The Fund will follow a strategy known as
"covered call option writing," which is a
strategy designed to produce income from
option premiums and offset a portion of a
market decline in the underlying security.
This strategy will be the Fund's principal
investment strategy in seeking to pursue
its primary investment objective. The Fund
will only "sell" or "write" options on
securities held in the Fund's portfolio. It
may not sell "naked" call options, i.e.,
options on securities that are not held by
the Fund or on more shares of a security
than are held in the Fund's portfolio. The
Fund will consider a call option written
with respect to a security underlying a
convertible security to be covered so long
as (i) the convertible security, pursuant
to its terms, grants to the holders of such
security the right to convert the
convertible security into the underlying
security and (ii) the convertible security,
upon conversion, will convert into enough
shares of the underlying security to cover
the call option written by the Fund.
An option whose strike price is above the
current price of the underlying security is
called "out-of-the-money." It is
anticipated that most of the options that
will be sold by the Fund will be
out-of-the-money at the time such options
are written, allowing the security to add
appreciation in addition to the proceeds
from the sale of the option.
6
An option whose strike price is below the
current price of the underlying security is
called "in-the-money" and will be sold by
the Fund as a defensive measure to seek to
protect against a possible decline in the
underlying stock. It is anticipated that
the Fund will sell more out-of-the-money
call options than in-the-money call
options.
When stocks in the portfolio rise, call
options that were out-of-the-money when
written may become in-the-money, thereby
increasing the likelihood that they could
be exercised and the Fund forced to sell
the underlying security. While this may be
desirable in some instances, the Fund
intends to minimize undesirable option
exercises by repurchasing the call options
prior to expiration.
Option contracts are originated and
standardized by an independent entity
called the Options Clearing Corporation
(the "OCC"). Currently, options are
available on over 2,300 stocks, with new
listings added periodically. The Fund will
write (sell) call options that are
generally issued, guaranteed and cleared by
the OCC. Listed call options are traded on
the American Stock Exchange, Chicago Board
Options Exchange, International Securities
Exchange, New York Stock Exchange (the
"NYSE"), Pacific Stock Exchange,
Philadelphia Stock Exchange or various
other U.S. options exchanges. The Fund may
also sell options in the over the counter
market and on non-U.S. exchanges.
LOWER GRADE SECURITIES. The Fund may invest
all of its assets in lower grade
securities, which are commonly referred to
as "junk bonds." Both the convertible
securities and the non-convertible high
yield securities in which the Fund will
invest may be lower grade securities.
Investments in lower grade securities will
expose the Fund to greater risks than if
the Fund owned only higher grade
securities. Lower grade securities or
equivalent securities often trade like
equity securities rather than debt and are
typically more volatile than highly rated
securities. See "The Fund's
Investments--Investment Philosophy and
Process--Lower Grade Securities."
FOREIGN SECURITIES. The Fund may invest a
portion of its Managed Assets in securities
of foreign issuers, including debt and
equity securities of corporate issuers, and
in debt securities of government issuers in
developed and emerging markets. A foreign
issuer is a company organized under the
laws of a foreign country whose securities
are principally traded in the financial
markets of a foreign country. Initially,
the Fund anticipates that approximately 20%
of its Managed Assets will be invested in
securities of foreign issuers, although
this percentage may increase or decrease
based on market conditions. See "The Fund's
Investments--Investment Philosophy and
Process--Foreign Securities."
RULE 144A SECURITIES. The Fund may invest
without limit in securities that have not
been registered for public sale, but that
are eligible for purchase and sale by
certain qualified institutional buyers
under Rule 144A under the Securities Act of
1933, as amended ("Rule 144A Securities").
See "The Fund's Investments--Investment
Philosophy and Process--Rule 144A
Securities."
7
OTHER SECURITIES. Under normal market
conditions, the Fund will invest at least
70% of its Managed Assets in a diversified
portfolio of equity securities and
convertible securities of U.S. and non-U.S.
issuers. It is anticipated that up to 30%
of the Fund's Managed Assets will be
invested in non-convertible high yield
securities and that, initially,
approximately 20% of the Fund's Managed
Assets will be invested in securities
issued by non-U.S. issuers, although this
percentage may increase or decrease based
on market conditions. The portion of the
Fund's Managed Assets invested in
convertible securities, equity securities
and high yield securities, as well as the
portion invested in securities issued by
U.S. and non-U.S. issuers, will vary from
time to time consistent with the Fund's
investment objectives, changes in equity
prices and changes in interest rates and
other economic and market factors. The Fund
may invest the remainder of its assets, if
any, in other securities of various types.
For temporary defensive purposes, the Fund
may depart from its principal investment
strategies and invest part or all of its
assets in securities with remaining
maturities of less than one year, cash
equivalents, or may hold cash. During such
periods, the Fund may not be able to
achieve its investment objectives.
INVESTMENT ADVISOR The Fund has entered into an investment
advisory agreement with Claymore Advisors,
LLC (the "Advisor"), the Fund's investment
advisor. Pursuant to such investment
advisory agreement, the Advisor receives an
annual fee from the Fund, calculated and
paid monthly, in arrears, based on the
average weekly value of the Fund's Managed
Assets. See "Management of the
Fund--Investment Advisor."
INVESTMENT MANAGER The Fund and the Advisor have entered into
an investment management agreement with
Advent Capital Management, LLC ("Advent" or
the "Investment Manager"), the Fund's
investment manager. Pursuant to such
investment management agreement, the
Advisor has delegated responsibility for
the day-to-day management of the Fund's
portfolio of securities to the Investment
Manager, which includes buying and selling
securities for the Fund and investment
research. Under the investment management
agreement, the Investment Manager will
receive an annual fee from the Fund,
calculated and paid monthly, in arrears,
based on the average weekly value of the
Fund's Managed Assets.
Advent Capital Management, LLC is an asset
management firm with approximately $3.8
billion in assets under management as of
September 30, 2004. See "Management of the
Fund--Investment Manager."
DISTRIBUTIONS The Fund intends to distribute quarterly
all or a portion of its investment company
taxable income to holders of common shares.
It is expected that the initial quarterly
dividend on the Fund's common shares will
be declared within approximately 90 days
after completion of this offering and that
such dividend will be paid approximately
120 days after completion of this offering.
If the Fund realizes a long-term capital
gain, it will be required to allocate such
gain between the common shares and the
preferred shares, if any, issued by the
Fund in proportion to the total dividends
paid to each class for the year in which
the income is realized. See
"Distributions."
8
Unless an election is made to receive
dividends in cash, shareholders will
automatically have all dividends and
distributions reinvested in common shares
through the Fund's Automatic Dividend
Reinvestment Plan. See "Dividend
Reinvestment Plan."
LISTING The Fund has applied for the listing of its
common shares on the New York Stock
Exchange under the symbol "LCM." See
"Description of Shares--Common Shares."
MARKET PRICE OF SHARES Common shares of closed-end investment
companies frequently trade at prices lower
than their net asset value. Common shares
of closed-end investment companies like the
Fund that invest primarily in convertible
securities, non-convertible income
securities and equity securities and that
write covered call options on such
securities have during some periods traded
at prices higher than their net asset value
and during other periods traded at prices
lower than their net asset value. The Fund
cannot assure you that its common shares
will trade at a price higher than or equal
to net asset value. The Fund's net asset
value will be reduced immediately following
this offering by the sales load and the
amount of the offering expenses paid by the
Fund. See "Use of Proceeds." In addition to
net asset value, the market price of the
Fund's common shares may be affected by
such factors as dividend levels, which are
in turn affected by expenses, dividend
stability, portfolio credit quality,
liquidity and market supply and demand. See
"Risks," "Description of Shares" and the
section of the Statement of Additional
Information with the heading "Repurchase of
Common Shares." The common shares are
designed primarily for long-term investors
and you should not purchase common shares
of the Fund if you intend to sell them
shortly after purchase.
SPECIAL RISK CONSIDERATIONS Risk is inherent in all investing.
Therefore, before investing in the Fund's
common shares, you should consider the
following risks carefully.
NO OPERATING HISTORY. The Fund is a newly
organized, diversified, closed-end
management investment company with no
operating history.
INVESTMENT AND MARKET DISCOUNT RISK. An
investment in the Fund's common shares is
subject to investment risk, including the
possible loss of the entire amount that you
invest. Your investment in common shares
represents an indirect investment in the
securities owned by the Fund, substantially
all of which are traded on securities
exchanges or in the over-the-counter
markets. The value of these securities,
like other market investments, may move up
or down, sometimes rapidly and
unpredictably. Your common shares at any
point in time may be worth less than what
you invested, even after taking into
account the reinvestment of Fund dividends
and distributions. In addition, shares of
closed-end management investment companies
frequently trade at a discount from their
net asset value. This risk may be greater
for investors expecting to sell their
shares of the Fund soon after completion of
the public offering. The shares of the Fund
were designed primarily for long-term
investors, and investors in the common
shares should not view the Fund as a
vehicle for trading purposes.
CONVERTIBLE SECURITIES RISK. The Fund is
not limited in the percentage of its assets
that may be invested in convertible
securities. Convertible
9
securities generally offer lower
interest or dividend yields than
non-convertible securities of similar
quality. The market values of
convertible securities tend to decline
as interest rates increase and,
conversely, to increase as interest
rates decline. However, the convertible
security's market value tends to reflect
the market price of the common stock of
the issuing company when that stock
price is greater than the convertible's
"conversion price." The conversion price
is defined as the predetermined price at
which the convertible security could be
exchanged for the associated stock. As
the market price of the underlying
common stock declines (other than in
distressed situations), the price of the
convertible security tends to be
influenced more by the yield of the
convertible security. Thus, it may not
decline in price to the same extent as
the underlying common stock. In the
event of a liquidation of the issuing
company, holders of convertible
securities would generally be paid after
the company's creditors, but before the
company's common stockholders.
Consequently, an issuer's convertible
securities generally entail more risk
than its debt securities, but less risk
than its common stock. See
"Risks--Convertible Securities Risk."
SYNTHETIC CONVERTIBLE SECURITIES RISK. The
value of a synthetic convertible security
will respond differently to market
fluctuations than a convertible security
because a synthetic convertible security is
composed of two or more separate
securities, each with its own market value.
In addition, if the value of the underlying
common stock or the level of the index
involved in the convertible component falls
below the exercise price of the warrant or
option, the warrant or option may lose all
value.
EQUITY SECURITIES RISK. The Fund is not
limited in the percentage of its assets
that may be invested in common stocks and
other equity securities, and therefore a
risk of investing in the Fund is equity
risk. Equity risk is the risk that
securities held by the Fund will fall due
to general market or economic conditions,
perceptions regarding the industries in
which the issuers of securities held by the
Fund participate, and the particular
circumstances and performance of particular
companies whose securities the Fund holds.
For example, an adverse event, such as an
unfavorable earnings report, may depress
the value of equity securities of an issuer
held by the Fund; the price of common stock
of an issuer may be particularly sensitive
to general movements in the stock market;
or a drop in the stock market may depress
the price of most or all of the common
stocks and other equity securities held by
the Fund. In addition, common stock of an
issuer in the Fund's portfolio may decline
in price if the issuer fails to make
anticipated dividend payments because,
among other reasons, the issuer of the
security experiences a decline in its
financial condition. Common equity
securities in which the Fund will invest
are structurally subordinated to preferred
stocks, bonds and other debt instruments in
a company's capital structure, in terms of
priority to corporate income, and therefore
will be subject to greater dividend risk
than preferred stocks or debt instruments
of such issuers. In addition, while broad
market measures of commons stocks have
historically generated higher average
returns than fixed income securities,
common stocks have also experienced
significantly more volatility in those
returns. See "Risks--Equity Securities
Risk."
10
RISKS ASSOCIATED WITH OPTIONS ON
SECURITIES. There are several risks
associated with transactions in options on
securities. For example, there are
significant differences between the
securities and options markets that could
result in an imperfect correlation between
these markets, causing a given transaction
not to achieve its objectives. A decision
as to whether, when and how to use options
involves the exercise of skill and
judgment, and even a well-conceived
transaction may be unsuccessful to some
degree because of market behavior or
unexpected events. As the writer of a
covered call option, the Fund forgoes,
during the option's life, the opportunity
to profit from increases in the market
value of the security covering the call
option above the sum of the premium and the
strike price of the call, but has retained
the risk of loss should the price of the
underlying security decline. The writer of
an option has no control over the time when
it may be required to fulfill its
obligation as a writer of the option. Once
an option writer has received an exercise
notice, it cannot effect a closing purchase
transaction in order to terminate its
obligation under the option and must
deliver the underlying security at the
exercise price.
There can be no assurance that a liquid
market will exist when the Fund seeks to
close out an option position. Reasons for
the absence of a liquid secondary market on
an exchange include the following: (i)
there may be insufficient trading interest
in certain options; (ii) restrictions may
be imposed by an exchange on opening
transactions or closing transactions or
both; (iii) trading halts, suspensions or
other restrictions may be imposed with
respect to particular classes or series of
options; (iv) unusual or unforeseen
circumstances may interrupt normal
operations on an exchange; (v) the
facilities of an exchange or the OCC may
not at all times be adequate to handle
current trading volume; or (vi) one or more
exchanges could, for economic or other
reasons, decide or be compelled at some
future date to discontinue the trading of
options (or a particular class or series of
options). If trading were discontinued, the
secondary market on that exchange (or in
that class or series of options) would
cease to exist. However, outstanding
options on that exchange that had been
issued by the OCC as a result of trades on
that exchange would continue to be
exercisable in accordance with their terms.
The Fund's ability to terminate
over-the-counter options is more limited
than with exchange-traded options and may
involve the risk that broker-dealers
participating in such transactions will not
fulfill their obligations. If the Fund were
unable to close out a covered call option
that it had written on a security, it would
not be able to sell the underlying security
unless the option expired without exercise.
The hours of trading for options may not
conform to the hours during which the
underlying securities are traded. To the
extent that the options markets close
before the markets for the underlying
securities, significant price and rate
movements can take place in the underlying
markets that cannot be reflected in the
options markets. Call options are marked to
market daily and their value will be
affected by changes in the value of and
dividend rates of the underlying common
stocks, an increase in interest rates,
changes in the actual or perceived
volatility of the stock market and the
underlying common stocks and the remaining
time to the options' expiration.
Additionally, the exercise price of an
option may be adjusted
11
downward before the option's expiration as
a result of the occurrence of certain
corporate events affecting the underlying
equity security, such as extraordinary
dividends, stock splits, merger or other
extraordinary distributions or events. A
reduction in the exercise price of an
option would reduce the Fund's capital
appreciation potential on the underlying
security.
To the extent that the Fund purchases
options pursuant to a hedging strategy, the
Fund will be subject to the following
additional risks. If a put or call option
purchased by the Fund is not sold when it
has remaining value, and if the market
price of the underlying security remains
equal to or greater than the exercise price
(in the case of a put), or remains less
than or equal to the exercise price (in the
case of a call), the Fund will lose its
entire investment in the option. Also,
where a put or call option on a particular
security is purchased to hedge against
price movements in a related security, the
price of the put or call option may move
more or less than the price of the related
security. If restrictions on exercise were
imposed, the Fund might be unable to
exercise an option it had purchased. If the
Fund were unable to close out an option
that it had purchased on a security, it
would have to exercise the option in order
to realize any profit or the option may
expire worthless.
The number of call options the Fund can
write is limited by the number of
securities the Fund holds, and further
limited by the fact that call options
represent 100 share lots of the underlying
security. The Fund will not write "naked"
or uncovered call options. Furthermore, the
Fund's options transactions will be subject
to limitations established by each of the
exchanges, boards of trade or other trading
facilities on which such options are
traded. These limitations govern the
maximum number of options in each class
which may be written or purchased by a
single investor or group of investors
acting in concert, regardless of whether
the options are written or purchased on the
same or different exchanges, boards of
trade or other trading facilities or are
held or written in one or more accounts or
through one or more brokers. Thus, the
number of options which the Fund may write
or purchase may be affected by options
written or purchased by other investment
advisory clients of the Investment Manager.
An exchange, board of trade or other
trading facility may order the liquidation
of positions found to be in excess of these
limits, and it may impose certain other
sanctions.
LOWER GRADE SECURITIES RISK. Investing in
lower grade securities involves additional
risks, including credit risk. Credit risk
is the risk that one or more securities in
the Fund's portfolio will decline in price,
or fail to pay interest or principal when
due, because the issuer of the security
experiences a decline in its financial
status. The Fund may invest an unlimited
portion of its Managed Assets in securities
rated Ba/BB or lower at the time of
investment or that are unrated but judged
to be of comparable quality by the
Investment Manager. These securities may
become the subject of bankruptcy
proceedings or otherwise subsequently
default as to the repayment of principal
and/or payment of interest or be downgraded
to ratings in the lower rating categories
(Ca or lower by Moody's or CC or lower by
Standard & Poor's). Securities rated BB or
Ba or lower are commonly referred to as
"junk bonds." The value of these
12
securities is affected by the
creditworthiness of the issuers of the
securities and by general economic and
specific industry conditions. Issuers of
lower grade securities are not perceived to
be as strong financially as those with
higher credit ratings, so the securities
are usually considered speculative
investments. These issuers are generally
more vulnerable to financial setbacks and
recession than more creditworthy issuers
which may impair their ability to make
interest and principal payments. Lower
grade securities tend to be less liquid and
more volatile than higher grade securities.
See "Risks--Lower Grade Securities Risk."
FOREIGN SECURITIES RISK. Investments in
non-U.S. issuers may involve unique risks
compared to investing in securities of U.S.
issuers. These risks are more pronounced to
the extent that the Fund invests a
significant portion of its non-U.S
investments in one region or in the
securities of emerging market issuers.
These risks may include:
- less information about non-U.S.
issuers or markets may be available
due to less rigorous disclosure or
accounting standards or regulatory
practices;
- many non-U.S. markets are smaller,
less liquid and more volatile. In a
changing market, the Investment
Manager may not be able to sell the
Fund's portfolio securities at
times, in amounts and at prices it
considers desirable;
- an adverse effect of currency
exchange rates or controls on the
value of the Fund's investments;
- the economies of non-U.S. countries
may grow at slower rates than
expected or may experience a
downturn or recession; economic,
political and social developments
may adversely affect the securities
markets; and
- withholding and other non-U.S.
taxes may decrease the Fund's
return.
See "Risks--Foreign Securities Risk."
EMERGING MARKETS RISK. Investing in
securities of issuers based in
underdeveloped emerging markets entails all
of the risks of investing in securities of
foreign issuers to a heightened degree.
These heightened risks include: (i) greater
risks of expropriation, confiscatory
taxation, nationalization, and less social,
political and economic stability; (ii) the
smaller size of the market for such
securities and a lower volume of trading,
resulting in lack of liquidity and in price
volatility; and (iii) certain national
policies which may restrict the Fund's
investment opportunities, including
restrictions on investing in issuers or
industries deemed sensitive to relevant
national interests.
INTEREST RATE RISK. In addition to the
risks discussed above, convertible
securities and non-convertible income
securities, including high yield and other
lower grade securities, are subject to
certain risks, including:
- if interest rates go up, the value
of convertible securities and
non-convertible income securities
in the Fund's portfolio generally
will decline;
13
- during periods of declining
interest rates, the issuer of a
security may exercise its option to
prepay principal earlier than
scheduled, forcing the Fund to
reinvest in lower yielding
securities. This is known as call
or prepayment risk. Lower grade
securities have call features that
allow the issuer to repurchase the
security prior to its stated
maturity. An issuer may redeem a
lower grade security if the issuer
can refinance the security at a
lower cost due to declining
interest rates or an improvement in
the credit standing of the issuer;
and
- during periods of rising interest
rates, the average life of certain
types of securities may be extended
because of slower than expected
principal payments. This may lock
in a below market interest rate,
increase the security's duration
(the estimated period until the
security is paid in full) and
reduce the value of the security.
This is known as extension risk.
CREDIT RISK. Credit Risk is the risk that
an issuer of a security will become unable
to meet its obligation to make interest and
principal payments. In general, lower rated
securities carry a greater degree of risk
that the issuer will lose its ability to
make interest and principal payments, which
could have a negative impact on the Fund's
net asset value or dividends. The Fund may
invest without limit in lower rated
securities. These securities are subject to
a greater risk of default. The prices of
these lower grade securities are more
sensitive to negative developments, such as
a decline in the issuer's revenues or a
general economic downturn, than are the
prices of higher grade securities. Lower
grade securities tend to be less liquid
than investment grade securities. The
market values of lower grade securities
tend to be more volatile than investment
grade securities.
CALL RISK. If interest rates fall, it is
possible that issuers of callable bonds
with high interest coupons will "call" (or
prepay) their bonds before their maturity
date. If a call were exercised by the
issuer during a period of declining
interest rates, the Fund is likely to have
to replace such called security with a
lower yielding security. If that were to
happen, it would decrease the Fund's net
investment income.
ILLIQUID INVESTMENTS. The Fund may invest
without limit in illiquid securities. The
Fund may also invest without limit in Rule
144A Securities. Although many of the Rule
144A Securities in which the Fund invests
may be, in the view of the Investment
Manager, liquid, if qualified institutional
buyers are unwilling to purchase these Rule
144A Securities, they may become illiquid.
Illiquid securities may be difficult to
dispose of at a fair price at the times
when the Fund believes it is desirable to
do so. The market price of illiquid
securities generally is more volatile than
that of more liquid securities, which may
adversely affect the price that the Fund
pays for or recovers upon the sale of
illiquid securities. Illiquid securities
are also more difficult to value and the
Investment Manager's judgment may play a
greater role in the valuation process.
Investment of the Fund's assets in illiquid
securities may restrict the Fund's ability
to take advantage of market opportunities.
The risks associated with illiquid
securities may be particularly acute in
situations in which the Fund's operations
require
14
cash and could result in the Fund borrowing
to meet its short-term needs or incurring
losses on the sale of illiquid securities.
CURRENCY RISKS. The value of the securities
denominated or quoted in foreign currencies
may be adversely affected by fluctuations
in the relative currency exchange rates and
by exchange control regulations. The Fund's
investment performance may be negatively
affected by a devaluation of a currency in
which the Fund's investments are
denominated or quoted. Further, the Fund's
investment performance may be significantly
affected, either positively or negatively,
by currency exchange rates because the U.S.
dollar value of securities denominated or
quoted in another currency will increase or
decrease in response to changes in the
value of such currency in relation to the
U.S. dollar.
MANAGEMENT RISK. The Investment Manager's
judgment about the attractiveness, relative
value or potential appreciation of a
particular sector, security or investment
strategy may prove to be incorrect, and
there can be no assurance that the
investment decisions made by the Investment
Manager will prove beneficial to the Fund.
Although certain members of the investment
team at the Investment Manager have
experience managing equity securities and
options, the Investment Manager, as an
entity, has limited experience managing
such securities and options. The Advisor
has a limited history advising registered
investment companies such as the Fund,
although the principals of the Advisor have
experience servicing regulated investment
companies and providing packaged products
to advisors and their clients.
STRATEGIC TRANSACTIONS. The Fund may use
various other investment management
techniques that also involve certain risks
and special considerations, including
engaging in hedging and risk management
transactions, including interest rate and
foreign currency transactions, options,
futures, swaps, caps, floors, and collars
and other derivatives transactions.
INFLATION RISK. Inflation risk is the risk
that the value of assets or income from
investments will be worth less in the
future as inflation decreases the value of
money. As inflation increases, the real
value of the Fund's common shares and
distributions thereon can decline. In
addition, during any periods of rising
inflation, the interest or dividend rates
payable by the Fund on any leverage the
Fund may have issued would likely increase,
which would tend to further reduce returns
to holders of the Fund's common shares.
ANTI-TAKEOVER PROVISIONS. The Fund's
Agreement and Declaration of Trust includes
provisions that could limit the ability of
other entities or persons to acquire
control of the Fund or convert the Fund to
open-end status. These provisions could
deprive the holders of common shares of
opportunities to sell their common shares
at a premium over the then current market
price of the common shares or at net asset
value. In addition, if the Fund issues
preferred shares, the holders of the
preferred shares will have voting rights
that could deprive holders of common shares
of such opportunities.
15
MARKET DISRUPTION RISK. The terrorist
attacks in the United States on September
11, 2001 had a disruptive effect on the
securities markets. The war in Iraq also
has resulted in recent market volatility
and may have long-term effects on the
United States and worldwide financial
markets and may cause further economic
uncertainties in the United States and
worldwide. The Fund cannot predict the
effects of the war or similar events in the
future on the United States economy and
securities markets.
CERTAIN OTHER RISKS. An investment in the
Fund is subject to certain other risks
described in the "Risks" section of this
prospectus beginning on page 25.
ADMINISTRATOR, CUSTODIAN AND
TRANSFER AGENT The Bank of New York will serve as the
Fund's Administrator, Custodian and
Transfer Agent (the "Administrator,"
"Custodian" and "Transfer Agent," as the
context requires) pursuant to various
agreements between the Fund and The Bank of
New York. See "Administrator, Custodian and
Transfer Agent."
16
SUMMARY OF FUND EXPENSES
The purpose of the table below is to help you understand all fees and
expenses that you, as a holder of the Fund's common shares, would bear directly
or indirectly. The following table shows Fund expenses as a percentage of net
assets attributable to common shares.
SHAREHOLDER TRANSACTION EXPENSES
Sales Load Paid by You (as a percentage of offering price) 4.50%(1)
Offering Expense Borne by the Fund (as a percentage of offering price)(2) .20%
Dividend Reinvestment Plan Fees None(3)
PERCENTAGE OF NET ASSETS
ATTRIBUTABLE TO COMMON SHARES
-----------------------------
ANNUAL EXPENSES
Management Fees 1.00%(4)
Other Expenses .25%
Total Annual Expenses 1.25%
----------
(1) The Fund has also agreed to pay the underwriters $.00667 per common share
as a partial reimbursement of expenses incurred in connection with the
offering. Separately, Claymore Advisors, LLC has retained Merrill Lynch,
Pierce, Fenner & Smith Incorporated to provide, as may reasonably be
requested by Claymore Advisors, LLC from time to time, certain consulting
and after-market shareholder support services. In connection with these
services, Merrill Lynch, Pierce, Fenner & Smith Incorporated will receive
from Claymore Advisors, LLC a quarterly fee equal to an annual rate of .15%
of the Fund's Managed Assets; provided, however, that such fee, together
with the partial reimbursement of expenses to the underwriters discussed
above and the fee paid to Claymore Securities, Inc. discussed in footnote 2
below, shall not exceed 4.5% of the total price to the public of the common
shares sold in this offering. See "Underwriting."
(2) Claymore Advisors, LLC has agreed to pay the organizational expenses of the
Fund. Claymore Advisors, LLC and Advent Capital Management, LLC have agreed
to pay the offering expenses of the Fund (other than the sales load, but
including the $.00667 per common share partial reimbursement of expenses to
the underwriters) that exceed $.04 per common share (.20% of the offering
price). To the extent that aggregate offering expenses are less than $.04
per common share, up to .15% of the amount of the offering up to such
expense limit will be paid to Claymore Securities, Inc. as compensation for
the distribution services it provides to the Fund. See "Underwriting."
(3) You will pay brokerage charges if you direct the Plan Agent (as defined
below) to sell your common shares held in a dividend reinvestment account.
(4) Represents the aggregate fee payable to the Advisor and Investment Manager.
The purpose of the table above and the example below is to help you
understand all fees and expenses that you, as a holder of common shares, would
bear directly or indirectly. The expenses shown in the table under "Other
Expenses" and "Total Annual Expenses" are based on estimated amounts for the
Fund's first full year of operations and assume that the Fund issues 15,000,000
common shares. If the Fund issues fewer common shares, all other things being
equal, these expenses would increase. See "Management of the Fund" and "Dividend
Reinvestment Plan."
The following example illustrates the expenses (including the sales load of
$45 and estimated offering expenses of this offering of $2) that you would pay
on a $1,000 investment in common shares, assuming (1) total net annual expenses
of 1.25% of net assets attributable to common shares in years one through five
and (2) a 5% annual return:(1)
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
Total Expenses Incurred $ 59 $ 85 $ 112 $ 191
----------
(1) THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF FUTURE EXPENSES.
ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE ASSUMED. The example
assumes that the estimated "Other Expenses" set forth in the Annual Expenses
table are accurate and that all dividends and distributions are reinvested
at net asset value. Moreover, the Fund's actual rate of return may be
greater or less than the hypothetical 5% return shown in the example.
17
THE FUND
The Fund is a recently organized, diversified, closed-end management
investment company registered under the Investment Company Act. The Fund was
organized as a Delaware statutory trust on January 30, 2004, pursuant to an
Agreement and Declaration of Trust governed by the laws of the State of
Delaware. As a recently organized entity, the Fund has no operating history. The
Fund's principal office is located at 2455 Corporate West Drive, Lisle, Illinois
60532, and its telephone number is (630) 505-3700.
USE OF PROCEEDS
The net proceeds of the offering of common shares will be approximately
$ ($ if the underwriters exercise the overallotment option in full) after
payment of the estimated organizational and offering costs. The Fund will invest
the net proceeds of the offering in accordance with the Fund's investment
objectives and policies as stated below. We currently anticipate that the Fund
will be able to invest primarily in convertible securities, equity securities
and high yield securities of U.S. and non-U.S. issuers that meet the Fund's
investment objectives and policies within approximately three months after the
completion of the offering. Pending investment in convertible securities, equity
securities and high yield securities of U.S. and non-U.S. issuers that meet the
Fund's investment objectives and policies, the net proceeds of the offering will
be invested in high quality, short-term fixed income securities and money market
securities to the extent such securities are available.
THE FUND'S INVESTMENTS
INVESTMENT OBJECTIVES AND POLICIES
The Fund's primary investment objective is to provide current income and
current gains from trading in securities, with a secondary objective of
long-term capital appreciation. There can be no assurance that the Fund will
achieve its investment objectives.
Under normal market conditions, the Fund will invest at least 70% of its
Managed Assets in a diversified portfolio of equity securities and convertible
securities of U.S. and non-U.S. issuers. It is anticipated that up to 30% of the
Fund's Managed Assets will be invested in non-convertible high yield securities
and that, initially, approximately 20% of the Fund's Managed Assets will be
invested in securities issued by non-U.S. issuers. The portion of the Fund's
Managed Assets invested in convertible securities, equity securities and
non-convertible high yield securities, as well as the portion invested in
securities issued by U.S. and non-U.S. issuers, will vary from time to time
consistent with the Fund's investment objectives, changes in equity prices and
changes in interest rates and other economic and market factors. All of the
Fund's Managed Assets may from time to time be invested in lower grade
securities.
In furtherance of the Fund's primary investment objective of generating
current income and current gains from trading in securities, under current
market conditions the Fund intends to engage in an option strategy of writing
(selling) covered call options on at least 50% of the securities held in the
portfolio of the Fund, thus generating option writing premiums.
These are non-fundamental policies and may be changed by the Board of
Trustees of the Fund provided that shareholders are provided with at least 60
days' prior written notice of any change as required by the rules under the
Investment Company Act. Percentage limitations described in this prospectus are
as of the time of investment by the Fund and could from time to time not be
complied with as a result of market value fluctuations of the Fund's portfolio
and other events.
18
INVESTMENT PHILOSOPHY AND PROCESS
GENERAL. The Fund's portfolio will be composed principally of the following
investments. A more detailed description of the Fund's investment policies and
restrictions and more detailed information about the Fund's portfolio
investments are contained in the Statement of Additional Information.
CONVERTIBLE SECURITIES. Under normal market conditions, the Fund will
invest at least 70% of its Managed Assets in a diversified portfolio of equity
and convertible securities of U.S. and non-U.S. issuers. The Fund is not limited
in the percentage of its assets that can be invested in convertible securities.
A convertible security is a debt security or preferred stock that is
exchangeable for an equity security of the issuer at a predetermined price. The
common stock underlying convertible securities may be issued by a different
entity than the issuer of the convertible securities. Convertible securities
entitle the holder to receive interest payments paid on corporate debt
securities or the dividend preference on a preferred stock until such time as
the convertible security matures or is redeemed or until the holder elects to
exercise the conversion privilege. As a result of the conversion feature,
however, the interest rate or dividend preference on a convertible security is
generally less than would be the case if the securities were issued in
non-convertible form.
The value of convertible securities is influenced by both the yield of
non-convertible securities of comparable issuers and by the value of the
underlying common stock. The value of a convertible security viewed without
regard to its conversion feature (i.e., strictly on the basis of its yield) is
sometimes referred to as its "investment value." The investment value of the
convertible security typically will fluctuate inversely with changes in
prevailing interest rates. However, at the same time, the convertible security
will be influenced by its "conversion value," which is the market value of the
underlying common stock that would be obtained if the convertible security were
converted. Conversion value fluctuates directly with the price of the underlying
common stock.
If, because of a low price of the common stock, the conversion value is
substantially below the investment value of the convertible security, the price
of the convertible security is governed principally by its investment value. If
the conversion value of a convertible security increases to a point that
approximates or exceeds its investment value, the value of the security will be
principally influenced by its conversion value. A convertible security will sell
at a premium over its conversion value to the extent investors place value on
the right to acquire the underlying common stock while holding a fixed income
security. Holders of convertible securities have a claim on the assets of the
issuer prior to the common stockholders, but may be subordinated to holders of
similar non-convertible securities of the same issuer.
