As filed with the Securities and Exchange Commission on April 13, 2007
Securities Act File No. 333-[__________]
Investment Company Act File No. 811-22050
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United States
Securities and Exchange Commission
Washington, D.C. 20549
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FORM N-2
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/X/ Registration Statement under the Securities Act of 1933
/_/ Pre-Effective Amendment No.
/_/ Post-Effective Amendment No.
and/or
/X/ Registration Statement under the Investment Company Act of 1940
/_/ Amendment No.
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DELAWARE ENHANCED GLOBAL DIVIDEND AND INCOME FUND
(Exact Name of Registrant as Specified in Charter)
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2005 Market Street
Philadelphia, Pennsylvania 19103
(Address of Principal Executive Offices)
(800) 523-1918
(Registrant's telephone number, including area code)
David P. O'Connor, Esquire
Delaware Enhanced Global Dividend and Income Fund
2005 Market Street
Philadelphia, Pennsylvania 19103
(Name and Address of Agent for Service)
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Copies to:
Bruce G. Leto, Esquire
Stradley Ronon Stevens & Young, LLP
2600 One Commerce Square
Philadelphia, Pennsylvania 19103
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Approximate Date of Proposed Public Offering:
As soon as practicable after the effective date of this Registration Statement.
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CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
=========================== ============== ================ ================ ==================
Title of Proposed Maximum Proposed Maximum
Securities Amount Being Offering Price Aggregate Amount of
Being Registered Registered per Unit Offering Price Registration Fee
--------------------------- -------------- ---------------- ---------------- ------------------
Common Shares, without
par value....... 100,000 shares $20.00 $2,000,000 (1) $61.40
=========================== ============== ================ ================ ==================
(1) Estimated solely for the purpose of calculating the registration fee.
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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 Securities and Exchange Commission, acting
pursuant to said Section 8(a), may determine.
Subject to Completion
Preliminary Prospectus dated [___________], 2007
PROSPECTUS
[LOGO]
Shares
Delaware Enhanced Global Dividend and Income Fund
Common Shares
$[_____] per Share
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Investment Objectives. Delaware Enhanced Global Dividend and Income Fund
(the "Fund") is a newly organized, diversified, closed-end management investment
company. The Fund's primary investment objective is to seek current income, with
a secondary objective of capital appreciation. The Fund seeks to achieve these
objectives by investing globally in dividend-paying or income-generating
securities across multiple asset classes, including, but not limited to, equity
securities of large, well-established companies, securities issued by real
estate companies (including real estate investment trusts ("REITs") and real
estate industry operating companies ("REOCs")), debt securities (such as
government bonds, investment grade and high-yield corporate bonds, and
convertible bonds), and emerging market securities. The Fund will also attempt
to enhance the level of distributions that the Fund pays to shareholders by
engaging in dividend capture trading, option overwriting, and realization of
gains on the sale of securities.
No Prior 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. The risk of loss due to this
discount may be greater for initial investors expecting to sell their shares in
a relatively short period after completion of the public offering.
The Fund anticipates that its common shares will be listed on the New York
Stock Exchange (the "NYSE") under the symbol "[___]." This Prospectus contains
information you should know before investing, including information about risks.
Please read it before you invest and keep it for future reference.
Investing in the common shares involves certain risks. See "Risks" on page
[___] of this Prospectus.
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Per Share Total (1)
Public offering price..................... $[_____] $
Sales load (2)............................ $[_____] $
Estimated offering expenses (3)........... $[_____] $
Proceeds, after expenses, to the Fund..... $[_____] $
(1) 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 of the date of this Prospectus solely to cover
overallotments, if any. If such option is exercised in full, the public
offering price, sales load, estimated offering expenses, and proceeds,
after expenses, to the Fund will be $[___], $[___] , $ [___], and $[___],
respectively. See "Underwriting."
(2) The Advisor has agreed to pay from its own assets additional compensation
to [___________________________]. The Advisor also may pay certain other
qualifying underwriters a marketing and structuring fee, additional
compensation, or a sales incentive fee in connection with the offering.
[The Advisor may pay commissions to employees of its affiliates that
participate in the marketing of the Fund's common shares. ] See
"Underwriting."
(3) The offering expenses paid by the Fund (other than the sales load), when
added to the Fund's organizational costs, will not exceed an aggregate of
$[____] per share of the Fund's common shares sold in this offering. [This
$[____] per common share amount may include a reimbursement of Delaware
Management Company's expenses incurred in connection with this offering.]
The Advisor has agreed to pay such offering expenses (and not
organizational costs) of the Fund to the extent offering expenses (other
than sales load), when added to the Fund's organizational expenses, exceed
$[____] per share of the Fund's common shares. The aggregate offering
expenses (other than sales load) to be incurred by the Fund are estimateto
be $[_________] (including amounts paid by the Advisor on behalf of the
Fund).
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 underwriters expect to deliver the common shares to purchasers on or
about [_____________], 2007.
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[LIST OF UNDERWRITERS]
The date of this Prospectus is [____________________] , 2007.
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.
Investment Advisor. The Fund's investment advisor is Delaware Management
Company ("DMC" or the "Advisor"), a series of Delaware Management Business
Trust.
Use of Leverage. The Fund will likely seek to enhance its total returns
through the use of leverage by issuing preferred shares, commercial paper and/or
other borrowings. See "Effects of Leverage" and "Risk Factors-Leverage Risk."
Investment Policies. Under normal market conditions, the Fund will invest
at least 80% of its total assets in a combination of dividend-paying or
income-generating securities across multiple asset classes, including but not
limited to, equity securities of large, well-established companies; securities
issued by real estate companies (including REITs and REOCs), debt securities
(such as government bonds, investment grade and high-yield corporate bonds, and
convertible bonds), and emerging market securities. The Fund will also attempt
to enhance the level of distributions that the Fund pays to shareholders by
engaging in dividend capture trading, option overwriting, and realization of
gains on the sale of securities. Under normal market conditions, the Fund will
invest at most 60% of its total assets in securities of U.S. issuers and at
least 40% of its total assets in securities of non-U.S. issuers, unless market
conditions are not deemed favorable by the Advisor, in which case the Fund would
invest at least 30% of its total assets in the securities of non-U.S. issuers.
The Fund may not invest 25% or more of its total assets in the securities of
issuers in any single industry.
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
[_____________________], 2007, containing additional information about the Fund,
has been filed with the Securities and Exchange Commission and, as amended from
time to time, is incorporated by reference in its entirety into this Prospectus.
You can review the table of contents of the Statement of Additional Information
on page [___] of this Prospectus. You may request a free copy of the Statement
of Additional Information by calling [___________] (toll free) or by writing to
the Fund, obtain a copy (and other information regarding the Fund) from the
Securities and Exchange Commission's Public Reference Room in Washington, D.C.
Call (202) 551-8090 for information, or by writing to Delaware Service Company,
Inc., 2005 Market Street, Philadelphia, Pennsylvania 19103. The Securities and
Exchange Commission charges a fee for copies. You can get the same information
free from the Securities and Exchange Commission's web site
(http://www.sec.gov). You may also e-mail requests for these documents to
publicinfo@sec.gov or make a request in writing to the Securities and Exchange
Commission's Public Reference Section, 100 F Street, N.E., Washington, D.C.
20549-0102. The Fund does not post a copy of the Statement of Additional
Information on its web site because the Fund's common shares are not
continuously offered, which means the Statement of Additional Information will
not be updated after completion of this offering and the information contained
in the Statement of Additional Information will become outdated. The Fund's
annual and semi-annual reports, when available, will be available at the Fund's
web site (http://www.delawareinvestments.com).
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.
TABLE OF CONTENTS
Page
Prospectus Summary.............................................................1
Summary of Fund Expenses......................................................17
The Fund......................................................................19
Use of Proceeds...............................................................19
The Fund's Investments........................................................19
Effects of Leverage...........................................................37
Risks.........................................................................39
How the Fund Manages Risk.....................................................48
Management of the Fund........................................................49
Net Asset Value...............................................................52
Distributions.................................................................52
Dividend Reinvestment Plan....................................................53
Description of Capital Structure..............................................55
Anti-Takeover Provisions in the Agreement and Declaration of Trust............58
Closed-End Fund Structure.....................................................59
Repurchase of Common Shares...................................................60
Tax Matters...................................................................60
Underwriting..................................................................63
Custodian and Transfer Agent..................................................66
Legal Opinions................................................................66
Independent Registered Public Accounting Firm.................................66
Other Information.............................................................66
Table of Contents for Statement of Additional Information.....................68
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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.
FORWARD-LOOKING STATEMENTS
This Prospectus contains or incorporates by reference forward-looking
statements, within the meaning of the federal securities laws, that involve
risks and uncertainties. These statements describe the Advisor's plans,
strategies and goals and the Advisor's beliefs and assumptions concerning future
economic or other conditions and the outlook for the Fund, based on currently
available information. In this Prospectus, words such as "anticipates,"
"believes," "expects," "objectives," "goals," "future," "intends,"
"seeks," "will," "may," "could," "should," and similar expressions are
used in an effort to identify forward-looking statements, although some
forward-looking statements may be expressed differently.
The Fund's actual results could differ materially from those anticipated in
the forward-looking statements because of various risks and uncertainties,
including the factors set forth in the section headed "Risk Factors" below and
elsewhere in this Prospectus. You should consider carefully the discussions of
risks and uncertainties in the "Risk Factors" section and elsewhere in this
Prospectus and in the Statement of Additional Information. The forward-looking
statements contained in this Prospectus are based on information available to
the Fund on the date of this Prospectus, and the Fund assumes no obligation to
update any such forward-looking statements, except as required by law.
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PROSPECTUS SUMMARY
This is only a summary of certain information contained in this Prospectus
relating to Delaware Enhanced Global Dividend and Income Fund. 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.
The Fund............. Delaware Enhanced Global Dividend and Income Fund is a
diversified, closed-end management investment company
with no operating history. Throughout the Prospectus,
the Delaware Enhanced Global Dividend and Income Fund
is referred to simply as the "Fund." See "The Fund."
The Offering......... The Fund is offering common shares of beneficial
interest at $[____] per share through a group of
underwriters led by [_____________] and [__________].
The common shares of beneficial interest are called
"common shares" in the rest of this Prospectus. You
must purchase at least [____] common shares
($[________]) 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. The offering expenses paid by the Fund (other
than the sales load), when added to the Fund's
organizational costs, will not exceed an aggregate of
$[____] per share of the Fund's common shares sold in
this offering. [This $[____] per common share amount
may include a reimbursement of Delaware Management
Company's expenses incurred in connection with this
offering.] Delaware Management Company has agreed to
pay offering costs (other than sales load) to the
extent that offering costs (other than sales load) and
organizational expenses exceed $[___] per common
share. See "Underwriting."
Investment
Objectives........ .. The Fund's primary investment objective is to seek
current income, with a secondary objective of capital
appreciation. The Fund is not intended as, and you
should not construe it to be, a complete investment
program. There is no assurance that the Fund will
achieve its investment objectives.
Investment Policies.. The Fund will seek to achieve its primary objectives
by focusing on broad diversification within its
portfolio by investing globally in dividend-paying or
income-generating securities across multiple asset
classes. The primary asset classes include equity
securities of large, well-established companies,
securities issued by real estate companies (including
REITs and REOCs), emerging market equities, preferred
securities, debt securities, including high-yield
corporate bonds, investment grade corporate bonds,
U.S. government securities, non-U.S. corporate bonds,
non-U.S. government securities, convertible bonds,
convertible preferred stock, emerging market debt
securities, and international currencies.
The Advisor will determine the proportion of the
Fund's assets to be allocated among the various assets
classes based on its analysis of economic and market
conditions and its assessment of the income and
potential for appreciation that can be achieved from
investments in such asset classes. The percentage of
the Fund's assets allocated to the various asset
classes described herein will vary depending on DMC's
assessment of these conditions. The key goals in
allocating across these various asset classes are to
attempt to minimize the Fund's volatility through
diversification and to attempt to optimize the Fund's
ability to generate income.
The Fund may invest in a variety of income generating
equity and debt securities. Not all investments,
however, are required to pay dividends or interest.