The Investment Manager typically applies a four-step approach when buying
and selling convertible securities for the Fund, which includes:
- screening the universe of convertible securities to identify securities
with attractive risk/ reward characteristics relative to the underlying
security;
- analyzing the creditworthiness of the issuer of the securities;
- analyzing the equity fundamentals of the convertible security's
underlying stock to determine its capital appreciation potential; and
- monitoring the portfolio on a continual basis to determine whether
each security is maintaining its investment potential.
SYNTHETIC CONVERTIBLE SECURITIES. The Fund may also invest in a "synthetic"
convertible security by combining separate securities that possess the two
principal characteristics of a true convertible security, i.e., an income
security ("income security component") and the right to acquire an equity
security ("convertible component"). The income security component is achieved by
investing in non-convertible income securities such as bonds, preferred stocks
and money market instruments. The convertible component is achieved by investing
in
19
warrants or options to buy common stock at a certain exercise price, or options
on a stock index. In creating a synthetic convertible security, the Fund may
also pool a basket of fixed-income securities and a basket of warrants or
options that produce the economic characteristics similar to a convertible
security. Within each basket of fixed-income securities and warrants or options,
different companies may issue the fixed-income and convertible components, which
may be purchased separately and at different times. The Fund may also purchase
synthetic securities created by other parties, typically investment banks,
including convertible structured notes. Convertible structured notes are
fixed-income debentures linked to equity. Convertible structured notes have the
attributes of a convertible security; however, the investment bank that issued
the convertible note assumes the credit risk associated with the investment,
rather than the issuer of the underlying common stock into which the note is
convertible. In certain circumstances, purchasing synthetic convertible
securities may offer more flexibility than purchasing a convertible security.
The Fund's holdings of synthetic convertible securities are considered
convertible securities for purposes of the Fund's policy to invest at least 70%
of its Managed Assets in convertible securities and equity securities.
EQUITY SECURITIES. The Fund may invest without limit in equity securities,
including preferred equity securities, and anticipates having a significant
portion of its portfolio invested in dividend-paying equity securities. Equity
securities are securities of a corporation or other entity that, in the case of
common stocks, entitle the holder to a pro rata interest in the profits of the
corporation, if any, without preference over any other class of securities,
including the company's debt securities, preferred stock and other senior equity
securities or, in the case of preferred stocks, has a preference over common
stock in liquidation (and generally as to dividends as well), but is
subordinated to the liabilities of the issuer in all respects. In making equity
security selections, the Investment Manager seeks to invest in equity securities
that have a history of paying dividends. Although equity securities have
historically generated higher average total returns than fixed income
securities, equity securities have also experienced significantly more
volatility in those returns. An adverse event, such as an unfavorable earnings
report, may depress the value of a particular equity security held by the Fund.
Also, the price of equity securities, particularly common stocks, are sensitive
to general movements in the stock market. A drop in the stock market may depress
the price of equity securities held by the Fund.
NON-CONVERTIBLE HIGH YIELD SECURITIES. The Fund may invest up to 30% of its
Managed Assets in non-convertible high yield securities, i.e., income securities
that are typically lower grade securities. The Fund's investments in
non-convertible high yield securities may have fixed or variable principal
payments and all types of interest rate and dividend payment and reset terms,
including fixed rate, adjustable rate, zero coupon, contingent, deferred,
payment in kind and auction rate features as well as a broad range of
maturities.
The Investment Manager typically applies a research approach that is
similar to its approach for convertible securities when buying and selling
non-convertible high yield securities for the Fund, which includes:
- analyzing the creditworthiness of the security, with an emphasis on the
issuing company's cash flow, interest coverage, balance sheet
structure, and assets, and assessment of the subordination of the
security within the capital structure;
- analyzing the business fundamentals of the issuing company; and
- monitoring the portfolio on a continual basis to determine whether
each security is maintaining its investment potential.
OPTIONS. The Fund intends to pursue its primary objective by employing an
option strategy of writing (selling) covered call options on at least 50% of the
Fund's securities, including, in some instances, synthetic convertible
securities held by the Fund. An option on a security is a contract that gives
the holder of the option, in return for a premium, the right to buy from (in the
case of a call) or sell to (in the case of a put) the writer of the option the
security underlying the option at a specified exercise or "strike" price. The
writer of an option on a security has the obligation upon exercise of the option
to deliver the underlying security upon payment of the exercise price or to pay
the exercise price upon delivery of the underlying security. Certain options,
known as
20
"American style" options may be exercised at any time during the term of the
option. Other options, known as "European style" options, may be exercised only
on the expiration date of the option. Since virtually all options on individual
stocks trade American style, the Investment Manager believes that substantially
all of the options written by the Fund will be American style options.
The Fund will write call options only if they are "covered." In the case of
a call option on a common stock or other security, the option is "covered" if
the Fund owns the security underlying the call or has an absolute and immediate
right to acquire that security without additional cash consideration (or, if
additional cash consideration is required, cash or other assets determined to be
liquid by the Investment Manager (in accordance with procedures established by
the Board of Trustees) in such amount are segregated by the Fund's custodian)
upon conversion or exchange of other securities held by the Fund. A call option
is also covered if the Fund holds a call on the same security as the call
written where the exercise price of the call held is (i) equal to or less than
the exercise price of the call written, or (ii) greater than the exercise price
of the call written, provided the difference is maintained by the Fund in
segregated assets determined to be liquid by the Investment Manager as described
above.
If an option written by the Fund expires unexercised, the Fund realizes on
the expiration date a capital gain equal to the premium received by the Fund at
the time the option was written. If an option purchased by the Fund expires
unexercised, the Fund realizes a capital loss equal to the premium paid. Prior
to the earlier of exercise or expiration, an exchange-traded option may be
closed out by an offsetting purchase or sale of an option of the same series
(type, underlying security, exercise price, and expiration). There can be no
assurance, however, that a closing purchase or sale transaction can be effected
when the Fund desires. The Fund may sell put or call options it has previously
purchased, which could result in a net gain or loss depending on whether the
amount realized on the sale is more or less than the premium and other
transaction costs paid on the put or call option when purchased. The Fund will
realize a capital gain from a closing purchase transaction if the cost of the
closing transaction is less than the premium received from writing the option,
or, if it is more, the Fund will realize a capital loss. If the premium received
from a closing sale transaction is more than the premium paid to purchase the
option, the Fund will realize a capital gain or, if it is less, the Fund will
realize a capital loss. Net gains from the Fund's option strategy will be
short-term capital gains which, for federal income tax purposes, will constitute
net investment company taxable income. See "Tax Matters."
The principal factors affecting the market value of a put or a call option
include supply and demand, interest rates, the current market price of the
underlying security in relation to the exercise price of the option, the
volatility of the underlying security, and the time remaining until the
expiration date. The premium paid for a put or call option purchased by the Fund
is an asset of the Fund. The premium received for an option written by the Fund
is recorded as an asset and equivalent liability. The Fund then adjusts the
liability to the market value of the option. The value of an option purchased or
written is marked to market daily and is valued at the closing price on the
exchange on which it is traded or, if not traded on an exchange or no closing
price is available, at the mean between the last bid and asked prices.
The Fund will follow a strategy known as "covered call option writing,"
which is a strategy designed to produce income and offset a portion of a market
decline in the underlying security. This strategy will be the Fund's primary
investment strategy. The Fund will only "sell" or "write" options on securities
held in the Fund's portfolio. It may not sell "naked" call options, i.e.,
options representing more shares of the security than are held in the portfolio.
The Fund will consider a call option written with respect to a security
underlying a convertible security to be covered so long as (i) the convertible
security, pursuant to its terms, grants to the holders of such security the
right to convert the convertible security into the underlying security and (ii)
the convertible security, upon conversion, will convert into enough shares of
the underlying security to cover the call option written by the Fund. In
addition, if the Fund writes an option on a security underlying a convertible
security, the Fund will segregate liquid assets in an amount equal to any
liability that may be created if the Fund were required to exercise its
conversion right in order to acquire the underlying security to cover the
option. This strategy will
21
ensure that the option is covered and that the Fund is not deemed to have
created a senior security in writing the option.
The standard contract size for a single option is 100 shares of the
underlying security. There are four items needed to identify any option: (1) the
underlying security; (2) the expiration month; (3) the strike price; and (4) the
type (call or put).
A call option whose strike price is above the current price of the
underlying stock is called "out-of-the-money." Most of the options that will be
sold by the Fund are expected to be out-of-the-money, allowing for potential
appreciation in addition to the proceeds from the sale of the option. An option
whose strike price is below the current price of the underlying stock is called
"in-the-money" and will be sold by the Fund as a defensive measure to protect
against a possible decline in the underlying stock.
For conventional listed call options, the option's expiration date can be
up to nine months from the date the call options are first listed for trading.
Longer-term call options can have expiration dates up to three years from the
date of listing. It is anticipated that most options that are written against
Fund security holdings will be repurchased prior to the option's expiration
date, generating a gain or loss in the options. If the options were not to be
repurchased, the option holder would exercise their rights and buy the security
from the Fund at the strike price if the security traded at a higher price than
the strike price. In general, the Fund intends to continue to hold its
securities rather than allowing them to be called away by the option holders.
Option contracts are originated and standardized by an independent entity
called the OCC. Currently, options are available on over 2,300 stocks with new
listings added periodically. The Fund will write (sell) call options that are
generally issued, guaranteed and cleared by the OCC. Listed call options are
traded on the American Stock Exchange, Chicago Board Options Exchange,
International Securities Exchange, NYSE, Pacific Stock Exchange, Philadelphia
Stock Exchange or various other U.S. options exchanges. The Fund may also sell
options in the over the counter market and on non-U.S. exchanges.
The Fund may also, to a limited extent, write covered put options. A put
option on a security is "covered" if the Fund segregates assets determined to be
liquid by the Investment Manager equal to the exercise price, as described
above. A put option is also covered if the Fund holds a put on the same security
as the put written where the exercise price of the put held is (i) equal to or
greater than the exercise price of the put written, or (ii) less than the
exercise price of the put written, provided the difference is maintained by the
Fund in segregated assets determined to be liquid by the Investment Manager as
described above.
LOWER GRADE SECURITIES. The Fund may invest all of its assets in securities
rated below investment grade, such as those rated Ba or lower by Moody's and BB
or lower by S&P or securities comparably rated by other rating agencies or in
unrated securities determined by the Investment Manager to be of comparable
quality. Lower grade securities are commonly referred to as "junk bonds."
Securities rated Ba by Moody's are judged to have speculative elements; their
future cannot be considered as well assured and often the protection of interest
and principal payments may be very moderate. Securities rated BB by S&P are
regarded as having predominantly speculative characteristics and, while such
obligations have less near-term vulnerability to default than other speculative
grade securities, they face 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. Securities rated C by
Moody's are regarded as having extremely poor prospects of ever attaining any
real investment standing. Securities rated D by S&P are in default and the
payment of interest and/or repayment of principal is in arrears. Although the
Fund will not invest in securities that, at the time of purchase by the Fund,
are rated below CCC by S&P, rated below Caa by Moody's or unrated securities
determined by the Investment Manager to be of comparable quality, the Fund may
hold securities whose ratings are downgraded, subsequent to the time of purchase
of such securities by the Fund, to a rating in the lower ratings categories (CC
or lower by S&P or Ca or lower by Moody's). When the Investment Manager believes
it to be in the best interests of the
22
Fund's shareholders, the Fund will reduce its investment in lower grade
securities and, in certain market conditions, the Fund may invest none of its
assets in lower grade securities.
Lower grade securities, though high yielding, are characterized by high
risk. They may be subject to certain risks with respect to the issuing entity
and to greater market fluctuations than certain lower yielding, higher rated
securities. The secondary market for lower grade securities may be less liquid
than that of higher rated securities. Adverse conditions could make it difficult
at times for the Fund to sell lower grade securities or could result in lower
prices than those used in calculating the Fund's net asset value. See
"Risks--Lower Grade Securities."
The prices of debt securities generally are inversely related to interest
rate changes; however, the price volatility caused by fluctuating interest rates
of securities also is inversely related to the coupon of such securities.
Accordingly, lower grade securities may be relatively less sensitive to interest
rate changes than higher quality securities of comparable maturity, because of
their higher coupons. The higher coupon is what the investor receives in return
for bearing greater credit risk. The higher credit risk associated with lower
grade securities potentially can have a greater effect on the value of such
securities than may be the case with higher quality issues of comparable
maturity, and will be a substantial factor in the Fund's relative share price
volatility. Lower grade securities may be particularly susceptible to economic
downturns. It is likely that an economic recession could disrupt severely the
market for such securities and may have an adverse impact on the value of such
securities. In addition, it is likely that any such economic downturn could
adversely affect the ability of the issuers of such securities to repay
principal and pay interest thereon and increase the incidence of default for
such securities.
The ratings of Moody's, S&P and the other rating agencies are their
opinions as to the quality of the obligations which they undertake to rate.
Ratings are relative and subjective and, although ratings may be useful in
evaluating the safety of interest and principal payments, they do not evaluate
the market value risk of such obligations. Although these ratings may be an
initial criterion for selection of portfolio investments, the Investment Manager
also will independently evaluate these securities and the ability of the issuers
of such securities to pay interest and principal. To the extent that the Fund
invests in lower grade securities that have not been rated by a rating agency,
the Fund's ability to achieve its investment objectives will be more dependent
on the Investment Manager's credit analysis than would be the case when the Fund
invests in rated securities.
The Fund will not invest in securities which are in default as to payment
of principal and interest at the time of purchase. However, securities held by
the Fund may become the subject of bankruptcy proceedings or otherwise default.
The Fund may be required to bear certain extraordinary expenses in order to
protect and recover its investment.
FOREIGN SECURITIES. The Fund will invest a portion of its Managed Assets in
securities of foreign issuers, including debt and equity securities of corporate
issuers, and in debt securities of government issuers in developed and emerging
markets. A foreign issuer is a company organized under the laws of a foreign
country that is principally traded in the financial markets of a foreign
country. The Fund anticipates that, initially, approximately 20% of its Managed
Assets will be invested in securities issued by foreign issuers, although this
percentage may increase or decrease based on market conditions.
RULE 144A SECURITIES. The Fund may invest without limit in securities that
have not been registered for public sale, but that are eligible for purchase and
sale by certain qualified institutional buyers.
OTHER INVESTMENT COMPANIES. The Fund may invest in the securities of other
investment companies to the extent that such investments are consistent with the
Fund's investment objectives and policies and permissible under the Investment
Company Act. Under the Investment Company Act, the Fund may not acquire the
securities of other investment companies if, as a result, (1) more than 10% of
the Fund's total assets would be invested in securities of other investment
companies, (2) such purchase would result in more than 3% of the total
outstanding voting securities of any one investment company being held by the
Fund or (3) more than 5% of the Fund's total
23
assets would be invested in any one investment company. These limitations do not
apply to the purchase of shares of any investment company in connection with a
merger, consolidation, reorganization or acquisition of substantially all the
assets of another investment company.
The Fund, as a holder of the securities of other investment companies, will
bear its pro rata portion of the other investment companies' expenses, including
advisory fees. These expenses are in addition to the direct expenses of the
Fund's own operations.
STRATEGIC TRANSACTIONS. The Fund may, but is not required to, use various
strategic transactions described below to generate total return, facilitate
portfolio management and mitigate risks. Such strategic transactions are
generally accepted as part of modern portfolio management and are regularly used
by many mutual funds and other institutional investors. Although the Investment
Manager seeks to use the practices to further the Fund's investment objectives,
no assurance can be given that these practices will achieve this result.
The Fund may purchase and sell derivative instruments such as
exchange-listed and over-the-counter put and call options on securities,
financial futures, equity, fixed-income and interest rate indices, and other
financial instruments, purchase and sell financial futures contracts and options
thereon, enter into various interest rate transactions such as swaps, caps,
floors or collars and enter into various currency transactions such as currency
forward contracts, currency futures contracts, currency swaps or options on
currency or currency futures or credit transactions and credit default swaps.
The Fund also may purchase derivative instruments that combine features of these
instruments and purchase securities for delayed settlement. Collectively, all of
the above are referred to as "Strategic Transactions." The Fund generally seeks
to use Strategic Transactions as a portfolio management or hedging technique to
seek to protect against possible adverse changes in the market value of
securities held in or to be purchased for the Fund's portfolio, protect the
value of the Fund's portfolio, facilitate the sale of certain securities for
investment purposes, manage the effective interest rate exposure of the Fund,
protect against changes in currency exchange rates, manage the effective
maturity or duration of the Fund's portfolio, or establish positions in the
derivatives markets as a temporary substitute for purchasing or selling
particular securities. The Fund may use Strategic Transactions to enhance
potential gain, although the Fund will not enter into a Strategic Transaction to
the extent such Strategic Transaction would cause the Fund to become subject to
regulation by the Commodity Futures Trading Commission as a commodity pool.
Strategic Transactions have risks, including the imperfect correlation
between the value of such instruments and the underlying assets, the possible
default of the other party to the transaction or illiquidity of the derivative
instruments. Furthermore, the ability to successfully use Strategic Transactions
depends on the Investment Manager's ability to predict pertinent market
movements, which cannot be assured. Thus, the use of Strategic Transactions may
result in losses greater than if they had not been used, may require the Fund to
sell or purchase portfolio securities at inopportune times or for prices other
than current market values, may limit the amount of appreciation the Fund can
realize on an investment, or may cause the Fund to hold a security that it might
otherwise sell. The use of currency transactions can result in the Fund
incurring losses as a result of the imposition of exchange controls, suspension
of settlements or the inability of the Fund to deliver or receive a specified
currency. Additionally, amounts paid by the Fund as premiums and cash or other
assets held in margin accounts with respect to Strategic Transactions are not
otherwise available to the Fund for investment purposes. The use of leverage by
the Fund, if any, may limit the Fund's ability to use Strategic Transactions.
A more complete discussion of Strategic Transactions and their risks is
contained in the Fund's Statement of Additional Information.
DEFENSIVE AND TEMPORARY INVESTMENTS. Under unusual market or economic
conditions or for temporary defensive purposes, the Fund may invest up to 100%
of its total assets in securities issued or guaranteed by the U.S. government or
its instrumentalities or agencies, certificates of deposit, bankers' acceptances
and other bank obligations, commercial paper rated in the highest category by a
nationally recognized statistical rating
24
organization or other fixed income securities deemed by the Investment Manager
to be consistent with a defensive posture, or may hold cash, including money
market funds. During such periods, the Fund may not be able to achieve its
investment objectives. The yield on such securities may be lower than that of
other investments, but the risk of loss of capital is reduced.
REPURCHASE AGREEMENTS. The Fund may enter into repurchase agreements with
broker-dealers, member banks of the Federal Reserve System and other financial
institutions. Repurchase agreements are arrangements under which the Fund
purchases securities and the seller agrees to repurchase the securities within a
specific time and at a specific price. The repurchase price is generally higher
than the Fund's purchase price, with the difference being income to the Fund.
The counterparty's obligations under the repurchase agreement are collateralized
with U.S. Treasury and/or agency obligations with a market value of not less
than 100% of the obligations, valued daily. Collateral is held by the Fund's
custodian in a segregated, safekeeping account for the benefit of the Fund.
Repurchase agreements afford the Fund an opportunity to earn income on
temporarily available cash at low risk. In the event of commencement of
bankruptcy or insolvency proceedings with respect to the seller of the security
before repurchase of the security under a repurchase agreement, the Fund may
encounter delay and incur costs before being able to sell the security. Such a
delay may involve loss of interest or a decline in price of the security. If the
court characterizes the transaction as a loan and the Fund has not perfected a
security interest in the security, the Fund may be required to return the
security to the seller's estate and be treated as an unsecured creditor of the
seller. As an unsecured creditor, the Fund would be at risk of losing some or
all of the principal and interest involved in the transaction.
LENDING OF PORTFOLIO SECURITIES. The Fund may lend portfolio securities to
registered broker-dealers or other institutional investors deemed by the
Investment Manager to be of good standing under agreements which require that
the loans be secured continuously by collateral in cash, cash equivalents or
U.S. Treasury bills maintained on a current basis at an amount at least equal to
the market value of the securities loaned. The Fund continues to receive the
equivalent of the interest or dividends paid by the issuer on the securities
loaned as well as the benefit of an increase and the detriment of any decrease
in the market value of the securities loaned and would also receive compensation
based on investment of the collateral. The Fund would not, however, have the
right to vote any securities having voting rights during the existence of the
loan, but would call the loan in anticipation of an important vote to be taken
among holders of the securities or of the giving or withholding of consent on a
material matter affecting the investment.
As with other extensions of credit, there are risks of delay in recovery or
even loss of rights in the collateral should the borrower of the securities fail
financially. At no time would the value of the securities loaned exceed 35% of
the value of the Fund's total assets.
PORTFOLIO TURNOVER. It is the policy of the Fund not to engage in trading
for short-term profits although portfolio turnover rate is not considered a
limiting factor in the execution of investment decisions for the Fund.
The Fund's portfolio will be composed principally of the foregoing
investments. A more detailed description of the Fund's investment policies and
restrictions and more detailed information about the Fund's portfolio
investments are contained in the Statement of Additional Information.
RISKS
The Fund is a diversified, closed-end management investment company
designed primarily as a long-term investment and not as a trading vehicle. The
Fund is not intended to be a complete investment program and, due to the
uncertainty inherent in all investments, there can be no assurance that the Fund
will achieve its investment objectives. Your common shares at any point in time
may be worth less than you invested, even after taking into account the
reinvestment of Fund dividends and distributions.
25
NO OPERATING HISTORY. The Fund is a newly organized, diversified,
closed-end management investment company with no operating history.
INVESTMENT AND MARKET DISCOUNT RISK. An investment in the Fund is subject
to investment risk, including the possible loss of the entire principal amount
that you invest. Your investment in common shares represents an indirect
investment in the securities owned by the Fund, substantially all of which are
traded on a national securities exchange or in the over-the-counter markets. The
value of these securities, like other market investments, may move up or down,
sometimes rapidly and unpredictably. Your common shares at any point in time may
be worth less than what you invested, even after taking into account the
reinvestment of Fund dividends and distributions. In addition, shares of
closed-end management investment companies frequently trade at a discount from
their net asset value.
This risk may be greater for investors expecting to sell their shares of
the Fund soon after completion of the public offering. The shares of the Fund
were designed primarily for long-term investors, and investors in the common
shares should not view the Fund as a vehicle for trading purposes. Net asset
value will be reduced following the offering by the underwriting discount and
the amount of offering expenses paid by the Fund.
Whether investors will realize a gain or loss upon the sale of the Fund's
common shares will depend upon whether the market value of the shares at the
time of sale is above or below the price the investor paid, taking into account
transaction costs, for the shares and is not directly dependent upon the Fund's
net asset value. Because the market value of the Fund's shares will be
determined by factors such as the relative demand for and supply of the shares
in the market, general market conditions and other factors beyond the control of
the Fund, the Fund cannot predict whether its common shares will trade at, below
or above net asset value, or below or above the initial offering price for the
shares.
CONVERTIBLE SECURITIES RISK. The Fund is not limited in the percentage of
its assets that may be invested in convertible securities. Convertible
securities generally offer lower interest or dividend yields than
non-convertible securities of similar quality. The market values of convertible
securities tend to decline as interest rates increase and, conversely, to
increase as interest rates decline. However, the convertible security's market
value tends to reflect the market price of the common stock of the issuing
company when that stock price is greater than the convertible's "conversion
price." The conversion price is defined as the predetermined price at which the
convertible security could be exchanged for the associated stock. As the market
price of the underlying common stock declines (other than in distressed
situations), the price of the convertible security tends to be influenced more
by the yield of the convertible security. Thus, it may not decline in price to
the same extent as the underlying common stock. In the event of a liquidation of
the issuing company, holders of convertible securities would be paid after the
company's creditors but before the company's common stockholders. Consequently,
the issuer's convertible securities generally may be viewed as having more risk
than its debt securities, but less risk than its common stock.
SYNTHETIC CONVERTIBLE SECURITIES RISK. The value of a synthetic convertible
security will respond differently to market fluctuations than a convertible
security because a synthetic convertible is composed of two or more separate
securities, each with its own market value. In addition, if the value of the
underlying common stock or the level of the index involved in the convertible
component falls below the exercise price of the warrant or option, the warrant
or option may lose all value.
EQUITY SECURITIES RISK. The Fund is not limited in the percentage of its
assets that may be invested in common stocks and other equity securities, and
therefore a risk of investing in the Fund is equity risk. Equity risk is the
risk that the value of the securities held by the Fund will fall due to general
market and economic conditions, perceptions regarding the industries in which
the issuers of securities held by the Fund participate or factors relating to
specific companies in which the Fund invests. Stock of an issuer in the Fund's
portfolio may decline in price if the issuer fails to make anticipated dividend
payments because, among other reasons, the issuer
26
of the security experiences a decline in its financial condition. Common stock
in which the Fund will invest is structurally subordinated to preferred stock,
bonds and other debt instruments in a company's capital structure, in terms of
priority to corporate income, and therefore will be subject to greater dividend
risk than preferred stock or debt instruments of such issuers. In addition,
while common stock has historically generated higher average returns than fixed
income securities, common stock has also experienced significantly more
volatility in those returns. An adverse event, such as an unfavorable earnings
report, may depress the value of common stock of an issuer held by the Fund.
Also, the price of common stock of an issuer is sensitive to general movements
in the stock market. A drop in the stock market may depress the price of most or
all of the common stocks held by the Fund.
There are special risks associated with investing in preferred equity
securities, including:
DEFERRAL. Preferred securities may include provisions that permit the
issuer, at its discretion, to defer distributions for a stated period without
any adverse consequences to the issuer. If the Fund owns a preferred security
that is deferring its distributions, the Fund may be required to report income
for tax purposes although it has not yet received such income.
NON-CUMULATIVE DIVIDENDS. Some preferred stocks are non-cumulative, meaning
that the dividends do not accumulate and need not ever be paid. A portion of the
portfolio may include investments in non-cumulative preferred securities,
whereby the issuer does not have an obligation to make up any arrearages to its
shareholders. Should an issuer of a non-cumulative preferred stock held by the
Fund determine not to pay dividends on such stock, the amount of dividends the
Fund pays may be adversely affected. There is no assurance that dividends or
distributions on non-cumulative preferred stocks in which the Fund invests will
be declared or otherwise made payable.
SUBORDINATION. Preferred securities are subordinated to bonds and other
debt instruments in a company's capital structure in terms of priority to
corporate income and liquidation payments, and therefore will be subject to
greater credit risk than more senior debt instruments.
LIQUIDITY. Preferred securities may be substantially less liquid than many
other securities, such as common stocks or United States government securities.
LIMITED VOTING RIGHTS. Generally, preferred security holders (such as the
Fund) have no voting rights with respect to the issuing company unless preferred
dividends have been in arrears for a specified number of periods, at which time
the preferred security holders may have the right to elect a number of directors
to the issuer's board. Generally, once all the arrearages have been paid, the
preferred security holders no longer have voting rights.
SPECIAL REDEMPTION RIGHTS. In certain varying circumstances, an issuer of
preferred securities may redeem the securities prior to a specified date. For
instance, for certain types of preferred securities, a redemption may be
triggered by a change in federal income tax or securities laws. As with call
provisions, a redemption by the issuer may negatively impact the return of the
security held by the Fund
RISKS ASSOCIATED WITH OPTIONS ON SECURITIES. There are several risks
associated with transactions in options on securities. For example, there are
significant differences between the securities and options markets that could
result in an imperfect correlation between these markets, causing a given
transaction not to achieve its objectives. A decision as to whether, when and
how to use options involves the exercise of skill and judgment, and even a
well-conceived transaction may be unsuccessful to some degree because of market
behavior or unexpected events. As the writer of a covered call option, the Fund
forgoes, during the option's life, the opportunity to profit from increases in
the market value of the security covering the call option above the sum of the
premium and the strike price of the call but has retained the risk of loss
should the price of the underlying security decline. The writer of an option has
no control over the time when it may be required to fulfill its obligation as a
writer of the option.
27
Once an option writer has received an exercise notice, it cannot effect a
closing purchase transaction in order to terminate its obligation under the
option and must deliver the underlying security at the exercise price.
There can be no assurance that a liquid market will exist when the Fund
seeks to close out an option position. Reasons for the absence of a liquid
secondary market on an exchange include the following: (i) there may be
insufficient trading interest in certain options; (ii) restrictions may be
imposed by an exchange on opening transactions or closing transactions or both;
(iii) trading halts, suspensions or other restrictions may be imposed with
respect to particular classes or series of options; (iv) unusual or unforeseen
circumstances may interrupt normal operations on an exchange; (v) the facilities
of an exchange or the OCC may not at all times be adequate to handle current
trading volume; or (vi) one or more exchanges could, for economic or other
reasons, decide or be compelled at some future date to discontinue the trading
of options (or a particular class or series of options). If trading were
discontinued, the secondary market on that exchange (or in that class or series
of options) would cease to exist. However, outstanding options on that exchange
that had been issued by the OCC as a result of trades on that exchange would
continue to be exercisable in accordance with their terms. The Fund's ability to
terminate over-the-counter options is more limited than with exchange-traded
options and may involve the risk that broker-dealers participating in such
transactions will not fulfill their obligations. If the Fund were unable to
close out a covered call option that it had written on a security, it would not
be able to sell the underlying security unless the option expired without
exercise.
The hours of trading for options may not conform to the hours during which
the underlying securities are traded. To the extent that the options markets
close before the markets for the underlying securities, significant price and
rate movements can take place in the underlying markets that cannot be reflected
in the options markets. Call options are marked to market daily and their value
will be affected by changes in the value of and dividend rates of the underlying
common stocks, an increase in interest rates, changes in the actual or perceived
volatility of the stock market and the underlying common stocks and the
remaining time to the options' expiration. Additionally, the exercise price of
an option may be adjusted downward before the option's expiration as a result of
the occurrence of certain corporate events affecting the underlying equity
security, such as extraordinary dividends, stock splits, merger or other
extraordinary distributions or events. A reduction in the exercise price of an
option would reduce the Fund's capital appreciation potential on the underlying
security.
When the Fund writes covered put options, it bears the risk of loss if the
value of the underlying stock declines below the exercise price. If the option
is exercised, the Fund could incur a loss if it is required to purchase the
stock underlying the put option at a price greater than the market price of the
stock at the time of exercise. While the Fund's potential gain in writing a
covered put option is limited to the interest earned on the liquid assets
securing the put option plus the premium received from the purchaser of the put
option, the Fund risks a loss equal to the entire value of the stock.
To the extent that the Fund purchases options pursuant to a hedging
strategy, the Fund will be subject to the following additional risks. If a put
or call option purchased by the Fund is not sold when it has remaining value,
and if the market price of the underlying security remains equal to or greater
than the exercise price (in the case of a put), or remains less than or equal to
the exercise price (in the case of a call), the Fund will lose its entire
investment in the option. Also, where a put or call option on a particular
security is purchased to hedge against price movements in a related security,
the price of the put or call option may move more or less than the price of the
related security. If restrictions on exercise were imposed, the Fund might be
unable to exercise an option it had purchased. If the Fund were unable to close
out an option that it had purchased on a security, it would have to exercise the
option in order to realize any profit or the option may expire worthless.
The number of call options the Fund can write is limited by the number of
securities the Fund holds, and further limited by the fact that call options
represent 100 share lots of the underlying security. The Fund will not write
"naked" or uncovered call options. Furthermore, the Fund's options transactions
will be subject to limitations established by each of the exchanges, boards of
trade or other trading facilities on which such options
28
are traded. These limitations govern the maximum number of options in each class
which may be written or purchased by a single investor or group of investors
acting in concert, regardless of whether the options are written or purchased on
the same or different exchanges, boards of trade or other trading facilities or
are held or written in one or more accounts or through one or more brokers.
Thus, the number of options which the Fund may write or purchase may be affected
by options written or purchased by other investment advisory clients of the
Investment Manager. An exchange, board of trade or other trading facility may
order the liquidation of positions found to be in excess of these limits, and it
may impose certain other sanctions.
LOWER GRADE SECURITIES RISK. Investing in lower grade securities involves
additional risks, including credit risk. Credit risk is the risk that one or
more securities in the trust's portfolio will decline in price, or fail to pay
interest or principal when due, because the issuer of the security experiences a
decline in its financial status. The Fund may invest an unlimited portion of its
Managed Assets in securities rated Ba/BB or lower at the time of investment or
that are unrated but judged to be of comparable quality by the Investment
Manager. Lower grade securities are commonly referred to as "junk bonds." The
value of lower grade securities is affected by the creditworthiness of the
issuers of the securities and by general economic and specific industry
conditions. Issuers of lower grade securities are not perceived to be as strong
financially as those with higher credit ratings, so the securities are usually
considered speculative investments. These issuers are generally more vulnerable
to financial setbacks and recession than more creditworthy issuers which may
impair their ability to make interest and principal payments. Lower grade
securities tend to be less liquid than if the Fund owned only higher grade
securities.
Debt securities rated below investment grade are speculative with respect
to the capacity to pay interest and repay principal in accordance with the terms
of such securities. A rating of C from Moody's means that the issue so rated can
be regarded as having extremely poor prospects of ever attaining any real
investment standing. Standard & Poor's assigns a rating of C to issues that are
currently highly vulnerable to nonpayment, and the C rating may be used to cover
a situation where a bankruptcy petition has been filed or similar action taken,
but payments on the obligation are being continued (a C rating is also assigned
to a preferred stock issue in arrears on dividends or sinking fund payments, but
that is currently paying).
The outstanding principal amount of lower grade securities has proliferated
in the past decade as an increasing number of issuers have used lower grade
securities for corporate financing. An economic downturn could severely affect
the ability of highly leveraged issuers to service their debt obligations or to
repay their obligations upon maturity. Similarly, down-turns in profitability in
specific industries could adversely affect the ability of issuers of lower grade
securities in those industries to meet their obligations. The market values of
lower grade debt securities tend to reflect individual developments of the
issuer to a greater extent that do higher quality securities, which react
primarily to fluctuations in the general level of interest rates. Factors having
an adverse impact on the market value of lower grade securities may have an
adverse effect on the Fund's net asset value and the market value of its common
shares. In addition, the Fund may incur additional expenses to the extent it is
required to seek recovery upon a default in payment of principal or interest on
its portfolio holdings. In certain circumstances, the Fund may be required to
foreclose on an issuer's assets and take possession of its property or
operations. In such circumstances, the Fund would incur additional costs in
disposing of such assets and potential liabilities from operating any business
acquired. If the Fund holds a security the rating of which is downgraded to a
rating of C or below, the Fund will incur significant risk in addition to the
risks associated with investments in high yield securities and corporate loans.
Distressed securities frequently do not produce income while they are
outstanding.
The secondary market for lower grade securities may not be as liquid as the
secondary market for more highly rated securities, a factor which may have an
adverse effect on the Fund's ability to dispose of a particular security when
necessary to meet its liquidity needs. There are fewer dealers in the market for
lower grade securities than investment grade obligations. The prices quoted by
different dealers may vary significantly and the spread between the bid and
asked price is generally much larger than for higher quality instruments. Under
29
adverse market or economic conditions, the secondary market for lower grade
securities could contract further, independent of any specific adverse changes
in the condition of a particular issuer, and these instruments may become
illiquid. As a result, the Fund could find it more difficult to sell these
securities or may be able to sell the securities only at prices lower than if
such securities were widely traded. Prices realized upon the sale of such lower
rated or unrated securities, under these circumstances, may be less than the
prices used in calculating the Fund's net asset value.
Since investors generally perceive that there are greater risks associated
with lower quality debt securities of the type in which the Fund may invest a
portion of its assets, the yields and prices of such securities may tend to
fluctuate more than those for higher rated securities. In the lower quality
segments of the debt securities market, changes in perceptions of issuers'
creditworthiness tend to occur more frequently and in a more pronounced manner
than do changes in higher quality segments of the debt securities market,
resulting in greater yield and price volatility.
FOREIGN SECURITIES RISK. Investments in non-U.S. issuers may involve unique
risks compared to investing in securities of U.S. issuers. These risks are more
pronounced to the extent that the Fund invests a significant portion of its
non-U.S. investments in one region or in the securities of emerging market
issuers. These risks may include:
- less information about non-U.S. issuers or markets may be available
due to less rigorous disclosure or accounting standards or regulatory
practices;
- many non-U.S. markets are smaller, less liquid and more volatile. In a
changing market, the Investment Manager may not be able to sell the
Fund's portfolio securities at times, in amounts and at prices it
considers desirable;
- adverse effect of currency exchange rates or controls on the value of
the Fund's investments;
- the economies of non-U.S. countries may grow at slower rates than
expected or may experience a downturn or recession;
- economic, political and social developments may adversely affect the
securities markets; and
- withholding and other non-U.S. taxes may decrease the Fund's return.
There may be less publicly available information about non-U.S. markets and
issuers than is available with respect to U.S. securities and issuers. Non-U.S.
companies generally are not subject to accounting, auditing and financial
reporting standards, practices and requirements comparable to those applicable
to U.S. companies. The trading markets for most non-U.S. securities are
generally less liquid and subject to greater price volatility than the markets
for comparable securities in the United States. The markets for securities in
certain emerging markets are in the earliest stages of their development. Even
the markets for relatively widely traded securities in certain non-U.S. markets,
including emerging market countries, may not be able to absorb, without price
disruptions, a significant increase in trading volume or trades of a size
customarily undertaken by institutional investors in the United States.
Additionally, market making and arbitrage activities are generally less
extensive in such markets, which may contribute to increased volatility and
reduced liquidity.
Economies and social and political climate in individual countries may
differ unfavorably from the United States. Non-U.S. economies may have less
favorable rates of growth of gross domestic product, rates of inflation,
currency valuation, capital reinvestment, resource self-sufficiency and balance
of payments positions. Many countries have experienced substantial, and in some
cases extremely high, rates of inflation for many years. Inflation and rapid
fluctuations in inflation rates have had, and may continue to have, very
negative effects on the economies and securities markets of certain emerging
countries. Unanticipated political or social developments may also affect the
values of the Fund's investments and the availability to the Fund of additional
investments in such countries.
30
EMERGING MARKETS RISK. Investing in securities of issuers based in
underdeveloped emerging markets entails all of the risks of investing in
securities of foreign issuers to a heightened degree. These heightened risks
include: (i) greater risks of expropriation, confiscatory taxation,
nationalization, and less social, political and economic stability; (ii) the
smaller size of the market for such securities and a lower volume of trading,
resulting in lack of liquidity and in price volatility; and (iii) certain
national policies which may restrict the Trust's investment opportunities
including restrictions on investing in issuers or industries deemed sensitive to
relevant national interests.
CURRENCY RISKS. The value of the securities denominated or quoted in
foreign currencies may be adversely affected by fluctuations in the relative
currency exchange rates and by exchange control regulations. The Fund's
investment performance may be negatively affected by a devaluation of a currency
in which the Fund's investments are denominated or quoted. Further, the Fund's
investment performance may be significantly affected, either positively or
negatively, by currency exchange rates because the U.S. dollar value of
securities denominated or quoted in another currency will increase or decrease
in response to changes in the value of such currency in relation to the U.S.
dollar.
INTEREST RATE RISK. Convertible securities and non-convertible income
securities, including high yield and other lower grade securities, are subject
to certain common risks, including:
- if interest rates go up, the value of convertible securities and
non-convertible securities in the Fund's portfolio generally will
decline;
- during periods of declining interest rates, the issuer of a security
may exercise its option to prepay principal earlier than scheduled,
forcing the Fund to reinvest in lower yielding securities. This is
known as call or prepayment risk. Lower grade securities frequently
have call features that allow the issuer to repurchase the security
prior to its stated maturity. An issuer may redeem an obligation if the
issuer can refinance the security at a lower cost due to declining
interest rates or an improvement in the credit standing of the issuer;
and
- during periods of rising interest rates, the average life of certain
types of securities may be extended because of slower than expected
principal payments. This may lock in a below market interest rate,
increase the security's duration (the estimated period until the
security is paid in full) and reduce the value of the security. This is
known as extension risk.
CREDIT RISK. Credit Risk is the risk that an issuer of a security will
become unable to meet its obligation to make interest and principal payments. In
general, lower rated securities carry a greater degree of risk that the issuer
will lose its ability to make interest and principal payments, which could have
a negative impact on the Fund's net asset value or dividends. The Fund may
invest without limit in lower rated securities. These securities are subject to
a greater risk of default. The prices of these lower grade securities are more
sensitive to negative developments, such as a decline in the issuer's revenues
or a general economic downturn, than are the prices of higher grade securities.
Lower grade securities tend to be less liquid than investment grade securities.
The market values of lower grade securities tend to be more volatile than
investment grade securities.
CALL RISK. If interest rates fall, it is possible that issuers of callable
bonds with high interest coupons will "call" (or prepay) their bonds before
their maturity date. If a call were exercised by the issuer during a period of
declining interest rates, the Fund is likely to have to replace such called
security with a lower yielding security. If that were to happen, it would
decrease the Fund's net investment income.
ILLIQUID INVESTMENTS. The Fund may invest without limit in illiquid
securities. The Fund may also invest without limitation in Rule 144A Securities.
Although many of the Rule 144A Securities in which the Fund invests may be, in
the view of the Investment Manager, liquid, if qualified institutional buyers
are unwilling to purchase these Rule 144A Securities, they may become illiquid.
Illiquid securities may be difficult to dispose of at a fair
31
price at the times when the Fund believes it is desirable to do so. The market
price of illiquid securities generally is more volatile than that of more liquid
securities, which may adversely affect the price that the Fund pays for or
recovers upon the sale of illiquid securities. Illiquid securities are also more
difficult to value and the Investment Manager's judgment may play a greater role
in the valuation process. Investment of the Fund's assets in illiquid securities
may restrict the Fund's ability to take advantage of market opportunities. The
risks associated with illiquid securities may be particularly acute in
situations in which the Fund's operations require cash and could result in the
Fund borrowing to meet its short-term needs or incurring losses on the sale of
illiquid securities.
MANAGEMENT RISK. The Investment Manager's judgment about the
attractiveness, relative value or potential appreciation of a particular sector,
security or investment strategy may prove to be incorrect, and there can be no
assurance that the investment decisions made by the Investment Manager will
prove beneficial to the Fund. Although certain members of the investment team at
the Investment Manager have experience managing equity securities and options,
the Investment Manager, as an entity, has limited experience managing such
securities and options. The Advisor has a limited history advising registered
investment companies such as the Fund, although the principals of the Advisor
have experience servicing regulated investment companies and providing packaged
products to advisors and their clients.
STRATEGIC TRANSACTIONS. Strategic Transactions in which the Fund may engage
also involve certain risks and special considerations, including engaging in
hedging and risk management transactions such as interest rate and foreign
currency transactions, options, futures, swaps and other derivatives
transactions. Strategic Transactions will primarily be entered into to seek to
manage the risks of the Fund's portfolio of securities, but may have the effect
of limiting the gains from favorable market movements. Strategic Transaction
involve risks, including (i) that the loss on the Strategic Transaction position
may be larger than the gain in the portfolio position being hedged and (ii) that
the derivative instruments used in Strategic Transaction may not be liquid and
may require the Fund to pay additional amounts of money. Successful use of
Strategic Transactions depends on the Investment Manager's ability to predict
correctly market movements which, of course, cannot be assured. Losses on
Strategic Transactions may reduce the Fund's net asset value and its ability to
pay dividends if they are not offset by gains on the portfolio positions being
hedged. The Fund may also lend the securities it owns to others, which allows
the Fund the opportunity to earn additional income. Although the Fund will
require the borrower of the securities to post collateral for the loan and the
terms of the loan will require that the Fund be able to reacquire the loaned
securities if certain events occur, the Fund is still subject to the risk that
the borrower of the securities may default, which could result in the Fund
losing money, which would result in a decline in the Fund's net asset value. The
Fund may also purchase securities for delayed settlement. This means that the
Fund is generally obligated to purchase the securities at a future date for a
set purchase price, regardless of whether the value of the securities is more or
less than the purchase price at the time of settlement.
INFLATION RISK. Inflation risk is the risk that the value of assets or
income from investments will be worth less in the future as inflation decreases
the value of money. As inflation increases, the real value of the Fund's common
shares and distributions thereon can decline. In addition, during any periods of
rising inflation, the interest or dividend rates payable by the Fund on any
leverage the Fund may have issued would likely increase, which would tend to
further reduce returns to holders of the Fund's common shares.
MARKET DISRUPTION RISK. The terrorist attacks in the U.S. on September 11,
2001 had a disruptive effect on the securities markets. The war in Iraq also has
resulted in recent market volatility and may have long-term effects on the U.S.
and worldwide financial markets and may cause further economic uncertainties in
the U.S. and worldwide. The Fund cannot predict the effects of the war or
similar events in the future on the U.S. economy and securities markets.
ANTI-TAKEOVER PROVISIONS. The Fund's Agreement and Declaration of Trust
includes provisions that could limit the ability of other entities or persons to
acquire control of the Fund or convert the Fund to open-end status. These
provisions could deprive the holders of common shares of opportunities to sell
their common shares at a
32
premium over the then current market price of the common shares or at net asset
value. In addition, if the Fund issues preferred shares, the holders of the
preferred shares will have voting rights that could deprive holders of common
shares of such opportunities.
MANAGEMENT OF THE FUND
TRUSTEES AND OFFICERS
The Fund's Board of Trustees is responsible for the overall management of
the Fund, including supervision of the duties performed by the Advisor and the
Investment Manager. There are seven trustees of the Fund. Three of the trustees
are "interested persons" (as defined in the Investment Company Act). The name
and business address of the trustees and officers of the Fund and their
principal occupations and other affiliations during the past five years are set
forth under "Management of the Fund" in the Statement of Additional Information.
INVESTMENT ADVISOR
Claymore Advisors, LLC, a wholly-owned subsidiary of Claymore Group, LLC,
serves as the investment advisor to the Fund. The Advisor is located at 2455
Corporate West Drive, Lisle, Illinois 60532. Pursuant to the investment advisory
agreement between the Advisor and the Fund, the Advisor furnishes offices,
necessary facilities and equipment, provides administrative services to the
Fund, oversees the activities of the Fund's Investment Manager, provides
personnel and pays the compensation of all trustees of the Fund who are its
affiliates. Claymore Advisors, LLC has a limited history in advising registered
closed-end investment companies such as the Fund. Claymore Securities, Inc., an
affiliate of the Advisor, is an underwriter in the offering being made pursuant
to this prospectus and acts as servicing agent to various investment companies.
Claymore Securities, Inc. specializes in the creation, development and
distribution of investment solutions for investment advisors and their valued
clients. Pursuant to the investment advisory agreement between the Advisor and
the Fund, as compensation for the services the Advisor provides to the Fund, the
Fund pays the Advisor an annual fee, payable monthly in arrears, at annual rate
equal to 0.49% of the average weekly value of the Fund's Managed Assets during
such month (the "Advisory Fee").
INVESTMENT MANAGER
Advent Capital Management, LLC, located at 1065 Avenue of the Americas,
31st Floor, New York, New York 10018, acts as the Fund's investment manager. The
Investment Manager operates as a limited liability company and had approximately
$3.8 billion in assets under management as of September 30, 2004. The Investment
Manager is majority owned and controlled by Tracy V. Maitland. Advent
specializes in managing convertible securities and high yield securities for
institutional and individual investors, and members of the investment team at
Advent have experience managing high yield securities, other income securities
and equity securities. The members of the investment team of Advent Capital
Management, LLC are: Tracy Maitland, Chief Investment Officer; Odell Lambroza,
Patrick Dealy, David Phipps, F. Barry Nelson and Les Levi, Portfolio Managers;
Alfredo Viegas, Portfolio Manager and Trader; and Phillippe DeSaint and
Robert Farmer, Traders. Advent will be responsible for the day-to-day
management of the Fund, which includes the buying and selling of securities
for the Fund. Advent has limited experience serving as investment manager to
registered investment companies.
Pursuant to an investment management agreement among the Advisor, the
Investment Manager and the Fund, the Fund has agreed to pay the Investment
Manager an annual fee, payable monthly in arrears, at an annual rate equal to
0.51% of the average weekly value of the Fund's Managed Assets during such month
(the "Management Fee") for the services and facilities provided by the
Investment Manager to the Fund. These services include the day-to-day management
of the Fund's portfolio of securities, which includes buying and selling
securities for the Fund and investment research. The Investment Manager also
provides personnel to the Fund and pays the compensation of all trustees of the
Fund who are its affiliates.
33
In addition to the Advisory Fee and the Management Fee, the Fund pays all
other costs and expenses of its operations, including the compensation of its
trustees (other than those affiliated with the Advisor and the Investment
Manager), custodian, transfer and dividend disbursing agent expenses, legal
fees, leverage expenses (if any), rating agency fees (if any), listing fees and
expenses, expenses of independent auditors, expenses of repurchasing shares,
expenses of preparing, printing and distributing shareholder reports, notices,
proxy statements and reports to governmental agencies, and taxes, if any.
NET ASSET VALUE
The net asset value of the common shares of the Fund will be computed based
upon the value of the Fund's portfolio securities and other assets. Net asset
value per common share will be determined as of the close of regular trading on
the New York Stock Exchange on each day on which there is a regular trading
session on the New York Stock Exchange. The Fund calculates net asset value per
common share by subtracting the Fund's liabilities (including accrued expenses,
dividends payable and any borrowings of the Fund) and the liquidation value of
any outstanding preferred shares of the Fund from the Fund's Managed Assets (the
value of the securities the Fund holds plus cash or other assets, including
interest accrued but not yet received) and dividing the result by the total
number of common shares of the Fund outstanding. The Fund's Administrator will
be responsible for calculating the net asset value per common share, and the
Fund's Advisor will be responsible for posting such calculation on the Fund's
website (www.adventclaymore.com). Valuations of many securities expected to be
in the Fund's portfolio may be made by a third party pricing service.
For purposes of determining the net asset value of the Fund, if a security
is traded on an exchange or national securities market, such security will be
valued at the last sales price on the exchange or the national securities market
on which it is primarily traded or, if there is no last sales price available
for such security, or if a security is not traded on an exchange or national
securities market, the mean of the closing bid and asked prices on such day for
any such security is used. If a security, including a synthetic convertible
security, is not traded on an exchange or national securities market and no bid
or asked prices are quoted for such security on such day, then the security is
valued by such method as the Board of Trustees shall determine in good faith to
reflect its fair market value.
DISTRIBUTIONS
The Fund intends to distribute to holders of its common shares quarterly
dividends of all or a portion of its net income after payment of dividends and
interest in connection with any leverage used by the Fund. It is expected that
the initial quarterly dividend on shares of the Fund's common shares will be
declared within approximately 90 days and paid approximately 120 days after
completion of this offering. The Fund expects that all or a portion of any
capital gain will be distributed at least annually.
Various factors will affect the level of the Fund's income, including the
asset mix, the amount of income on the options written by the Fund, the average
maturity of the Fund's portfolio, the amount of leverage utilized by the Fund
and the Fund's use of hedging. To permit the Fund to maintain a more stable
quarterly distribution, the Fund may from time to time distribute less than the
entire amount of income earned in a particular period. The undistributed income
would be available to supplement future distributions. As a result, the
distributions paid by the Fund for any particular quarterly period may be more
or less than the amount of income actually earned by the Fund during that
period. Undistributed income will add to the Fund's net asset value and,
correspondingly, distributions from undistributed income will deduct from the
Fund's net asset value. Shareholders will automatically have all dividends and
distributions reinvested in common shares of the Fund issued by the Fund or
purchased in the open market in accordance with the Fund's dividend reinvestment
plan unless an election is made to receive cash. See "Dividend Reinvestment
Plan."
34
DIVIDEND REINVESTMENT PLAN
Unless the registered owner of common shares elects to receive cash by
contacting the Plan Administrator, all dividends declared on common shares of
the Fund will be automatically reinvested by The Bank of New York (the "Plan
Administrator"), for shareholders in the Fund's Automatic Dividend Reinvestment
Plan (the "Plan"), in additional common shares of the Fund. Shareholders who
elect not to participate in the Plan will receive all dividends and other
distributions in cash paid by check mailed directly to the shareholder of record
(or, if the common shares are held in street or other nominee name, then to such
nominee) by The Bank of New York, as dividend disbursing agent. You may elect
not to participate in the Plan and to receive all dividends in cash by
contacting The Bank of New York, as dividend disbursing agent, at the address
set forth below. Participation in the Plan is completely voluntary and may be
terminated or resumed at any time without penalty by notice if received and
processed by the Plan Administrator prior to the dividend record date; otherwise
such termination or resumption will be effective with respect to any
subsequently declared dividend or other distribution. Some brokers may
automatically elect to receive cash on your behalf and may re-invest that cash
in additional common shares of the Fund for you. If you wish for all dividends
declared on your common shares of the Fund to be automatically reinvested
pursuant to the Plan, please contact your broker.
The Plan Administrator will open an account for each common shareholder
under the Plan in the same name in which such common shareholder's common shares
are registered. Whenever the Fund declares a dividend or other distribution
(together, a "Dividend") payable in cash, non-participants in the Plan will
receive cash and participants in the Plan will receive the equivalent in common
shares. The common shares will be acquired by the Plan Administrator for the
participants' accounts, depending upon the circumstances described below, either
(i) through receipt of additional unissued but authorized common shares from the
Fund ("Newly Issued Common Shares") or (ii) by purchase of outstanding common
shares on the open market ("Open-Market Purchases") on the New York Stock
Exchange or elsewhere. If, on the payment date for any Dividend, the closing
market price plus estimated brokerage commissions per common share is equal to
or greater than the net asset value per common share, the Plan Administrator
will invest the Dividend amount in Newly Issued Common Shares on behalf of the
participants. The number of Newly Issued Common Shares to be credited to each
participant's account will be determined by dividing the dollar amount of the
Dividend by the net asset value per common share on the payment date; provided
that, if the net asset value is less than or equal to 95% of the closing market
value on the payment date, the dollar amount of the Dividend will be divided by
95% of the closing market price per common share on the payment date. If, on the
payment date for any Dividend, the net asset value per common share is greater
than the closing market value plus estimated brokerage commissions, the Plan
Administrator will invest the Dividend amount in common shares acquired on
behalf of the participants in Open-Market Purchases. In the event of a market
discount on the payment date for any Dividend, the Plan Administrator will have
until the last business day before the next date on which the common shares
trade on an "ex-dividend" basis or 30 days after the payment date for such
Dividend, whichever is sooner (the "Last Purchase Date"), to invest the Dividend
amount in common shares acquired in Open-Market Purchases. It is contemplated
that the Fund will pay quarterly income Dividends. Therefore, the period during
which Open-Market Purchases can be made will exist only from the payment date of
each Dividend through the date before the next "ex-dividend" date which
typically will be approximately ten days. If, before the Plan Administrator has
completed its Open-Market Purchases, the market price per common share exceeds
the net asset value per common share, the average per common share purchase
price paid by the Plan Administrator may exceed the net asset value of the
common shares, resulting in the acquisition of fewer common shares than if the
Dividend had been paid in Newly Issued Common Shares on the Dividend payment
date. Because of the foregoing difficulty with respect to Open-Market Purchases,
the Plan provides that if the Plan Administrator is unable to invest the full
Dividend amount in Open-Market Purchases during the purchase period or if the
market discount shifts to a market premium during the purchase period, the Plan
Administrator may cease making Open-Market Purchases and may invest the
uninvested portion of the Dividend amount in Newly Issued Common Shares at the
net asset value per common share at the close of business on the Last Purchase
Date provided that, if the net asset value is less than or equal to 95% of the
then
35
current market price per common share; the dollar amount of the Dividend will be
divided by 95% of the market price on the payment date.
The Plan Administrator maintains all shareholders' accounts in the Plan and
furnishes written confirmation of all transactions in the accounts, including
information needed by shareholders for tax records. Common shares in the account
of each Plan participant will be held by the Plan Administrator on behalf of the
Plan participant, and each shareholder proxy will include those shares purchased
or received pursuant to the Plan. The Plan Administrator will forward all proxy
solicitation materials to participants and vote proxies for shares held under
the Plan in accordance with the instructions of the participants. In the case of
shareholders such as banks, brokers or nominees which hold shares for others who
are the beneficial owners, the Plan Administrator will administer the Plan on
the basis of the number of common shares certified from time to time by the
record shareholder's name and held for the account of beneficial owners who
participate in the Plan.
There will be no brokerage charges with respect to common shares issued
directly by the Fund. However, each participant will pay a pro rata share of
brokerage commissions incurred in connection with Open-Market Purchases. The
automatic reinvestment of Dividends will not relieve participants of any
Federal, state or local income tax that may be payable (or required to be
withheld) on such Dividends. See "Tax Matters." Participants that request a sale
of shares through the Plan Administrator are subject to brokerage commissions.
The Fund reserves the right to amend or terminate the Plan. There is no
direct service charge to participants with regard to purchases in the Plan;
however, the Fund reserves the right to amend the Plan to include a service
charge payable by the participants.
All correspondence or questions concerning the Plan should be directed to
the Plan Administrator at The Bank of New York, 2 Hanson Place, Brooklyn, New
York 11217, phone number (718) 315-4818.
DESCRIPTION OF SHARES
COMMON SHARES
The Fund is an unincorporated statutory trust organized under the laws of
Delaware pursuant to an Agreement and Declaration of Trust dated as of January
30, 2004, as subsequently amended and restated to date. The Fund is authorized
to issue an unlimited number of common shares of beneficial interest, par value
$.001 per share. Each common share has one vote and, when issued and paid for in
accordance with the terms of this offering, will be fully paid and
non-assessable, except that the trustees shall have the power to cause
shareholders to pay expenses of the Fund by setting off charges due from
shareholders from declared but unpaid dividends or distributions owed the
shareholders and/or by reducing the number of common shares owned by each
respective shareholder. Whenever preferred shares are outstanding, the holders
of common shares will not be entitled to receive any distributions from the Fund
unless all accrued dividends on preferred shares have been paid, unless asset
coverage (as defined in the Investment Company Act) with respect to preferred
shares would be at least 200% after giving effect to the distributions and
unless certain other requirements imposed by any rating agencies rating the
preferred shares have been met. All common shares are equal as to dividends,
assets and voting privileges and have no conversion, preemptive or other
subscription rights. The Fund will send annual and semi-annual reports,
including financial statements, to all holders of its shares.
The Fund has no present intention of offering any additional shares other
than the common shares issued under the Fund's Dividend Reinvestment Plan. Any
additional offerings of shares will require approval by the Fund's Board of
Trustees. Any additional offering of common shares will be subject to the
requirements of the Investment Company Act, which provides that shares may not
be issued at a price below the then current net asset value, exclusive of sales
load, except in connection with an offering to existing holders of common shares
or with the consent of a majority of the Fund's outstanding voting securities.
36
The Fund has applied for the listing of its common shares on the New York
Stock Exchange under the symbol "LCM."
The Fund's net asset value per share generally increases and decreases
based on the market value of the Fund's securities, and these changes are likely
to be greater if the Fund utilizes a leveraged capital structure. Net asset
value will be reduced immediately following the offering of common shares by the
amount of the sales load and organization and offering expenses paid by the
Fund. See "Use of Proceeds."
Unlike open-end funds, closed-end funds like the Fund do not continuously
offer shares and do not provide daily redemptions. Rather, if a shareholder
determines to buy additional common shares or sell shares already held, the
shareholder may do so by trading through a broker on the New York Stock Exchange
or otherwise. Shares of closed-end investment companies frequently trade on an
exchange at prices lower than net asset value. Shares of closed-end investment
companies like the Fund that invest predominantly in convertible, high yield and
equity securities have during some periods traded at prices higher than net
asset value and during other periods have traded at prices lower than net asset
value. Because the market value of the common shares may be influenced by such
factors as dividend levels (which are in turn affected by expenses), call
protection on its portfolio securities, dividend stability, portfolio credit
quality, net asset value, relative demand for and supply of such shares in the
market, general market and economic conditions and other factors beyond the
control of the Fund, the Fund cannot assure you that common shares will trade at
a price equal to or higher than net asset value in the future. The common shares
are designed primarily for long-term investors and you should not purchase the
common shares if you intend to sell them soon after purchase. See the Statement
of Additional Information under "Repurchase of Common Shares."
CERTAIN PROVISIONS IN THE AGREEMENT AND DECLARATION OF TRUST
The Agreement and Declaration of Trust includes provisions that could have
the effect of limiting the ability of other entities or persons to acquire
control of the Fund or to change the composition of its Board of Trustees. This
could have the effect of depriving shareholders of an opportunity to sell their
shares at a premium over prevailing market prices by discouraging a third party
from seeking to obtain control over the Fund. Such attempts could have the
effect of increasing the expenses of the Fund and disrupting the normal
operation of the Fund. The Board of Trustees is divided into three classes, with
the terms of one class expiring at each annual meeting of shareholders. 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 by the action of a
majority of the remaining trustees followed by a vote of the holders of at least
75% of the shares then entitled to vote for the election of the respective
trustee.
In addition, the Fund's Agreement and Declaration of Trust requires the
favorable vote of a majority of the Fund's Board of Trustees followed by the
favorable vote of the holders of at least 75% of the outstanding shares of each
affected class or series of the Fund, voting separately as a class or series, to
approve, adopt or authorize certain transactions with 5% or greater holders of a
class or series of shares and their associates, unless the transaction has been
approved by at least 80% of the trustees, in which case "a majority of the
outstanding voting securities" (as defined in the Investment Company Act) of the
Fund shall be required. For purposes of these provisions, a 5% or greater holder
of a class or series of shares (a "Principal Shareholder") refers to any person
who, whether directly or indirectly and whether alone or together with its
affiliates and associates, beneficially owns 5% or more of the outstanding
shares of any class or series of shares of beneficial interest of the Fund.
The 5% holder transactions subject to these special approval requirements
are:
- the merger or consolidation of the Fund or any subsidiary of the Fund
with or into any Principal Shareholder;
37
- the issuance of any securities of the Fund to any Principal Shareholder
for cash (other than pursuant to any automatic dividend reinvestment
plan);
- 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 2% of the total assets of
the Fund, 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
- the sale, lease or exchange to the Fund or any subsidiary of the Fund,
in exchange for securities of the Fund, of any assets of any Principal
Shareholder, except assets having an aggregate fair market value of
less than 2% of the total assets of the Fund, aggregating for purposes
of such computation all assets sold, leased or exchanged in any series
of similar transactions within a twelve-month period.
To convert the Fund to an open-end investment company, the Fund's Agreement
and Declaration of Trust requires the favorable vote of a majority of the board
of the trustees followed by the favorable vote of the holders of at least 75% of
the outstanding shares of each affected class or series of shares of the Fund,
voting separately as a class or series, unless such amendment has been approved
by at least 80% of the trustees, in which case "a majority of the outstanding
voting securities" (as defined in the Investment Company Act) of the Fund shall
be required. The foregoing vote would satisfy a separate requirement in the
Investment Company Act that any conversion of the Fund to an open-end investment
company be approved by the shareholders. If approved in the foregoing manner,
conversion of the Fund to an open-end investment company 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.
Conversion of the Fund to an open-end investment company would require the
redemption of any outstanding preferred shares, which could eliminate or alter
the leveraged capital structure of the Fund with respect to the common shares,
if the Fund utilizes such a structure. Following any such conversion, it is also
possible that certain of the Fund's investment policies and strategies would
have to be modified to assure sufficient portfolio liquidity. In the event of
conversion, the common shares would cease to be listed on the New York Stock
Exchange or other national securities exchanges or market systems. Shareholders
of an open-end investment company may require the company to redeem their shares
at any time, except in certain circumstances as authorized by or under the
Investment Company Act, at their net asset value, less such redemption charge,
if any, as might be in effect at the time of a redemption. The Fund expects to
pay all such redemption requests in cash, but reserves the right to pay
redemption requests in a combination of cash or securities. If such partial
payment in securities were made, investors may incur brokerage costs in
converting such securities to cash. If the Fund were converted to an open-end
fund, it is likely that new shares would be sold at net asset value plus a sales
load. The Board of Trustees believes, however, that the closed-end structure is
desirable in light of the Fund's investment objectives and policies. Therefore,
you should assume that it is not likely that the Board of Trustees would vote to
convert the Fund to an open-end fund.
To liquidate the Fund, the Fund's Agreement and Declaration of Trust
requires the favorable vote of a majority of the Board of Trustees followed by
the favorable vote of the holders of at least 75% of the outstanding shares of
each affected class or series of the Fund, voting separately as a class or
series, unless such liquidation has been approved by at least 80% of trustees,
in which case "a majority of the outstanding voting securities" (as defined in
the Investment Company Act) of the Fund shall be required. For the purposes of
calculating "a majority of the outstanding voting securities" under the Fund's
Agreement and Declaration of Trust, each class and series of the Fund shall vote
together as a single class, except to the extent required by the Investment
Company Act or the Fund's Agreement and Declaration of Trust with respect to any
class or series of shares. If a separate vote is required, the applicable
proportion of shares of the class or series, voting as a separate class or
series, also will be required.
The Board of Trustees has determined that provisions with respect to the
Board of Trustees and the shareholder voting requirements described above, which
voting requirements are greater than the minimum requirements under Delaware law
or the Investment Company Act, are in the best interest of shareholders
38
generally. Reference should be made to the Agreement and Declaration of Trust on
file with the Securities and Exchange Commission for the full text of these
provisions.
CLOSED-END FUND STRUCTURE
The Fund is a newly organized, diversified, closed-end management
investment company (commonly referred to as a closed-end fund). Closed-end funds
differ from open-end funds (which are generally referred to as mutual funds) in
that closed-end funds generally list their shares for trading on a stock
exchange and do not redeem their shares at the request of the shareholder. This
means that if you wish to sell your shares of a closed-end fund you must trade
them on the market like any other stock at the prevailing market price at that
time. In a mutual fund, if the shareholder wishes to sell shares of the fund,
the mutual fund will redeem or buy back the shares at "net asset value." Also,
mutual funds generally offer new shares on a continuous basis to new investors,
and closed-end funds generally do not. The continuous inflows and outflows of
assets in a mutual fund can make it difficult to manage the fund's investments.
By comparison, closed-end funds are generally able to stay more fully invested
in securities that are consistent with their investment objectives, and also
have greater flexibility to make certain types of investments, and to use
certain investment strategies, such as financial leverage and investments in
illiquid securities.
Shares of closed-end funds frequently trade at a discount to their net
asset value. Because of this possibility and the recognition that any such
discount may not be in the interest of shareholders, the Fund's Board of
Trustees might consider from time to time engaging in open-market repurchases,
tender offers for shares or other programs intended to reduce the discount. We
cannot guarantee or assure, however, that the Fund's Board of Trustees will
decide to engage in any of these actions. Nor is there any guarantee or
assurance that such actions, if undertaken, would result in the shares trading
at a price equal or close to net asset value per share. The Board of Trustees
might also consider converting the Fund to an open-end mutual fund, which would
also require a vote of the shareholders of the Fund.