Under normal market conditions, the Fund will invest
at least 80% of its total assets in a combination of
dividend-paying or income-generating securities across
multiple asset classes, including but not limited to,
equity securities of large, well-established
companies; securities issued by real estate companies
(including REITs and REOCs), debt securities (such as
government bonds, investment grade and high-yield
corporate bonds, and convertible bonds), and emerging
market securities. In addition, under normal market
conditions, the Fund will invest at most 60% of its
total assets in securities of U.S. issuers and at
least 40% of its total assets in securities of
non-U.S. issuers, unless market conditions are not
deemed favorable by the Advisor, in which case, the
Fund would invest at least 30% of its total assets in
the securities of non-U.S. issuers. The Fund may not
invest more than 25% of the Fund's total assets in any
one industry nor, as to 75% of the Fund's total
assets, will more than 5% be invested in the
securities of any one issuer.
The Advisor's strategy to income generating investing
is based on the primary attribute of seeking a
sustainable and recurring income stream, with capital
appreciation as a secondary attribute. This
investment approach should provide diversification,
low sector correlation, low interest rate sensitivity,
and downside protection which over the long-term
should result in an attractive risk adjusted return.
The Advisor believes that seeking income on a global
basis can provide investors with opportunities not
available in the U.S. equity and debt markets. For
example, recently, many countries, including the
United Kingdom, France, Canada, Australia, Japan,
Singapore, and Hong Kong and several others, have
enacted REIT or similar legislation that has created
real estate companies which are required to payout a
significant portion of their earnings in dividends.
In addition, the Advisor will use a combination of
dividend capture trading, option overwriting, and
realization of gains on the sale of securities to
enhance the sustainability of the income stream. The
percentage of the Fund's assets invested these
strategies will vary from time to time based on the
Advisor's assessment of economic and market conditions
and the potential for income.
The Fund's dividend capture strategy seeks to maximize
the level of dividend income that the Fund receives by
engaging in dividend capture trading and by
identifying special dividend situations. In a dividend
capture trade, the Fund sells a stock on or shortly
after the stock's ex-dividend date and uses the sale
proceeds to purchase one or more other stocks that are
expected to pay dividends before the next dividend
payment on the stock being sold. Special dividend
situations may include those where companies decide to
return large cash balances to shareholders as one-time
dividend payments, for instance due to a restructuring
or recent strong operating performance. Other special
dividends may arise in a variety of situations. The
Fund's option overwriting strategy seeks to increase
its income or may hedge a portion of its portfolio
investments through writing (i.e., selling) covered
put and call options. The Fund will receive a premium
when it writes put and call options, which increases
the Fund's return on the underlying security in the
event the option expires unexercised or is closed out
at a profit. The Fund anticipates utilizing both
short-term and, to the extent permitted by applicable
law, long-term capital gains as part of its periodic
distributions to shareholders. The Fund realizes a
capital gain when it sells a portfolio security at a
price higher than its original cost. The Fund will
attempt to realize such gains in certain situations to
attempt to help keep distributions as consistent and
sustainable as possible without disrupting the
underlying investment philosophy of the Advisor. See
"The Fund's Investments - Investment Strategy -
Distribution Enhancement Strategies."
Investment Advisor... The Fund's investment advisor is Delaware Management
Company ("DMC" or the "Advisor"), a series of Delaware
Management Business Trust. DMC will receive an annual
fee, payable monthly, in an amount equal to 1.00% of
the average daily value of the Fund's total assets.
See "Management of the Fund." When the Fund is
utilizing leverage, the fee paid to DMC will be higher
than if the Fund did not use leverage because the fees
paid will be calculated based on the Fund's total
assets, which include the principal amount of
outstanding borrowings used for leverage. As of
[March 31, 2007], DMC managed approximately $[______]
billion in total assets. DMC has an experienced team
of portfolio managers and research analysts.
Distributions........ Commencing with the Fund's initial dividend, the Fund
intends to make a level cash distribution each month
to common shareholders pursuant to a managed
distribution policy. Under the policy, the Fund is
managed with a goal of generating as much of the
distribution as possible from ordinary income (net
investment income and short-term capital gains). The
balance of the distribution will then come from
long-term capital gains to the extent permitted and,
if necessary, a return of capital. The Advisor
expects to declare the initial monthly dividend on the
Fund's common shares within approximately [45] days
after completion of this offering and to pay that
initial monthly dividend approximately [60 to 90] days
after completion of this offering. The level dividend
rate may be modified by the Board of Trustees from
time to time. The Board of Trustees may also
determine to amend their managed distribution policy
to modify the Fund's distribution frequency from
monthly to some other period.
DMC currently intends to apply to the U.S. Securities
and Exchange Commission, on behalf of the Fund, for an
exemption from Section 19(b) of the Investment Company
Act of 1940, as amended (the "1940 Act"), and Rule
19b-1 thereunder permitting the Fund to make periodic
distributions of long-term capital gains. No assurance
can be given that the U.S. Securities and Exchange
Commission will grant the exemption to the Fund. This
offering, however, is not contingent upon the receipt
of such exemption. See "Distribution Policy."
The level dividend distribution described above would
result in the payment of approximately the same amount
to the Fund's shareholders each month. If the source
of the dividend or other distribution were the
original capital contribution of the shareholder, and
the payment amounted to a return of capital, Section
19(a) of the 1940 Act and Rule 19a-1 thereunder
require the Fund to provide shareholders with written
disclosure to that effect that accompanies such
payment. Nevertheless, persons who periodically
receive the payment of a dividend or other
distribution may be under the impression that they are
receiving net profits when they are not. Shareholders
should read any written disclosure provided pursuant
to Section 19(a) and Rule 19a-1 carefully, and should
not assume that the source of any distribution from
the Fund is net profit. See "Distributions."
Shareholders will automatically have all dividends and
distributions reinvested in common shares issued by
the Fund or common shares of the Fund 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."
Leverage............. The Fund will likely seek to enhance its total returns
through the use of leverage, which may include the
issuance of preferred shares, commercial paper, and/or
other borrowings. The net asset value of the Fund's
common shares will be reduced by the issuance costs of
any leverage. If the Fund does choose to use leverage,
it may use leverage up to the maximum amount permitted
under the 1940 Act. Currently, under the 1940 Act, the
Fund may borrow money up to 33?% of its total assets
(including the amount obtained from leverage), and may
issue shares of preferred stock in amounts up to 50%
of the value of its total assets to finance additional
investments. Through leveraging, the Fund will seek
to obtain a higher return for holders of common shares
than if the Fund did not use leverage. Leverage is a
speculative technique and there are special risks and
costs associated with leverage. There is no assurance
that the Fund will be successful in enhancing the
level of its total return during any period in which
leverage is utilized. See "Effects of Leverage" and
"Risk Factors-Leverage Risk."
Listing.............. The Fund anticipates that its common shares will be
listed on the New York Stock Exchange ("NYSE") under
the symbol "[___]." See "Description of Capital
Structure."
Custodian and
Transfer Agent....... [___________] will serve as the Fund's custodian.
[____________] will serve as the Fund's transfer
agent. See "Custodian and Transfer Agent."
Administrator........ Delaware Service Company, Inc. ("DSC" or the
"Administrator"), 2005 Market Street, Philadelphia,
Pennsylvania 19103, an affiliate of DMC, will serve as
the Fund's administrator and will provide accounting
and administrative services to the Fund. Among other
things, DSC is responsible for calculating the net
asset value of the common shares and generally
managing the administrative affairs of the Fund. DSC
is entitled to receive [fee structure to be added],
plus out of pocket expenses. When the Fund is
utilizing leverage, the fee paid to DSC will be higher
than if the Fund did not use leverage because the fees
paid will be calculated based on the Fund's total
assets, which include the principal amount of
outstanding borrowings used for leverage.
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 such as the Fund that invest primarily in
dividend-paying or income-generating 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 its 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 and organizational 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 other
factors. See "Risks," "Description of Capital
Structure," and "Repurchase of Common Shares." The
common shares are designed primarily for long-term
investors; you should not purchase common shares of
the Fund if you intend to sell them shortly after
purchase.
Special Risk
Considerations....... No Operating History. The Fund is a diversified,
closed-end management investment company with no
operating history.
Market Discount Risk. As with any stock, the price of
the Fund's shares will fluctuate with market
conditions and other factors. If shares are sold, the
price received may be more or less than the original
investment. Net asset value will be reduced
immediately following the initial offering by the
amount of the sales load and organizational and
offering expenses paid by the Fund. Common shares are
designed for long-term investors and should not be
treated as trading vehicles. Shares of closed-end
management investment companies frequently trade at a
discount from their net asset value. The Fund's
shares may trade at a price that is less than the
initial offering price. This risk may be greater for
investors who sell their shares in a relatively short
period of time after completion of the initial
offering. The Fund may utilize leverage, which
magnifies the stock market risk.
Investment and Market Risk. An investment in the
Fund's common shares is subject to investment risk,
including the possible loss of the entire principal
amount invested. An investment in common shares
represents an indirect investment in the securities
owned by the Fund, which are generally traded on a
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. The common shares at any
point in time may be worth less than the original
investment, even after taking into account any
reinvestment of dividends and distributions.
Issuer Risk. The value of an issuer's securities that
are held in the Fund's portfolio may decline for a
number of reasons which directly relate to the issuer,
such as management performance, financial leverage,
and reduced demand for the issuer's goods
and services.
Dividend Strategy Risks. The Fund's pursuit of its
investment objectives depends somewhat upon the
Advisor's ability to anticipate the dividend policies
of the companies in which it chooses to invest. It is
difficult to anticipate the level of dividends that
companies will pay in any given timeframe. The Fund's
dividend capture strategies include having the Advisor
attempt to identify and exploit opportunities such as
the announcement of major corporate actions, such as
restructuring initiatives or a special dividend, that
may lead to high current dividend income. These
situations are typically not recurring in nature or
frequency, may be difficult to predict, and may not
result in an opportunity that allows the Advisor to
fulfill the Fund's investment objectives. In addition,
the dividend policies of the Fund's target companies
are heavily influenced by the current economic climate
and the favorable federal tax treatment afforded to
dividends. Challenging economic conditions, affecting
either the market as a whole or a specific investment
in the Fund's portfolio, may limit the opportunity to
benefit from the current dividend policies of the
companies in which the Fund invests or may cause such
companies to reduce or eliminate their dividends.
Special dividends may result in extraordinary
dividends subject to special tax rules. The use of
dividend capture strategies will expose the Fund to
increased trading costs and potential for capital loss
or gain, particularly in the event of significant
short-term price movements of stocks subject to
dividend capture trading, and resultant dividends may
not be qualified dividends eligible for reduced
federal income tax rates under the Internal Revenue
Code of 1986, as amended (the "Code"). Also, the
reduced federal income tax rates that apply to
qualified dividend income sunset, and will not apply,
to taxable years beginning after December 31, 2010,
unless extended or made permanent. This and other
changes in the favorable provisions of the federal
income tax laws may limit your ability to benefit from
dividend increases or special dividends, may effect a
widespread reduction in announced dividends and may
adversely impact the valuation of the shares of
dividend-paying companies.
Risk of Option Overwriting. The Fund will receive a
premium when it writes put and call options, which
increases the Fund's return on the underlying security
in the event the option expires unexercised or is
closed out at a profit. By writing a call, the Fund
will limit its opportunity to profit from an increase
in the market value of the underlying security above
the exercise price of the option for as long as the
Fund's obligation as the writer of the option
continues. Upon the exercise of a put option written
by the Fund, the Fund may suffer an economic loss
equal to the difference between the price at which the
Fund is required to purchase the underlying security
and its market value at the time of the option
exercise, less the premium received for writing the
option. Upon the exercise of a call option written by
the Fund, the Fund may suffer an economic loss equal
to an amount not less than the excess of the
security's market value at the time of the option
exercise over the Fund's acquisition cost of the
security, less the sum of the premium received for
writing the option and the difference, if any, between
the call price paid to the Fund and the Fund's
acquisition cost of the security. Thus, in some
periods the Fund might receive less total return and
in other periods greater total return from its hedged
positions than it would have received from leaving its
underlying securities unhedged.
Common Stock Risk. Common stocks are an example of
equity securities in which the Fund will invest.
Although common stocks have historically generated
higher average returns than fixed income securities
over the long term, common stocks also have
experienced significantly more volatility in returns.
Common stocks may be more susceptible to adverse
changes in market value due to issuer specific events
or general movements in the equities markets. A drop
in the stock market may depress the price of common
stocks held by the Fund. Common stock prices fluctuate
for many reasons, including changes in investors'
perceptions of the financial condition of an issuer or
the general condition of the relevant stock market, or
the occurrence of political or economic events
affecting issuers. For example, an adverse event, such
as an unfavorable earnings report, may depress the
value of common stock in which the Fund has invested;
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
held by the Fund. Also, 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. The common stocks in which the Fund will
invest are structurally subordinated to preferred
securities, bonds and other debt instruments in a
company's capital structure, in terms of priority to
corporate income and assets, and therefore will be
subject to greater risk than the preferred securities
or debt instruments of such issuers. In addition,
common stock prices may be sensitive to rising
interest rates, as the costs of capital rise and
borrowing costs increase.
Foreign Securities Risk. The Fund will have
substantial exposure to foreign securities, including
emerging market securities. The Fund's investments in
securities of foreign issuers are subject to risks not
usually associated with owning securities of
U.S. issuers. These risks can include fluctuations in
foreign currencies; foreign currency exchange
controls; social, political and economic instability;
differences in securities regulation and trading,
differences in accounting, auditing and financial
standards; expropriation or nationalization of assets;
possible difficulties in transaction settlements; and
foreign taxation issues. In addition, changes in
government administrations or economic or monetary
policies in the United States or abroad could result
in appreciation or depreciation of the Fund's
securities. It may also be more difficult to obtain
and enforce a judgment against a foreign issuer. Any
foreign investments made by the Fund must be made in
compliance with U.S. and foreign currency restrictions
and tax laws restricting the amounts and types of
foreign investments. The Fund has no other investment
restrictions with respect to investing in foreign
issuers. Dividends paid on foreign securities may not
qualify for the reduced federal income tax rates
applicable to qualified dividends under the Code. As a
result, there can be no assurance as to what portion
of the Fund's distributions attributable to foreign
securities will be designated as qualified dividend
income. See "Tax Matters."
The Fund may invest in securities of issuers located
in "emerging market countries." Because of less
developed markets and economies and, in some
countries, less mature governments and governmental
institutions, the risks of investing in foreign
securities can be intensified in the case of
investments in issuers domiciled or doing substantial
business in emerging market countries. These risks
include high concentration of market capitalization
and trading volume in a small number of issuers
representing a limited number of industries, as well
as a high concentration of investors and financial
intermediaries; lack of liquidity and greater price
volatility due to the smaller size of the market for
such securities and lower trading volume; political
and social uncertainties; national policies that may
restrict the Fund's investment opportunities,
including restrictions on investing in issuers or
industries deemed sensitive to relevant national
interests; greater risks of expropriation,
confiscatory taxation and nationalization;
over-dependence on exports, especially with respect to
primary commodities, making these economies vulnerable
to changes in commodity prices; overburdened
infrastructure and obsolete or unseasoned financial
systems; environmental problems; less developed legal
systems; less reliable custodial services and
settlement practices. Dividends paid by issuers in
emerging market countries will generally not qualify
for the reduced federal income tax rates applicable to
qualified dividends under the Code. See "Tax Matters."
Small and Medium Cap Company Risk. The Fund's share
price may be more volatile because it also invests in
small and medium capitalization companies. Compared to
large companies, small and medium capitalization
companies are more likely to have (i) more limited
product lines or markets and less mature businesses,
(ii) fewer capital resources, (iii) more limited
management depth, and (iv) shorter operating
histories. Further, compared to large cap stocks, the
securities of small and medium capitalization
companies are more likely to experience sharper swings
in market values, be harder to sell at times and at
prices that the Advisor believes appropriate, and
offer greater potential for gains and losses.
Portfolio Turnover Risk. The techniques and
strategies contemplated by the Fund might result in a
high degree of portfolio turnover. The Fund cannot
accurately predict its securities portfolio turnover
rate, but anticipates that its annual portfolio
turnover rate will likely exceed 100% under normal
market conditions, although it could be materially
higher under certain conditions. Higher portfolio
turnover rates could result in corresponding increases
in brokerage commissions, may generate short-term
capital gains taxable as ordinary income and cause
dividends received on portfolio securities to not be
qualified dividends eligible for reduced federal
income tax rates under the Code.
Defensive Positions. During periods of adverse market
or economic conditions, the Fund may temporarily
invest all or a substantial portion of its assets in
cash or cash equivalents. The Fund would not be
pursuing its investment objectives in these
circumstances and could miss favorable market
developments.
Management Risk. The Fund is subject to management
risk because it is an actively managed portfolio. The
Fund's successful pursuit of its investment objectives
depends upon the Advisor's ability to find and exploit
market inefficiencies with respect to undervalued
securities and identify companies experiencing a
change in dividend policy, including the announcement
of restructuring initiatives or special dividends.
Such situations occur infrequently and sporadically
and may be difficult to predict, and may not result in
a favorable pricing opportunity that allows the
Advisor to fulfill the Fund's investment objectives.
The Advisor's security selections and other investment
decisions might produce losses or cause the Fund to
underperform when compared to other funds with similar
investment goals. If one or more key individuals
leaves the employ of the Advisor, the Advisor may not
be able to hire qualified replacements, or may require
an extended time to do so. This could prevent the Fund
from achieving its investment objectives.
Leverage Risk. ...The use of leverage by the Fund
would create three major types of risks for
shareholders: the likelihood of greater volatility of
net asset value and market price of common shares
because changes in value of the Fund's portfolio
(including changes in the value of any interest rate
swap, if applicable) are borne entirely by the common
shareholders; the possibility either that share income
will fall if the interest rate on any borrowings or
the dividend rate on any preferred shares issued
rises, or that share income and distributions will
fluctuate because the interest rate on any borrowings
or the dividend rate on any preferred shares issued
varies; and if the Fund leverages through issuing
preferred shares, commercial paper or borrowings, the
Fund may not be permitted to declare dividends or
other distributions with respect to its common shares
or purchase its capital stock, unless at the time
thereof the Fund meets certain asset coverage
requirements.
The Advisor in its best judgment nevertheless may
determine to use leverage if it deems such action to
be appropriate in the circumstances. During periods in
which the Fund is using leverage, the fees paid to the
Advisor for investment advisory services and the
Administrator for administrative services will be
higher than if the Fund did not use leverage because
the fees paid will be calculated on the basis of the
Fund's total assets, including proceeds from issuance
of preferred shares, commercial paper or borrowings,
which may create an incentive to leverage the Fund.
See "Effects of Leverage."
Real Estate Industry Risk. Investments in the real
estate industry (including REITs and REOCs and their
equivalent in foreign countries) may subject the Fund
to certain risks associated with direct ownership of
real estate and with the real estate industry in
general (although the Fund does not intend to own real
estate directly). If the Fund holds real estate
directly, as a result of defaults, or receives rental
income from its real estate holdings, its tax status
as a regulated investment company could be
jeopardized. Investments in the real estate industry
are also affected by interest rate changes,
particularly if the companies in which the Fund
invests use floating rate debt to finance their
ongoing operations. In addition, changes in interest
rates may hurt real estate values or make REIT shares
less attractive than other income producing
investments.
Real estate industry risks include among others:
o possible declines in the value of real estate
and real property values;
o risks related to economic conditions;
o possible shortage of mortgage funds;
o overbuilding and extended vacancies;
o increased competition;
o changes in property taxes, operating expenses
or zoning laws;
o costs of environmental clean-up, or damages
from natural disasters;
o limitations or fluctuations in rent payments;
o cash flow fluctuations; and
o defaults by borrowers.
If the Fund invests in REITs or REOCs, such
investments will also subject the Fund to various
risks. Returns from REITs or REOCs, which typically
are small or medium capitalization stocks, may trail
returns from the overall stock market. Dividends paid
by REITs will not generally qualify for the reduced
federal income tax rates applicable to qualified
dividends under the Code, and may result in "excess
inclusion income" subject to special tax rules. REITs
are also subject to the risk of failing to qualify for
tax-free pass-through of income under the Code and/or
failing to qualify for an exemption from registration
as an investment company under the 1940 Act.
Investments in Undervalued Securities. A portion
of the Fund's assets will be invested in securities,
which, in the opinion of the Advisor, are undervalued.
The identification of investment opportunities in
undervalued securities is a difficult task and there
is no assurance that such opportunities will be
successfully recognized or acquired. While investments
in undervalued securities offer opportunities for
above-average capital appreciation, these investments
involve a high degree of financial risk and can result
in substantial losses.
High Yield, High-Risk Securities. Investing in
so-called "high yield" or "high-risk" securities
("junk bonds") entails certain risks, including the
risk of loss of principal, which may be greater than
the risks involved in investment-grade securities, and
which should be considered by investors contemplating
an investment in the Fund. Such securities are
sometimes issued by companies whose earnings at the
time of issuance are less than the projected debt
service on the high yield securities.
Although the market for high yield securities has been
in existence for many years, including periods of
economic downturns, the high yield market grew rapidly
during the long economic expansion which took place in
the United States during the 1980s. During that
economic expansion, the use of high yield debt
securities to fund highly leveraged corporate
acquisitions and restructurings increased
dramatically. As a result, the high yield market grew
substantially during that economic expansion.
Although experts disagree on the impact recessionary
periods have had and will have on the high yield
market, some analysts believe a protracted economic
downturn would severely disrupt the market for high
yield securities, would adversely affect the value of
outstanding bonds, and would adversely affect the
ability of high yield issuers to repay principal and
interest. Those analysts cite volatility experienced
in the high yield market in the past as evidence for
their position. It is likely that protracted periods
of economic uncertainty would result in increased
volatility in the market prices of high yield
securities and an increase in the number of high yield
bond defaults.
Special Risks Associated with Foreign Currency
Options. Buyers and sellers of foreign currency
options are subject to the same risks that apply to
options generally, as described below. In addition,
there are certain additional risks associated with
foreign currency options, including taxation risks.
The markets in foreign currency options are relatively
new, and the Fund's ability to establish and close out
positions on such options is subject to the
maintenance of a liquid secondary market. Although the
Fund will not purchase or write such options unless
and until, in the opinion of the Advisor, the market
for them has developed sufficiently to ensure that the
risks in connection with such options are not greater
than the risks in connection with the underlying
currency, there can be no assurance that a liquid
secondary market will exist for a particular option at
any specific time. In addition, options on foreign
currencies are affected by most of the same factors
that influence foreign exchange rates and investments
generally.
The value of a foreign currency option depends upon
the value of the underlying currency relative to the
U.S. dollar. As a result, the price of the option
position may vary with changes in the value of either
or both currencies and may have no relationship to the
investment merits of a foreign security. Because
foreign currency transactions occurring in the
interbank market involve substantially larger amounts
than those that may be involved in the use of foreign
currency options, investors may be disadvantaged by
having to deal in an odd lot market (generally
consisting of transactions of less than $1 million)
for the underlying foreign currencies at prices that
are less favorable than for round lots.
There is no systematic reporting of last sale
information for foreign currencies or any regulatory
requirement that quotations available through dealers
or other market sources be firm or revised on a timely
basis. Available quotation information is generally
representative of very large transactions in the
interbank market and thus may not reflect relatively
smaller transactions (i.e., less than $1 million)
where rates may be less favorable. The interbank
market in foreign currencies is a global,
around-the-clock market. To the extent that the
U.S. option markets are closed while the markets for
the underlying currencies remain open, significant
price and rate movements may take place in the
underlying markets that cannot be reflected in the
options markets until they reopen.
Risk Characteristics of Options and Futures. Options
and futures transactions can be highly volatile
investments. Successful hedging strategies require the
anticipation of future movements in securities prices,
interest rates and other economic factors. When a fund
uses futures contracts and options as hedging devices,
the prices of the securities subject to the futures
contracts and options may not correlate with the
prices of the securities in a portfolio. This may
cause the futures and options to react to market
changes differently than the portfolio securities.
Even if expectations about the market and economic
factors are correct, a hedge could be unsuccessful if
changes in the value of the portfolio securities do
not correspond to changes in the value of the futures
contracts. The ability to establish and close out
futures contracts and options on futures contracts
positions depends on the availability of a secondary
market. If these positions cannot be closed out due to
disruptions in the market or lack of liquidity, losses
may be sustained on the futures contract or option.
Special tax rules apply to options and futures.
Special Risks Associated with Foreign Currency Futures
Contracts and Related Options. Buyers and sellers of
foreign currency futures contracts are subject to the
same risks that apply to the use of futures generally.