REPURCHASE OF COMMON SHARES
Shares of closed-end investment companies often trade at a discount to
their net asset values, and the Fund's common shares may also trade at a
discount to their net asset value, although it is possible that they may trade
at a premium above net asset value. The market price of the Fund's common shares
will be determined by such factors as relative demand for and supply of such
common shares in the market, the Fund's net asset value, general market and
economic conditions and other factors beyond the control of the Fund. See "Net
Asset Value." Although the Fund's common shareholders will not have the right to
redeem their common shares, the Fund may take action to repurchase common shares
in the open market or make tender offers for its common shares. This may have
the effect of reducing any market discount from net asset value. There is no
assurance that, if action is undertaken to repurchase or tender for common
shares, such action will result in the common shares trading at a price which
approximates their net asset value. Although share repurchases and tenders could
have a favorable effect on the market price of the Fund's common shares, you
should be aware that the acquisition of common shares by the Fund will decrease
the capital of the Fund and, therefore, may have the effect of increasing the
Fund's expense ratio and decreasing the asset coverage with respect to any
preferred shares outstanding. Any share repurchases or tender offers will be
made in accordance with requirements of the Securities Exchange Act of 1934, as
amended, the Investment Company Act and the principal stock exchange on which
the common shares are traded.
39
TAX MATTERS
FEDERAL INCOME TAX MATTERS
The discussion below and in the Statement of Additional Information
provides general Federal income tax information related to an investment in the
Fund's common shares. The discussion reflects applicable tax laws of the United
States as of the date of this prospectus, which tax laws may be changed or
subject to new interpretations by the courts or the Internal Revenue Service
(the "IRS") retroactively or prospectively. No attempt is made to present a
detailed explanation of all Federal, state, local and foreign tax concerns
affecting the Fund and its shareholders (including shareholders owning a large
position in the Fund), and the discussions set forth here and in the Statement
of Additional Information do not constitute tax advice. Because tax laws are
complex and often change, you should consult your tax advisor about the tax
consequences of an investment in the Fund.
In order to avoid corporate federal income taxation of its taxable income,
the Fund must elect to be treated as a regulated investment company under
Subchapter M of the Code and meet certain requirements that govern the Fund's
sources of income, diversification of assets and distribution of earnings to
shareholders. The Fund intends to make such an election and intends to meet
these requirements each year. If the Fund failed to do so, the Fund would be
required to pay corporate taxes on its taxable income and all the distributions
would be taxable as ordinary income to the extent of the Fund's earnings and
profits.
The Fund intends to distribute at least annually all or substantially all
of its taxable income and realized capital gain. Distributions of investment
company taxable income including net short-term gain are taxable as ordinary
income (to the extent of the current and accumulated earnings and profits of the
Fund). Such income (if designated by the Fund) may qualify (provided holding
periods and other requirements are met) (i) for the dividends received deduction
in the case of corporate shareholders to the extent the Fund's income consists
of dividends received from U.S. corporations and (ii) under the Jobs and Growth
Tax Relief Reconciliation Act of 2003 (effective for taxable years after
December 31, 2002 through December 31, 2008) ("2003 Tax Act"), as qualified
dividend income eligible for the reduced maximum rate applicable to individuals
of generally 15% (5% for individuals in lower tax brackets) to the extent that
the Fund receives qualified dividend income. Qualified dividend income is, in
general, dividend income from taxable domestic corporations and certain
qualified foreign corporations (e.g., generally, foreign corporations
incorporated in a possession of the United States or in certain countries with a
qualified comprehensive tax treaty with the United States, or the stock of which
and with respect to which such dividend is paid is readily tradable on an
established securities market in the United States). Distributions of net
long-term capital gain that are designated by the Fund as capital gain dividends
are taxable to you as long-term capital gain regardless of how long you have
owned your shares, and will not qualify for a dividends received deduction
available to corporate shareholders. Under the 2003 Tax Act, the tax rate on net
long-term capital gain of individuals is reduced generally from 20% to 15% (5%
for individuals in lower brackets) for such gain realized on or after May 6,
2003 and before January 1, 2009. Distributions by the Fund in excess of its
current and accumulated earnings and profits will be treated as a return of
capital to the extent of (and in reduction of) the tax basis in your shares. Any
excess will be treated as gain from the sale of your shares.
Gain or loss resulting from the sale or exchange of shares will be measured
by the difference between the proceeds of the sale and the holders' adjusted tax
basis in the shares being sold or exchanged and will generally be taxable as
capital gain or loss, and will be a long-term capital gain or loss if you have
held your shares for more than one year. For corporate shareholders, both
long-term and short-term capital gain is taxed at the 35% rate. For
non-corporate shareholders, under the 2003 Tax Act, long-term capital gain is
generally taxed at a maximum rate of 15% and short-term capital gain is taxed at
the maximum rate of 35% applicable to ordinary income.
40
Each year, you will receive a year-end statement designating the amounts of
capital gain, ordinary income, qualified dividend income and dividends which
qualify for the dividends received deduction paid to you during the preceding
year. You will receive this statement from the firm where you purchased your
shares if you hold your investment in street name; the Fund will send you this
statement if you hold your shares in registered form. The tax status of your
dividends is not affected by whether you reinvest your dividends or receive them
in cash.
The Fund may be required to withhold taxes on certain of your dividends if
you have not provided the Fund with your correct taxpayer identification number
(if you are an individual, normally your Social Security number), or if you are
otherwise subject to back-up withholding.
Please refer to the Statement of Additional Information for more detailed
information. Fund distributions may also be subject to state and local taxes.
You are urged to consult your tax advisor.
41
UNDERWRITING
Subject to the terms and conditions of a purchase agreement dated ,
2005, each underwriter named below, for which Merrill Lynch, Pierce, Fenner &
Smith Incorporated is acting as representative, has severally agreed to
purchase, and the Fund has agreed to sell to such underwriter, the number of
common shares set forth opposite the name of such underwriter.
NUMBER OF
UNDERWRITER COMMON SHARES
----------- -------------
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
Advest, Inc.
Robert W. Baird & Co. Incorporated
Claymore Securities, Inc.
Ferris, Baker Watts, Incorporated.
Fixed Income Securities, L.P.
J.J.B. Hilliard, W.L. Lyons, Inc.
KeyBanc Capital Markets, a division of McDonald Investments Inc.
Legg Mason Wood Walker, Incorporated
RBC Capital Markets Corporation
Wedbush Morgan Securities Inc.
Wells Fargo Securities, LLC
-------------
Total
=============
The purchase agreement provides that the obligations of the underwriters to
purchase the common shares included in this offering are subject to the approval
of certain legal matters by counsel and certain other conditions. The
underwriters are obligated to purchase all the common shares sold under the
purchase agreement if any of the common shares are purchased. In the purchase
agreement, the Fund, the Advisor and the Investment Manager have agreed to
indemnify the underwriters against certain liabilities, including liabilities
arising under the Securities Act of 1933, as amended, or to contribute payments
the underwriters may be required to make for any of those liabilities.
COMMISSIONS AND DISCOUNTS
The underwriters propose to initially offer some of the common shares
directly to the public at the public offering price set forth on the cover page
of this prospectus and some of the common shares to certain dealers at the
public offering price less a concession not in excess of $ per share. The
sales load the Fund will pay of $.90 per share is equal to 4.5% of the initial
offering price. The underwriters may allow, and the dealers may reallow, a
discount in excess of $ per share on sales to other dealers. Notwithstanding
the foregoing, certain underwriters may pay an additional $ per share from
the sales load to certain dealers pursuant to existing arrangements with such
dealers. After the initial public offering, the public offering price,
concession and discount may be changed. Investors must pay for any common shares
purchased on or before , 2005.
The following table shows the public offering price, sales load, estimated
offering expenses and proceeds, after expenses, to the Fund. The information
assumes either no exercise or full exercise by the underwriters of their
overallotment option.
PER SHARE WITHOUT OPTION WITH OPTION
--------- -------------- -----------
Public offering price $ 20.00 $ $
Sales load $ .90 $ $
Estimated offering expenses $ .04 $ $
Proceeds, after expenses, to the Fund $ 19.06 $ $
42
The expenses of the offering are estimated at $ and are payable by the
Fund. The Fund has agreed to pay the underwriters $.00667 per common share as a
partial reimbursement of expenses incurred in connection with the offering. The
amount paid by the Fund as the partial reimbursement to the underwriters will
not exceed .03335% of the total price to the public of the common shares sold in
this offering. The Advisor has agreed to pay the organizational expenses of the
Fund, and the Advisor and the Investment Manager have agreed to pay the offering
expenses of the Fund (other than sales load, but including the reimbursement of
expenses described above) that exceed $.04 per common share (the "Reimbursement
Cap").
OVERALLOTMENT OPTION
The Fund has granted the underwriters an option to purchase up to
additional common shares at the public offering price, less the sales load,
within 45 days from the date of this prospectus solely to cover any over
allotments. If the underwriters exercise this option, each will be obligated,
subject to conditions contained in the purchase agreement, to purchase a number
of additional shares proportionate to that underwriter's initial amount
reflected in the above table.
PRICE STABILIZATION, SHORT POSITIONS AND PENALTY BIDS
Until the distribution of the common shares is complete, Securities and
Exchange Commission rules may limit underwriters and selling group members from
bidding for and purchasing our common shares. However, the representatives may
engage in transactions that stabilize the price of our common shares, such as
bids or purchases to peg, fix or maintain that price.
If the underwriters create a short position in our common shares in
connection with the offering, i.e., if they sell more common shares than are
listed on the cover of this prospectus, the representatives may reduce that
short position by purchasing common shares in the open market. The
representatives may also elect to reduce any short position by exercising all or
part of the over allotment option described above. The underwriters may also
impose a penalty bid, whereby selling concessions allowed to syndicate members
or other broker-dealers in respect of the common shares sold in this offering
for their account may be reclaimed by the syndicate if such common shares are
repurchased by the syndicate in stabilizing or covering transactions. Purchases
of our common shares to stabilize its price or to reduce a short position may
cause the price of our common shares to be higher than it might be in the
absence of such purchases.
Neither we nor any of the underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transaction
described above may have on the price of our common shares. In addition, neither
we nor any of the underwriters make any representation that the representatives
will engage in these transactions or that these transactions, once commenced,
will not be discontinued without notice.
The Fund has agreed not to offer or sell any additional common shares for a
period of 180 days after the date of the purchase agreement without the prior
written consent of the underwriters, except for the sale of the common shares to
the underwriters pursuant to the purchase agreement and certain transactions
related to the Fund's dividend reinvestment plan.
The Fund anticipates that the underwriters may from time to time act as
brokers or, after they have ceased to be underwriters, dealers in executing the
Fund's portfolio transactions. The underwriters are active underwriters of, and
dealers in, securities and act as market makers in a number of such securities,
and therefore can be expected to engage in portfolio transactions with the Fund.
ADDITIONAL COMPENSATION TO UNDERWRITERS AND OTHER RELATIONSHIPS
The Advisor (and not the Fund) has agreed to pay a fee to Merrill Lynch,
payable quarterly, at the annual rate of .15% of the Fund's Managed Assets
during the continuance of the Investment Advisory Agreement between the Advisor
and the Fund. Merrill Lynch has agreed, as requested by the Advisor, to, among
other things, provide
43
certain after-market support services designed to maintain the visibility of the
Fund on an ongoing basis and to provide relevant information, studies or reports
regarding the Fund and the closed-end investment company industry and to consult
the Advisor with respect to applicable strategies designed to address market
value discounts. In addition, the Advisor will pay to Merrill Lynch a fee in
the amount of $8,177 as a transaction processing fee. The total amount of
these additional compensation payments and transaction processing fee to
Merrill Lynch will not exceed % of the total price to the public of the
common shares sold in this offering.
Claymore Securities, Inc. will provide distribution assistance in
connection with the sale of the common shares of the Fund. Claymore Securities,
Inc. will be a party to the underwriting agreement among the Fund, the Advisor,
the Investment Manager and the other underwriters named therein. Generally,
Claymore Securities, Inc. pays a fee of .15% of the offering amount to employees
who assist in marketing securities as compensation, and such employees are also
reimbursed their reasonable out-of-pocket expenses in accordance with Claymore
Securities, Inc.'s reimbursement policy. Such fees are paid by Claymore
Securities, Inc. and not the Fund. To the extent that the Fund has not otherwise
paid organizational and offering expenses equal to the Reimbursement Cap, the
Fund will pay up to .15% of the amount of the offering up to the Reimbursement
Cap to Claymore Securities, Inc. as payment for its distribution assistance.
Claymore Securities, Inc. is a registered broker-dealer and a member of the
National Association of Securities Dealers. The amount of this payment to
Claymore Securities, Inc. will not exceed .15% of the total price to the
public of the common shares sold in this offering.
The sum of the fees payable to Merrill Lynch and Claymore Securities, Inc.
(excluding the sales load), plus the amount paid by the Fund as the $.00667 per
common share reimbursement to the underwriters, will not exceed 4.5% of the
aggregate initial offering price of the common shares offered hereby. The sum
total of all compensation to underwriters in connection with this public
offering of common shares, including sales load and additional compensation to
and reimbursement of underwriters, will be limited to 9.0% of the total price to
the public of the common shares sold in this offering.
In connection with the offering, the underwriters or selected dealers may
distribute prospectuses electronically.
The address of Merrill Lynch, Pierce, Fenner & Smith Incorporated is 4
World Financial Center, New York, New York 10080. The address of Claymore
Securities, Inc. is 2455 Corporate West Drive, Lisle, Illinois 60532.
ADMINISTRATOR, CUSTODIAN AND TRANSFER AGENT
The Custodian, Administrator, Transfer Agent, fund accountant and
dividend-paying agent of the Fund is The Bank of New York. As Custodian, The
Bank of New York performs custodial, fund accounting and portfolio accounting
services, and as Administrator, The Bank of New York calculates the net asset
value of the common shares and generally assists in all aspects of the
administration and operation of the Fund.
The Bank of New York's offices are located at 101 Barclay Street, New York,
New York 10286.
LEGAL OPINIONS
Certain legal matters in connection with the common shares will be passed
upon for the Fund by Skadden, Arps, Slate, Meagher & Flom LLP, New York, New
York, and for the underwriters by Clifford Chance US LLP, New York, New York.
Clifford Chance US LLP may rely as to certain matters of Delaware law on the
opinion of Skadden, Arps, Slate, Meagher & Flom LLP. Skadden, Arps, Slate,
Meagher & Flom LLP serves as counsel to the Investment Manager and other funds
advised by the Investment Manager and periodically represents certain of the
underwriters and the Advisor in connection with various matters.
44
PRIVACY PRINCIPLES OF THE FUND
The Fund is committed to maintaining the privacy of its shareholders and to
safeguarding their non-public personal information. The following information is
provided to help you understand what personal information the Fund collects, how
the Fund protects that information and why, in certain cases, the Fund may share
information with select other parties.
Generally, the Fund does not receive any non-public personal information
relating to its shareholders, although certain non-public personal information
of its shareholders may become available to the Fund. The Fund does not disclose
any non-public personal information about its shareholders or former
shareholders to anyone, except as permitted by law or as is necessary in order
to service shareholder accounts (for example, to a transfer agent or third party
administrator).
The Fund restricts access to non-public personal information about its
shareholders to employees of the Fund's Advisor, Investment Manager and their
respective affiliates with a legitimate business need for the information. The
Fund maintains physical, electronic and procedural safeguards designed to
protect the non-public personal information of its shareholders.
45
TABLE OF CONTENTS FOR THE
STATEMENT OF ADDITIONAL INFORMATION
PAGE
----
Use of Proceeds 2
Investment Objectives and Policies 2
Investment Policies and Techniques 3
Other Investment Policies and Techniques 6
Management of the Fund 14
Portfolio Transactions and Brokerage 21
Description of Shares 22
Repurchase of Common Shares 23
Tax Matters 24
Experts 29
Additional Information 29
Report of Independent Registered Public Accounting Firm F-1
Financial Statements F-2
Appendix A Ratings of Investments A-1
Appendix B Proxy Voting Policy and Procedures B-1
46
Until , 2005 (25 days after the date of this prospectus), all
dealers that buy, sell or trade the common shares, whether or not participating
in this offering, may be required to deliver a prospectus. This is in addition
to the dealers' obligation to deliver a prospectus when acting as underwriters
and with respect to their unsold allotments or subscriptions.
[ADVENT CAPITAL MANAGEMENT, LLC LOGO] [CLAYMORE(R) LOGO]
SHARES
ADVENT/CLAYMORE
ENHANCED GROWTH & INCOME FUND
COMMON SHARES
$20.00 PER SHARE
----------
PROSPECTUS
----------
MERRILL LYNCH & CO.
ADVEST, INC.
ROBERT W. BAIRD & CO.
CLAYMORE SECURITIES, INC.
FERRIS, BAKER WATTS
INCORPORATED
FIXED INCOME SECURITIES, L.P.
J.J.B. HILLIARD, W.L. LYONS, INC.
KEYBANC CAPITAL MARKETS
LEGG MASON WOOD WALKER
INCORPORATED
RBC CAPITAL MARKETS
WEDBUSH MORGAN SECURITIES INC.
WELLS FARGO SECURITIES
, 2005
ADVENT/CLAYMORE ENHANCED
GROWTH & INCOME FUND
STATEMENT OF ADDITIONAL INFORMATION
Advent/Claymore Enhanced Growth & Income Fund (the "Fund") is a newly
organized, diversified, closed-end management investment company. This Statement
of Additional Information relating to common shares does not constitute a
prospectus, but should be read in conjunction with the prospectus relating
thereto that is anticipated to be dated January , 2005. This Statement of
Additional Information, which is not a prospectus, does not include all
information that a prospective investor should consider before purchasing common
shares, and investors should obtain and read the prospectus prior to purchasing
such shares. A copy of the prospectus may be obtained without charge by calling
(800) 345-7999. You may also obtain a copy of the prospectus on the Securities
and Exchange Commission's web site (http://www.sec.gov). Capitalized terms used
but not defined in this Statement of Additional Information have the meanings
ascribed to them in the prospectus.
TABLE OF CONTENTS
PAGE
USE OF PROCEEDS 2
INVESTMENT OBJECTIVES AND POLICIES 2
INVESTMENT POLICIES AND TECHNIQUES 3
OTHER INVESTMENT POLICIES AND TECHNIQUES 6
MANAGEMENT OF THE FUND 14
PORTFOLIO TRANSACTIONS AND BROKERAGE 21
DESCRIPTION OF SHARES 22
REPURCHASE OF COMMON SHARES 23
TAX MATTERS 24
EXPERTS 29
ADDITIONAL INFORMATION 29
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM F-1
FINANCIAL STATEMENTS F-2
APPENDIX A RATINGS OF INVESTMENTS A-1
APPENDIX B PROXY VOTING POLICY AND PROCEDURES B-1
THIS STATEMENT OF ADDITIONAL INFORMATION IS DATED JANUARY , 2005.
USE OF PROCEEDS
Pending investment in convertible securities and non-convertible income
securities that meet the Fund's investment objectives and policies, the net
proceeds of the offering will be invested in high quality, short-term fixed
income securities and money market securities to the extent such securities are
available. See "Investment Policies and Techniques--Short-Term Fixed Income
Securities."
INVESTMENT OBJECTIVES AND POLICIES
The Fund's primary investment objective is to provide current income and
current gains from trading in securities, with a secondary objective of
long-term capital appreciation. There can be no assurance that the Fund will
achieve its investment objectives.
INVESTMENT RESTRICTIONS
Except as described below, the Fund, as a fundamental policy, may not,
without the approval of the holders of a majority of the outstanding common
shares and preferred shares (if any) voting together as a single class, and of
the holders of a majority of the outstanding preferred shares (if any) voting as
a separate class:
(1) invest 25% or more of the value of its Managed Assets in any one
industry, provided that this limitation does not apply to government
securities;
(2) with respect to 75% of its Managed Assets, invest more than 5% of
the value of its Managed Assets in the securities of any single issuer or
purchase more than 10% of the outstanding voting securities of any one
issuer;
(3) issue senior securities or borrow money other than as permitted
by the Investment Company Act of 1940, as amended (the "Investment Company
Act"), or pledge its assets other than to secure such issuances or in
connection with Strategic Transactions and other investment strategies;
(4) make loans of money or property to any person, except through
loans of portfolio securities, the purchase of convertible securities and
non-convertible income securities consistent with the Fund's investment
objectives and policies or the entry into repurchase agreements;
(5) underwrite the securities of other issuers, except to the extent
that in connection with the disposition of portfolio securities or the sale
of its own securities the Fund may be deemed to be an underwriter;
(6) purchase or sell real estate, except that the Fund may invest in
securities of companies that deal in real estate or are engaged in the real
estate business, including real estate investment trusts, and securities
secured by real estate or interests therein and the Fund may hold and sell
real estate or mortgages on real estate acquired through default,
liquidation or other distributions of an interest in real estate as a
result of the Fund's ownership of such securities; or
(7) purchase or sell commodities or commodity contracts for any
purposes except as, and to the extent, permitted by applicable law without
the Fund becoming subject to registration with the Commodity Futures
Trading Commission (the "CFTC") as a commodity pool.
When used with respect to particular shares of the Fund, "majority of the
outstanding" means (i) 67% or more of the shares present at a meeting, if the
holders of more than 50% of the shares are present or represented by proxy, or
(ii) more than 50% of the shares, whichever is less.
In addition to the foregoing fundamental investment policies, the Fund is
also subject to the following non-fundamental restrictions and policies, which
may be changed by the Board of Trustees. The Fund may not:
(1) make any short sale of securities except in conformity with
applicable laws, rules and regulations and unless after giving effect to
such sale, the market value of all securities sold short does not exceed
25% of the value of the Fund's Managed Assets and the Fund's aggregate
short sales of a particular class of
2
securities does not exceed 25% of the then outstanding securities of that
class. The Fund may also make short sales "against the box" without respect
to such limitations. In this type of short sale, at the time of the sale,
the Fund owns or has the immediate and unconditional right to acquire at no
additional cost the identical security;
(2) purchase securities of open-end or closed-end investment
companies except in compliance with the Investment Company Act or any
exemptive relief obtained thereunder; or
(3) purchase securities of companies for the purpose of exercising
control.
Under the Investment Company Act, the Fund may invest up to 10% of its
total assets in the aggregate in shares of other investment companies and up to
5% of its total assets in any one investment company, provided the investment
does not represent more than 3% of the voting stock of the acquired investment
company at the time such shares are purchased. As a shareholder in any
investment company, the Fund will bear its ratable share of that investment
company's expenses, and will remain subject to payment of the Fund's advisory
and management fees and other expenses with respect to assets so invested.
Holders of common shares will therefore be subject to duplicative expenses to
the extent the Fund invests in other investment companies. In addition, the
securities of other investment companies may also be leveraged and will
therefore be subject to the same leverage risks described herein. As described
herein, the net asset value and market value of leveraged shares will be more
volatile and the yield to shareholders will tend to fluctuate more than the
yield generated by unleveraged shares.
With respect to the Fund's non-fundamental policy of investing at least 70%
of its Managed Assets in a diversified portfolio of equity and convertible
securities of U.S. and non-U.S. issuers, up to 30% of the Fund's Managed Assets
in non-convertible high yield securities and its intent to write options on at
least 50% of its portfolio securities, the Fund has adopted a policy to provide
shareholders of the Fund at least 60 days' prior notice of any change in this
non-fundamental investment policy, if the change is not first approved by
shareholders, which notice will comply with the Investment Company Act and the
rules and regulations thereunder. The restrictions and other limitations set
forth above will apply only at the time of purchase of securities and will not
be considered violated unless an excess or deficiency occurs or exists
immediately after and as a result of the acquisition of securities.
In addition, to comply with Federal tax requirements for qualification as a
"regulated investment company," the Fund's investments will be limited in a
manner such that at the close of each quarter of each taxable year, (a) no more
than 25% of the value of the Fund's total assets are invested in the securities
(other than United States government securities or securities of other regulated
investment companies) of a single issuer or two or more issuers controlled by
the Fund and engaged in the same, similar or related trades or businesses and
(b) with regard to at least 50% of the Fund's total assets, no more than 5% of
its total assets are invested in the securities (other than United States
government securities or securities of other regulated investment companies) of
a single issuer and such securities do not represent more than 10 percent of the
voting securities of such issuer. These tax-related limitations may be changed
by the trustees to the extent appropriate in light of changes to applicable tax
requirements.
INVESTMENT POLICIES AND TECHNIQUES
Under normal market conditions, the Fund will invest at least 70% of its
Managed Assets in a diversified portfolio of equity securities and convertible
securities of U.S. and non-U.S. issuers. It is anticipated that up to 30% of the
Fund's Managed Assets will be invested in non-convertible high yield securities
and that, initially, approximately 20% of the Fund's Managed Assets will be
invested in securities issued by non-U.S. issuers. The portion of the Fund's
Managed Assets invested in convertible securities, equity securities and
non-convertible high yield securities, as well as the portion invested in
securities issued by U.S. and non-U.S. issuers, will vary from time to time
consistent with the Fund's investment objectives, changes in equity prices and
changes in interest rates and other economic and market factors. All of the
Fund's Managed Assets may from time to time be invested in lower grade
securities. Lower grade securities are commonly referred to as "junk bonds" and
are considered speculative with respect to the issuer's capacity to pay interest
and repay principal. They involve
3
greater risk of loss, are subject to greater price volatility and are less
liquid, especially during periods of economic uncertainty or change, than higher
rated securities.
In furtherance of the Fund's primary investment objective of generating
current income and current gains from trading in securities, under current
market conditions the Fund intends to engage in an option strategy of writing
(selling) covered call options on at least 50% of the securities held in the
portfolio of the Fund, thus generating option writing premiums. A secondary
source of current income to the Fund will be the receipt of dividends or
interest on the securities held in the Fund's portfolio.
INVESTMENT PHILOSOPHY AND PROCESS
The prospectus presents the investment objectives and the principal
investment strategies and risks of the Fund. This section supplements the
disclosure in the Fund's prospectus and provides additional information on the
Fund's investment policies or restrictions. Restrictions or policies stated as a
maximum percentage of the Fund's assets are only applied immediately after a
portfolio investment to which the policy or restriction is applicable (other
than the limitations on borrowing). Accordingly, any later increase or decrease
resulting from a change in values, net assets or other circumstances will not be
considered in determining whether the investment complies with the Fund's
restrictions and policies.
DISTRESSED SECURITIES. The Fund may hold securities that become the subject
of bankruptcy proceedings or are otherwise in default as to the repayment of
principal and/or payment of interest. The Fund may also hold securities whose
ratings are in the lower rating categories (Ca or lower by Moody's or CC or
lower by Standard & Poor's) or which are unrated investments considered by the
Investment Manager to be of comparable quality. Investment in distressed
securities is speculative and involves significant risk. Distressed securities
frequently do not produce income while they are outstanding and may require the
Fund to bear certain extraordinary expenses in order to protect and recover its
investment. Therefore, to the extent the Fund seeks capital appreciation through
investment in distressed securities, the Fund's ability to achieve current
income for its shareholders may be diminished. The Fund also will be subject to
significant uncertainty as to when and in what manner and for what value the
obligations evidenced by the distressed securities will eventually be satisfied
(e.g., through a liquidation of the obligor's assets, an exchange offer or plan
of reorganization involving the distressed securities or a payment of some
amount in satisfaction of the obligation). In addition, even if an exchange
offer is made or a plan of reorganization is adopted with respect to distressed
securities held by the Fund, there can be no assurance that the securities or
other assets received by the Fund in connection with such exchange offer or plan
of reorganization will not have a lower value or income potential than may have
been anticipated when the investment was made. Moreover, any securities received
by the Fund upon completion of an exchange offer or plan of reorganization may
be restricted as to resale. As a result of the Fund's participation in
negotiations with respect to any exchange offer or plan of reorganization with
respect to an issuer of distressed securities, the Fund may be restricted from
disposing of such securities.
SHORT-TERM FIXED INCOME SECURITIES
For temporary defensive purposes or to keep cash on hand fully invested,
the Fund may invest up to 100% of its Managed Assets in cash equivalents and
short-term fixed income securities. Short-term fixed income investments are
defined to include, without limitation, the following:
(1) U.S. government securities, including bills, notes and bonds
differing as to maturity and rates of interest that are either issued or
guaranteed by the U.S. Treasury or by U.S. government agencies or
instrumentalities. U.S. government securities include securities issued by
(a) the Federal Housing Administration, Farmers Home Administration,
Export-Import Bank of the United States, Small Business Administration and
Government National Mortgage Association, whose securities are supported by
the full faith and credit of the United States; (b) the Federal Home Loan
Banks, Federal Intermediate Credit Banks and Tennessee Valley Authority,
whose securities are supported by the right of the agency to borrow from
the U.S. Treasury; (c) the Federal National Mortgage Association, whose
securities are supported by the discretionary authority of the U.S.
government to purchase certain obligations of the agency or
4
instrumentality; and (d) the Student Loan Marketing Association, whose
securities are supported only by its credit. While the U.S. government
provides financial support to such U.S. government-sponsored agencies or
instrumentalities, no assurance can be given that it always will do so
since it is not so obligated by law. The U.S. government, its agencies and
instrumentalities do not guarantee the market value of their securities.
Consequently, the value of such securities may fluctuate.
(2) Certificates of deposit issued against funds deposited in a bank
or a savings and loan association. Such certificates are for a definite
period of time, earn a specified rate of return and are normally
negotiable. The issuer of a certificate of deposit agrees to pay the amount
deposited plus interest to the bearer of the certificate on the date
specified thereon. Certificates of deposit purchased by the Fund may not be
fully insured by the Federal Deposit Insurance Corporation.
(3) Repurchase agreements, which involve purchases of debt
securities. At the time the Fund purchases securities pursuant to a
repurchase agreement, it simultaneously agrees to resell and redeliver such
securities to the seller, who also simultaneously agrees to buy back the
securities at a fixed price and time. This assures a predetermined yield
for the Fund during its holding period, since the resale price is always
greater than the purchase price and reflects an agreed-upon market rate.
Such actions afford an opportunity for the Fund to invest temporarily
available cash. The Fund may enter into repurchase agreements only with
respect to obligations of the U.S. government, its agencies or
instrumentalities; certificates of deposit; or bankers' acceptances in
which the Fund may invest. Repurchase agreements may be considered loans to
the seller, collateralized by the underlying securities.
The risk to the Fund is limited to the ability of the seller to pay
the agreed-upon sum on the repurchase date; in the event of default, the
repurchase agreement provides that the Fund is entitled to sell the
underlying collateral. If the value of the collateral declines after the
agreement is entered into, and if the seller defaults under a repurchase
agreement when the value of the underlying collateral is less than the
repurchase price, the Fund could incur a loss of both principal and
interest. The Investment Manager monitors the value of the collateral at
the time the action is entered into and at all times during the term of the
repurchase agreement. The Investment Manager does so in an effort to
determine that the value of the collateral always equals or exceeds the
agreed-upon repurchase price to be paid to the Fund. If the seller were to
be subject to a Federal bankruptcy proceeding, the ability of the Fund to
liquidate the collateral could be delayed or impaired because of certain
provisions of the bankruptcy laws.
(4) Commercial paper, which consists of short-term unsecured
promissory notes, including variable rate master demand notes issued by
corporations to finance their current operations. Master demand notes are
direct lending arrangements between the Fund and a corporation. There is no
secondary market for such notes. However, they are redeemable by the Fund
at any time. The Investment Manager will consider the financial condition
of the corporation (e.g., earning power, cash flow and other liquidity
ratios) and will continuously monitor the corporation's ability to meet all
of its financial obligations, because the Fund's liquidity might be
impaired if the corporation were unable to pay principal and interest on
demand. Investments in commercial paper will be limited to commercial paper
rated in the two highest categories by a major rating agency or are unrated
but determined to be of comparable quality by the Investment Manager and
which mature within one year of the date of purchase or carry a variable or
floating rate of interest.
SHORT SALES
The Fund may make short sales of securities. A short sale is a transaction
in which the Fund sells a security it does not own in anticipation that the
market price of that security will decline. The Fund may make short sales to
hedge positions, for duration and risk management, in order to maintain
portfolio flexibility or to enhance income or gain.
When the Fund makes a short sale, it must borrow the security sold short
and deliver it to the broker-dealer through which it made the short sale as
collateral for its obligation to deliver the security upon conclusion of the
5
sale. The Fund may have to pay a fee to borrow particular securities and is
often obligated to pay over any payments received on such borrowed securities.
The Fund's obligation to replace the borrowed security will be secured by
collateral deposited with the broker-dealer, usually cash, U.S. government
securities or other liquid securities. The Fund will also be required to
designate on its books and records similar collateral with its custodian to the
extent, if any, necessary so that the aggregate collateral value is at all times
at least equal to the current market value of the security sold short. Depending
on arrangements made with the broker-dealer from which it borrowed the security
regarding payment over of any payments received by the Fund on such security,
the Fund may not receive any payments (including interest) on its collateral
deposited with such broker-dealer.
If the price of the security sold short increases between the time of the
short sale and the time the Fund replaces the borrowed security, the Fund will
incur a loss; conversely, if the price declines, the Fund will realize a gain.
Any gain will be decreased, and any loss increased, by the transaction costs
described above. Although the Fund's gain is limited to the price at which it
sold the security short, its potential loss is theoretically unlimited.