In addition, there are risks associated with foreign
currency futures contracts and their use as a hedging
device similar to those associated with options on
foreign currencies, as described above.
Options on foreign currency futures contracts may
involve certain additional risks, including taxation
risks. Trading options on foreign currency futures
contracts is relatively new. The ability to establish
and close out positions on such options is subject to
the maintenance of a liquid secondary market. To
reduce this risk, the Fund will not purchase or write
options on foreign currency futures contracts unless
and until, in the opinion of the Advisor, the market
for such options has developed sufficiently that the
risks in connection with such options are not greater
than the risks in connection with transactions in the
underlying foreign currency futures contracts.
Compared to the purchase or sale of foreign currency
futures contracts, the purchase of call or put options
on futures contracts involves less potential risk to
the Fund because the maximum amount at risk is the
premium paid for the option (plus transaction costs).
However, there may be circumstances when the purchase
of a call or put option on a futures contract would
result in a loss of up to the amount of the premium
paid for the option, such as when there is no movement
in the price of the underlying currency or futures
contract.
Preferred Securities Risk. In addition to credit risk,
investment in preferred securities carries risks,
including deferral risk, redemption risk, limited
voting rights, risk of subordination, and lack of
liquidity. Fully taxable or hybrid preferred
securities typically contain provisions that allow an
issuer, at its discretion, to defer distributions for
up to 20 consecutive quarters. Traditional preferreds
also contain provisions that allow an issuer, under
certain conditions to skip (in the case of
"noncumulative preferreds") or defer (in the case of
"cumulative preferreds"), dividend payments. If the
Fund owns a preferred security that is deferring its
distributions, the Fund may be required to report
income for tax purposes while it is not receiving any
distributions. Preferred securities typically contain
provisions that allow for redemption in the event of
tax or security law changes in addition to call
features at the option of the issuer. In the event of
a redemption, the Fund may not be able to reinvest the
proceeds at comparable rates of return. Preferred
securities typically do not provide any voting rights,
except in cases when dividends are in arrears beyond a
certain time period, which varies by issue. 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 those debt instruments. Preferred
securities may be substantially less liquid than many
other securities, such as U.S. government securities,
corporate debt or common stocks. Dividends paid on
preferred securities may not qualify for the reduced
federal income tax rates applicable to qualified
dividends under the Code.
Interest Rate Risk. Interest rate risk is the risk
that preferred stocks paying fixed dividend rates and
fixed-rate debt securities will decline in value
because of changes in market interest rates. When
interest rates rise, the market value of such
securities generally will fall. The Fund's investment
in preferred stocks and fixed-rate debt securities
means that the net asset value and price of the common
shares may decline if market interest rates rise.
Interest rates are currently low relative to historic
levels. During periods of declining interest rates, an
issuer of preferred stock or fixed-rate debt
securities may exercise its option to redeem
securities prior to maturity, forcing the Fund to
reinvest in lower yielding securities. This is known
as call risk. During periods of rising interest rates,
the average life of certain types of securities may be
extended because of slower than expected payments.
This may lock in a below market yield, increase the
security's duration, and reduce the value of the
security. This is known as extension risk. The value
of the Fund's common stock investments may also be
influenced by changes in interest rates.
Duration Risk. Duration is a measure of the expected
life of a fixed income security that was developed as
a more precise alternative to the concept of
term-to-maturity. Duration incorporates a bond's
yield, coupon interest payments, final maturity and
call features into one measure. The duration of a
fixed income security is a measure of the portfolio's
sensitivity to changes in interest rates. Prices of
fixed income securities with longer effective
maturities are more sensitive to interest rate changes
than those with shorter effective maturities. As
nominal interest rates rise, the value of fixed income
securities held by the Fund is likely to decrease.
Convertible Securities Risk. The value of a
convertible security is a function of its "investment
value" (determined by its yield in comparison with the
yields of other securities of comparable maturity and
quality that do not have a conversion privilege) and
its "conversion value" (the security's worth, at
market value, if converted into the underlying common
stock). The investment value of a convertible security
is influenced by changes in interest rates, with
investment value declining as interest rates increase
and increasing as interest rates decline. The credit
standing of the issuer and other factors may also have
an effect on the convertible security's investment
value. The conversion value of a convertible security
is determined by the market price of the underlying
common stock. If the conversion value is low relative
to the investment value, the price of the convertible
security is governed principally by its investment
value. Generally, the conversion value decreases as
the convertible security approaches maturity. To the
extent the market price of the underlying common stock
approaches or exceeds the conversion price, the price
of the convertible security will be increasingly
influenced by its conversion value. A convertible
security generally will sell at a premium over its
conversion value by the extent to which investors
place value on the right to acquire the underlying
common stock while holding a fixed income security.
A convertible security may be subject to redemption at
the option of the issuer at a price established in the
convertible security's governing instrument. If a
convertible security held by the Fund is called for
redemption, the Fund will be required to permit the
issuer to redeem the security, convert it into the
underlying common stock or sell it to a third party.
Any of these actions could have an adverse effect on
the Fund's ability to achieve its investment
objectives.
Illiquid Securities Risk. Restricted securities and
other illiquid investments of the Fund involve the
risk that the securities will not be able to be sold
at the time desired by the Advisor or at prices
approximating the value at which the Fund is carrying
the securities. Where registration is required to sell
a security, the Fund may be obligated to pay all or
part of the registration expenses, and a considerable
period may elapse between the decision to sell and the
time the Fund may be permitted to sell a security
under an effective registration statement. If, during
such a period, adverse market conditions were to
develop, the Fund might obtain a less favorable price
than prevailed when it decided to sell. Restricted
securities for which no market exists and other
illiquid investments are valued at fair value as
determined in accordance with procedures approved and
periodically reviewed by the Trustees of the Fund.
Inflation Risk. Inflation risk is the risk that the
purchasing power 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 common shares and distributions
thereon can decline. In addition, during any periods
of rising inflation, dividend rates of any preferred
shares of the Fund would likely increase, which would
tend to further reduce returns to common shareholders.
Securities Lending Risk. 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. Securities lending is
subject to the risk that loaned securities may not be
available to the Fund on a timely basis and the Fund
may, therefore, lose the opportunity to sell the
securities at a desirable price. Any loss in the
market price of securities loaned by the Fund that
occurs during the term of the loan would be borne by
the Fund and would adversely affect the Fund's
performance. Also, there may be delays in recovery, or
no recovery, of securities loaned or even a loss of
rights in the collateral should the borrower of the
securities fail financially while the loan is
outstanding. The Fund's entry into securities lending
transactions may cause the replacement income earned
on the loaned securities to fall outside of the
definition of qualified dividend income. This
replacement income generally will not be eligible for
reduced federal income tax rates under the Code.
Market Disruption and Geopolitical Risk. The
aftermath of the war in Iraq and the continuing
occupation of Iraq, instability in the Middle East,
and terrorist attacks in the United States and around
the world may result in 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 does not know how long the securities markets
will continue to be affected by these events and
cannot predict the effects of the occupation 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 premium over the then current
market price of the common shares or at net asset
value.
Given the risks described above, an investment in the
common shares may not be appropriate for all
investors. You should carefully consider your ability
to assume these risks before making an investment in
the Fund.
SUMMARY OF FUND EXPENSES
The following table shows Fund expenses as a percentage of net assets
attributable to common shares assuming the Fund [issues preferred stock equal to
50% of the Fund's total assets after such issuance or utilizes borrowings equal
to 33?% of the Fund's total assets after such borrowing]:
Shareholder Transaction Expenses
Sales load paid by you (as a percentage
of offering price)....................................... [_____]%
Offering expenses borne by the Fund (as a percentage
of offering price) (1)................................... [_____]%
Dividend reinvestment plan fees (2)...................... None
Percentage of
Net Assets
Attributable
to
Common Shares
(Assuming the
Use of
Leverage)
Annual Expenses
Management Fees (3)...................................... [______]%
Administration Fees (4).................................. [______]%
Interest Payments on Borrowed Funds (5).................. [______]%
Other Expenses (6)....................................... [______]%
Acquired Fund Fees and Expenses (7)...................... [______]%
Total Annual Expenses.................................... [______]%
---------------------------------------
(1) DMC has agreed to pay offering costs, and not organization costs, of the
Fund (other than the sales load) that, when added to the Fund's
organizational costs, exceed $[___] per common share ([____]% of the
offering price). Assuming an offering of [_________] common shares for
$[________], the total offering costs are estimated to be $[_________],
$[________] of which will be borne by the Fund (after taking into account
organizational costs) and $[________] of which will be paid by the Advisor.
[The costs borne by the Fund may include a reimbursement of DMC's expenses
incurred in connection with this offering.] [To the extent the Fund
utilizes leverage in the form of borrowings, the estimated expenses of
establishing the borrowings are $[___].
(2) You will be charged a $[_____] service charge and pay brokerage charges if
you direct the Plan Agent (as defined below) to sell your common shares
held in a dividend reinvestment account.
(3) The investment management agreement between the Fund and the Advisor
obligates the Fund to pay the Advisor an annual investment management fee
equal to [1.00]% of the average daily total assets of the Fund. Total
assets include assets purchased with borrowed amounts from proceeds of
preferred shares and borrowings, commonly referred to as leverage. For
purposes of this table, it is assumed that the Fund has utilized leverage
in the form of [the issuance of preferred shares in an aggregate amount of
50% of its total assets and/or borrowings in an aggregate amount of 33?% of
its total assets]. Assuming no borrowing or issuance of preferred shares,
the Fund's expenses would be as set forth in footnote 5 below.
(4) The Administration Agreement between the Fund and DSC obligates the Fund to
pay DSC an administration fee of [__]% of the Fund's average daily managed
assets for providing administration and accounting to the Fund. Total
assets include assets purchased with borrowed amounts from [issuing
preferred shares and borrowing], commonly referred to as leverage. For
purposes of this table, it is assumed that the Fund has utilized leverage
in the form of [the issuance of preferred shares in an aggregate amount of
50% of its total assets and borrowing in an aggregate amount of 33?% of its
total assets]. Assuming no borrowing or issuance of preferred shares, the
Fund's expenses would be as set forth in footnote 5 below.
(5) Assumes the Fund (i) utilizes leverage in the form of [the issuance of
preferred stock in an aggregate amount equal to 50% of the Fund's total
assets or borrowings in an aggregate amount equal to 33?% of the Fund's
total assets] and (ii) the annual interest rate on the amount borrowed is
[___]%. However, assuming the Fund has not utilized any such leverage the
Fund's estimated annual expenses (as a percentage of net assets
attributable to common shares) would be:
Annual Expenses (as a percentage of net assets attributable to Common Shares)
Management Fees................................................... [______]%
Administration Fees............................................... [______]%
Interest Payments on Borrowed Funds............................... None
Other Expenses.................................................... [______]%
Acquired Fund Fees and Expenses................................... [______]%
Total Annual Expenses............................................. [______]%
(6) "Other Expenses" are based on estimated amounts for the Fund's first full
year of operations.
(7) "Acquired Fund Fees and Expenses" are based on estimated amounts of the
Fund's fees and expenses related to the Fund's investment in other
investment companies during its first full year of operations.
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
[__________] common shares. If the Fund issues fewer common shares, all other
things being equal, these expenses, as a percentage of the Fund's net assets
attributable to common shares, would increase. See "Management of the Fund" and
"Dividend Reinvestment Plan."
Example* 1 Year 3 Years 5 Years 10 Years
You would pay the following expenses on a $1,000 investment
in common shares, assuming (1) offering expenses of $[___],
(2) a sales load of $[___], (3) expenses of leverage [in the
form of issuing preferred shares or borrowings] of $[___],
(4) annual expenses of [___]% of net assets attributable to
common shares [which assumes the Fund's use of leverage
through the issuance of preferred shares in an amount equal
to 50% of the Fund's total assets and/or borrowings in an
aggregate amount equal to 33?% of the Fund's total assets
and an annual interest rate on the borrowings of [____]%],
and (5) a 5% annual return on net assets:
$[____] $[____] $[____] $[____]
---------------------------------------
* The example should not be considered a representation of future expenses.
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. Actual expenses may be
greater or less than those assumed. Moreover, the Fund's actual rate of
return may be greater or less than the hypothetical 5% return shown in the
example.
THE FUND
The Fund is a newly-organized, diversified, closed-end management
investment company registered under the 1940 Act. The Fund was organized as a
Delaware statutory trust on [______________], 2007, pursuant to an Agreement and
Declaration of Trust governed by the laws of the State of Delaware. The Fund has
no operating history. The Fund's principal office is located at 2005 Market
Street, Philadelphia, Pennsylvania 19103, and its telephone number is (800)
523-1918.
USE OF PROCEEDS
The net proceeds of this offering of common shares will be approximately
$[___] ($[___] if the underwriters exercise the overallotment option in full)
after payment of the estimated offering costs and the deduction of the sales
load. The Fund will invest the net proceeds of this offering in accordance with
the Fund's investment objectives and policies as stated below. The Advisor
currently anticipates that the Fund will be fully invested in securities that
meet the Fund's investment objectives and policies within approximately one
month after the completion of this offering. It is anticipated that certain Fund
proceeds will be invested in short-term debt securities prior to being invested
otherwise pursuant to the Fund's investment objectives and policies.
THE FUND'S INVESTMENTS
Investment Objectives and Policies
The Fund's primary investment objective is to seek current income, with a
secondary objective of capital appreciation. The Fund will seek to achieve its
objectives by focusing on broad diversification within its portfolio by
investing globally in dividend-paying or income-generating securities across
multiple asset classes. The primary asset classes include equity securities of
large, well-established companies, securities issued by real estate companies
(including REITs and REOCs), emerging market equities, preferred securities,
debt securities, including high-yield corporate bonds, investment grade
corporate bonds, U.S. government securities, non-U.S. corporate bonds, and
non-U.S. government securities, convertible bonds, convertible preferred stock,
and emerging market debt securities, and international currencies. There is no
assurance that the Fund will achieve its investment objectives.
The Advisor will determine the proportion of the Fund's assets to be
allocated among the various assets classes based on its analysis of economic and
market conditions and its assessment of the income and potential for
appreciation that can be achieved from investments in such asset classes. The
percentage of the Fund's assets allocated to the various asset classes described
herein will vary depending on DMC's assessment of these conditions. The key
goals in allocating across these various asset classes are to attempt to
minimize the Fund's volatility through diversification and to attempt to
optimize the Fund's ability to generate income.
The Fund may use leverage through issuing preferred shares, commercial
paper or other borrowings. The Fund may use leverage to the maximum amount
permitted by the 1940 Act. Under the 1940 Act, the Fund may issue preferred
shares in an aggregate amount up to 50% of its total assets (including the
amount obtained from leverage) or the Fund may borrow in an aggregate amount up
to 33?% of its total assets (including the amount obtained from leverage). The
Fund also may borrow money as a temporary measure for extraordinary or emergency
purposes, including the payment of dividends and the settlement of securities
transactions, which otherwise might require untimely dispositions of Fund
securities. See "Effects of Leverage."
The Fund may, from time to time, take temporary defensive positions that
are inconsistent with the Fund's principal investment strategies in attempting
to respond to adverse market, economic, political or other conditions. During
such times, the Fund may temporarily invest up to 100% of its assets in cash or
cash equivalents, including money market instruments, prime commercial paper,
repurchase agreements, Treasury bills and other short-term obligations of the
U.S. Government, its agencies or instrumentalities. In these and in other cases,
the Fund may not achieve its investment objectives.
Generally, securities will be purchased or sold by the Fund on national
securities exchanges and in the over-the-counter market. From time to time,
securities may be purchased or sold in private transactions, including
securities that are not publicly traded or that are otherwise illiquid.
The Advisor may invest the Fund's cash balances in any investments it deems
appropriate, including, without limitation and as permitted under the 1940 Act,
money market funds, including the Delaware Cash Reserve Fund, repurchase
agreements, U.S. Treasury and U.S. agency securities, municipal bonds, and bank
accounts. Any income earned from such investments is ordinarily reinvested by
the Fund in accordance with its investment program. Many of the considerations
entering into the Advisor's recommendations and the portfolio managers'
decisions are subjective.
Investment Strategy
Overall Philosophy
The Fund may invest in a variety of dividend-paying or income-generating
securities. Not all investments, however, are required to pay dividends or
interest. Under normal market conditions, the Fund will invest at least 80% of
its total assets in a combination of dividend-paying or income-generating
securities across multiple asset classes, including but not limited to, equity
securities of large, well-established companies; securities issued by real
estate companies (including REITs and REOCs), debt securities (such as
government bonds, investment grade and high-yield corporate bonds, and
convertible bonds), and emerging market securities. In addition, under normal
market conditions, the Fund will invest at most 60% of its total assets in
securities of U.S. issuers and at least 40% of its total assets in securities of
non-U.S. issuers, unless market conditions are not deemed favorable by the
Advisor, in which case the Fund would invest at least 30% of its total assets in
the securities of non-U.S. issuers. The Fund may not invest more than 25% of the
Fund's total assets in any one industry nor, as to 75% of the Fund's total
assets, will more than 5% be invested in the securities of any one issuer. In
addition, the Advisor will use a combination of dividend capture trading, option
overwriting, and realization of gains on the sale of securities to enhance the
sustainability of the income stream.
The Advisor's strategy to income generating investing is based on the
primary attribute of seeking a sustainable and recurring income stream, with
capital appreciation as a secondary objective. This investment approach should
provide diversification, low sector correlation, low interest rate sensitivity
and downside protection, which over the long-term should result in an attractive
risk adjusted return. The Advisor believes that seeking income on a global basis
can provide investors with opportunities not available in the U.S. equity and
debt markets. For example, recently many countries, including the United
Kingdom, France, Canada, Australia, Japan, Singapore, and Hong Kong and several
others, have enacted REIT or similar legislation that has created real estate
companies which are required to pay out a significant portion of their earnings
in dividends.
Total return from an equity investment is derived from two components,
income and capital appreciation. From the end of 1929 through 2006, the income
component has represented approximately one-half of the total investment return
in the U.S. equity market. Within that period, returns from the income component
of total return have tended to be, over the long-term, more stable than returns
from capital appreciation. As an example, as shown in the chart below, while
returns from the securities comprising the Standard & Poor's 500(R)Composite
Index ("S&P 500(R)") since 1929 due to the income component have varied from 1%
to 10%, annual returns from capital appreciation have varied from -47.1% to
45.00%. In addition, the past two decades of the 1980s and 1990s provided
investors with average annual returns from capital appreciation of 12.6% and
15.3%, respectively, well above the long-term average annual return from capital
appreciation of 5.6% from the end of 1929 to 2006. The Advisor believes that the
following decade of the 2000s (average annual return from capital appreciation
of -0.5% from 2000 to 2006) has begun a prolonged environment of lower returns
in which the income component of total return will provide a more equal portion
of total return in the future. Historically, income provided 43% of the total
return component from 1929 to 2006. During the 1980s and 1990s, the income
component provided only 29% and 16% of the total return component, respectively.
Thus, the Advisor believes that the income component of total return will revert
to the historical mean of 43% of the total return component. A strategy borne of
current income will provide better risk adjusted returns due to the income
component being a larger determinant of total return.(1)
The Advisor believes that many foreign equity markets have exhibited
properties similar to those described for the U.S. equity market above with
respect to the income component of total return. Although the supporting data
for international markets as represented by the Morgan Stanley Capital
International Europe, Australasia, and Far East Index (the "MSCI EAFE
Index(R)"), a benchmark that measures international equity performance, does not
provide as much history as the S&P 500(R), the trend of income return becoming a
more dominant component of total return is similar in direction. During the time
period measured from the end of 1969 to 2006, returns from the income component
of total return have tended to be, over the long-term, more stable than returns
from capital appreciation. As an example, while returns from the income
component of the securities comprising the MSCI EAFE Index(R) since the end of
1969 have varied from 1% to 4.2%, annual returns from capital appreciation have
varied from -25.6% to 66.8%. In addition, the past two decades of the 1980s and
1990s, the income component represented only 11% and 24% of the total return
component, respectively. The Advisor believes the following decade of the 2000s
has begun a trend similar to the United States whereby the average annual return
from income has been 46% of the total return component of the MSCI EAFE
Index(R)from 2000 through 2006. Similar to returns in the United States, the
Advisor believes a strategy of seeking current and sustainable income will
provide better risk adjusted returns due to the income component being a larger
determinant of total return.(2)
(1) Source of data for this paragraph is Ibbotson Associates and Bloomberg.
(2) Source of data for this paragraph is MSCI/BARRA, FACTSET, Delaware
Investments.
S&P 500 Return by Decade - Annualized Return
[BAR CHART OMITTED]
Decade Ending Capital Appreciation Income
------------- -------------------- ------
1930's -5.3% 5.2%
1940's 3.0% 6.1%
1950's 13.6% 5.8%
1960's 4.4% 3.4%
1970's 1.6% 4.3%
1980's 12.6% 5.0%
1990's 15.3% 2.9%
2000 - 2006 -0.5% 1.6%
Source: Ibbotson Associates, Bloomberg and Delaware Investments
MSCI EAFE Index Return by Decade - Annualized Return
[BAR CHART OMITTED]
Decade Ending Capital Appreciation Income
------------- -------------------- ------
1970's 5.8% 3.0%
1980's 19.5% 2.4%
1990's 5.3% 1.7%
2000 - 2006 2.4% 2.1%
Source: MSCI/BARRA, FACTSET and Delaware Investments
Multi-Asset Classes
The Fund will primarily invest in the following asset classes to attempt to
achieve broad diversification of income and capital appreciation within its
portfolio. It may not, however, be invested in all these asset classes at any
given time.
U.S. Equities. The Advisor researches individual companies and analyze
economic and market conditions, seeking to identify the securities that the
Advisor believes are the best investments for the Fund. The Advisor takes a
disciplined approach to investing, combining investment strategies and risk
management techniques that the Advisor believes can help shareholders meet their
goals. The Fund invests primarily in securities of large-capitalization
companies that the Advisor believes have long-term capital appreciation
potential. The Advisor follows a value-oriented investment philosophy in
selecting stocks for the Fund using a research-intensive approach that considers
factors such as:
o a security price that reflects a market valuation that is judged to be
below the estimated present or future value of the company;
o favorable earnings growth prospects;
o expected above-average return on equity and dividend yield;
o the financial condition of the issuer; and
o various qualitative factors.
The Advisor may sell a security if the Advisor no longer believes the
security will contribute to meeting the investment objectives of the Fund. In
considering whether to sell a security, the Advisor may evaluate, among other
things, the conditions of the U.S. economy, the condition of foreign economies,
meaningful changes in the issuer's financial condition, and changes in the
condition and outlook in the issuer's industry sector.
Securities Issued by Real Estate Companies. The Fund may invest in
securities that represent a variety of different sectors in the real estate
industry, including REITs and REOCs. The Advisor researches individual companies
and analyzes economic and market conditions, seeking to identify the securities
or market sectors that the Advisor believes are the best global real estate
investments for the Fund. The Advisor takes a disciplined approach to investing,
combining investment strategies and risk management techniques that can help
shareholders meet their goals. The Advisor strives to achieve maximum long-term
total return through a combination of current income and capital appreciation.
The Fund will invest among companies in various regions and countries throughout
the world, including the United States and developed, developing, and emerging
market non-U.S. countries. The Fund's global real estate investments may at
times have a significant investment in real estate companies, including REITs,
REIT-equivalents, and REOCs, organized or located within or outside the United
States. See "Global Real Estate Investment Trusts" and "Global Real Estate
Industry Operating Companies." Under certain market conditions, the Fund may
shift more of its investments to U.S. real estate companies. The Fund may invest
in securities issued in any currency and may hold foreign currency.
The Advisor's global real estate investment strategy is based on both a
top-down and a bottom-up assessment of countries and specific markets. From a
top-down perspective, the Advisor considers each region's economy, including
current economic conditions, interest rates, job growth, and capital flows. The
Advisor's bottom-up analysis is based on a relative valuation methodology that
is focused on both real estate valuations and security-level research with
disciplined portfolio management. Real estate factors that are important to the
Advisor's analysis would be supply/demand, vacancy rates, and rental growth in a
particular market. This market-by-market research is coupled with an overview of
a company's financials, cash flow, dividend growth rates, and management
strategy. In addition, the Advisor considers selling a security based generally
on the following disciplines: a security reaching the Advisor's targeted price
ranges; relative pricing of a security versus other investment opportunities; or
a negative change in how the Advisor views a security's fundamentals.