The Fund will not make a short sale if, after giving effect to such sale,
the market value of all securities sold short exceeds 25% of the value of its
Managed Assets or the Fund's aggregate short sales of a particular class of
securities exceeds 25% of the outstanding securities of that class. The Fund may
also make short sales "against the box" without respect to such limitations. In
this type of short sale, at the time of the sale, the Fund owns or has the
immediate and unconditional right to acquire at no additional cost the identical
security.
OTHER INVESTMENT POLICIES AND TECHNIQUES
BORROWINGS AND PREFERRED SHARES
Although the Fund is authorized by its fundamental investment restrictions
to issue preferred shares in an amount up to 50% of its Managed Assets, the Fund
currently does not anticipate issuing preferred shares, and if it does so it
anticipates that, under current market conditions, it would offer preferred
shares representing no more than 20% of its Managed Assets immediately after the
issuance of the preferred shares. Also, although it has no current intention to
do so, the Fund may, in the future, seek to enhance the yield of the Fund's
current income through the use of other types of leverage, including through the
issuance of commercial paper or notes and/or borrowings in an aggregate amount
up to 20% of the Fund's Managed Assets after such issuance and/or borrowing. The
Fund may borrow from banks and other financial institutions. Leverage creates a
greater risk of loss, as well as a potential for more gain, for the common
shares than if leverage is not used. When leverage is employed, the net asset
value and market prices of the common shares and the yield to holders of common
shares will be more volatile. If the Fund offers preferred shares, such shares
will be senior to the common shares and the costs of any such offering will be
borne immediately by common shareholders and result in a reduction of the net
asset value of the common shares. Any issuance of commercial paper or notes or
borrowings will also have seniority over the common shares. The leveraging
strategy employed by the Fund (if any) may not be successful. The proceeds of
borrowings may be used for any valid purpose including, without limitation,
liquidity, investments and repurchases of shares of the Fund. Borrowing is a
form of leverage and, in that respect, entails risks comparable to those
associated with the issuance of preferred shares.
The Agreement and Declaration of Trust provides that the Fund's board of
trustees may authorize and issue preferred shares (the "preferred shares") with
rights as determined by the board of trustees, by action of the board of
trustees without the approval of the holders of the common shares. Holders of
common shares have no preemptive right to purchase any preferred shares that
might be issued. Whenever preferred shares are outstanding, the holders of
common shares will not be entitled to receive any distributions from the Fund
unless all accrued dividends on preferred shares have been paid, unless asset
coverage (as defined in the Investment Company Act) with respect to preferred
shares would be at least 200% after giving effect to the distributions and
unless certain other requirements imposed by any rating agencies rating the
preferred shares have been met.
In the event of any voluntary or involuntary liquidation, dissolution or
winding up of the Fund, the holders of preferred shares will be entitled to
receive a preferential liquidating distribution, which is expected to equal the
6
original purchase price per preferred share plus accrued and unpaid dividends,
whether or not declared, before any distribution of assets is made to holders of
common shares. After payment of the full amount of the liquidating distribution
to which they are entitled, the holders of preferred shares will not be entitled
to any further participation in any distribution of assets by the Fund.
The Investment Company Act requires that the holders of any preferred
shares, voting separately as a single class, have the right to elect at least
two trustees at all times. The remaining trustees will be elected by holders of
common shares and preferred shares, voting together as a single class. In
addition, subject to the prior rights, if any, of the holders of any other class
of senior securities outstanding, the holders of any preferred shares have the
right to elect a majority of the trustees of the Fund at any time two years'
dividends on any preferred shares are unpaid. The Investment Company Act also
requires that, in addition to any approval by shareholders that might otherwise
be required, the approval of the holders of a majority of any outstanding
preferred shares, voting separately as a class, would be required to (1) adopt
any plan of reorganization that would adversely affect the Pre-ferred Shares,
and (2) take any action requiring a vote of security holders under Section 13(a)
of the Investment Company Act, including, among other things, changes in the
Fund's subclassification as a closed-end investment company or changes in its
fundamental investment restrictions. As a result of these voting rights, the
Fund's ability to take any such actions may be impeded to the extent that there
are any preferred shares outstanding. The board of trustees presently intends
that, except as otherwise indicated in this prospectus and except as otherwise
required by applicable law, holders of preferred shares will have equal voting
rights with holders of common shares (one vote per share, unless otherwise
required by the Investment Company Act) and will vote together with holders of
com-mon shares as a single class.
The affirmative vote of the holders of a majority of the outstanding
preferred shares, voting as a separate class, will be required to amend, alter
or repeal any of the preferences, rights or powers of holders of preferred
shares so as to affect materially and adversely such preferences, rights or
powers, or to increase or decrease the au-thorized number of preferred shares.
The class vote of holders of preferred shares described above will in each case
be in addition to any other vote required to authorize the action in question.
The terms of any preferred shares would typically provide that (1) they are
redeemable by the Fund in whole or in part at the original purchase price per
share plus accrued dividends per share, (2) the Fund may tender for or purchase
preferred shares and (3) the Fund may subsequently resell any shares so tendered
for or purchased. Any redemption or purchase of preferred shares by the Fund
will reduce the leverage applicable to the common shares, if any, while any
resale of shares by the Fund will increase that leverage, if any.
The discussion above describes the possible offering of preferred shares by
the Fund. If the board of trus-tees determines to proceed with such an offering,
the terms of the preferred shares may be the same as, or different from, the
terms described above, subject to applicable law and the Fund's Agreement and
Declaration of Trust. The board of trustees, without the approval of the holders
of common shares, may authorize an offering of preferred shares or may determine
not to authorize such an offering, and may fix the terms of the preferred shares
to be offered.
The Fund anticipates that it will apply for ratings for any preferred
shares it issues from Moody's Investors Service, Inc. ("Moody's"), Fitch Ratings
("Fitch") and/or Standard & Poor's Ratings Group, a division of The McGraw Hill
Companies ("S&P"). In order to obtain and maintain the required ratings, the
Fund will be required to comply with investment quality, diversification and
other guidelines established by Moody's, Fitch and/or S&P. Such guidelines will
likely be more restrictive than the restrictions set forth above. The Fund does
not anticipate that such guidelines would have a material adverse effect on the
Fund's holders of common shares or its ability to achieve its investment
objectives. The Fund presently anticipates that any preferred shares that it
issues would be initially given the highest ratings by Moody's (Aaa), Fitch
(AAA) and/or S&P (AAA), but no assurance can be given that such ratings will be
obtained. No minimum rating is required for the issuance of preferred shares by
the Fund. Moody's, Fitch and S&P receive fees in connection with their ratings
issuances.
7
LEVERAGE RISK
Leverage risk is the risk associated with the borrowing of funds and other
investment techniques, including the issuance of any preferred shares by the
Fund to leverage the common shares.
Leverage is a speculative technique which may expose the Fund to greater
risk and increase its costs. Increases and decreases in the value of the Fund's
portfolio will be magnified if the Fund uses leverage. For example, leverage may
cause greater swings in the Fund's net asset value or cause the Fund to lose
more than it invested. The Fund will also have to pay interest or dividends on
its leverage, reducing the Fund's return. This expense may be greater than the
Fund's return on the underlying investment. There is no assurance that the
Fund's leveraging strategy will be successful.
If leverage is employed, the net asset value and market value of the common
shares will be more volatile, and the yield to the holders of common shares will
tend to fluctuate with changes in the shorter-term interest rates on the
leverage. If the interest rate on the leverage approaches the net rate of return
on the Fund's investment portfolio, the benefit of leverage to the holders of
the common shares would be reduced. If the interest rate on the leverage exceeds
the net rate of return on the Fund's portfolio, the leverage will result in a
lower rate of return to the holders of common shares than if the Fund were not
leveraged. The Fund will pay (and the holders of common shares will bear) any
costs and expenses relating to any leverage. Accordingly, the Fund can not
assure you that the use of leverage would result in a higher yield or return to
the holders of the common shares.
Any decline in the net asset value of the Fund's investments will be borne
entirely by the holders of common shares which increases the risk of loss to the
common shares. Therefore, if the market value of the Fund's portfolio declines,
the leverage will result in a greater decrease in net asset value to the holders
of common shares than if the Fund were not leveraged. This greater net asset
value decrease will also tend to cause a greater decline in the market price for
the common shares. In extreme cases, the Fund might be in danger of failing to
maintain the required 200% asset coverage, of losing its ratings on any
preferred shares issued or the Fund's current investment income might not be
sufficient to meet the interest payments on indebtedness or the dividend
requirements on any preferred shares. In order to counteract such events, the
Fund might need to reduce its indebtedness and to liquidate investments or to
unwind Strategic Transactions in order to fund a redemption of some or all of
the preferred shares or to comply with rating agency requirements.
Liquidation at times of low security prices may result in capital losses
and may reduce returns to the holders of common shares.
While the Investment Manager may from time to time consider reducing the
Fund's leverage, if any, in response to actual or anticipated changes in
interest rates in an effort to mitigate the increased volatility of current
income and net asset value associated with leverage, there can be no assurance
that the Investment Manager will actually reduce the Fund's leverage in the
future or that any reduction, if undertaken, will benefit the holders of common
shares. Changes in the future direction of interest rates are very difficult to
predict accurately. If the Investment Manager were to reduce the Fund's
leverage, if any, based on a prediction about future changes to interest rates,
and that prediction turned out to be incorrect, the reduction in leverage would
likely reduce the income and/or total returns to holder of common shares
relative to the circumstance where the Investment Manager had not reduced the
Fund's leverage. The Investment Manager may decide that this risk outweighs the
likelihood of achieving the desired reduction to volatility in income and share
price if the prediction were to turn out to be correct, and determine not to
reduce the Fund's leverage as described above. When the Fund uses financial
leverage, the investment advisory fee payable to the Advisor and the management
fee payable to the Investment Manager will be higher than if the Fund did not
use leverage. Therefore, there may be a conflict of interest.
Certain types of borrowings by the Fund may result in the Fund being
subject to covenants in credit agreements relating to asset coverage and
portfolio composition requirements. The Fund may be subject to certain
restrictions on investments imposed by guidelines of one or more rating
agencies, which may issue ratings for any preferred shares or other leverage
securities issued by the Fund. These guidelines may impose asset coverage or
portfolio composition requirements that are more stringent than those imposed by
the Investment Company Act.
8
The Investment Manager does not believe that these covenants or guidelines will
impede the Investment Manager from managing the Fund's portfolio in accordance
with the Fund's investment objectives and policies.
STRATEGIC TRANSACTIONS
Consistent with its investment objectives and policies as set forth herein,
the Fund may also enter into certain hedging and risk management transactions.
In particular, the Fund may purchase and sell futures contracts, exchange-listed
and over-the-counter put and call options on securities, financial indices and
futures contracts, forward foreign currency contracts and may enter into various
interest rate transactions (collectively, "Strategic Transactions"). Strategic
Transactions may be used to attempt to protect against possible changes in the
market value of the Fund's portfolio resulting from fluctuations in the
securities markets and changes in interest rates, to protect the Fund's
unrealized gains in the value of its portfolio securities, to facilitate the
sale of such securities for investment purposes or to establish a position in
the securities markets as a temporary substitute for purchasing particular
securities. Any or all of these techniques may be used at any time. There is no
particular strategy that requires use of one technique rather than another. Use
of any Strategic Transaction is a function of market conditions. The Strategic
Transactions that the Fund may use are described below. The ability of the Fund
to hedge successfully will depend on the Investment Manager's ability to predict
pertinent market movements, which cannot be assured.
INTEREST RATE TRANSACTIONS. Among the Strategic Transactions into which the
Fund may enter are interest rate swaps and the purchase or sale of interest rate
caps and floors. The Fund expects to enter into the transactions primarily to
preserve a return or spread on a particular investment or portion of its
portfolio as a duration management techniques or to protect against any increase
in the price of securities the Fund anticipates purchasing at a later date or,
as discussed in the prospectus, to hedge against increased preferred share
dividend rates or increases in the Fund's cost of borrowing.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS. In connection with its
hedging and other risk management strategies, the Fund may also enter into
contracts for the purchase or sale for future delivery ("future contracts") of
securities, aggregates of securities, financial indices and U.S. government debt
securities or options on the foregoing securities to hedge the value of its
portfolio securities that might result from a change in interest rates or market
movements. The Fund will engage in such transactions only for bona fide hedging,
risk management and other appropriate portfolio management purposes. In each
case the Fund will engage in such transactions in accordance with the rules and
regulations of the CFTC.
CREDIT DERIVATIVES. The Fund may engage in credit derivative transactions.
There are two broad categories of credit derivatives: default price risk
derivatives and market spread derivatives. Default price risk derivatives are
linked to the price of reference securities or loans after a default by the
issuer or borrower, respectively. Market spread derivatives are based on the
risk that changes in market factors, such as credit spreads, can cause a decline
in the value of a security, loan or index. There are three basic transactional
forms or credit derivatives: swaps, options and structured instruments. The use
of credit derivatives is a highly specialized activity which involves strategies
and risks different from those associated with ordinary portfolio security
transactions. If incorrect in its forecasts of default risks, market spreads or
other applicable factors, the investment performance of the Fund would diminish
compared with what it would have been if these techniques were not used.
Moreover, even if it is correct in its forecasts, there is a risk that a credit
derivative position may correlate imperfectly with the price of the asset or
liability being hedged. There is no limit on the amount of credit derivative
transactions that may be entered into by the Fund for hedging purposes. The
Fund's risk of loss in a credit derivative transaction varies with the form of
the transaction. For example, if the Fund purchases a default option on a
security, and if no default occurs with respect to the security, the Fund's loss
is limited to the premium it paid for the default option. In contrast, if there
is a default by the grantor of a default option, the Fund's loss will include
both the premium that it paid for the option and the decline in value of the
underlying security that the default option hedged.
CALLS ON SECURITIES, INDICES AND FUTURES CONTRACTS. In order to enhance
income or reduce fluctuations in net asset value, the Fund may purchase call
options on securities and indices based upon the prices of securities that are
traded on U.S. securities exchanges and to the over-the-counter markets. A call
option gives the purchaser of
9
the option the right to buy, and obligates the seller to sell, the underlying
security, futures contract or index at the exercise price at any time or at a
specified time during the option period. The purchase of a call gives the Fund
the right to buy the underlying instrument or index at a fixed price.
PUTS ON SECURITIES, INDICES AND FUTURES CONTRACTS.As with calls, the Fund
may purchase put options ("puts") on securities (whether or not it holds such
securities in its portfolio). For the same purposes, the Fund may also sell puts
on securities financial indices and puts on futures contracts on securities if
the Fund's contingent obligations on such puts are secured by segregated assets
consisting of cash or liquid high grade debt securities having a value not less
than the exercise price. The Fund will not sell puts if, as a result, more than
50% of the Fund's assets would be required to cover its potential obligation
under its hedging and other investment transactions. In selling puts, there is a
risk that the Fund may be required to buy the underlying instrument or index at
higher than the current market price.
The principal risks relating to the use of futures and other Strategic
Transitions are: (i) less than perfect correlation between the prices of the
hedging instrument and the market value of the securities in the Fund's
portfolio; (ii) possible lack of a liquid secondary market for closing out a
position in such instruments; (iii) losses resulting from interest rate or other
market movements not anticipated by the Investment Manager; and (iv) the
obligation to meet additional variation margin or other payment requirements.
FORWARD CURRENCY CONTRACTS. The Fund may enter into forward currency
contracts to purchase or sell foreign currencies for a fixed amount of U.S.
dollars or another foreign currency. A forward currency contract involves an
obligation to purchase or sell a specific currency at a future date, which may
be any fixed number of days (term) from the date of the forward currency
contract agreed upon by the parties, at a price set at the time the forward
currency contract is entered into. Forward currency contracts are traded
directly between currency traders (usually large commercial banks) and their
customers. The Fund may purchase a forward currency contract to lock in the U.S.
dollar price of a security denominated in a foreign currency that the Fund
intends to acquire. The Fund may sell a forward currency contract to lock in the
U.S. dollar equivalent of the proceeds from the anticipated sale of a security
or a dividend or interest payment denominated in a foreign currency. The Fund
may also use forward currency contracts to shift the Fund's exposure to foreign
currency exchange rate changes from one currency to another. For example, if the
Fund owns securities denominated in a foreign currency and the Investment
Manager believes that currency will decline relative to another currency, it
might enter into a forward currency contract to sell the appropriate amount of
the first foreign currency with payment to be made in the second currency. The
Fund may also purchase forward currency contracts to enhance income when the
Investment Manager anticipates that the foreign currency will appreciate in
value but securities denominated in that currency do not present attractive
investment opportunities.
The Fund may also use forward currency contracts to hedge against a decline
in the value of existing investments denominated in a foreign currency. Such a
hedge would tend to offset both positive and negative currency fluctuations, but
would not offset changes in security values caused by other factors. The Fund
could also hedge the position by entering into a forward currency contract to
sell another currency expected to perform similarly to the currency in which the
Fund's existing investments are denominated. This type of hedge could offer
advantages in terms of cost, yield or efficiency, but may not hedge currency
exposure as effectively as a simple hedge into U.S. dollars. This type of hedge
may result in losses if the currency used to hedge does not perform similarly to
the currency in which the hedged securities are denominated.
The Fund may also use forward currency contracts in one currency or a
basket of currencies to attempt to hedge against fluctuations in the value of
securities denominated in a different currency if the Investment Manager
anticipates that there will be a correlation between the two currencies.
The cost to the Fund of engaging in forward currency contracts varies with
factors such as the currency involved, the length of the contract period and the
market conditions then prevailing. Because forward currency contracts are
usually entered into on a principal basis, no fees or commissions are involved.
When the Fund enters into a forward currency contract, it relies on the
counterparty to make or take delivery of the underlying currency
10
at the maturity of the contract. Failure by the counterparty to do so would
result in the loss of some or all of any expected benefit of the transaction.
Secondary markets generally do not exist for forward currency contracts,
with the result that closing transactions generally can be made for forward
currency contracts only by negotiating directly with the counterparty. Thus,
there can be no assurance that the Fund will in fact be able to close out a
forward currency contract at a favorable price prior to maturity. In addition,
in the event of insolvency of the counterparty, the Fund might be unable to
close out a forward currency contract. In either event, the Fund would continue
to be subject to market risk with respect to the position, and would continue to
be required to maintain a position in securities denominated in the foreign
currency or to maintain cash or liquid assets in a segregated account.
The precise matching of forward currency contract amounts and the value of
the securities involved generally will not be possible because the value of such
securities, measured in the foreign currency, will change after the forward
currency contract has been established. Thus, the Fund might need to purchase or
sell foreign currencies in the spot cash market to the extent such foreign
currencies are not covered by forward currency contracts. The projection of
short-term currency market movements is extremely difficult, and the successful
execution of a short-term hedging strategy is highly uncertain. Certain
provisions of the Code may restrict or affect the ability of the Fund to engage
in Strategic Transactions. See "Tax Matters."
REPURCHASE AGREEMENTS
As temporary investments, the Fund may invest in repurchase agreements. A
repurchase agreement is a contractual agreement whereby the seller of securities
agrees to repurchase the same security at a specified price on a future date
agreed upon by the parties. The agreed-upon repurchase price determines the
yield during the Fund's holding period. Repurchase agreements are considered to
be loans collateralized by the underlying security that is the subject of the
repurchase contract. The Fund will only enter into repurchase agreements with
registered securities dealers or domestic banks that, in the opinion of the
Investment Manager, present minimal credit risk. The risk to the Fund is limited
to the ability of the issuer to pay the agreed-upon repurchase price on the
delivery date; however, although the value of the underlying collateral at the
time the transaction is entered into always equals or exceeds the agreed-upon
repurchase price, if the value of the collateral declines there is a risk of
loss of both principal and interest. In the event of default, the collateral may
be sold but the Fund might incur a loss if the value of the collateral declines,
and might incur disposition costs or experience delays in connection with
liquidating the collateral. In addition, if bankruptcy proceedings are commenced
with respect to the seller of the security, realization upon the collateral by
the Fund may be delayed or limited. The Investment Manager will monitor the
value of the collateral at the time the transaction is entered into and at all
times subsequent during the term of the repurchase agreement in an effort to
determine that such value always equals or exceeds the agreed-upon repurchase
price. In the event the value of the collateral declines below the repurchase
price, the Investment Manager will demand additional collateral from the issuer
to increase the value of the collateral to at least that of the repurchase
price, including interest.
LENDING OF SECURITIES
The Fund may lend its portfolio securities to banks or dealers which meet
the creditworthiness standards established by the Board of Trustees of the Fund
("Qualified Institutions"). By lending its portfolio securities, the Fund
attempts to increase its income through the receipt of interest on the loan. Any
gain or loss in the market price of the securities loaned that may occur during
the term of the loan will be for the account of the Fund. The Fund may lend its
portfolio securities so long as the terms and the structure of such loans are
not inconsistent with requirements of the Investment Company Act, which
currently require that (i) the borrower pledge and maintain with the Fund
collateral consisting of cash, a letter of credit issued by a domestic U.S. bank
or securities issued or guaranteed by the U.S. government having a value at all
times not less than 100% of the value of the securities loaned, (ii) the
borrower add to such collateral whenever the price of the securities loaned
rises (i.e., the value of the loan is "marked to the market" on a daily basis),
(iii) the loan be made subject to termination by the Fund at any time and (iv)
the Fund receive reasonable interest on the loan (which may include the Fund's
11
investing any cash collateral in interest bearing short term investments), any
distributions on the loaned securities and any increase in their market value.
The Fund will not lend portfolio securities if, as a result, the aggregate of
such loans exceeds 33 1/3% of the value of the Fund's total assets (including
such loans). Loan arrangements made by the Fund will comply with all other
applicable regulatory requirements, including the rules of the New York Stock
Exchange, which rules presently require the borrower, after notice, to redeliver
the securities within the normal settlement time of five business days. All
relevant facts and circumstances, including the creditworthiness of the
Qualified Institution, will be monitored by the Investment Manager, and will be
considered in making decisions with respect to lending securities, subject to
review by the Fund's Board of Trustees.
The Fund may pay reasonable negotiated fees in connection with loaned
securities, so long as such fees are set forth in a written contract and
approved by the Fund's Board of Trustees. In addition, voting rights may pass
with the loaned securities, but if a material event were to occur affecting such
a loan, the loan must be called and the securities voted.
WHEN-ISSUED AND FORWARD COMMITMENT SECURITIES
The Fund may purchase bonds on a "when-issued" basis and may purchase or
sell bonds on a "forward commitment" basis. When such transactions are
negotiated, the price, which is generally expressed in yield terms, is fixed at
the time the commitment is made, but delivery and payment for the securities
take place at a later date. When-issued and forward commitment securities may be
sold prior to the settlement date, but the Fund will enter into when-issued and
forward commitment securities only with the intention of actually receiving or
delivering the securities, as the case may be. If the Fund disposes of the right
to acquire a when-issued security prior to its acquisition or disposes of its
right to deliver or receive against a forward commitment, it can incur a gain or
loss. At the time the Fund entered into a transaction on a when-issued or
forward commitment basis, it may segregate with its custodian cash or other
liquid securities with a value not less than the value of the when-issued or
forward commitment securities. The value of these assets will be monitored daily
to ensure that their marked to market value will at all times equal or exceed
the corresponding obligations of the Fund. There is always a risk that the
securities may not be delivered and that the Fund may incur a loss. Settlements
in the ordinary course are not treated by the Fund as when-issued or forward
commitment transactions and accordingly are not subject to the foregoing
restrictions.
PAY-IN-KIND SECURITIES
The Fund may invest pay-in-kind, or "PIK," securities. PIK securities are
securities which pay interest through the issuance of additional debt or equity
securities. Similar to zero coupon obligations, PIK securities also carry
additional risk as holders of these types of securities realize no cash until
the cash payment date unless a portion of such securities is sold and, if the
issuer defaults, the Fund may obtain no return at all on its investment. The
market price of PIK securities is affected by interest rate changes to a greater
extent, and therefore tends to be more volatile, than that of securities which
pay interest in cash. Additionally, current Federal tax law requires the holder
of certain PIK securities to accrue income with respect to these securities
prior to the receipt of cash payments. To maintain its qualification as a
regulated investment company and avoid liability for Federal income and excise
taxes, the Fund may be required to distribute income accrued with respect to
these securities and may have to dispose of portfolio securities under
disadvantageous circumstances in order to generate cash to satisfy these
distribution requirements.
BRADY BONDS
The Fund's emerging market debt securities may include emerging market
governmental debt obligations commonly referred to as Brady Bonds. Brady Bonds
are debt securities, generally denominated in U.S. dollars, issued under the
framework of the Brady Plan, an initiative announced by U.S. Treasury Secretary
Nicholas F. Brady in 1989 as a mechanism for debtor nations (primarily emerging
market countries) to restructure their outstanding external indebtedness
(generally, commercial bank debt). Brady Bonds are created through the
12
exchange of existing commercial bank loans to foreign entities for new
obligations in connection with debt restructuring. A significant amount of the
Brady Bonds that the Fund may purchase have no or limited collateralization, and
the Fund will be relying for payment of interest and (except in the case of
principal collateralized Brady Bonds) principal primarily on the willingness and
ability of the foreign government to make payment in accordance with the terms
of the Brady Bonds. A substantial portion of the Brady Bonds and other sovereign
debt securities in which the Fund may invest are likely to be acquired at a
discount.
ZERO COUPON BONDS
The Fund may invest in zero-coupon bonds, which are normally issued at a
significant discount from face value and do not provide for periodic interest
payments. Zero-coupon bonds may experience greater volatility in market value
than similar maturity debt obligations which provide for regular interest
payments. Additionally, current Federal tax law requires the holder of certain
zero-coupon bonds to accrue income with respect to these securities prior to the
receipt of cash payments. To maintain its qualification as a regulated
investment company and to potentially avoid liability for Federal income and
excise taxes, the Fund may be required to distribute income accrued with respect
to these securities and may have to dispose of Fund securities under
disadvantageous circumstances in order to generate cash to satisfy these
distribution requirements. See "Tax Matters."
STRUCTURED INVESTMENTS
The Fund may invest a portion of its assets in interests in entities
organized and operated solely for the purpose of restructuring the investment
characteristics of securities. This type of restructuring involves the deposit
with or purchase by an entity, such as a corporation or a trust, of specified
instruments and the issuance by that entity of one or more classes of securities
("Structured Investments") backed by, or representing interests in, the
underlying instruments. The cash flow on the underlying instruments may be
apportioned among the newly issued Structured Investments to create securities
with different investment characteristics such as varying maturities, payment
priorities and interest rate provisions, and the extent of the payments made
with respect to Structured Investments is dependent on the extent of the cash
flow on the underlying instruments. Because Structured Investments of the type
in which the Fund anticipates it will invest typically involve no credit
enhancement, their credit risk generally will be equivalent to that of the
underlying instruments.
The Fund is permitted to invest in a class of Structured Investments that
is either subordinated or not subordinated to the right of payment of another
class. Subordinated Structured Investments typically have higher yields and
present greater risks than unsubordinated Structured Investments.
Certain issuers of Structured Investments may be deemed to be "investment
companies" as defined in the Investment Company Act. As a result, the Fund's
investment in these Structured Investments may be limited by the restrictions
contained in the Investment Company Act. Structured Investments are typically
sold in private placement transactions, and there currently is no active trading
market for Structured Investments.
WARRANTS
The Fund may acquire warrants for equity securities and debt securities
that are acquired as units with debt securities. Warrants are securities
permitting, but not obligating, their holder to subscribe to other securities.
Warrants do not carry with them the right to dividends or voting rights with
respect to the securities that they entitle their holder to purchase, and they
do not represent any rights in the assets of the issuer. As a result, warrants
may be considered more speculative than certain other types of investments. In
addition, the value of a warrant does not necessarily change with the value of
the underlying securities and a warrant ceases to have value if it is not
exercised prior to its expiration date. The Fund does not intend to retain in
its portfolio any common stock received upon the exercise of a warrant and will
sell the common stock as promptly as practicable and in the manner that it
believes will reduce its risk of a loss in connection with the sale.
13
MANAGEMENT OF THE FUND
INVESTMENT ADVISORY AGREEMENT
Although the Advisor intends to devote such time and effort to the business
of the Fund as is reasonably necessary to perform its duties to the Fund, the
services of the Advisor are not exclusive, and the Advisor provides similar
services to other clients and may engage in other activities.
The investment advisory agreement was approved by the Fund's Board of
Trustees at an in-person meeting of the Board of Trustees held on December 14,
2004, including a majority of the trustees who are not parties to the agreement
or interested persons of any such party (as such term is defined in the
Investment Company Act). This agreement provides for the Fund to pay an advisory
fee to the Advisor, such advisory fee being payable monthly in arrears at an
annual rate equal to 0.49% of the average weekly value of the Fund's Managed
Assets.
The investment advisory agreement was approved by the sole common
shareholder of the Fund on January 12, 2005. The investment advisory
agreement will continue in effect for a period of two years from its
effective date, and if not sooner terminated, will continue in effect for
successive periods of 12 months thereafter, provided that each continuance is
specifically approved at least annually by both (1) the vote of a majority of
the Fund's Board of Trustees or the vote of a majority of the outstanding
voting securities of the Fund at the time outstanding and entitled to vote
(as such term is defined in the Investment Company Act) and (2) by the vote
of a majority of the trustees who are not parties to the investment
management agreement or interested persons (as such term is defined in the
Investment Company Act) of any such party, cast in person at a meeting called
for the purpose of voting on such approval. The investment advisory agreement
may be terminated as a whole at any time by the Fund, without the payment of
any penalty, upon the vote of a majority of the Fund's Board of Trustees or a
majority of the outstanding voting securities of the Fund or by the Advisor,
on 60 days' written notice by either party to the other which can be waived
by the non-terminating party. The investment advisory agreement will
terminate automatically in the event of its assignment (as such term is
defined in the Investment Company Act and the rules thereunder).
The investment advisory agreement also provides that in the absence of
willful misfeasance, bad faith, gross negligence or reckless disregard of its
obligations thereunder, the Advisor is not liable to the Fund or any of the
Fund's shareholders for any act or omission by the Advisor in the supervision or
management of its respective investment activities or for any loss sustained by
the Fund or the Fund's shareholders and provides for indemnification by the Fund
of the Advisor, its directors, officers, employees, agents and control persons
for liabilities incurred by them in connection with their services to the Fund,
subject to certain limitations and conditions.
The business address of the Advisor is 2455 Corporate West Drive, Lisle,
Illinois 60532.
INVESTMENT MANAGEMENT AGREEMENT
Although Advent intends to devote such time and effort to the business of
the Fund as is reasonably necessary to perform its duties to the Fund, the
services of Advent are not exclusive, and Advent provides similar services to
other clients and may engage in other activities.
The investment management agreement was approved by the Fund's Board of
Trustees at an in-person meeting of the Board of Trustees held on December 14,
2004, including a majority of the trustees who are not parties to the agreement
or interested persons of any such party (as such term is defined in the
Investment Company Act). This agreement provides for the Fund to pay a
management fee to the Investment Manager, such management fee being payable
monthly in arrears at an annual rate equal to 0.51% of the average weekly value
of the Fund's Managed Assets.
The investment management agreement was approved by the sole common
shareholder of the Fund on January 12, 2005. The investment management
agreement will continue in effect for a period of two years from its
effective date, and if not sooner terminated, will continue in effect for
successive periods of 12 months thereafter, provided that each continuance is
specifically approved at least annually by both (1) the vote of a majority of
the Fund's
14
Board of Trustees or the vote of a majority of the outstanding voting securities
of the Fund at the time outstanding and entitled to vote (as such term is
defined in the Investment Company Act) and (2) by the vote of a majority of the
trustees who are not parties to the investment management agreement or
interested persons (as such term is defined in the Investment Company Act) of
any such party, cast in person at a meeting called for the purpose of voting on
such approval. The investment management agreement may be terminated as a whole
at any time by the Fund, without the payment of any penalty, upon the vote of a
majority of the Fund's Board of Trustees or a majority of the outstanding voting
securities of the Fund or by the Investment Manager, on 60 days' written notice
by either party to the other which can be waived by the non-terminating party.
The investment management agreement will terminate automatically in the event of
its assignment (as such term is defined in the Investment Company Act and the
rules thereunder).
The investment management agreement also provides that in the absence of
willful misfeasance, bad faith, gross negligence or reckless disregard of its
obligations thereunder, the Investment Manager is not liable to the Fund or any
of the Fund's shareholders for any act or omission by the Investment Manager in
the supervision or management of its respective investment activities or for any
loss sustained by the Fund or the Fund's shareholders and provides for
indemnification by the Fund of the Investment Manager, its directors, officers,
employees, agents and control persons for liabilities incurred by them in
connection with their services to the Fund, subject to certain limitations and
conditions.
BOARD CONSIDERATION OF INVESTMENT ADVISORY AGREEMENT AND INVESTMENT MANAGEMENT
AGREEMENT
The Board of Trustees of the Fund, in approving the selection of the
Advisor and the Investment Manager and in approving the investment advisory
agreement between the Fund and the Advisor and the investment management
agreement among the Fund, the Advisor and the Investment Manager (collectively,
the "Agreements"), considered and concluded the following:
FACTORS CONSIDERED
In considering the Agreements, the Board of Trustees, including the
non-interested Trustees, did not identify any factor as all-important or
all-controlling and instead considered many factors collectively in light of all
of the Fund's surrounding circumstances, including the following: (i) the
investment objectives and policies of the Fund, (ii) the team of investment
advisory personnel assigned to the Fund, some of whom were present at the
meeting at which the Agreements were considered, (iii) the nature and quality of
the services to be provided to the Fund by the Advisor and the Investment
Manager, (iv) the Fund's fee and expense data as compared to a peer group of
closed-end funds with similar investment strategies as the Fund, (v) a pro forma
profitability analysis of both the Advisor and the Investment Manager with
respect to the Fund based on certain assumed levels of Managed Assets and (v)
the direct and indirect benefits to the Advisor and the Investment Manager from
their relationship with the Fund.