International Equities. The Advisor's investment strategy in international
equities seeks long-term growth without undue risk to principal. The Fund
invests primarily in equity securities, including common or ordinary stocks,
which provide the potential for capital appreciation. The Advisor's strategy
would commonly be described as a value strategy. That is, the Advisor strives to
purchase stocks that the Advisor believes have a greater value than the price at
which the stock is purchased.
In selecting foreign stocks, the Advisor's philosophy is based on the
concept that adversity creates opportunity and that transitory problems can be
overcome by well-managed companies. The Advisor uses an approach that combines
quantitative, valuation-based screening at the early stages followed by
comprehensive company and industry specific research. The philosophy and process
are based on the concept that valuation screens serve solely as a starting point
in the creation of a portfolio of undervalued stocks because accounting measures
only approximate the intrinsic value of any company. The investment universe
segmentation prioritizes research and the Advisor's bottom-up contrarian
investment style seeks to identify mispriced securities.
The Fund may purchase securities in any foreign country, developed or
emerging markets; however, the Advisor currently anticipates investing in
Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Greece,
Hong Kong, Ireland, Italy, Japan, Korea, Mexico, Netherlands, New Zealand,
Norway, Portugal, Singapore, Spain, Sweden, Switzerland, Taiwan, and the United
Kingdom. While this is a representative list, the Fund may also invest in
countries not listed here.
The Fund's portfolio management team generally maintains a long-term focus
in the Fund, seeking companies that it believes will perform well over the next
three to five years.
Emerging Market Equities. The Advisor's emerging markets strategy seeks
long-term capital appreciation and the Fund may invest in a broad range of
emerging market equity securities, including common or ordinary stocks. The
Advisor's primary emphasis will be on the stocks of companies considered to be
from an emerging market country.
The Advisor considers an "emerging market country" to be any country that
is:
o generally recognized to be an emerging or developing country by the
international financial community, including the World Bank and the
International Finance Corporation;
o classified by the United Nations as developing; or
o included in the International Finance Corporation Free Index or the
Morgan Stanley Capital International Emerging Markets Index.
Developing or emerging countries include almost every nation in the world
except the United States, Canada, Japan, Australia, New Zealand, and most
nations located in Western and Northern Europe. A representative list of the
countries where the Fund's portfolio manager may invest includes: Argentina,
Brazil, Chile, China, Croatia, Czech Republic, Egypt, Estonia, Hungary, India,
Indonesia, Israel, Malaysia, Mexico, Panama, Poland, Republic of Korea, Russia,
South Africa, Taiwan, and Thailand. The Fund may invest in other countries,
particularly as markets in other emerging countries develop.
In deciding whether a company is from an emerging market country, the
Advisor will evaluate publicly available information and question individual
companies to determine if the company meets one of the following criteria:
o the principal trading market for the company's securities is in a
country that is emerging;
o the company is organized under the laws of an emerging market country
and has a principal office in an emerging market country; or
o the company derives a majority of its income from operations in
emerging market countries, even though the company's securities are
traded in an established market or in a combination of emerging and
established markets.
Convertible Securities. The Fund may invest without limit in convertible
securities, another category of income generating equity securities. These
securities may be of any credit quality, including those rated below investment
grade by a nationally recognized statistical rating organization ("NRSRO") or
those that are unrated but deemed equivalent to non-investment grade. The Fund
principally invests in convertible securities that offer favorable upside
participation and downside protection relative to the underlying equity security
that it is linked to. The Advisor primarily utilizes convertible securities to
invest in sectors or industries of the market which the Advisor believes
represent attractive investment opportunities but do not offer attractive yields
or diversification through traditional equity or debt securities. The
convertible structure enables the Advisor to gain this exposure while still
realizing income returns and minimizing volatility.
U.S. Investment Grade Fixed Income. In managing the Fund's assets allocated
to the investment-grade sector, the Fund will invest principally in debt
obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities, and by U.S. corporations. The corporate debt obligations in
which the Fund may invest include bonds, notes, debentures, and commercial paper
of U.S. companies. The U.S. Government securities in which the Fund may invest
include a variety of securities that are issued or guaranteed as to the payment
of principal and interest by the U.S. Government, and by various agencies or
instrumentalities which have been established or sponsored by the U.S.
Government. The investment-grade sector of the Fund's assets may also be
invested in mortgage-backed securities issued or guaranteed by the U.S.
Government, its agencies, or instrumentalities or by government sponsored
corporations. Other mortgage-backed securities in which the Fund may invest are
issued by certain private, non-government entities. Subject to quality
limitations, the Fund may also invest in securities which are backed by assets
such as receivables on home equity and credit card loans, automobile, mobile
home, recreational vehicle and other loans, wholesale dealer floor plans, and
leases.
Securities purchased by the Fund within this sector will be rated in one of
the four highest rating categories by an NRSRO, such as those rated AAA, AA, A,
and BBB by the Standard & Poor's Ratings Group ("S&P") or Fitch, Inc. ("Fitch")
or Aaa, Aa, A, and Baa by Moody's Investors Service, Inc. ("Moody's"), or will
be unrated securities that the Advisor determines are of comparable quality.
U.S. High Yield Fixed Income. The Fund will invest its assets that are
allocated to the domestic high yield sector primarily in those securities having
a liberal and consistent yield and those tending to reduce the risk of market
fluctuations. The Fund may invest in domestic corporate debt obligations,
including notes, which may be convertible or non-convertible, commercial paper,
units consisting of bonds with stock or warrants to buy stock attached,
debentures, convertible debentures, zero coupon bonds, and pay-in-kind
securities ("PIKs").
The Fund will invest in both rated and unrated bonds. The rated bonds that
the Fund may purchase in this sector will generally be rated BB or lower by S&P
or Fitch, Ba or lower by Moody's, or similarly rated by another NRSRO. Unrated
bonds may be more speculative in nature than rated bonds.
International Developed Markets Fixed Income. The international developed
markets fixed income sector invests primarily in fixed income securities of
issuers organized or having a majority of their assets or deriving a majority of
their operating income in international developed markets. These fixed income
securities may include foreign government securities, debt obligations of
foreign companies, and securities issued by supranational entities. A
supranational entity is an entity established or financially supported by the
national governments of one or more countries to promote reconstruction or
development. Examples of supranational entities include, among others, the
International Bank for Reconstruction and Development (more commonly known as
the "World Bank"), the European Economic Community, the European Investment
Bank, the Inter-Development Bank, and the Asian Development Bank. The
international developed markets sector will be subject to certain risks,
including, but not limited to, the risk that securities within this sector may
be adversely affected by political instability, changes in currency exchange
rates, foreign economic conditions, or inadequate regulatory and accounting
standards.
Emerging Markets Fixed Income. The Fund may purchase securities of issuers
in any foreign country, developed and underdeveloped. These investments may
include direct obligations of issuers located in emerging markets countries.
Fixed income securities in the emerging markets fixed income sector may include
foreign government securities, debt obligations of foreign companies, and
securities issued by supranational entities. In addition to the risks associated
with investing in all foreign securities, emerging-markets debt is subject to
specific risks, particularly those that result from emerging markets generally
being less stable, politically and economically, than developed markets. There
is substantially less publicly available information about issuers in emerging
markets than there is about issuers in developed markets, and the information
that is available tends to be of a lesser quality. Also, emerging markets are
typically less mature, less liquid, and subject to greater price volatility than
are developed markets.
Distribution Enhancement Strategies
The Advisor will use a combination of dividend capture trading, option
overwriting, and realization of gains on the sale of securities to enhance the
sustainability of the income stream. The percentage of the Fund's assets
invested in these strategies will vary from time to time based on the Advisor's
assessment of economic and market conditions and the potential for income.
Dividend Capture. The Fund's dividend capture strategy seeks to maximize
the level of dividend income that the Fund receives by engaging in dividend
capture trading and by identifying special dividend situations. In a dividend
capture trade, the Fund sells a stock on or shortly after the stock's
ex-dividend date and uses the sale proceeds to purchase one or more other stocks
that are expected to pay dividends before the next dividend payment on the stock
being sold. Through this rotation practice, the Fund may receive more dividend
payments over a given period of time than if it held a single stock. Receipt of
a greater number of dividend payments during a given time period could augment
the total amount of dividend income the Fund receives over this period. For
example, during the course of a single year it may be possible through dividend
capture trading for the Fund to receive five or more dividend payments with
respect to Fund assets attributable to dividend capture trading where it may
only have received four quarterly payments in a hold only strategy. Special
dividend situations may include those where companies decide to return large
cash balances to shareholders as one-time dividend payments, for instance due to
a restructuring or recent strong operating performance. Other special dividends
may arise in a variety of situations. See "Risks-Dividend Strategy Risks."
Option Overwriting. The Fund may seek to increase its income or may hedge a
portion of its portfolio investments through writing (i.e., selling) covered put
and call options. The Fund will receive a premium when it writes put and call
options, which increases the Fund's return on the underlying security in the
event the option expires unexercised or is closed out at a profit. The Fund may
purchase and write options on securities that are listed on national securities
exchanges or are traded over the counter, although it expects, under normal
circumstances, to effect such transactions on national securities exchanges. See
"The Fund's Investments-Investment Techniques-Options on Securities."
Realization of Gains on the Sale of Securities. The Fund anticipates
utilizing both short-term and, to the extent permitted by applicable law,
long-term capital gains as part of its periodic distributions to shareholders.
The Fund realizes a capital gain when it sells a portfolio security at a price
higher than its original cost. Only the excess of net realized capital gains
over prior year capital loss carryovers, if any, are available for distribution.
Over time the Advisor believes that portions of the Fund's securities should
appreciate in value, and consequently, the Fund will be able to realize gains on
these securities. The Fund will attempt to realize such gains in certain
situations to attempt to help keep distributions as consistent and sustainable
as possible without disrupting the underlying investment philosophy of the
Advisor. If, however, the Fund realizes capital losses in a year after making a
capital gains distribution, the capital gains distribution may later be
recharacterized as a return of capital. See "Distributions."
Portfolio of Investments
Common Stocks. The Fund will invest in common stocks. Common stocks
represent an ownership interest in an issuer. While offering greater potential
for long-term growth, common stocks are more volatile and more risky than some
other forms of investment. Common stock prices fluctuate for many reasons,
including adverse events, such as an unfavorable earnings report, changes in
investors' perceptions of the financial condition of an issuer or the general
condition of the relevant stock market, or when political or economic events
affecting the issuers occur. In addition, common stock prices may be sensitive
to rising interest rates as the costs of capital rise and borrowing costs
increase.
Preferred Stocks. Preferred stock, like common stock, represents an equity
ownership in an issuer. Generally, preferred stock has a priority of claim over
common stock in dividend payments and upon liquidation of the issuer. Unlike
common stock, preferred stock does not usually have voting rights. Preferred
stock in some instances is convertible into common stock. Although they are
equity securities, preferred stocks have characteristics of both debt and common
stock. Like debt, their promised income is contractually fixed. Like common
stock, they do not have rights to precipitate bankruptcy proceedings or
collection activities in the event of missed payments. Other equity
characteristics are their subordinated position in an issuer's capital structure
and that their quality and value are heavily dependent on the profitability of
the issuer rather than on any legal claims to specific assets or cash flows.
Distributions on preferred stock must be declared by the board of trustees
and may be subject to deferral, and thus they may not be automatically payable.
Income payments on preferred stocks may be cumulative, causing dividends and
distributions to accrue even if not declared by the board or otherwise made
payable, or they may be non-cumulative, so that skipped dividends and
distributions do not continue to accrue. There is no assurance that dividends on
preferred stocks in which the Fund invests will be declared or otherwise made
payable. The Fund may invest in non-cumulative preferred stock, although the
Advisor would consider, among other factors, their non-cumulative nature in
making any decision to purchase or sell such securities.
Shares of preferred stock have a liquidation value that generally equals
the original purchase price at the date of issuance. The market values of
preferred stock may be affected by favorable and unfavorable changes impacting
the issuers' industries or sectors, including companies in the utilities and
financial services sectors, which are prominent issuers of preferred stock. They
may also be affected by actual and anticipated changes or ambiguities in the tax
status of the security and by actual and anticipated changes or ambiguities in
tax laws, such as changes in corporate and individual income tax rates, and in
the dividends received deduction for corporate taxpayers or the characterization
of dividends as tax-advantaged as described herein.
Because the claim on an issuer's earnings represented by preferred stock
may become onerous when interest rates fall below the rate payable on the stock
or for other reasons, the issuer may redeem preferred stock, generally after an
initial period of call protection in which the stock is not redeemable. Thus, in
declining interest rate environments in particular, the Fund's holdings of
higher dividend paying preferred stocks may be reduced and the Fund may be
unable to acquire securities paying comparable rates with the redemption
proceeds.
Foreign Securities. Under normal circumstances, the Fund intends to,
although it is not required to, invest a significant portion of its assets in
securities of issuers located in any foreign country (in addition to the United
States), including emerging markets. The Fund will invest in foreign securities,
including direct investments in securities of foreign issuers and investments in
depository receipts (such as American, European and Global Depository Receipts
("ADR," "GDRs," and "EDRs," respectively)) that represent indirect interests in
securities of foreign issuers. The Fund is not limited in the amount of assets
it may invest in such foreign securities. These investments involve risks not
associated with investments in the United States, including the risk of
fluctuations in foreign currency exchange rates, unreliable and untimely
information about the issuers and political and economic instability. These
risks could result in the Advisor's misjudging the value of certain securities
or in a significant loss in the value of those securities.
The value of foreign securities is affected by changes in currency rates,
foreign tax laws (including withholding tax), government policies (in this
country or abroad), relations between nations and trading, settlement,
custodial, and other operational risks. In addition, the costs of investing
abroad are generally higher than in the United States, and foreign securities
markets may be less liquid, more volatile and less subject to governmental
supervision than markets in the United States. As an alternative to holding
foreign-traded securities, the Fund may invest in dollar-denominated securities
of foreign companies that trade on U.S. exchanges or in the U.S.
over-the-counter market (including depository receipts and exchange-traded funds
("ETFs")).
Because foreign companies are not subject to uniform accounting, auditing
and financial reporting standards, practices and requirements comparable to
those applicable to U.S. companies, there may be less publicly available
information about a foreign company than about a domestic company. Volume and
liquidity in most foreign debt markets is less than in the United States and
securities of some foreign companies are less liquid and more volatile than
securities of comparable U.S. companies. There is generally less government
supervision and regulation of securities exchanges, broker-dealers and listed
companies than in the United States. Mail service between the United States and
foreign countries may be slower or less reliable than within the United States,
thus increasing the risk of delayed settlements of portfolio transactions or
loss of certificates for portfolio securities. Payment for securities before
delivery may be required. In addition, with respect to certain foreign
countries, there is the possibility of expropriation or confiscatory taxation,
political or social instability, or diplomatic developments, which could affect
investments in those countries. Moreover, individual foreign economies may
differ favorably or unfavorably from the U.S. economy in such respects as growth
of gross national product, rate of inflation, capital reinvestment, resource
self-sufficiency and balance of payments position. Foreign securities markets,
while growing in volume and sophistication, are generally not as developed as
those in the United States, and securities of some foreign issuers (particularly
those located in developing countries) may be less liquid and more volatile than
securities of comparable U.S. companies.
The Fund may purchase ADRs, EDRs, and GDRs, which are certificates
evidencing ownership of shares of foreign issuers and are alternatives to
purchasing directly the underlying foreign securities in their national markets
and currencies. However, such depository receipts continue to be subject to many
of the risks associated with investing directly in foreign securities. These
risks include foreign exchange risk as well as the political and economic risks
associated with the underlying issuer's country. ADRs, EDRs, and GDRs may be
sponsored or unsponsored. Unsponsored receipts are established without the
participation of the issuer. Unsponsored receipts may involve higher expenses,
they may not pass-through voting or other shareholder rights, and they may be
less liquid. Less information is normally available on unsponsored receipts.
The risks of foreign investments described above apply to an even greater
extent on investments in emerging markets. The securities markets of emerging
countries are generally smaller, less developed, less liquid, and more volatile
than the securities markets of the United States and developed foreign markets.
Disclosure and regulatory standards in many respects are less stringent than in
the United States and developed foreign markets. There also may be a lower level
of monitoring and regulation of securities markets in emerging market countries
and the activities of investors in such markets and enforcement of existing
regulations has been extremely limited. Many emerging countries have experienced
substantial, and in some periods 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. Economies in emerging markets generally are
heavily dependent upon international trade and, accordingly, have been and may
continue to be affected adversely by trade barriers, exchange controls, managed
adjustments in relative currency values, and other protectionist measures
imposed or negotiated by the countries with which they trade. The economies of
these countries also have been and may continue to be adversely affected by
economic conditions in the countries in which they trade. The economies of
countries with emerging markets may also be predominantly based on only a few
industries or dependent on revenues from particular commodities. In addition,
custodial services and other costs relating to investment in foreign markets may
be more expensive in emerging markets than in many developed foreign markets,
which could reduce the Fund's income from such securities.
In many cases, governments of emerging countries continue to exercise
significant control over their economies, and government actions relative to the
economy, as well as economic developments generally, may affect the Fund's
investments in those countries. In addition, there is a heightened possibility
of expropriation or confiscatory taxation, imposition of withholding taxes on
interest payments, or other similar developments that could affect investments
in those countries. There can be no assurance that adverse political changes
will not cause the Fund to suffer a loss of any or all of its foreign
investments.
Global Real Estate Investment Trusts. The Fund may invest in REITs and
REIT-equivalents located in any country (including the United States and
emerging market countries). REITs are financial vehicles that pool investors'
capital to purchase or finance real estate. The market value of REIT shares and
the ability of REITs to distribute income may be adversely affected by numerous
factors, including rising interest rates, changes in the national, state and
local economic climate and real estate conditions, perceptions of prospective
tenants of the safety, convenience and attractiveness of the properties, the
ability of the owners to provide adequate management, maintenance and insurance,
the cost of complying with the Americans with Disabilities Act, increasing
competition and compliance with environmental laws, changes in real estate taxes
and other operating expenses, adverse changes in governmental rules and fiscal
policies, adverse changes in zoning laws, and other factors beyond the control
of the issuers. In addition, distributions received by the Fund from REITs may
consist of dividends, capital gains and/or return of capital. As REITs generally
pay a higher rate of dividends than most other operating companies, to the
extent application of the Fund's investment strategy results in the Fund
investing in REIT shares, the percentage of the Fund's dividend income received
from REIT shares will likely exceed the percentage of the Fund's portfolio that
is comprised of REIT shares.
Global Real Estate Industry Operating Companies. The Fund may invest in
REOCs located in any country (including the United States and emerging market
countries). The Advisor considers a REOC to be a company that derives at least
50% of its gross revenues or net profits from: (1) ownership, development,
construction, financing, management, or sale of commercial, industrial, or
residential real estate; or (2) products or services related to the real estate
industry, such as building supplies or mortgage servicing.
Exchange-Traded Funds. The Fund may invest in ETFs, which are investment
companies that aim to track or replicate a desired index, such as a sector,
market, or global segment. ETFs are passively managed and their shares are
traded on a national exchange or The NASDAQ Stock Market ("NASDAQ"). ETFs do not
sell individual shares directly to investors and only issue their shares in
large blocks known as "creation units." The investor purchasing a creation
unit may sell the individual shares on a secondary market. Therefore, the
liquidity of ETFs depends on the adequacy of the secondary market. There can be
no assurance that an ETF's investment objective will be achieved, as ETFs based
on an index may not replicate and maintain exactly the composition and relative
weightings of securities in the index. ETFs are subject to the risks of
investing in the underlying securities. The Fund, as a holder of the securities
of the ETF, will bear its pro rata portion of the ETF's expenses, including
advisory fees. These expenses are in addition to the direct expenses of the
Fund's own operations.
Closed-End Investment Companies. The Fund may invest in closed-end
investment companies that invest in the same types of securities in which the
Fund may invest. The Fund will indirectly bear its proportionate share of any
management fees and other expenses paid by the investment companies in which it
invests in addition to the management fee paid by the Fund. The value of
closed-end investment company securities, which are usually traded on an
exchange, is affected by the demand for the securities of the closed-end fund,
independent of the demand for the underlying portfolio assets, and, accordingly,
such securities can trade at a discount from their net asset values.
Convertible Securities. The Fund may invest in convertible securities.
Convertible securities include fixed income securities that may be exchanged or
converted into a predetermined number of shares of the issuer's underlying
common stock at the option of the holder during a specified period. Convertible
securities may take the form of convertible preferred stock, convertible bonds
or debentures, units consisting of "usable" bonds and warrants or a
combination of the features of several of these securities. The investment
characteristics of each convertible security vary widely, which allows
convertible securities to be employed for a variety of investment strategies.
The Fund will exchange or convert convertible securities into shares of
underlying common stock when, in the opinion of the Advisor, the investment
characteristics of the underlying common shares will assist the Fund in
achieving its investment objectives. The Fund may also elect to hold or trade
convertible securities. In selecting convertible securities, the Advisor
evaluates the investment characteristics of the convertible security as a fixed
income instrument, and the investment potential of the underlying equity
security for capital appreciation. In evaluating these matters with respect to a
particular convertible security, the Advisor considers numerous factors,
including the economic and political outlook, the value of the security relative
to other investment alternatives, trends in the determinants of the issuer's
profits, and the issuer's management capability and practices.
Securities Lending. The Fund may loan up to 25% of its assets to qualified
broker/dealers or institutional investors for their use relating to short sales
or other security transactions.
It is the understanding of the Advisor that the staff of the U.S.
Securities and Exchange Commission permits portfolio lending by registered
investment companies if certain conditions are met. These conditions are as
follows: 1) the Fund will receive collateral consisting generally of cash,
short-term U.S. Government securities, or irrevocable letters of credit payable
by banks acceptable to a Fund from the borrower, which will be maintained by
marking to market daily in an amount equal to at least (a) 102% of the current
market value of the loaned securities with respect to U.S. securities and (b)
105% of the current market value of the loaned securities with respect to
foreign securities; 2) this collateral must be valued daily and should the
market value of the loaned securities increase, the borrower must furnish
additional collateral to the Fund; 3) the Fund must be able to terminate the
loan after notice, at any time; 4) the Fund must receive reasonable interest on
any loan, and any dividends, interest, or other distributions on the lent
securities, and any increase in the market value of such securities; 5) the Fund
may pay reasonable custodian fees in connection with the loan; and 6) the voting
rights on the lent securities may pass to the borrower; however, if the Fund
knows that a material event will occur affecting a loan, the Fund must either
terminate the loan in order to vote the proxy or enter into an alternative
arrangement with the borrower to enable the Fund to vote the proxy.
The major risk to which the Fund would be exposed on a loan transaction is
the risk that a borrower would go bankrupt at a time when the value of the
security goes up. Therefore, the Fund will only enter into loan arrangements
after a review of all pertinent facts by the Advisor, under the supervision of
the Board of Trustees, including the creditworthiness of the borrowing broker,
dealer, or institution and then only if the consideration to be received from
such loans would justify the risk. Credit-worthiness will be monitored on an
ongoing basis by the Advisor.
Corporate Bonds, Government Debt Securities, and Other Debt Securities. The
Fund may invest in corporate bonds, debentures, and other debt securities. Debt
securities in which the Fund may invest may pay fixed or variable rates of
interest. Bonds and other debt securities generally are issued by corporations
and other issuers to borrow money from investors. The issuer pays the investor a
fixed or variable rate of interest and normally must repay the amount borrowed
on or before maturity. Certain debt securities are "perpetual" in that they
have no maturity date.
The Fund will invest in government debt securities, including those of
emerging market issuers or of other non-U.S. issuers. These securities may be
U.S. dollar-denominated or non-U.S. dollar-denominated and include: (a) debt
obligations issued or guaranteed by foreign national, provincial, state,
municipal or other governments with taxing authority or by their agencies or
instrumentalities; and (b) debt obligations of supranational entities.
Government debt securities include: debt securities issued or guaranteed by
governments, government agencies or instrumentalities and political
subdivisions; debt securities issued by government owed, controlled or sponsored
entities; interests in entities organized and operated for the purpose of
restructuring the investment characteristics issued by the above-noted issuers;
or debt securities issued by supranational entities such as the World Bank or
the European Union. The Fund may also invest in securities denominated in
currencies of emerging market countries. Emerging market debt securities
generally are rated in the lower rating categories of recognized credit rating
agencies or are unrated and considered to be of comparable quality to lower
rated debt securities. A non-U.S. issuer of debt or the non-U.S. governmental
authorities that control the repayment of the debt may be unable or unwilling to
repay principal or interest when due, and the Fund may have limited resources in
the event of a default. Some of these risks do not apply to issuers in large,
more developed countries. These risks are more pronounced in investments in
issuers in emerging markets or if the Fund invests significantly in one country.