During its deliberations, the Board of Trustees focused on the experience,
resources and strengths of (i) the Investment Manager in managing investment
companies that invest, among other types of investments, in convertible and high
yield securities and (ii) the Advisor in supervising the investment activities
of certain non-affiliated closed-end fund managers, strategizing with such fund
managers as to the investment programs of the funds they manage and providing
various administrative and shareholder support services to closed-end funds. The
Board of Trustees discussed with the portfolio managers the investment policies
of the Fund and the means by which they intend to pursue those policies, how
those means may differ from the means employed with respect to other funds
managed by the Investment Manager and/or the Advisor with different investment
objectives and policies and the Investment Manager's policies and procedures in
respect of execution of portfolio transactions. The Board of Trustees, based on
their experience as directors or trustees of other investment companies managed
by the Investment Manager or administered by the Investment Advisor, also
focused on the quality of the compliance and administrative staff at the Advisor
and the Investment Manager and assured themselves that the services provided by
such staff would be made available to the Fund. The Board of Trustees also
focused on the Fund's advisory fee rate, investment management fee rate,
aggregate advisory fee rate and anticipated expense
15
ratios as compared to those of comparable closed-end funds with comparable
investment objectives and strategies (such information was provided by the
Advisor and was based on publicly available information). The Board of Trustees
also considered whether the Fund presented opportunities for economies of scale.
The non-interested Trustees were represented by independent counsel who
assisted them in their deliberations. Although the Board of Trustees was made
aware of certain arrangements to be entered into between the Advisor and/or the
Investment Manager and certain third parties in connection with the on-going
operation of the Fund (including anticipated fees to be paid to such third
parties), the Board of Trustees was informed by independent counsel to the
non-interested Trustees that it was not to consider any such fees being paid by
the Advisor and/or the Investment Manager to third parties when considering the
reasonableness of each of the advisory fee and management fee being paid to the
Advisor and the Investment Manager, respectively, by the Fund in connection with
the services the Advisor and the Investment Manager provide to the Fund.
CONCLUSIONS
Based on the information reviewed and discussions held with respect to each
of the foregoing items, the Board of Trustees, including a majority of the
non-interested Trustees, concluded that:
- it was satisfied with the nature, extent and quality of the services to
be provided by each of the Advisor and the Investment Manager to the
Fund;
- there did not appear at this time to be any significant economies of
scale to be shared between the Fund and the Investment Manager or the
Advisor;
- in light of the anticipated costs of providing investment management and
advisory services to the Fund, the pro forma profit levels and other
ancillary benefits that the Investment Manager and the Advisor were
projected to receive with regard to providing investment management,
advisory and other services to the Fund were reasonable; and
- each of the advisory fee rate and investment management fee rate was
reasonable in relation to such services, giving due regard to the
sophisticated and multi-dimensional nature of the investment strategies
to be employed by the Fund.
TRUSTEES AND OFFICERS
The officers of the Fund manage its day-to-day operations. The officers are
directly responsible to the Fund's Board of Trustees which sets broad policies
for the Fund and chooses its officers. Following is a list of his present
positions and principal occupations during the last five years. The business
address of the Fund and the Fund's board members and officers is 2455 Corporate
West Drive, Lisle, Illinois 60532, unless specified otherwise below.
INDEPENDENT TRUSTEES
TERM OF
NAME, ADDRESS, AGE OFFICE AND PRINCIPAL OCCUPATION
AND POSITION(S) HELD LENGTH OF DURING THE PAST FIVE YEARS OTHER DIRECTORSHIPS
WITH REGISTRANT TIME SERVED AND OTHER AFFILIATIONS HELD BY TRUSTEE
------------------------------ --------------- ---------------------------------------------- ----------------------------------
Derek Medina Three Vice President, Business Affairs and News Director of Young Scholar's
ABC News 47 West 66th Street years(1)(2) Planning at ABC News from 2003-present. Institute. Former Director of
New York, NY 10023 Formerly Executive Director, Office of the Episcopal Social Services. Trustee
Age: 37 President at ABC News (2000-2003). Former of Advent Claymore Convertible
Trustee associate at Cleary Gottlieb Steen & Hamilton Securities and Income Fund.
(law firm) (1995-1998). Former associate in
Corporate Finance at J.P. Morgan/Morgan
Guaranty (1988-1990).
16
TERM OF
NAME, ADDRESS, AGE OFFICE AND PRINCIPAL OCCUPATION
AND POSITION(S) HELD LENGTH OF DURING THE PAST FIVE YEARS OTHER DIRECTORSHIPS
WITH REGISTRANT TIME SERVED AND OTHER AFFILIATIONS HELD BY TRUSTEE
------------------------------ --------------- ---------------------------------------------- ----------------------------------
Ronald A. Nyberg Three Principal of Ronald A. Nyberg, Ltd., a law Director, Edward Hospital
200 East 5th Avenue Suite 116 years(1)(2) firm specializing in Corporate Law, Estate Foundation, Naperville, IL; Trustee,
Naperville, IL 60563 Planning and Business Transactions from North Park University, Chicago;
Age: 51 2000-present. Formerly, Executive Vice Trustee, MBIA Capital/Claymore
Trustee President, General Counsel and Corporate Managed Duration Investment Grade
Secretary of Van Kampen Investments Municipal Fund; Western
(1982-1999). Former associate of Querrey & Asset/Claymore U.S. Treasury
Harrow (law firm) (1978-1982). Inflation Protected Securities
Fund; Western Asset/Claymore U.S.
Treasury Inflation Protected
Securities Fund 2; Dreman/Claymore
Dividend and Income Fund; TS &
W/Claymore Tax-Advantaged
Balanced Fund; and Madison/Claymore
Covered Call Fund; Advent Claymore
Convertible Securities and Income
Fund; and Fiduciary/Claymore MLP
Opportunity Fund.
Gerald L. Seizert, Three Chief Executive Officer of SeizertCapital Former Director of Loomis, Sayles
CFP Seizert years(1)(2) Partners, LLC, where he directs the equity and Co., L.P. Trustee of Advent
Capital Partners, LLC disciplines of the firm and serves as a co- Claymore Convertible Securities
1668 S. Telegraph Suite 120 manager of the firm's hedge fund, Proper and Income Fund.
Bloomfield Hills, MI 48302 Associates, LLC from 2000-present. Formerly
Age: 52 Co-Chief Executive (1998-1999) and a Managing
Trustee Partner and Chief Investment Officer-Equities
of Munder Capital Management, LLC (1995-1999).
Former Vice President and Portfolio Manager of
Loomis, Sayles & Co., L.P. (asset manager)
(1984-1995). Former Vice President and
Portfolio Manager at First of America Bank
(1978-1984).
Ronald E. Toupin, Jr. Three Formerly Vice President, Manager and Portfolio Trustee, MBIA Capital/Claymore
117 Ashland Avenue years(1)(2) Manager of Nuveen Asset Management Managed Duration Investment Grade
River Forest, IL 60305 (1998-1999), Vice President of Nuveen Municipal Fund; Western
Age: 46 Investment Advisory Corporation (1992-1999), Asset/Claymore U.S. Treasury
Trustee Vice President and Manager of Nuveen Unit Inflation Protected Securities
Investment Trusts (1991-1999), and Assistant Fund; Western Asset/Claymore U.S.
Vice President and Portfolio Manager of Nuveen Treasury Inflation Protected
Unit Trusts (1988-1999), each of John Nuveen & Securities Fund 2; Dreman/Claymore
Company, Inc. (asset manager) (1982-1999). Dividend and Income Fund;
TS&W/Claymore Tax-Advantaged
Balanced Fund; and
Madison/Claymore Covered Call
Fund; Advent Claymore Convertible
Securities and Income Fund; and
Fiduciary/Claymore MLP
Opportunity Fund.
17
INTERESTED TRUSTEES
TERM OF
NAME, ADDRESS, AGE OFFICE AND PRINCIPAL OCCUPATION
AND POSITION(S) HELD LENGTH OF DURING THE PAST FIVE YEARS OTHER DIRECTORSHIPS
WITH REGISTRANT TIME SERVED AND OTHER AFFILIATIONS HELD BY TRUSTEE
------------------------------ --------------- ---------------------------------------------- ----------------------------------
Tracy V. Maitland Three President of Advent Capital Management, LLC, Trustee of Advent Claymore
1065 Avenue of the years(1)(2) which he founded in June, 2001. Prior to June, Convertible Securities and
Americas 31st Floor 2001, President of Advent Capital Management, Income Fund.
New York, NY 10018 a division of Utendahl Capital.
Age: 44
Trustee, Chairman, President
and Chief Executive Officer
Nicholas Dalmaso Three Senior Managing Director and General Counsel Trustee, MBIA Capital/Claymore
2455 Corporate years(1)(2) of Claymore Advisors, LLC and Claymore Managed Duration Investment Grade
West Drive Lisle, Securities, Inc. from 2001-present. Manager, Municipal Fund; Western
Illinois 60532 Claymore Fund Management Company, LLC. Asset/Claymore U.S. Treasury
Age: 39 Formerly, Assistant General Counsel, John Inflation Protected Securities
Trustee Nuveen and Company Inc. (asset manager) Fund; Western Asset/Claymore U.S.
(1999-2001). Former Vice President and Treasury Inflation Protected
Associate General Counsel of Van Kampen Securities Fund 2; Flaherty &
Investments, Inc. (1992-1999). Crumrine Claymore Preferred
Securities & Income Fund; Flaherty
& Crumrine/Claymore Total Return
Fund; Dreman/Claymore Dividend &
Income Fund; TS & W/Claymore
Tax-Advantaged Balanced Fund; and
Madison/Claymore Covered Call
Fund; Advent Claymore Convertible
Securities and Income Fund; and
Fiduciary/Claymore MLP Opportunity
Fund.
Michael A. Smart Three Managing Partner, Williams Capital Partners, Director, Country Pure Foods.
Williams Capital Partners, L.P. years(1)(2)(3) L.P., Advisor to First Atlantic Capital Ltd., Trustee of Advent Claymore
650 Fifth Avenue a private equity firm (2001-present). Formerly Convertible Securities and
New York, NY 10019 a Managing Director in Investment Banking-The Income Fund.
Age: 44 Private Equity Group (1995-2001) and a Vice
Trustee President in Investment Banking-Corporate
Finance (1992-1995) at Merrill Lynch & Co.
Founding Partner of The Carpediem Group, a
private placement firm (1991-1992). Former
associate at Dillon, Read and Co.
(investment bank) (1988-1990).
(1) After a trustee's initial term, each trustee is expected to serve a
three-year term concurrent with the class of trustees for which he serves:
-- Messrs. Smart and Nyberg, as Class I trustees, are expected to stand for
re-election at the Trust's 2005 annual meeting of shareholders.
-- Messrs. Maitland and Dalmaso, as Class II trustees, are expected to
stand for re-election at the Fund's 2006 annual meeting of shareholders.
-- Messrs. Seizert, Toupin and Medina, as Class III trustees, are expected
to stand for re-election at the Fund's 2007 annual meeting of
shareholders.
(2) Each trustee has served in such capacity since the Fund's inception.
(3) Mr. Smart will cease to be an Interested Trustee once Merrill Lynch is no
longer a principal underwriter of the Fund.
18
OFFICERS
PRINCIPAL OCCUPATION DURING THE PAST
NAME AND AGE TITLE FIVE YEARS AND OTHER AFFILIATIONS
------------------------------ ----------------------- ----------------------------------------------------------------
Heidemarie Gregoriev Assistant Secretary Vice President and Assistant General Counsel, Claymore Advisors,
Age: 32 LLC and Claymore Securities, Inc. (since 2004). Previously,
Legal Counsel for Henderson Global Investors (North America)
Inc. (2001-2004) and Assistant Secretary (2001-2004) and Chief
Legal Officer (2003-2004) for Henderson Global Funds; Associate,
Gardner, Carton & Douglas (1997-2001).
F. Barry Nelson Vice President Co-Portfolio Manager and Research Director at Advent Capital
Age: 61 Management, LLC from June, 2000 to present. Prior to June, 2000,
Mr. Nelson held the same position at Advent Capital Management,
a division of Utendahl Capital.
Bruce Berger Treasurer and Chief Advent Capital Management, LLC: Controller, 2004 - present;
Age: 32 Financial Officer Maple Securities: Controller, 2001-2004; Arthur Andersen:
Manager, 1998-2001.
Rodd Baxter Secretary and Chief Advent Capital Management, LLC: General Counsel--Legal, 2002 to
Age: 54 Compliance Officer present; SG Cowen Securities Corporation: Director and Senior
Counsel, 1998-2002; Cowen & Co: General Counsel of Cowen Asset
Management, 1992-1998.
Steven M. Hill Assistant Treasurer Managing Director of Claymore Advisors, LLC and Claymore
Age: 40 Securities, Inc., 2003 to present; Treasurer of Henderson Global
Funds and Operations Manager of Henderson Global Investors (NA)
Inc. (2002-2003); Managing Director, FrontPoint Partners LLC
(2001-2002); Vice President, Nuveen Investments (1999-2001);
Chief Financial Officer, Skyline Asset Management LP (1999);
Vice President, Van Kampen Investments and Assistant Treasurer,
Van Kampen mutual funds (1989-1999).
Prior to the initial public offering of the Fund's common shares, all of
the outstanding shares of the Fund were owned by Claymore Securities, Inc.
AGGREGATE DOLLAR RANGE OF
EQUITY SECURITIES IN ALL
REGISTERED INVESTMENT
COMPANIES OVERSEEN BY
DOLLAR RANGE OF EQUITY TRUSTEES IN THE
NAME OF BOARD MEMBER SECURITIES IN THE FUND(1) FAMILY COMPANIES(1)
-------------------- ------------------------- -------------------------
Michael A. Smart $ 0 $0
Ronald E. Toupin, Jr. $ 0 $0
Gerald L. Seizert $ 0 $10,001 - $50,000
Ronald Nyberg $ 0 $10,001 - $50,000
Derek Medina $ 0 $0
Tracy V. Maitland $ 0 Over $100,000
Nicholas Dalmaso $ 0 $0
(1) As of December 31, 2004.
Each Independent Trustee receives an annual fee of $12,000, plus $1,500 for
each meeting of the Board of Trustees or any committee thereof attended
in-person by such Independent Trustee. Each Independent Trustee receives $500
for each meeting of the Board of Trustees or any committee thereof attended via
telephone. Each trustee is entitled to reimbursement for all travel and
out-of-pocket expenses of such trustee incurred in connection with attending
each meeting of the Board of Trustees and any committee thereof. The fees and
expenses of the Independent Trustees of the Fund are paid by the Fund. Mr.
Toupin, as chairman of the Audit Committee, receives an additional $1,500 per
year for serving in such office. It is estimated that the Independent
19
Trustees will receive from the Fund the amounts set forth below for the Fund's
calendar year ending December 31, 2005, assuming the Fund had been in existence
for the entire calendar year preceding such date.
TOTAL COMPENSATION
FROM THE FUND AND FUND
AGGREGATE COMPENSATION COMPLEX PAID TO BOARD
NAME OF BOARD MEMBER FROM FUND MEMBER(1)
-------------------- ---------------------- -----------------------
Michael A. Smart $ 21,000(2) $ 42,000(2)
Ronald E. Toupin, Jr. $ 22,500(2) $ 45,000(2)
Gerald L. Seizert $ 21,000(2) $ 42,000(2)
Ronald Nyberg $ 18,000 $ 36,000
Derek Medina $ 21,000(2) $ 42,000(2)
(1) States the total compensation anticipated to be earned by such person
during the Fund's calendar year ending December 31, 2005 from the Fund and
Advent Claymore Convertible Securities and Income Fund, assuming the Fund
had been in existence for the entire calendar year preceding such date. As
of December 31, 2004, there were no other funds in the Fund Complex.
(2) Includes compensation for service on the Audit Committee.
The Board of Trustees of the Fund currently has two committees: an
Executive Committee and an Audit Committee.
The Executive Committee consists of Tracy V. Maitland and acts in
accordance with the powers permitted to such a committee under the Agreement and
Declaration of Trust and By-Laws of the Fund. The Executive Committee, subject
to the Fund's Agreement and Declaration of Trust, By-Laws and applicable law,
acts on behalf of the full Board of Trustees in the intervals between meetings
of the Board. As of December 31, 2004, the Executive Committee has not taken any
actions on behalf of the Fund.
The Audit Committee consists of Derek Medina, Ronald E. Toupin, Jr. and
Gerald L. Seizert. Michael A. Smart will become a member of the Audit Committee
once Merrill Lynch is no longer a principal underwriter of the Fund. The Audit
Committee acts according to the Audit Committee charter. The Audit Committee is
responsible for reviewing and evaluating issues related to the accounting and
financial reporting policies of the Fund, overseeing the quality and objectivity
of the Fund's financial statements and the audit thereof and to act as a liaison
between the Board of Trustees and the Fund's independent accountants. The Audit
Committee took certain actions on March 30, 2004, including, among other things,
recommending to the Independent Trustees that the independent auditors of the
Fund be approved as such. The Board of Trustees of the Fund has determined that
the Fund has two audit committee financial experts serving on its Audit
Committee, Mr. Toupin, Jr. and Mr. Seizert, both of whom are independent for the
purpose of the definition of audit committee financial expert as applicable to
the Fund.
No trustee who is not an interested person of the Fund owns beneficially or
of record any security of the Advisor or any person (other than a registered
investment company) directly or indirectly controlling, controlled by or under
common control with the Advisor.
PROXY VOTING POLICIES
The Board of Trustees of the Fund has delegated the voting of proxies for
Fund securities to the Investment Manager pursuant to the Investment Manager's
proxy voting guidelines. Under these guidelines, the Investment Manager will
vote proxies related to Fund securities in the best interests of the Fund and
its shareholders. A copy of the Investment Manager's proxy voting procedures are
attached as Appendix B to this Statement of Additional Information.
20
CODES OF ETHICS
The Fund and the Investment Manager have adopted a consolidated code of
ethics under Rule 17j-1 of the Investment Company Act. The Advisor has adopted a
code of ethics under Rule 17j-1 of the Investment Company Act, as has its
affiliate, Claymore Securities, Inc. These codes permit personnel subject to the
codes to invest in securities, including securities that may be purchased or
held by the Fund. These codes can be reviewed and copied at the Security and
Exchange Commission's Public Reference Room in Washington, D.C. Information on
the operation of the Public Reference Room may be obtained by calling the
Security and Exchange Commission at 1-202-942-8090. The consolidated code of
ethics is available on the EDGAR Database on the Security and Exchange
Commission's web site (http://www.sec.gov), and copies of these codes may be
obtained, after paying a duplicating fee, by electronic request at the following
e-mail address: publicinfo@sec.gov, or by writing the Security and Exchange
Commission's Public Reference Section, Washington, D.C. 20549-0102.
INVESTMENT ADVISOR
Claymore Advisors, LLC, a wholly-owned subsidiary of Claymore Group, LLC,
serves as the investment advisor to the Fund. The Advisor is located at 2455
Corporate West Drive, Lisle, Illinois 60532. Pursuant to the investment advisory
agreement between the Advisor and the Fund, the Advisor furnishes offices,
necessary facilities and equipment, provides administrative services to the
Fund, oversees the activities of the Fund's Investment Manager, provides
personnel and pays the compensation of all trustees of the Fund who are its
affiliates. Claymore Advisors, LLC has a limited history in advising registered
closed-end investment companies such as the Fund. Claymore Securities, Inc., an
affiliate of the Advisor, is an underwriter in the offering being made pursuant
to this prospectus and acts as servicing agent to various investment companies.
Claymore Securities, Inc. specializes in the creation, development and
distribution of investment solutions for investment advisors and their valued
clients.
INVESTMENT MANAGER
Advent Capital Management, LLC, located at 1065 Avenue of the Americas,
31st Floor, New York, New York 10018, acts as the Fund's Investment Manager.
Advent operates as a limited liability company and had approximately $3.8
billion in assets under management as of September 30, 2004. The Investment
Manager is majority owned and controlled by Tracy V. Maitland. Advent
specializes in managing convertible and high yield securities for institutional
and individual investors. Members of the investment team at Advent have
experience managing equity securities. Advent will be responsible for the
day-to-day management of the Fund, which includes the buying and selling of
securities for the Fund. Advent has limited experience serving as Investment
Manager to registered investment companies.
PORTFOLIO TRANSACTIONS AND BROKERAGE
Subject to the supervision of the Board of Trustees and the Advisor,
decisions to buy and sell securities for the Fund and brokerage commission rates
are made by the Investment Manager. Transactions on stock exchanges involve the
payment by the Fund of brokerage commissions. There is generally no stated
commission in the case of securities traded in the over-the counter market but
the price paid by the Fund usually includes an undisclosed dealer commission or
mark-up. In certain instances the Fund may make purchases of underwritten issues
at prices which include underwriting fees.
In selecting a broker to execute each particular transaction, the
Investment Manager will take the following into consideration: the best net
price available; the reliability, integrity and financial condition of the
broker; the size and difficulty in executing the order; and the value of the
expected contribution of the broker to the investment performance of the Fund on
a continuing basis. Accordingly, the cost of the brokerage commissions to the
Fund in any transaction may be greater than that available from other brokers if
the difference is reasonably justified by other aspects of the portfolio
execution services offered. Subject to such policies and procedures as the
trustees may determine, the Investment Manager shall not be deemed to have acted
unlawfully or to have breached any duty solely by reason of it having caused the
Fund to pay a broker that provides research services an
21
amount of commission for effecting a portfolio investment transaction in excess
of the amount of commission another broker would have charged from effecting
that transaction if the Investment Manager determines in good faith that such
amount of commission was reasonable in relation to the value of the research
service provided by such broker viewed in terms of either that particular
transaction or a series of transactions between such broker and the Fund or the
Investment Manager. Research and investment information may be provided by these
and other brokers at no cost to the Investment Manager and is available for the
benefit of other accounts advised by the Investment Manager and its affiliates,
and not all of the information will be used in connection with the Fund. While
this information may be useful in varying degrees and may tend to reduce the
Investment Manager's expenses, it is not possible to estimate its value and in
the opinion of the Investment Manager it does not reduce the Investment
Manager's expenses in a determinable amount. The extent to which the Investment
Manager makes use of statistical, research and other services furnished by
brokers is considered by the Investment Manager in the allocation of brokerage
business but there is not a formula by which such business is allocated. The
Investment Manager does so in accordance with its judgment of the best interests
of the Fund and its shareholders. The Investment Manager may also take into
account payments made by brokers effecting transactions for the Fund to other
persons on behalf of the Fund for services provided to it for which it would be
obligated to pay (such as custodial and professional fees). In addition,
consistent with the Conduct Rules of the National Association of Securities
Dealers, Inc., and subject to seeking best price and execution, the Investment
Manager may consider sales of shares of the Fund as a fact in the selection of
brokers and dealers to enter into portfolio transactions with the Fund.
One or more of the other funds which the Investment Manager manages may own
from time to time some of the same investments as the Fund. Investment decisions
for the Fund are made independently from those of such other investment
companies or accounts; however, from time to time, the same investment decision
may be made for more than one company or account. When two or more companies or
accounts seek to purchase or sell the same securities, the securities actually
purchased or sold will be allocated among the companies and accounts on a good
faith equitable basis by the Investment Manager in its discretion in accordance
with the accounts' various investment objectives. In some cases, this system may
adversely affect the price or size of the position obtainable for the Fund. In
other cases, however, the ability of the Fund to participate in volume
transactions may produce better execution for the Fund. It is the opinion of the
Fund's Board of Trustees that this advantage, when combined with the other
benefits available due to the Investment Manager's organization, outweighs any
disadvantages that may be said to exist from exposure to simultaneous
transactions.
DESCRIPTION OF SHARES
COMMON SHARES
The Fund's common shares are described in the prospectus. The Fund intends
to hold annual meetings of shareholders so long as the common shares are listed
on a national securities exchange and such meetings are required as a condition
to such listing.
PREFERRED SHARES
Although the terms of any preferred share issued by the Fund, including
their dividend rate, voting rights, liquidation preference and redemption
provisions, will be determined by the Board of Trustees (subject to applicable
law and the Fund's Agreement and Declaration of Trust) when it authorizes a
preferred shares offering, the Fund currently expects that the preference on
distributions, liquidation preference, voting rights and redemption provisions
of any such preferred shares will likely be as stated in the prospectus.
If the Board of Trustees determines to proceed with an offering of
preferred shares, the terms of the preferred shares may be the same as, or
different from, the terms described earlier in this statement, subject to
applicable law and the Fund's Agreement and Declaration of Trust. The Board of
Trustees, without the approval of the holders of common shares, may authorize an
offering of preferred shares or may determine not to authorize such an offering,
and may fix the terms of the preferred shares to be offered.
22
OTHER SHARES
The Board of Trustees (subject to applicable law and the Fund's Agreement
and Declaration of Trust) may authorize an offering, without the approval of the
holders of either common shares or preferred shares, of other classes of shares,
or other classes or series of shares, as they determine to be necessary,
desirable or appropriate, having such terms, rights, preferences, privileges,
limitations and restrictions as the Board of Trustees sees fit. The Fund
currently does not expect to issue any other classes of shares, or series of
shares, except for the common shares and the preferred shares.
REPURCHASE OF COMMON SHARES
The Fund is a closed-end management investment company and as such its
shareholders will not have the right to cause the Fund to redeem their shares.
Instead, the Fund's common shares will trade in the open market at a price that
will be a function of several factors, including dividend levels (which are in
turn affected by expenses), net asset value, call protection, dividend
stability, relative demand for and supply of such shares in the market, general
market and economic conditions and other factors. Because shares of a closed-end
investment company may frequently trade at prices lower than net asset value,
the Fund's Board of Trustees may consider action that might be taken to reduce
or eliminate any material discount from net asset value in respect of common
shares, which may include the repurchase of such shares in the open market or in
private transactions, the making of a tender offer for such shares or the
conversion of the Fund to an open-end investment company. The Board of Trustees
may decide not to take any of these actions. In addition, there can be no
assurance that share repurchases or tender offers, if undertaken, will reduce
market discount.
Notwithstanding the foregoing, at any time when the Fund's preferred shares
are outstanding, the Fund may not purchase, redeem or otherwise acquire any of
its common shares unless (1) all accrued preferred shares dividends have been
paid and (2) at the time of such purchase, redemption or acquisition, the net
asset value of the Fund's portfolio (determined after deducting the acquisition
price of the common shares) is at least 200% of the liquidation value of the
outstanding preferred shares (expected to equal the original purchase price per
share plus any accrued and unpaid dividends thereon). Any service fees incurred
in connection with any tender offer made by the Fund will be borne by the Fund
and will not reduce the stated consideration to be paid to tendering
shareholders.
Subject to its investment restrictions, the Fund may borrow to finance the
repurchase of shares or to make a tender offer. Interest on any borrowings to
finance share repurchase transactions or the accumulation of cash by the Fund in
anticipation of share repurchases or tenders will reduce the Fund's net income.
Any share repurchase, tender offer or borrowing that might be approved by the
Fund's Board of Trustees would have to comply with the Securities Exchange Act
of 1934, as amended, the Investment Company Act and the rules and regulations
thereunder.
Although the decision to take action in response to a discount from net
asset value will be made by the Board of Trustees at the time it considers such
issue, it is the board's present policy, which may be changed by the Board of
Trustees, not to authorize repurchases of common shares or a tender offer for
such shares if: (1) such transactions, if consummated, would (a) result in the
delisting of the common shares from the New York Stock Exchange, or (b) impair
the Fund's status as a regulated investment company under the Code, (which would
make the Fund a taxable entity, causing the Fund's income to be taxed at the
corporate level in addition to the taxation of shareholders who receive
dividends from the Fund) or as a registered closed-end investment company under
the Investment Company Act; (2) the Fund would not be able to liquidate
portfolio securities in an orderly manner and consistent with the Fund's
investment objectives and policies in order to repurchase shares; or (3) there
is, in the board's judgment, any (a) material legal action or proceeding
instituted or threatened challenging such transactions or otherwise materially
adversely affecting the Fund, (b) general suspension of or limitation on prices
for trading securities on the New York Stock Exchange, (c) declaration of a
banking moratorium by Federal or state authorities or any suspension of payment
by United States or New York banks, (d) material limitation affecting the Fund
or the issuers of its portfolio securities by Federal or state authorities on
the extension of credit by lending institutions or on the exchange of foreign
currency, (e) commencement of war, armed hostilities or
23
other international or national calamity directly or indirectly involving the
United States or (f) other event or condition which would have a material
adverse effect (including any adverse tax effect) on the Fund or its
shareholders if shares were repurchased. The Board of Trustees may in the future
modify these conditions in light of experience.
The repurchase by the Fund of its shares at prices below net asset value
will result in an increase in the net asset value of those shares that remain
outstanding. However, there can be no assurance that share repurchases or tender
offers at or below net asset value will result in the Fund's shares trading at a
price equal to their net asset value. Nevertheless, the fact that the Fund's
shares may be the subject of repurchase or tender offers from time to time, or
that the Fund may be converted to an open-end investment company, may reduce any
spread between market price and net asset value that might otherwise exist.
In addition, a purchase by the Fund of its common shares will decrease the
Fund's Managed Assets which would likely have the effect of increasing the
Fund's expense ratio. Any purchase by the Fund of its common shares at a time
when preferred shares are outstanding will increase the leverage applicable to
the outstanding common shares then remaining.
Before deciding whether to take any action if the common shares trade below
net asset value, the Fund's Board of Trustees would likely consider all relevant
factors, including the extent and duration of the discount, the liquidity of the
Fund's portfolio, the impact of any action that might be taken on the Fund or
its shareholders and market considerations. Based on these considerations, even
if the Fund's shares should trade at a discount, the Board of Trustees may
determine that, in the interest of the Fund and its shareholders, no action
should be taken.
TAX MATTERS
The following is a discussion of certain Federal income tax consequences to
a shareholder of acquiring, holding and disposing of common shares of the Fund.
The discussion reflects applicable tax laws of the United States as of the date
of this prospectus, which tax laws may be changed or subject to new
interpretations by the courts or the Internal Revenue Service (the "IRS")
retroactively or prospectively. No attempt is made to present a detailed
explanation of all Federal, state, local and foreign tax concerns affecting the
Fund and its shareholders (including shareholders owning a large position in the
Fund), and the discussion set forth herein does not constitute tax advice.
Investors are urged to consult their own tax advisers to determine the tax
consequences to them of investing in the Fund.
TAXATION OF THE FUND
The Fund intends to elect to be treated and intends to qualify each year to
be taxed as a regulated investment company under Subchapter M of the Internal
Revenue Code of 1986, as amended (the "Code"). In order to qualify as a
regulated investment company, the Fund must satisfy certain requirements
relating to the source of its income, diversification of its assets and
distributions of its income to its shareholders. First, the Fund must derive at
least 90% of its annual gross income from dividends, interest, payments with
respect to securities loans, gains from the sale or other disposition of stock
or securities or foreign currencies or other income (including but not limited
to gains from options, futures and forward contracts) derived with respect to
its business of investing in such stock, securities or currencies. Second, the
Fund must diversify its holdings so that, at the close of each quarter of its
taxable year, (i) at least 50% of the value of its total assets is comprised of
cash, cash items, United States government securities, securities of other
regulated investment companies and other securities, limited in respect of any
one issuer to an amount not greater in value than 5% of the value of the Fund's
total assets and to not more than 10% of the outstanding voting securities of
such issuer, and (ii) not more than 25% of the value of the total assets is
invested in the securities of any one issuer (other than United States
government securities and securities of other regulated investment companies) or
two or more issuers controlled by the Fund and engaged in the same, similar or
related trades or businesses. Income derived by the Fund from option premiums
and gains, if any, from closing transactions on options pursuant to the Fund's
"covered call option writing" strategy will be treated as qualifying income for
purposes of the 90% of gross income requirement described above.
24
As a regulated investment company, the Fund will not be subject to Federal
income tax on income and gains that it distributes each taxable year to its
shareholders, provided that in such taxable year it distributes at least 90% of
the sum of (i) its "investment company taxable income" (which includes, among
other items, dividends, taxable interest, taxable original issue discount and
market discount income, income from securities lending, net short-term capital
gain in excess of net long-term capital loss, and any other taxable income other
than "net capital gain" (as defined below) and is reduced by deductible
expenses) determined without regard to the deduction for dividends paid and (ii)
its net tax-exempt interest (the excess of its gross tax-exempt interest income
over certain disallowed deductions). The Fund may retain for investment its net
capital gain (which consists of the excess of its net long-term capital gain
over its net short-term capital loss). However, if the Fund retains any net
capital gain or any investment company taxable income, it will be subject to tax
at regular corporate rates on the amount retained. If the Fund retains any net
capital gain, it may designate the retained amount as undistributed capital gain
in a notice to its shareholders who, if subject to Federal income tax on
long-term capital gain, (i) will be required to include in income for Federal
income tax purposes, as long-term capital gain, their share of such
undistributed amount and (ii) will be entitled to credit their proportionate
shares of the tax paid by the Fund against their Federal income tax liabilities,
if any, and to claim refunds to the extent the credit exceeds such liabilities.
For Federal income tax purposes, the tax basis of shares owned by a shareholder
of the Fund will be increased by the amount of undistributed capital gain
included in the gross income of the shareholder less the tax deemed paid by the
shareholder under clause (ii) of the preceding sentence. The Fund intends to
distribute at least annually to its shareholders all or substantially all of its
investment company taxable income and net capital gain.
Although dividends generally will be treated as distributed when paid,
dividends declared in October, November or December, payable to shareholders of
record on a specified date in one of those months and paid during the following
January, will be treated as having been distributed by the Fund (and received by
the shareholder) on December 31.
The IRS has taken the position that if a regulated investment company has
two classes of stock, it may designate distributions made to each class in any
year as consisting of no more than such class's proportionate share of
particular types of income, such as long-term capital gain. A class's
proportionate share of a particular type of income is determined according to
the percentage of total dividends paid by the regulated investment company
during such year that was paid to such class. Consequently, the Fund will
designate distributions made to the common shareholders and preferred
shareholders as consisting of particular types of income in accordance with the
classes' proportionate shares of such income. Because of this rule, the Fund is
required to allocate a portion of its net capital gain, qualified dividend
income and dividends qualifying for the dividends received deduction, if any, to
common shareholders and preferred shareholders. The amount of net capital gain
and qualified dividend income and dividends qualifying for the dividends
received deduction allocable among common shareholders and the preferred
shareholders will depend upon the amount of such net capital gain and qualified
dividend income and dividends qualifying for the dividends received deduction
realized by the Fund and the total dividends paid by the Fund on shares of
common stock and the preferred shares during a taxable year.
In order to avoid a 4% Federal excise tax, the Fund must distribute or be
deemed to have distributed by December 31 of each calendar year the sum of at
least 98% of its taxable ordinary income for such year, at least 98% of its
capital gain net income (the excess of its realized capital gains over its
realized capital losses, generally computed on the basis of the one-year period
ending on October 31 of such year) and 100% of any taxable ordinary income and
capital gain net income for the prior year that was not distributed during such
year and on which the Fund paid no Federal income tax. For purposes of the
excise tax, a regulated investment company may reduce its capital gain net
income (but not below its net capital gain) by the amount of any net ordinary
loss for the calendar year. The Fund intends to make timely distributions in
compliance with these requirements and consequently it is anticipated that it
generally will not be required to pay the excise tax.
If in any tax year the Fund should fail to qualify under Subchapter M for
tax treatment as a regulated investment company, the Fund would incur a regular
corporate Federal income tax upon its taxable income for that year, and
distributions to its shareholders would be taxable to shareholders as ordinary
dividend income for
25
Federal income tax purposes to the extent of the Fund's earnings and profits. In
addition, the Fund may not immediately re-qualify as a regulated investment
company afforded special tax treatment.
FUND INVESTMENTS
Certain of the Fund's investment practices are subject to special
provisions of the Code that, among other things, may defer the use of certain
deductions or 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 regulated investment company 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 regulated investment company.
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. 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 with which to make required distributions to its shareholders.
Investments by the Fund in certain "passive foreign investment companies"
could subject the Fund to Federal income tax (including interest charges) on
certain distributions or dispositions with respect to those investments that
cannot be eliminated by making distributions to shareholders. Elections may be
available to the Fund to mitigate the effect of this provision, but an election
generally accelerates the recognition of income without the receipt of cash. In
addition, dividends from passive foreign investment companies do not qualify for
the reduced rate applicable to qualified dividend income.
The Fund may be subject to withholding and other foreign taxes with respect
to its foreign securities. The Fund does not expect to satisfy the requirements
to pass through to the shareholders their share of the foreign taxes paid by the
Fund. Similarly, although the Fund may invest in tax exempt securities, the Fund
does not expect to pass through tax exempt income to its shareholders.
TAXATION OF SHAREHOLDERS
Distributions by the Fund of investment company taxable income, whether
received in cash or additional shares, will be taxable to shareholders as
ordinary income (to the extent of the current or accumulated earning and profits
of the Fund). Such income if designated by the Fund, may qualify (provided
holding periods and other requirements are met) (i) for the dividends received
deduction in the case of corporate shareholders to the extent the Fund's income
consists of dividends received from U.S. corporations and (ii) under the Jobs
and Growth Tax Relief Reconciliation Act of 2003 (effective for taxable years
after December 31, 2002 through December 31, 2008) ("2003 Tax Act"), as
qualified dividend income eligible for the reduced maximum rate applicable to
individuals of generally 15% (5% for individuals in lower tax brackets) to the
extent that the Fund receives qualified dividend income. Qualified dividend
income is, in general, dividend income from taxable domestic corporations and
certain foreign corporations (e.g., generally, foreign corporations incorporated
in a possession of the United States or in certain countries with a qualified
comprehensive tax treaty with the United States, or the stock of which and with
respect to which such dividend is paid is readily tradable on an established
securities market in the United States). A qualified foreign corporation does
not include a foreign corporation which for the taxable year of the corporation
in which the dividend was paid, or the preceding taxable year, is a "foreign
personal holding company," a "foreign investment company," or a "passive foreign
investment company," as defined in the Code. If the Fund lends portfolio
securities, amounts received by the Fund that is the equivalent of the dividends
paid by the issuer on the securities loaned will not be eligible for qualified
dividend income treatment. The recently enacted Working Families Tax Relief Act
of 2004 clarifies that a shareholder of the Fund may include as part of
qualifying dividend income any dividends designated by the Fund as qualifying
dividend income. In order for the Fund to designate the amount as qualified
dividend income, the Fund's qualified dividend income must be less than 95
percent of its gross income, and the aggregate amount designated as qualified
dividends may not exceed the aggregate dividends received during the year by the
Fund. The recently
26
enacted Working Families Tax Relief Act of 2004 clarifies that if the Fund's
qualified dividend income is less than 95 percent of its gross income, a
shareholder of the Fund may only include as qualifying dividend income that
portion of the dividends that may be and are so designated by the Fund as
qualifying dividend income. Net long-term capital gain realized by the Fund
which is properly designated as capital gain dividends and distributed to
shareholders in cash or additional shares will be taxable to shareholders as
long-term capital gain regardless of the length of time investors have owned
shares of the Fund. Under the 2003 Tax Act, the maximum tax rate on net
long-term capital gain of individuals is reduced generally from 20% to 15% (5%
for individuals in lower brackets) for such gain realized on or after May 6,
2003 and before January 1, 2009. Distributions by the Fund in excess of the
Fund's current and accumulated earnings and profits will be treated as a return
of capital to the extent of (and in reduction of) the shareholder's tax basis in
his or her shares. Any excess will be treated as gain from the sale of his or
her shares, as discussed below.
The sale, redemption or other disposition of common shares generally will
result in capital gain or loss to shareholders who hold their shares as capital
assets. A redemption may result in ordinary income rather than capital gain if
the redemption does not result in a meaningful reduction in the shareholder's
proportionate interest in the Fund. Generally, a shareholder's gain or loss will
be long-term capital gain or loss if the shares have been held for more than one
year. Present law taxes both long-term and short-term capital gain of
corporations at the 35% rate. For non-corporate taxpayers, under the 2003 Tax
Act, long-term capital gain will generally be taxed at a maximum rate of 15%,
while short-term capital gain will be taxed at the maximum rate of 35%
applicable to ordinary income. Because of the limitations on itemized deductions
and the deduction for personal exemptions applicable to higher income taxpayers,
the effective tax rate may be higher in certain circumstances.
No loss will be allowed on sale or other disposition of common shares if
the shareholder acquires or enters into a contract or option to acquire shares
that are substantially identical to common shares of the Fund within a period of
61 days beginning 30 days before and ending 30 days after such sale or exchange.
If disallowed, the loss will be reflected in an adjustment to the basis of the
shares acquired. Further, any losses realized on the sale or other disposition
of shares held for six months or less will be treated as long-term capital
losses to the extent of any capital gain dividends received (or amounts credited
as undistributed capital gain) with respect to such shares.
Prior to purchasing shares in the Fund, an investor should carefully
consider the impact of dividends which are expected to be or have been declared,
but not paid. Any dividend declared shortly after a purchase of such shares
prior to the record date will have the effect of reducing the per share net
asset value by the per share amount of the dividend.
A shareholder that is a nonresident alien individual or a foreign
corporation (a "foreign investor") generally may be subject to U.S. withholding
tax at a rate of 30% (or possibly a lower rate provided by an applicable tax
treaty) on ordinary income dividends consisting of investment company taxable
income and short-term capital gain. Different tax consequences may result if the
foreign investor is engaged in a trade or business in the United States or, in
the case of an individual, is present in the United States for at least 31 days
during the taxable year and a significant number of days in the prior two years.
Distributions of net capital gain and any net capital gain retained by the
Fund which are designated as undistributed capital gains will not be subject to
U.S. withholding tax at the rate of 30% (or lower treaty rate) unless the
foreign investor is a nonresident alien individual and is physically present in
the United States for more than 182 days during the taxable year and meets other
requirements. In the case of a foreign investor who is a nonresident alien
individual, the Fund may be required to withhold Federal income tax on
distributions of net capital gain unless the foreign shareholder certifies his
or her non-U.S. status under penalties of perjury or otherwise establishes an
exemption. Any gain that a foreign investor realizes upon the sale, exchange or
other disposition of shares will ordinarily be exempt from Federal income tax
unless (i) the income from the Fund is "effectively connected" with a trade or
business within the United States carried on by the foreign investor, or (ii) in
the case of a foreign investor that is a nonresident alien individual, the gain
is U.S. source income and such shareholder is physically present in the United
States for more than 182 days during the taxable year and meets certain other
requirements.
27
The Fund is required to withhold tax on taxable dividends and certain other
payments paid to non-corporate shareholders who have not furnished to the Fund
their correct taxpayer identification number (in the case of individuals,
generally their Social Security number) and certain certifications, or who are
otherwise subject to backup withholding. Backup withholding is not an additional
tax and any amount withheld may be refunded or credited against the
shareholder's Federal income tax liability, provided the required information is
furnished to the IRS.
The recently enacted American Jobs Creation Act of 2004 (the "2004 Jobs
Act"), which was signed by President Bush on October 22, 2004, amends certain
rules relating to regulated investment companies. The 2004 Jobs Act modifies the
90 percent gross income test with respect to income of a regulated investment
company to include net income derived from an interest in certain qualified
"publicly traded partnerships" and modifies the asset diversification test of a
regulated investment company to include a new limitation on the investment by a
regulated investment company in certain qualified publicly traded partnership
interests. In addition, the 2004 Jobs Act provides that the separate treatment
for publicly traded partnerships under the passive loss rules of the Code
applies to a regulated investment company holding an interest in a qualified
publicly traded partnership, with respect to items attributable to such
interest.
The 2004 Jobs Act also provides that certain dividends designated by the
Fund as "interest-related dividends" that are received by most foreign investors
(generally those that would qualify for the portfolio interest exemptions of
Section 871(h) or Section 881(c) of the Code) in the Fund will be exempt from
U.S. withholding tax. Interest-related dividends are those dividends derived
from certain interest income (including bank deposit interest and short term
original issue discount that is currently exempt from the withholding tax)
earned by the Fund that would not be subject to U.S. tax if earned by a foreign
person directly. The 2004 Jobs Act further provides that certain dividends
designated by the Fund as "short-term capital gain dividends" that are received
by certain foreign investors (generally those not present in the United States
for 183 days or more) will be exempt from U.S. withholding tax. In general,
short-term capital gain dividends are those that are derived from the Fund's
short-term capital gains over net long-term capital losses. In addition, the
2004 Jobs Act provides that distributions of the Fund attributable to gains from
sales or exchanges of "U.S. real property interests," as defined in the Code and
Treasury regulations (including gains on the sale or exchange of shares in
certain U.S. real property holding corporations, which may include interests in
certain "real estate investment trusts" ("REITs") and certain REIT capital gain
dividends) will generally cause the foreign investor to be treated as
recognizing such gain as income effectively connected to a trade or business
within the United States, generally subject to tax at the same rates applicable
to U.S. shareholders. Also, such gain may be subject to a 30% branch profits tax
in the hands of a foreign investor that is a corporation. Such distributions may
be subject to U.S. withholding tax and may give rise to an obligation on the
part of the foreign investor to file a U.S. federal income tax return. These
provisions generally apply, with certain exceptions, to taxable years beginning
after December 31, 2004 and before January 1, 2008. Prospective investors are
urged to consult their tax advisors regarding the specific tax consequences to
them related to the 2004 Jobs Act.
The foregoing is a general and abbreviated summary of the provisions of the
Code and the Treasury Regulations presently in effect as they directly govern
the taxation of the Fund and its shareholders. For complete provisions,
reference should be made to the pertinent Code sections and Treasury
Regulations. The Code and the Treasury Regulations are subject to change by
legislative or administrative action, and any such change may be retroactive
with respect to Fund transactions. Holders of common shares are advised to
consult their own tax advisors for more detailed information concerning the
Federal income taxation of the Fund and the income tax consequences to its
holders of common shares. Holders of common shares are also advised to consult
their own tax advisors with regard to the tax consequences under the laws of
state, local, foreign or other taxing jurisdictions.
28
EXPERTS
The Statement of Net Assets of the Fund as of January 13, 2005 included
in this Statement of Additional Information has been so included in reliance
on the report of PricewaterhouseCoopers LLP, independent accountants, given
the authority of said firm as experts in auditing and accounting.
PricewaterhouseCoopers LLP, located at 300 Madison Avenue, New York, New York
10017, provides accounting and auditing services to the Fund.
ADDITIONAL INFORMATION
A registration statement on Form N-2, including amendments thereto,
relating to the shares offered hereby, has been filed by the Fund with the
Securities and Exchange Commission, Washington, D.C. The prospectus and this
Statement of Additional Information do not contain all of the information set
forth in the registration statement, including any exhibits and schedules
thereto. For further information with respect to the Fund and the shares offered
hereby, reference is made to the registration statement. Statements contained in
the prospectus and this Statement of Additional Information as to the contents
of any contract or other document referred to are not necessarily complete and
in each instance reference is made to the copy of such contract or other
document filed as an exhibit to the registration statement, each such statement
being qualified in all respects by such reference. A copy of the registration
statement may be inspected without charge at the Securities and Exchange
Commission's principal office in Washington, D.C., and copies of all or any part
thereof may be obtained from the Securities and Exchange Commission upon the
payment of certain fees prescribed by the Commission.
29
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholder and Board of Trustees of Advent/Claymore Enhanced Growth &
Income Fund
In our opinion, the accompanying statement of net assets presents fairly,
in all material respects, the financial position of Advent/Claymore Enhanced
Growth & Income Fund (the "Fund") at January 13, 2005, in conformity with
accounting principles generally accepted in the United States of America. This
financial statement is the responsibility of the Fund's management; our
responsibility is to express an opinion on this financial statement based on our
audit. We conducted our audit of this financial statement in accordance with the
standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statement is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statement, assessing the accounting
principles used and significant estimates made by management, and evaluating the
overall financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
PricewaterhouseCoopers LLP
New York, New York
January 18, 2005
F-1
FINANCIAL STATEMENTS
ADVENT/CLAYMORE ENHANCED GROWTH & INCOME FUND
STATEMENT OF NET ASSETS
JANUARY 13, 2005
ASSETS:
Cash $ 100,084
-----------
Total Assets 100,084
-----------
NET ASSETS $ 100,084
===========
COMPOSITION OF NET ASSETS:
Capital shares, at par value of $0.001 per share $ 5
Paid in Surplus 100,079
-----------
NET ASSETS $ 100,084
===========
COMMON SHARES:
Net asset value per share ($100,084 / 5,240 shares of beneficial interest issued and
outstanding) $ 19.100
===========
Public offering price per share $ 20.00
===========
SEE NOTES TO FINANCIAL STATEMENT
F-2
ADVENT/CLAYMORE ENHANCED GROWTH & INCOME FUND
NOTES TO FINANCIAL STATEMENT
JANUARY 13, 2005
NOTE 1--ORGANIZATION:
Advent/Claymore Enhanced Growth & Income Fund (the "Fund") was organized as
an unincorporated statutory trust organized under the laws of Delaware pursuant
to an Agreement and Declaration of Trust dated as of January 30, 2004, as
subsequently amended and restated to date. The Fund is registered as a
diversified, closed-end management investment company under the Investment
Company Act of 1940, as amended. The Fund has not had any operations to date
other than the sale of 5,240 common shares of beneficial interest to Claymore
Securities, Inc. for the amount of $100,084.
Offering expenses are estimated to be $900,000, assuming 22,500,000 shares
of beneficial interest are sold, which will be borne by the Fund. Included in
this estimate are payments to the underwriters of $0.00667 per common share
representing a partial reimbursement of expenses incurred in connection with
this offering. Claymore Advisors, LLC and Advent Capital Management, LLC, the
Fund's investment adviser and investment manager, respectively, have agreed to
pay offering expenses (other than sales load, but including the reimbursement of
expenses to the underwriters) in excess of $.04 per common share. Claymore
Advisors, LLC has also agreed to pay the Fund's organizational expenses. The
actual number of shares sold in the initial public offering and associated costs
may differ significantly from the above estimates.
NOTE 2--ACCOUNTING POLICIES:
The preparation of the financial statement in accordance with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts
and disclosures in the financial statement. Actual results could differ from
these estimates. In the normal course of business, the Fund enters into
contracts that contain a variety of representations which provide general
indemnifications. The Fund's maximum exposure under these arrangements is
unknown, as this would involve future claims that may be made against the Fund
that have not yet occurred. However, the Fund expects the risk of loss to be
remote.
NOTE 3--INVESTMENT ADVISORY AGREEMENT, INVESTMENT MANAGEMENT AGREEMENT AND OTHER
AGREEMENTS:
Pursuant to an Investment Advisory Agreement (the "Agreement") between
Claymore Advisors, LLC (the "Adviser") and the Fund, the Adviser furnishes
offices, necessary facilities and equipment, provides administrative services to
the Fund, oversees the activities of the Fund's Investment Manager, provides
personnel and pays the compensation of all trustees of the Fund who are its
affiliates. As compensation for these services, the Fund pays the Adviser an
annual fee, payable monthly in arrears, at an annual rate equal to 0.49% of the
average Managed Assets during such month. Managed Assets means the total of
assets of the Fund (including any assets attributable to any preferred shares or
otherwise attributable to the use of financial leverage, if any) less the sum of
accrued liabilities.
Pursuant to an Investment Management Agreement among the Adviser, the
Investment Manager and the Fund, the Fund has agreed to pay the Investment
Manager an annual fee, payable monthly in arrears, at an annual rate equal to
0.51% of the average Managed Assets during such month for the services and
facilities provided by the Investment Manager to the Fund. These services
include the day-to-day management of the Fund's portfolio of securities, which
includes buying and selling securities for the Fund and investment research. The
Investment Manager also provides personnel to the Fund and pays the compensation
of all trustees of the Fund who are its affiliates.
The Bank of New York ("BNY") acts as the Fund's custodian, administrator
and transfer agent. As custodian, BNY is responsible for the custody of the
Fund's assets. As administrator, BNY is responsible for maintaining the books
and records of the Fund's securities and cash. As transfer agent, BNY is
responsible for performing transfer agency services for the Fund.
F-3
NOTE 4--FEDERAL INCOME TAXES:
The Fund intends to comply with the requirements of the Internal Revenue
Code of 1986, as amended, applicable to regulated investment companies.
Accordingly, no provision for U.S. federal income taxes is required. In
addition, by distributing substantially all of its ordinary income and long-term
capital gains, if any, during each calendar year, the Fund intends not to be
subject to U.S. federal excise tax.
F-4
APPENDIX A
RATINGS OF INVESTMENTS
STANDARD & POOR'S CORPORATION
A brief description of the applicable Standard & Poor's Corporation ("S&P")
rating symbols and their meanings (as published by S&P) follows:
LONG-TERM DEBT
An S&P corporate or municipal debt rating is a current assessment of the
creditworthiness of an obligor with respect to a specific obligation. This
assessment may take into consideration obligors such as guarantors, insurers or
lessees.
The debt 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 by the issuer or
obtained by S&P 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, or based on other
circumstances.
The ratings are based, in varying degrees, on the following considerations:
1. Likelihood of default-capacity and willingness of the obligor as to the
timely payment of interest and repayment of principal in accordance with the
terms of the obligation;
2. Nature of and provisions of the obligation; and
3. Protection afforded by, and relative position of, the obligation in the event
of bankruptcy, reorganization, or other arrangement under the laws of bankruptcy
and other laws affecting creditors' rights.
INVESTMENT GRADE
AAA Debt rated "AAA" has the highest rating assigned by S&P. Capacity to
pay interest and repay principal is extremely strong.
AA Debt rated "AA" has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in small
degree.
A Debt rated "A" has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than debt
in higher rated categories.
BBB Debt rated "BBB" is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for debt in this category than in higher
rated categories.
SPECULATIVE GRADE RATING
Debt rated "BB", "B", "CCC", "CC" and "C" is 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 major uncertainties or major exposures
to adverse conditions.
BB Debt rated "BB" has 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
A-1
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 rated "B" has 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 rated "CCC" has a currently identifiable vulnerability to
default, and is dependent upon favorable business, financial, and
economic conditions to meet timely payment of interest and repayment
of principal. In the event of adverse business, financial, or
economic conditions, it is not likely to have the capacity to pay
interest and repay principal.
The "CCC" rating category is also used for debt subordinated to
senior debt that is assigned an actual or implied "B" or "B" rating.
CC The rating "CC" typically is applied to debt subordinated to senior
debt that is assigned an actual or implied "CCC" debt rating.
C The rating "C" typically is applied to debt subordinated to senior
debt 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.
CI The rating "CI" is reserved for income bonds on which no interest is
being paid.
D Debt rated "D" is in payment default. The "D" rating category is used
when interest payments or principal payments are not made on the date
due even if the applicable grace period has not expired, unless S&P
believes that such payments will be made during such grace period.
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.
Provisional Ratings: The letter "p" indicates that the rating is
provisional. A provisional rating assumes the successful completion of the
project 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 judgment with respect to such likelihood and risk.
R The letter "r" is attached to highlight derivative, hybrid, and
certain other obligations that S&P believes may experience high
volatility or high variability in expected returns due to non-credit
risks. Examples of such obligations are: securities who's principal or
interest return is indexed to equities, commodities, or currencies;
certain swaps and options; and interest only and principal only
mortgage securities. The absence of an "r" symbol should not be taken
as an indication that an obligation will exhibit no volatility or
variability in total return.
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 Federally insured by the Federal Savings & Loan
Insurance Corporation or the Federal Deposit Insurance Corporation*
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
----------
* Continuance of the rating is contingent upon S&P's receipt of an executed
copy of the escrow agreement or closing documentation confirming
investments and cash flow.
A-2
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 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
An S&P 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-1" for the
highest quality obligations to "D" for the lowest. These categories are as
follows:
A-1 This highest category indicates that the degree of safety regarding
timely payment is strong. Those issues determined to possess extremely
strong safety characteristics are denoted with a plus sign (+)
designation.
A-2 Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as
for issues designated "A-1."
A-3 Issues carrying this designation have adequate capacity for timely
payment. They are, however, somewhat more vulnerable to the adverse
effects of changes in circumstances than obligations carrying the
higher designations.
B Issues rated "B" are regarded as having only speculative capacity for
timely payment.
C This rating is as signed to short-term debt obligations with a doubtful
capacity for payment.
D Debt rated "D" is in payment default. The "D" rating category is used
when interest payments or principal Payments are not made on the date
due, even if the applicable grace period has not expired, unless S&P
believes that such payments will be made during such grace period.
A commercial 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 by S&P 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 or based on other circumstances.
MOODY'S INVESTORS SERVICE, INC.
A brief description of the applicable Moody's Investors Service, Inc.
("Moody's") rating symbols and their meanings (as published by Moody's) follows:
LONG-TERM DEBT
The following summarizes the ratings used by Moody's for corporate and
municipal long-term debt:
Aaa Bonds 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 issuer.
Aa Bonds 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 risks
appear somewhat larger than in "Aaa" securities.
A-3
A Bonds 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 considered medium-grade obligations, i.e., they are neither
highly protected nor poorly secured. Interest payments and principal
security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over
any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
Ba, B, Caa, Ca, and C
Bonds that possess one of these ratings provide questionable
protection of interest and principal ("Ba" indicates some speculative
elements; "B" indicates a general lack of characteristics of
desirable investment; "Caa" represents a poor standing; "Ca"
represents obligations which are speculative in a high degree; and
"C" represents the lowest rated class of bonds). "Caa," "Ca" and "C"
bonds may be in default.
Con. (--) - Bonds for which the security depends upon the completion of
some act or the fulfillment of some condition are rated conditionally. These are
bonds secured by (a) earnings of projects under construction, (b) earnings of
projects unseasoned in operation experience, (c) rentals which begin when
facilities are completed, or (d) payments to which some other limiting condition
attaches. Parenthetical rating denotes probable credit stature upon completion
of construction or elimination of basis of condition.
(P) - When applied to forward delivery bonds, indicates that the rating is
provisional pending delivery of the bonds. The rating may be revised prior to
delivery if changes occur in the legal documents or the underlying credit
quality of the bonds.
Note: Those bonds in the Aa, A, Baa, Ba and B groups which Moody's believes
possess the strongest investment attributes are designated by the symbols, Aa1,
A1, Ba1 and B1.
SHORT-TERM LOANS
MIG 1/VMIG 1 This designation denotes best quality. There is
present strong protection by established cash flows, superior
liquidity support or demonstrated broad-based access to the
market for refinancing.
MIG 2/VMIG 2 This designation denotes high quality. Margins of protection
are ample although not so large as in the preceding group.
MIG 3/VMIG 3 This designation denotes favorable quality. All security elements
are accounted for but there is lacking the undeniable strength of
the preceding grades. Liquidity and cash flow protection may be
narrow and market access for refinancing is likely to be less
well-established.
MIG 4/VMIG 4 This designation denotes adequate quality. Protection commonly
regarded as required of an investment security is present and
although not distinctly or predominantly speculative, there is
specific risk.
S.G. This designation denotes speculative quality. Debt instruments
in this category lack margins of protection.
A-4
COMMERCIAL PAPER
Issuers rated Prime-1 (or related supporting institutions) have a superior
capacity for repayment of short-term promissory obligations. Prime-1 repayment
capacity will normally be evidenced by the following characteristics:
--Leading market positions in well-established industries.
--High rates of return on funds employed.
--Conservative capitalization structures with moderate reliance on debt and
ample asset protection.
--Broad margins in earnings coverage of fixed financial charges and high
internal cash generation.
--Well-established access to a range of financial markets and assured sources of
alternate liquidity.
Issuers rated Prime-2 (or related supporting institutions) have a strong
capacity for repayment of short-term promissory 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, will be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
Issuers rated Prime-3 (or related supporting institutions) have an
acceptable capacity for repayment of short-term promissory obligations. The
effect of industry characteristics and market composition may be more
pronounced. Variability in earnings and profitability may result in changes in
the level of debt protection measurements and the requirement for relatively
high financial leverage. Adequate alternate liquidity is maintained.
Issuers rated Not Prime do not fall within any of the Prime rating
categories.
FITCH IBCA, INC.
A brief description of the applicable Fitch IBCA, Inc. ("Fitch") ratings
symbols and meanings (as published by Fitch) follows:
LONG-TERM CREDIT RATINGS
INVESTMENT GRADE
AAA Highest credit quality. "AAA" ratings denote the lowest expectation
of credit risk. They are assigned only in case of exception ally
strong capacity for timely payment of financial commitments. This
capacity is highly unlikely to be adversely affected by foreseeable
events.
AA Very high credit quality. "AA" ratings denote a very low expectation
of credit risk. They indicate very strong capacity for timely payment
of financial commitments. This capacity is not significantly
vulnerable to foreseeable events.
A High credit quality. "A" ratings denote a low expectation of credit
risk. The capacity for timely payment of financial commitments is
considered strong. This capacity may, nevertheless, be more vulnerable
to changes in circumstances or in economic conditions than is the case
for higher ratings.
BBB Good credit quality. "BBB" ratings indicate that there is currently a
low expectation of credit risk. The capacity for timely payment of
financial commitments is considered adequate, but adverse changes in
circumstances and in economic conditions are more likely to impair
this capacity. This is the lowest investment-grade category.
SPECULATIVE GRADE
BB Speculative. "BB" ratings indicate that there is a possibility of
credit risk developing, particularly as the result of adverse economic
change over time; however, business or financial alternatives may be
available to allow financial commitments to be met. Securities rated
in this category are not investment grade.
B Highly speculative. "B" ratings indicate that significant credit risk
is present, but a limited margin of safety remains. Financial
commitments are currently being met; however, capacity for continued
payment is contingent upon a sustained, favorable business and
economic environment.
A-5
CCC,
CC, C High default risk. Default is a real possibility. Capacity for
meeting financial commitments is solely reliant upon sustained,
favorable business or economic developments. A "CC" rating indicates
that default of some kind appears probable. "C" ratings signal
imminent default.
DDD,
DD,
and D Default. The ratings of obligations in this category are based on
their prospects for achieving partial or full recovery in a
reorganization or liquidation of the obligor. While expected recovery
values are highly speculative and cannot be estimated with any
precision, the following serve as general guidelines. "DDD"
obligations have the highest potential for recovery, around 90%-100%
of outstanding amounts and accrued interest. "DD" indicates potential
recoveries in the range of 50%-90%, and "D" the lowest recovery
potential, i.e., below 50%.
Entities rated in this category have defaulted on some or all of their
obligations. Entities rated "DDD" have the highest prospect for
resumption of performance or continued operation with or without a
formal reorganization process. Entities rated "DD" and "D" are
generally undergoing a formal reorganization or liquidation process;
those rated "DD" are likely to satisfy a higher portion of their
outstanding obligations, while entities rated "D" have a poor prospect
for repaying all obligations.
SHORT-TERM CREDIT RATINGS
A short-term rating has a time horizon of less than 12 months for most
obligations, or up to three years for U.S. public finance securities, and thus
places greater emphasis on the liquidity necessary to meet financial commitments
in a timely manner.
F1 Highest credit quality. Indicates the strongest capacity for timely
payment of financial commitments; may have an added "+" to denote any
exceptionally strong credit feature.
F2 Good credit quality. A satisfactory capacity for timely payment of
financial commitments, but the margin of safety is not as great as in
the case of the higher ratings.
F3 Fair credit quality. The capacity for timely payment of financial
commitments is adequate; however, near-term adverse changes could
result in a reduction to non-investment grade.
B Speculative. Minimal capacity for timely payment of financial
commitments, plus vulnerability to near-term adverse changes in
financial and economic conditions.
C High default risk. Default is a real possibility. Capacity for
meeting financial commitments is solely reliant upon a sustained,
favorable business and economic environment.
D Default. Denotes actual or imminent payment default.
NOTES:
"+" or "-" may be appended to a rating to denote relative status within major
rating categories. Such suffixes are not added to the "AAA" long-term
rating category, to categories below "CCC," or to short-term ratings other
than "F1."
`NR' indicates that Fitch does not rate the issuer or issue in question.
`Withdrawn': A rating is withdrawn when Fitch deems the amount of information
available to be inadequate for rating purposes, or when an obligation
matures, is called, or refinanced.
Rating alert: Ratings are placed on Rating alert to notify investors that there
is a reasonable probability of a rating change and the likely direction of
such change. These are designated as "Positive," indicating a potential
upgrade, "Negative," for a potential downgrade, or "Evolving," if ratings
may be raised, lowered or maintained. Rating alert is typically resolved
over a relatively short period.
A-6
APPENDIX B
PROXY VOTING POLICY AND PROCEDURES
I. POLICY STATEMENT
INTRODUCTION--Advent Capital Management, LLC (the "Investment Manager") is
adopting these proxy voting policies and procedures (the "Policies and
Procedures") in order to comply with Rule 206(4)-6 under the Investment Advisers
Act of 1940, as amended and its associated recordkeeping requirements.
The Policies and Procedures apply to those client accounts (i) that contain
voting securities; and (ii) for which the Investment Manager has authority to
vote client proxies. The Policies and Procedures will be reviewed and, as
necessary, updated periodically to address new or revised proxy voting issues.
Other, similar rights such as consent rights shall be evaluated on a case by
case basis.
Pursuant to the Policies and Procedures and its fiduciary duties, the Investment
Manager will vote client proxies as part of its authority to manage, acquire and
dispose of account assets. When voting proxies for client accounts, the
Investment Manager's primary objective is to make voting decisions solely in the
best interests of clients and beneficiaries and participants of benefits plans
for which we manage assets. In fulfilling its obligations to clients, the
Investment Manager will act in a manner deemed to be prudent and diligent and
which is intended to enhance the economic value of the underlying securities
held in client accounts. In certain situations, a client or its fiduciary may
provide the Investment Manager with a statement of proxy voting policy. In these
situations, the Investment Manager seeks to comply with such policy to the
extent it would not be inconsistent with applicable regulation or the fiduciary
responsibility of the Investment Manager.
DUTY TO VOTE PROXIES--The Investment Manager acknowledges that it is part of its
fiduciary duty to its clients to vote client proxies, except in cases in which
the cost of doing so, in the opinion of the Investment Manager, would exceed the
expected benefits to the client. This may be particularly true in the case of
non-U.S. securities. While the proxy voting process is well established in the
United States and other developed markets with a number of tools and services
available to assist an investment manager, voting proxies of non-US companies
located in certain jurisdictions, particularly emerging markets, may involve a
number of logistical problems that may have a detrimental effect on the
Investment Manager's ability to vote such proxies. The logistical problems
include, but are not limited to: (i) proxy statements and ballots being written
in a language other than English, (ii) untimely and/or inadequate notice of
shareholder meetings, (iii) restrictions on the ability of holders outside the
issuer's jurisdiction of organization to exercise votes, (iv) requirements to
vote proxies in person, (v) the imposition of restrictions on the sale of the
securities for a period of time in proximity to the shareholder meeting, and
(vi) requirements to provide local agents with power of attorney to facilitate
the Investment Manager's voting instructions. Accordingly, the Investment
Manager may conduct a cost-benefit analysis in determining whether to attempt to
vote its clients' shares at a non-US company's meeting, whereby if it is
determined that the cost associated with the attempt to exercise its vote
outweighs the benefit the Investment Manager believes its clients will derive by
voting on the company's proposal, the Investment Manager may decide not to
attempt to vote at the meeting.
MATERIAL CONFLICTS--The Investment Manager will vote its clients' proxies in the
best interests of its clients and not its own. In voting client proxies, the
Investment Manager will avoid material conflicts of interests between the
interests of the Investment Manager and its affiliates on the one hand and the
interests of its clients on the other. The Investment Manager recognizes that it
may have a material conflict of interest in voting a client proxy where (i) it
manages assets, administers employee benefit plans, or provides brokerage,
underwriting or insurance to companies whose management is soliciting proxies;
(ii) it manages money for an employee group that is the proponent of a proxy
proposal; (iii) has a personal relationship with participants in a proxy
solicitation or a director or candidate for director; or (iv) it otherwise has a
personal interest in the outcome in a particular matter before shareholders.
Notwithstanding the above categories, the Investment Manager understands that
the determination of whether a "material conflict" exists depends on all of the
facts and circumstances of the particular situation. The Investment Manager
acknowledges the existence of a relationship of the type discussed above, even
in the absence of any active efforts to solicit the investment adviser with
respect to a proxy vote, is sufficient for a material conflict to exist.
B-1
II. GENERAL PROXY VOTING GUIDELINES
It is the policy of the Investment Manager in voting proxies to consider and
vote each proposal with the objective of maximizing long-term investment returns
for its clients. To ensure consistency in voting proxies on behalf of its
clients, the Investment Manager utilizes the proxy voting guidelines (the "Proxy
Voting Guidelines") set forth below. These guidelines address a broad range of
issues, including board size and composition, executive compensation,
anti-takeover proposals, capital structure proposals and social responsibility
issues
A. MANAGEMENT PROPOSALS:
1. The following management sponsored proposals are often voted in support
of management.
/X/ / / / / Selection or ratification of auditors
FOR AGAINST CASE BY
CASE
/X/ / / / / Approval of financial statements, director and auditor reports
FOR AGAINST CASE BY
CASE
/X/ / / / / Election of Directors
FOR AGAINST CASE BY
CASE
/X/ / / / / Limiting Directors' liability and broadening indemnification of Directors
FOR AGAINST CASE BY
CASE
/X/ / / / / Requirement that a certain percentage (up to 66 2/3%) of its Board's members be
FOR AGAINST CASE BY comprised of independent and unaffiliated Directors
CASE
/X/ / / / / Requirement that members of the company's compensation, nominating and audit
FOR AGAINST CASE BY committees be comprised of independent or unaffiliated Directors
CASE
/X/ / / / / Recommendations to set retirement ages or require specific levels of stock
FOR AGAINST CASE BY ownership by Directors
CASE
/X/ / / / / General updating/corrective amendments to the charter
FOR AGAINST CASE BY
CASE
/X/ / / / / Elimination of cumulative voting
FOR AGAINST CASE BY
CASE
/X/ / / / / Elimination of preemptive rights
FOR AGAINST CASE BY
CASE
/X/ / / / / Provisions for confidential voting and independent tabulation of voting results
FOR AGAINST CASE BY
CASE
/X/ / / / / Proposals related to the conduct of the annual meeting except those proposals which
FOR AGAINST CASE BY relate to the "transaction of such other business which may come before the meeting"
CASE
B-2
/X/ / / / / Capitalization changes which eliminate other classes of stock and voting rights
FOR AGAINST CASE BY
CASE
/X/ / / / / Proposals to increase the authorization of existing classes of stock if: (i) a clear and
FOR AGAINST CASE BY legitimate business purpose is stated; (ii) the number of shares requested is reasonable in
CASE relation to the purpose for which authorization is requested; and (iii) the authorization
does not exceed 10% of shares currently authorized and at least 10% of the new authorization
will be outstanding
/X/ / / / / Proposals to create a new class of preferred stock or for issuances of preferred stock up to
FOR AGAINST CASE BY 10% of issued capital unless the terms of the preferred stock would adversely affect the
CASE rights of existing shareholders
/X/ / / / / Proposals for share repurchase plans, unless it appears that a repurchase plan lacks a bona
FOR AGAINST CASE BY fide business purpose
CASE
/X/ / / / / Proposals to reduce the number of authorized shares of common or preferred stock, or to
FOR AGAINST CASE BY eliminate classes of preferred stock, provided such proposals have a legitimate business
CASE purpose
/X/ / / / / Proposals to effect stock splits unless such a split would be contrary to shareholders' best
FOR AGAINST CASE BY interests
CASE
/X/ / / / / Proposals to effect reverse stock splits if management proportionately reduces the
FOR AGAINST CASE BY authorized share amount set forth in the corporate charter. Reverse stock splits that do not
CASE adjust proportionately to the authorized share amount will generally be approved if the
resulting increase in authorized shares coincides with the proxy guidelines set forth above
for common stock increases
/X/ / / / / Director fees unless the amounts are excessive relative to other companies in the country or
FOR AGAINST CASE BY industry
CASE
/X/ / / / / Employee stock purchase plans that permit discounts up to 15%, but only for grants that are
FOR AGAINST CASE BY part of a broad based employee plan, including all non-executive employees
CASE
/X/ / / / / Establishment of Employee Stock Option Plans and other employee ownership plans
FOR AGAINST CASE BY
CASE
/X/ / / / / Modify or rescind existing supermajority vote requirements to amend the charters or bylaws.
FOR AGAINST CASE BY
CASE
/X/ / / / / Adoption of anti-greenmail provisions provided that the proposal (a) defines greenmail, (b)
FOR AGAINST CASE BY prohibits buyback offers to large block holders not made to all shareholders or not approved
CASE by disinterested shareholders, and (c) contains no anti-takeover measures or other
provisions restricting the rights of shareholders.
2. The following proposals are often voted against, notwithstanding
management support:
/X/ / / / / Capitalization changes which add classes of stock which substantially dilute the voting
FOR AGAINST CASE BY interests of existing shareholders
CASE
B-3
/ / /X/ / / Proposals to increase the authorized number of shares of existing classes of
FOR AGAINST CASE BY stock which carry preemptive rights or super voting rights
CASE
/ / /X/ / / Creation of blank check preferred stock
FOR AGAINST CASE BY
CASE
/ / /X/ / / Changes in capitalization by 5% or more where management does not offer an
FOR AGAINST CASE BY appropriate rationale or where it is contrary to the best interests of existing
CASE shareholders
/ / /X/ / / Compensation proposals that allow for discounted stock options which have not
FOR AGAINST CASE BY been offered to employees in general
CASE
/ / /X/ / / Change-in-control provisions in non-salary compensation plans, employment
FOR AGAINST CASE BY contracts, and severance agreements that benefit management and would be costly
CASE to shareholders if triggered
/ / /X/ / / Shareholders rights plans which allow appropriate offers to shareholders to be
FOR AGAINST CASE BY blocked by the board or trigger provisions which prevent legitimate offers from
CASE proceeding
/ / /X/ / / Amendments to bylaws that would require a supermajority shareholder vote to
FOR AGAINST CASE BY pass or repeal certain provisions
CASE
/ / /X/ / / Proposals to indemnify auditors
FOR AGAINST CASE BY
CASE
3. The following types of proposals are often voted on a case-by-case
basis:
/ / / / /X/ Mergers, acquisitions and other special corporate transactions (i.e.,
FOR AGAINST CASE BY takeovers, spin-offs, sales of assets, reorganizations, restructurings and
CASE recapitalizations) will be examined on a case-by-case basis
/ / / / /X/ Executive/Director stock option plans. Generally, the stock option plans should
FOR AGAINST CASE BY meet the following criteria: (i) Whether the stock option plan is incentive
CASE based; (ii) For mature companies, should be no more than 5% of the issued
capital at the time of approval; and (iii) For growth companies, should be no
more than 10% of the issued capital at the time of approval
/ / / / /X/ Proposals requiring shareholder ratification of poison pills
FOR AGAINST CASE BY
CASE
B. SHAREHOLDER PROPOSALS:
1. The following shareholder proposals are often supported:
/X/ / / / / Requiring Auditors to attend the annual meeting of shareholders
FOR AGAINST CASE BY
CASE
B-4
/X/ / / / / Requirement that members of the company's compensation, nominating and audit
FOR AGAINST CASE BY committees be comprised of independent or unaffiliated Directors
CASE
2. The following shareholder proposals are often determined on a
case-by-case basis:
/ / / / /X/ Proposals which limit tenure of directors
FOR AGAINST CASE BY
CASE
/ / / / /X/ Proposals to limit golden parachutes
FOR AGAINST CASE BY
CASE
/ / / / /X/ Proposals requiring directors to own large amounts of stock to be eligible for
FOR AGAINST CASE BY election
/ / / / /X/ Restoring cumulative voting in the election of directors
FOR AGAINST CASE BY
CASE
/ / / / /X/ Requirement that a certain percentage of its Board's members be comprised of
FOR AGAINST CASE BY independent and unaffiliated Directors
CASE
/ / / / /X/ Proposals which request or require disclosure of executive compensation in
FOR AGAINST CASE BY addition to the disclosure required by the Securities and Exchange Commission
CASE ("SEC") regulations.
/ / / / /X/ Proposals which limit retirement benefits or executive compensation
FOR AGAINST CASE BY
CASE
/ / / / /X/ Requiring shareholder approval for Bylaw or charter amendments
FOR AGAINST CASE BY
CASE
/ / / / /X/ Requiring shareholder approval for shareholder rights plan or poison pill
FOR AGAINST CASE BY
CASE
/ / / / /X/ Requiring shareholder approval of golden parachutes
FOR AGAINST CASE BY
CASE
/ / / / /X/ Confidential voting
FOR AGAINST CASE BY
CASE
/ / / / /X/ Elimination of certain anti-takeover related provisions
FOR AGAINST CASE BY
CASE
/ / / / /X/ Reduction or elimination of supermajority vote requirements
FOR AGAINST CASE BY
CASE
/ / / / /X/ Prohibit payment of greenmail
FOR AGAINST CASE BY
CASE
B-5
3. The following shareholder proposals are often not supported:
/ / /X/ / / Requirements that the issuer prepare reports which are costly to provide or which would
FOR AGAINST CASE BY require duplicative efforts or expenditures which are of a nonbusiness nature or would provide
CASE no pertinent information from the perspective of institutional shareholders
/ / /X/ / / Restrictions related to social, political or special interest issues that impact the ability
FOR AGAINST CASE BY of the company to do business or be competitive and which have a significant financial or best
CASE interest impact to the shareholders
/ / /X/ / / Proposals which require inappropriate endorsements or corporate actions.
FOR AGAINST CASE BY
CASE
III. ADMINISTRATION OF PROXY POLICIES AND PROCEDURES
A. PROXY REVIEW COMMITTEE
The Investment Manager's Proxy Review Committee (the "Committee") is responsible
for creating and implementing the Policies and Procedures and, in that regard,
has adopted the general principles and guidelines set forth above in Sections I
and II. Among other things, the Committee is responsible for the following:
1. The Committee, consisting of members designated by the Chief Executive
Officer, shall establish and review these Policies and Procedures and
determine how the Investment Manager will vote proxies on an ongoing
basis.
2. The Committee shall have the authority to amend and change the
Policies and Procedures and designate voting positions consistent with
the objective of maximizing long-term investment returns for the
Investment Manager's clients.
3. The Committee shall meet as needed to oversee and address all
questions relating to the Investment Manager's Policies and
Procedures, including: (1) general review of proposals being put forth
at shareholder meetings of portfolio companies; (2) adopting changes
in the Policies and Procedures; (3) determining whether voting on
matters in the manner favored by the Investment Manager are "material"
conflicts of interests within the meaning of Rule 206(4)-6 under the
Investment Advisers Act of 1940, as amended; (4) determining how to
vote matters for which specific direction has not been provided the
Proxy Voting Guidelines (i.e. "case by case" matters) or are otherwise
not covered by the Proxy Voting Guidelines (collectively,
"Discretionary Proposals"); (5) determining whether to override the
Proxy Voting Guidelines with respect to any proxy vote; and (6)
designating a compliance officer (the "Compliance Officer") to
implement the Operating Procedures set forth in Part B of this Section
III.
4. The Committee will periodically review the Proxy Voting Guidelines to
determine if they are current and consistent with the Investment
Manager's policy and will make appropriate changes as needed.
B. OPERATING PROCEDURES
The following operating procedures are intended to ensure that the Investment
Manager satisfies its proxy voting obligations:
1. The Compliance Officer will review all new client accounts to
determine whether (i) the account contains voting securities and (ii)
the client has delegated proxy voting authorization to the Investment
Manager in the investment advisory agreement or (iii) the client has
otherwise provided specific voting instructions. Any questions
regarding whether or not a security is a "voting" security or whether
voting authority has been delegated by a client will be directed to
the General Counsel of the Investment Manager.
2. The Compliance Officer will receive proxy materials and ballots and
reconcile these materials with holdings in client accounts at least
once monthly.
B-6
3. The Compliance Officer will compile and review the matters to be voted
on, at least once monthly, and determine: (i) which matters are to be
voted in accordance with the Proxy Voting Guidelines (a
"Pre-Determined Matter"); and (ii) which matters are Discretionary
Matters and (iii) which matters are to be voted pursuant to the
instructions of clients (a "Directed Matter"). Any questions regarding
whether a matter is a Pre-Determined Matter, a Discretionary Matter or
a Directed Matter will be directed to the General Counsel of the
Investment Manager.
4. For all Discretionary Matters, the Compliance Officer shall screen the
matter and make a preliminary determination regarding whether the
matter presents a potential material conflict of interest between the
interests of the Investment Manager and its affiliates on the one hand
and the Investment Manager's client on the other.
In order to determine whether a Discretionary Matter poses a potential
material conflict of interest, the Compliance Officer shall compile
and maintain a list of the following as applicable:
(a) all issuers for which the Investment Manager or its affiliates
manages assets;
(b) all issuers for which the Investment Manager or its affiliates
administers employee benefit plans;
(c) all issuers for which the Investment Manager or its affiliates
brokerage, underwriting or insurance;
(d) any issuer for which the Investment Manager or its affiliates is
soliciting the provision of services enumerated in (a), (b) and
(c);
(e) any other issuer with which the Investment Manager or its
affiliates or its senior officers has a material business
relationship; and
(f) any employee group for which the Investment Manager manages
money;
This list, which the Compliance Officer shall update at least
quarterly, shall be known as the "Master Conflicts List."
The Compliance Officer shall screen the issuer, employee group or any
other material related party ("Material Parties") involved in the
Discretionary Matter against the Master Conflicts List and develop a
list of potential conflicts ("Potential Conflicts List").
5. For each Discretionary Matter, the Compliance Officer shall solicit
written reports from portfolio managers, investment personnel,
analysts and other employees of the Investment Manager who may have an
investment or other professional interest in the Discretionary Matter.
The Compliance Officer shall compile these reports in an "Advisory
Report."
6. The Compliance Officer shall present each meeting of the Committee
with: (i) a list of all Pre-Determined Matters to be voted in
accordance with the Proxy Voting Guidelines; (ii) a list of all
Discretionary Matters; (iii) a list of all Directed Matters to be
voted in accordance with client instructions (iv) the Potential
Conflicts List; and (v) any Advisory Reports.
7. The Committee shall meet quarterly. The Committee shall review and
approve the list of Pre-Determined Matters to be voted in accordance
with the Proxy Voting Guidelines and the list of all Directed Matters
to be voted in accordance with client instructions. For each
Discretionary Matter presented, the Committee will determine: (i) the
manner in which to vote on the proxy and, (ii) whether the manner in
which the Committee has determined to vote the proxy would, under the
facts and circumstances, create a material conflict of interest
between the interests of the Investment Manager and its affiliates on
the one hand and the Investment Manager's clients on the other. In
making the finding required in (ii) above, the Committee shall
consider the Potential Conflicts List and any other material
relationship known to the Committee between the Investment Manager and
its affiliates and the Material Parties.
If the Proxy Review Committee determines that with respect to any
Discretionary Matter that a material conflict of interest exists in
voting the Discretionary Matter in the manner favored by the
Committee, the Committee shall direct the Compliance Officer to obtain
the informed written consent of the affected client
B-7
(or clients) to the Committee's favored vote. If obtaining such
consent from any client is impracticable or undesirable, the
Investment Manager shall vote the client's proxy in accordance with
the recommendation of an independent third-party service provider
experienced in such matters to be retained by the Investment Manager
on a case-by-case basis, as necessary.
8. If any portfolio manager, investment person, or any other employee of
the Investment Manager wishes to vote a proxy with respect to a
Pre-Determined Matter in a manner other than that set forth in the
Proxy Voting Guidelines (an "Override Matter"), such person shall
contact the Compliance Officer. The Compliance Officer shall screen
the Override Matter against the Master List and include the results on
the Potential Conflicts List. The Compliance Officer shall also
solicit an Advisory Report for presentation to the Committee. The
Override Matter shall be presented at the next scheduled meeting of
the Committee for a determination of: (i) whether the matter should be
voted in a manner other than as specified in the Proxy Voting
Guidelines; and (ii) whether the manner in which the Committee has
determined to vote the proxy would constitute a material conflict of
interest. If the Committee determines that a material conflict of
interest exists with respect to voting the Override Matter in the
manner it favors, the Committee shall direct the Compliance Officer to
either: (i) vote the Override Matter in the manner originally
prescribed by the Proxy Voting Guidelines; or (ii) obtain the informed
written consent of the affected client (or clients) to the Committee's
favored vote.
9. Directed Matters will be voted in accordance with the instructions of
the client.
10. The Compliance Officer will ensure that all proxies are voted in
accordance with these Procedures and Policies.
11. The Compliance Officer may delegate any of his or her functions to a
third party proxy voting or other service provider.
12. All decisions of the Committee, including all determinations regarding
whether or not a material conflict of interest existed with respect to
a Discretionary or Override Matter and the basis for such
determination, shall be documented in writing and maintained by the
Compliance Officer for a period of at least 6 years.
IV. CLIENT DISCLOSURE POLICIES
The Investment Manager will disclose the Policies and Procedures to its clients.
The Investment Manager's disclosure will consist of a "concise summary" of its
proxy voting policies and procedures. This disclosure will also tell clients how
to get a complete copy of the Investment Manager's policies and procedures. The
proxy voting disclosure will be provided to existing clients with their first
quarterly account statement after June 30, 2003. The Investment Manager's proxy
voting disclosure will be provided to new clients in the Investment Manager's
"brochure" or Part II to its Form ADV which will be delivered with a letter
identifying the presence of the disclosure. The Compliance Officer will provide
any client, upon written request, with a tabulation of how such client's proxies
were voted by the Investment Manager.
V. RECORDKEEPING REQUIREMENTS
Rule 204-2 under the Advisers Act, as amended, requires that the Investment
Manager retain (i) its proxy voting policies and procedures; (ii) proxy
statements received regarding client securities; (iii) records of votes it cast
on behalf of clients; (iv) records of client requests for proxy voting
information, and (v) any documents prepared by the investment adviser that were
material to making a decision how to vote, or that memorialized the basis for
the decision. The Investment Manager will keep all written requests from clients
and any written response from the Investment Manager (to either a written or an
oral request). The Investment Manager may rely on proxy statements filed on the
SEC's EDGAR system instead of keeping its own copies, and may rely on proxy
statements and records of proxy votes cast by the Investment Manager that are
maintained with a third party such as a proxy voting service, provided that the
Investment Manager has obtained an undertaking from the third party to provide a
copy of the documents promptly upon request.
B-8
PART C
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(1) Financial Statements
Part A--None.
Part B--Statement of Net Assets.
(2) Exhibits
(a) Agreement and Declaration of Trust.(2)
(b) By-Laws.(2)
(c) Inapplicable.
(d) Form of Specimen Certificate.(1)
(e) Automatic Dividend Reinvestment Plan.(2)
(f) Inapplicable.
(g)(1) Investment Advisory Agreement.(2)
(g)(2) Investment Management Agreement.(2)
(h) Form of Purchase Agreement.(1)
(i) Inapplicable.
(j)(1) Form of Custodian Agreement.(2)
(j)(2) Form of Foreign Custody Manager Agreement.(2)
(k)(1) Form of Stock Transfer Agency Agreement.(2)
(k)(2) Form of Administration Agreement.(2)
(k)(3) Form of Fund Accounting Agreement.(2)
(1) Opinion and consent of Counsel to the Fund (1)
(m) Inapplicable.
(n) Consent of Independent Public Accountants.(1)
(o) Inapplicable.
(p) Initial Subscription Agreement.(1)
(q) Inapplicable.
(r)(1) Consolidated Code of Ethics of the Fund and the Investment
Manager.(2)
C-1
(r)(2) Code of Ethics of the Advisor and Claymore Securities, Inc.(2)
(s) Power of Attorney.(2)
----------
(1) Filed herewith.
(2) Previously filed.
ITEM 25. MARKETING ARRANGEMENTS
Reference is made to the Form of Purchase Agreement for the
Registrant's shares of beneficial interest to be filed by amendment to this
registration statement.
ITEM 26. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the estimated expenses to be incurred
in connection with the offering described in this registration statement:
Registration fee $ 37,076
NYSE listing fee $ 30,000
Printing (other than certificates) $415,000
Engraving and printing certificates $ 13,000
Accounting fees and expenses $ 15,000
Legal fees and expenses $252,500
NASD fee $ 30,500
Miscellaneous $106,924
Total $900,000
ITEM 27. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH THE REGISTRANT
None.
ITEM 28. NUMBER OF HOLDERS OF SHARES
As of January 24, 2005
NUMBER OF
TITLE OF CLASS RECORD HOLDERS
-------------- --------------
Common Shares of Beneficial Interest 1
ITEM 29. INDEMNIFICATION
Article V of the Registrant's Agreement and Declaration of Trust
provides as follows:
5.1 NO PERSONAL LIABILITY OF SHAREHOLDERS, TRUSTEES, ETC. No
Shareholder of the Fund shall be subject in such capacity to any personal
liability whatsoever to any Person in connection with Fund Property or the acts,
obligations or affairs of the Fund. Shareholders shall have the same limitation
of personal liability as is extended to stockholders of a private corporation
for profit incorporated under the Delaware General Corporation Law. No trustee
or officer of the Fund shall be subject in such capacity to any personal
liability whatsoever to any Person, save only liability to the Fund or its
Shareholders arising from bad faith, willful misfeasance, gross negligence or
reckless disregard for his duty to such Person; and, subject to the foregoing
exception, all such Persons shall look solely to the Fund Property for
satisfaction of claims of any nature arising in connection with the affairs of
the Fund.
C-2
If any Shareholder, trustee or officer, as such, of the Fund, is made a party to
any suit or proceeding to enforce any such liability, subject to the foregoing
exception, he shall not, on account thereof, be held to any personal liability.
Any repeal or modification of this Section 5.1 shall not adversely affect any
right or protection of a trustee or officer of the Fund existing at the time of
such repeal or modification with respect to acts or omissions occurring prior to
such repeal or modification.
5.2 MANDATORY INDEMNIFICATION. (a) The Fund hereby agrees to indemnify
each person who at any time serves as a trustee or officer of the Fund (each
such person being an "indemnitee") against any liabilities and expenses,
including amounts paid in satisfaction of judgments, in compromise or as fines
and penalties, and reasonable counsel fees reasonably incurred by such
indemnitee in connection with the defense or disposition of any action, suit or
other proceeding, whether civil or criminal, before any court or administrative
or investigative body in which he may be or may have been involved as a party or
otherwise or with which he may be or may have been threatened, while acting in
any capacity set forth in this Article V by reason of his having acted in any
such capacity, except with respect to any matter as to which he shall not have
acted in good faith in the reasonable belief that his action was in the best
interest of the Fund or, in the case of any criminal proceeding, as to which he
shall have had reasonable cause to believe that the conduct was unlawful,
provided, however, that no indemnitee shall be indemnified hereunder against any
liability to any person or any expense of such indemnitee arising by reason of
(i) willful misfeasance, (ii) bad faith, (iii) gross negligence, or (iv)
reckless disregard of the duties involved in the conduct of his position (the
conduct referred to in such clauses (i) through (iv) being sometimes referred to
herein as "disabling conduct"). Notwithstanding the foregoing, with respect to
any action, suit or other proceeding voluntarily prosecuted by any indemnitee as
plaintiff, indemnification shall be mandatory only if the prosecution of such
action, suit or other proceeding by such indemnitee (1) was authorized by a
majority of the trustees or (2) was instituted by the indemnitee to enforce his
or her rights to indemnification hereunder in a case in which the indemnitee is
found to be entitled to such indemnification. The rights to indemnification set
forth in this Declaration shall continue as to a person who has ceased to be a
trustee or officer of the Fund and shall inure to the benefit of his or her
heirs, executors and personal and legal representatives. No amendment or
restatement of this Declaration or repeal of any of its provisions shall limit
or eliminate any of the benefits provided to any person who at any time is or
was a trustee or officer of the Fund or otherwise entitled to indemnification
hereunder in respect of any act or omission that occurred prior to such
amendment, restatement or repeal.
(b) Notwithstanding the foregoing, no indemnification shall be made
hereunder unless there has been a determination (i) by a final decision on the
merits by a court or other body of competent jurisdiction before whom the issue
of entitlement to indemnification hereunder was brought that such indemnitee is
entitled to indemnification hereunder or, (ii) in the absence of such a
decision, by (1) a majority vote of a quorum of those trustees who are neither
"interested persons" of the Fund (as defined in Section 2(a)(19) of the
Investment Company Act) nor parties to the proceeding ("Disinterested Non-Party
Trustees"), that the indemnitee is entitled to indemnification hereunder, or (2)
if such quorum is not obtainable or even if obtainable, if such majority so
directs, independent legal counsel in a written opinion concludes that the
indemnitee should be entitled to indemnification hereunder. All determinations
to make advance payments in connection with the expense of defending any
proceeding shall be authorized and made in accordance with the immediately
succeeding paragraph (c) below.
(c) The Fund shall make advance payments in connection with the
expenses of defending any action with respect to which indemnification might be
sought hereunder if the Fund receives a written affirmation by the indemnitee of
the indemnitee's good faith belief that the standards of conduct necessary for
indemnification have been met and a written undertaking to reimburse the Fund
unless it is subsequently determined that the indemnitee is entitled to such
indemnification and if a majority of the trustees determine that the applicable
standards of conduct necessary for indemnification appear to have been met. In
addition, at least one of the following conditions must be met: (i) the
indemnitee shall provide adequate security for his undertaking, (ii) the Fund
shall be insured against losses arising by reason of any lawful advances, or
(iii) a majority of a quorum of the Disinterested Non-Party Trustees, or if a
majority vote of such quorum so direct, independent legal counsel in a written
opinion, shall conclude, based on a review of readily available facts (as
opposed to a full trial-type inquiry), that there is substantial reason to
believe that the indemnitee ultimately will be found entitled to
indemnification.
(d) The rights accruing to any indemnitee under these provisions shall
not exclude any other right which any person may have or hereafter acquire under
this Declaration, the By-Laws of the Fund, any statute, agreement,
C-3
vote of stockholders or trustees who are "disinterested persons" (as defined in
Section 2(a)(19) of the Investment Company Act) or any other right to which he
or she may be lawfully entitled.
(e) Subject to any limitations provided by the Investment Company Act
and this Declaration, the Fund shall have the power and authority to indemnify
and provide for the advance payment of expenses to employees, agents and other
Persons providing services to the Fund or serving in any capacity at the request
of the Fund to the full extent corporations organized under the Delaware General
Corporation Law may indemnify or provide for the advance payment of expenses for
such Persons, provided that such indemnification has been approved by a majority
of the trustees.
5.3 NO BOND REQUIRED OF TRUSTEES. No trustee shall, as such, be
obligated to give any bond or other security for the performance of any of his
duties hereunder.
5.4 NO DUTY OF INVESTIGATION; NOTICE IN FUND INSTRUMENTS, ETC. No
purchaser, lender, transfer agent or other person dealing with the trustees or
with any officer, employee or agent of the Fund shall be bound to make any
inquiry concerning the validity of any transaction purporting to be made by the
trustees or by said officer, employee or agent or be liable for the application
of money or property paid, loaned, or delivered to or on the order of the
trustees or of said officer, employee or agent. Every obligation, contract,
undertaking, instrument, certificate, Share, other security of the Fund, and
every other act or thing whatsoever executed in connection with the Fund shall
be conclusively taken to have been executed or done by the executors thereof
only in their capacity as trustees under this Declaration or in their capacity
as officers, employees or agents of the Fund. The trustees may maintain
insurance for the protection of the Fund Property, its Shareholders, trustees,
officers, employees and agents in such amount as the trustees shall deem
adequate to cover possible tort liability, and such other insurance as the
trustees in their sole judgment shall deem advisable or is required by the
Investment Company Act.
5.5 RELIANCE ON EXPERTS, ETC. Each trustee and officer or employee of
the Fund shall, in the performance of its duties, be fully and completely
justified and protected with regard to any act or any failure to act resulting
from reliance in good faith upon the books of account or other records of the
Fund, upon an opinion of counsel, or upon reports made to the Fund by any of the
Fund's officers or employees or by any Investment Manager, administrator,
manager, distributor, selected dealer, accountant, appraiser or other expert or
consultant selected with reasonable care by the trustees, officers or employees
of the Fund, regardless of whether such counsel or expert may also be a trustee.
Insofar as indemnification for liabilities arising under the Act, may
be terminated to trustees, officers and controlling persons of the Fund,
pursuant to the foregoing provisions or otherwise, the Fund has been advised
that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a trustee, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
trustee, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue. Reference is made to Article of the underwriting
agreement attached as Exhibit (h), which is incorporated herein by reference.
ITEM 30. BUSINESS AND OTHER CONNECTIONS OF ADVISOR AND INVESTMENT MANAGER
Not Applicable
ITEM 31. LOCATION OF ACCOUNTS AND RECORDS
The Registrant's accounts, books and other documents are currently
located at the offices of (i) the Registrant, c/o Advent Capital Management,
LLC, the Registrant's Investment Manager, located at 1065 Avenue of the
Americas, 31st Floor, New York, New York 10018, (ii) The Bank of New York, the
Registrant's Administrator,
C-4
Custodian and Transfer Agent, located at 101 Barclay Street, New York,
New York 10286 and (iii) Claymore Advisors, LLC, the Registrant's Advisor,
located at 2455 Corporate West Drive, Lisle, Illinois 60532.
ITEM 32. MANAGEMENT SERVICES
Not Applicable
ITEM 33. UNDERTAKINGS
(1) The Registrant hereby undertakes to suspend the offering of its
units until it amends its prospectus if (a) subsequent to the effective date of
its registration statement, the net asset value declines more than 10 percent
from its net asset value as of the effective date of the Registration Statement
or (b) the net asset value increases to an amount greater than its net proceeds
as stated in the prospectus.
(2) Not applicable
(3) Not applicable
(4) Not applicable
(5) (a) For the purposes of determining any liability under the
Securities Act of 1933, the information omitted from the form of prospectus
filed as part of a registration statement in reliance upon Rule 430A and
contained in the form of prospectus filed by the Registrant under Rule 497 (h)
under the Securities Act of 1933 shall be deemed to be part of the Registration
Statement as of the time it was declared effective.
(b) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the securities
offered therein, and the offering of the securities at that time shall be deemed
to be the initial bona fide offering thereof.
(6) The Registrant undertakes to send by first class mail or other
means designed to ensure equally prompt delivery within two business days of
receipt of a written or oral request, any Statement of Additional Information.
C-5
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of New York, and State of New York, on the 25th day of
January, 2005.
ADVENT/CLAYMORE ENHANCED GROWTH & INCOME FUND
By: /s/ Tracy V. Maitland
----------------------------------
Tracy V. Maitland
Trustee, President and Chief
Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities set forth below on the 25th day of January, 2005.
SIGNATURE TITLE
--------------------------------- ----------------------------------------------
/s/ Tracy V. Maitland Trustee, President and Chief Executive Officer
---------------------------------
Tracy V. Maitland
/s/ Bruce Berger Treasurer and Chief Financial Officer
---------------------------------
Bruce Berger
* Trustee
---------------------------------
Derek Medina
* Trustee
---------------------------------
Ronald A. Nyberg
* Trustee
---------------------------------
Gerald L. Seizert
* Trustee
---------------------------------
Michael A. Smart
* Trustee
---------------------------------
Nicholas Dalmaso
* Trustee
---------------------------------
Ronald E. Toupin, Jr.
* By: /s/Rodd Baxter Attorney-in-fact
----------------------
Rodd Baxter
INDEX TO EXHIBITS
(d) Form of Specimen Certificate.
(h) Form of Purchase Agreement.
(l) Opinion and Consent of Counsel to the Fund.
(n) Consent of Independent Public Accountants.
(p) Initial Subscription Agreement.