The Fund will invest in debt securities rated below investment grade (i.e.,
securities rated lower than Baa by Moody's or lower than BBB by S&P), or their
equivalent as determined by the Advisor. These securities are commonly referred
to as "junk bonds." The foregoing credit quality policy applies only at the
time a security is purchased, and the Fund is not required to dispose of
securities already owned by the Fund in the event of a change in assessment of
credit quality or the removal of a rating.
Duration. Most debt obligations provide interest (coupon) payments in
addition to a final (par) payment at maturity. Some obligations also have call
provisions. Depending on the relative magnitude of these payments and the nature
of the call provisions, the market values of debt obligations may respond
differently to changes in the level and structure of interest rates.
Traditionally, a debt security's term-to-maturity has been used as a proxy for
the sensitivity of the security's price to changes in interest rates (which is
the interest rate risk or volatility of the security). However, term-to-maturity
measures only the time until a debt security provides its final payment, taking
no account of the pattern of the security's payments prior to maturity.
Duration is a measure of the expected life of a fixed income security that
was developed as a more precise alternative to the concept of term-to-maturity.
Duration incorporates a bond's yield, coupon interest payments, final maturity
and call features into one measure. Duration is one of the fundamental tools
used by the Advisor in the selection of fixed income securities. Duration is a
measure of the expected life of a fixed income security on a present value
basis. Duration takes the length of the time intervals between the present time
and the time that the interest and principal payments are scheduled or, in the
case of a callable bond, expected to be received, and weights them by the
present values of the cash to be received at each future point in time. For any
fixed income security with interest payments occurring prior to the payment of
principal, duration is always less than maturity. In general, all other factors
being the same, the lower the stated or coupon rate of interest of a fixed
income security, the longer the duration of the security; conversely, the higher
the stated or coupon rate of interest of a fixed income security, the shorter
the duration of the security.
There are some situations where even the standard duration calculation does
not properly reflect the interest rate exposure of a security. For example,
floating and variable rate securities often have final maturities of ten or more
years; however, their interest rate exposure corresponds to the frequency of the
coupon reset. Another example where the interest rate exposure is not properly
captured by duration is the case of mortgage pass-through securities. The stated
final maturity of such securities is generally 30 years, but current prepayment
rates are more critical in determining the securities' interest rate exposure.
In these and other similar situations, the Advisor will use sophisticated
analytical techniques that incorporate the economic life of a security into the
determination of its interest rate exposure.
Illiquid Securities. Illiquid securities include securities that have legal
or contractual restrictions on resale, securities that are not readily
marketable, and repurchase agreements maturing in more than seven days. Illiquid
securities involve the risk that the securities will not be able to be sold at
the time desired or at prices approximating the value at which the Fund is
carrying the securities. The Fund may invest up to 10% of the value of its net
assets in illiquid securities.
Rule 144A Securities. The Fund may invest in restricted securities that are
eligible for resale pursuant to Rule 144A under the Securities Act of 1933, as
amended (the "1933 Act"). Generally, Rule 144A establishes a safe harbor from
the registration requirements of the 1933 Act for resale by large institutional
investors of securities that are not publicly traded. The Advisor determines the
liquidity of the Rule 144A securities according to guidelines adopted by the
Board of Trustees. The Board of Trustees monitors the application of those
guidelines and procedures. Securities eligible for resale pursuant to Rule 144A,
which are determined to be liquid, are not subject to the Fund's 10% limit on
investments in illiquid securities.
Other Investments. The Fund may use a variety of other investment
instruments in pursuing its investment programs. The investments of the Fund may
include fixed income securities, sovereign debt, options on foreign currencies,
and forward foreign currency contracts.
Investment Techniques
The Fund may, but is under no obligation to, from time to time employ a
variety of investment techniques, including those described below, to hedge
against fluctuations in the price of portfolio securities, to enhance total
return or to provide a substitute for the purchase or sale of securities. Some
of these techniques, such as purchases of put and call options, options on stock
indices and stock index futures and entry into certain credit derivative
transactions, may be used as hedges against or substitutes for investments in
equity securities. Other techniques such as the purchase of interest rate
futures and entry into transactions involving interest rate swaps, options on
interest rate swaps, and certain credit derivatives are hedges against or
substitutes for investments in debt securities. The Fund's ability to utilize
any of the techniques described below may be limited by restrictions imposed on
its operations in connection with obtaining and maintaining its qualification as
a regulated investment company under the Code. Additionally, other factors (such
as cost) may make it impractical or undesirable to use any of these investment
techniques from time to time.
Leverage. The Fund may use leverage through the issuance of preferred
shares, commercial paper, borrowings, or a combination thereof. Currently, under
the 1940 Act, the Fund may borrow money up to 33?% of its total assets
(including the amount obtained from any leverage), and may issue shares of
preferred stock in amounts up to 50% of the value of its total assets (including
the amount obtained from any leverage) to finance additional investments. The
Fund also may borrow money as a temporary measure for extraordinary or emergency
purposes, including the payment of dividends and the settlement of securities
transactions, which otherwise might require untimely dispositions of Fund
securities. The Fund may also enter into derivatives transactions that in
certain circumstances may produce effects similar to leverage. The Fund may also
use leverage from specific international markets for the purpose of investing in
the securities that the Fund intends to purchase in those respective markets.
See "Effects of Leverage."
Options on Securities. In order to hedge against adverse market shifts, the
Fund may purchase put and call options on securities. The Fund will also, in
certain situations, augment its investment positions by purchasing call options,
both on specific equity securities, as well as securities representing exposure
to equity sectors or indices and fixed income indices. In addition, the Fund may
seek to increase its income or may hedge a portion of its portfolio investments
through writing (i.e., selling) covered put and call options. A put option
embodies the right of its purchaser to compel the writer of the option to
purchase from the option holder an underlying security or its equivalent at a
specified price at any time during the option period. In contrast, a call option
gives the purchaser the right to buy the underlying security or its equivalent
covered by the option or its equivalent from the writer of the option at the
stated exercise price. Under interpretations of the U.S. Securities and Exchange
Commission currently in effect, which may change from time to time, a
"covered" call option means that so long as the Fund is obligated as the
writer of the option, it will own (1) the underlying instruments subject to the
option, (2) instruments convertible or exchangeable into the instruments subject
to the option, or (3) a call option on the relevant instruments with an exercise
price no higher than the exercise price on the call option written.
Similarly, the U.S. Securities and Exchange Commission currently requires
that, to "cover" or support its obligation to purchase the underlying
instruments if a put option is written by the Fund, the Fund must (1) segregate
liquid securities on the books of the Fund or its custodian having a value at
least equal to the exercise price of the underlying securities, (2) continue to
own an equivalent number of puts of the same "series" (that is, puts on the
same underlying security having the same exercise prices and expiration dates as
those written by the Fund), or an equivalent number of puts of the same
"class" (that is, puts on the same underlying security) with exercise prices
greater than those it has written (or, if the exercise prices of the puts it
holds are less than the exercise prices of those it has written, it will deposit
the difference with its custodian in a segregated account), or (3) sell short
the securities underlying the put option at the same or a higher price than the
exercise price on the put option written.
The Fund will receive a premium when it writes put and call options, which
increases the Fund's return on the underlying security in the event the option
expires unexercised or is closed out at a profit. By writing a call, the Fund
will limit its opportunity to profit from an increase in the market value of the
underlying security above the exercise price of the option for as long as the
Fund's obligation as the writer of the option continues. Upon the exercise of a
put option written by the Fund, the Fund may suffer an economic loss equal to
the difference between the price at which the Fund is required to purchase the
underlying security and its market value at the time of the option exercise,
less the premium received for writing the option. Upon the exercise of a call
option written by the Fund, the Fund may suffer an economic loss equal to an
amount not less than the excess of the security's market value at the time of
the option exercise over the Fund's acquisition cost of the security, less the
sum of the premium received for writing the option and the difference, if any,
between the call price paid to the Fund and the Fund's acquisition cost of the
security. Thus, in some periods the Fund might receive less total return and in
other periods greater total return from its hedged positions than it would have
received from leaving its underlying securities unhedged.
The Fund may purchase and write options on securities that are listed on
national securities exchanges or are traded over the counter, although it
expects, under normal circumstances, to effect such transactions on national
securities exchanges.
As a holder of a put option, the Fund will have the right to sell the
securities underlying the option and as the holder of a call option, the Fund
will have the right to purchase the securities underlying the option, in each
case at their exercise price at any time prior to the option's expiration date.
The Fund may choose to exercise the options it holds, permit them to expire or
terminate them prior to their expiration by entering into closing sale
transactions. In entering into a closing sale transaction, the Fund would sell
an option of the same series as the one it has purchased. The ability of the
Fund to enter into a closing sale transaction with respect to options purchased
and to enter into a closing purchase transaction with respect to options sold
depends on the existence of a liquid secondary market. There can be no assurance
that a closing purchase or sale transaction can be effected when the Fund so
desires. The Fund's ability to terminate option positions established in the
over-the-counter market may be more limited than in the case of exchange-traded
options and may also involve the risk that securities dealers participating in
such transactions would fail to meet their obligations to the Fund.
In purchasing a put option, the Fund will seek to benefit from a decline in
the market price of the underlying security, while in purchasing a call option,
the Fund will seek to benefit from an increase in the market price of the
underlying security. If an option purchased is not sold or exercised when it has
remaining value, or 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 equal to
or below the exercise price, in the case of a call, during the life of the
option, the option will expire worthless. For the purchase of an option to be
profitable, the market price of the underlying security must decline
sufficiently below the exercise price, in the case of a put, and must increase
sufficiently above the exercise price, in the case of a call, to cover the
premium and transaction costs. Because option premiums paid by the Fund are
small in relation to the market value of the instruments underlying the options,
buying options can result in large amounts of leverage. The leverage offered by
trading in options could cause the Fund's net asset value to be subject to more
frequent and wider fluctuation than would be the case if the Fund did not invest
in options.
Options on Stock Indices. The Fund may purchase put and call options on
domestic stock indices to hedge against risks of market-wide price movements
affecting its assets. The Fund will also, in certain situations, augment its
investment positions by purchasing call options, both on specific equity
securities, as well as securities representing exposure to equity sectors or
indices and fixed income indices. In addition, the Fund may write covered put
and call options on stock indices. A stock index measures the movement of a
certain group of stocks by assigning relative values to the common stocks
included in the index. Options on stock indices are similar to options on
securities. Because no underlying security can be delivered, however, the option
represents the holder's right to obtain from the writer, in cash, a fixed
multiple of the amount by which the exercise price exceeds (in the case of a
put) or is less than (in the case of a call) the closing value of the underlying
index on the exercise date. The advisability of using stock index options to
hedge against the risk of market-wide movements will depend on the extent of
diversification of the Fund's investments and the sensitivity of its investments
to factors influencing the underlying index. The effectiveness of purchasing or
writing stock index options as a hedging technique will depend upon the extent
to which price movements in the Fund's securities investments correlate with
price movements in the stock index selected. In addition, successful use by the
Fund of options on stock indices will be subject to the ability of the Advisor
to predict correctly changes in the relationship of the underlying index to the
Fund's portfolio holdings. No assurance can be given that the Advisor's judgment
in this respect will be correct.
Portfolio Turnover. The Fund may engage in short-term trading strategies,
and securities may be sold without regard to the length of time held when, in
the opinion of the Advisor, investment considerations warrant such action. These
policies, together with the ability of the Fund to engage in transactions in
options and futures, may have the effect of increasing the Fund's annual rate of
portfolio turnover. A high turnover rate (100% or more) necessarily involves
greater trading costs to the Fund and may result in the realization of net short
term capital gains.
Foreign Currency Transactions. The Fund may engage in foreign currency
exchange transactions in connection with its investments in foreign securities.
The Fund will conduct its foreign currency exchange transactions either on a
spot (i.e., cash) basis at the spot rate prevailing in the foreign currency
exchange market or through forward contracts to purchase or sell foreign
currencies, including the payment of dividends and the settlement of securities
transactions which otherwise might require untimely dispositions of Fund
securities.
Forward Foreign Currency Exchange Contracts. The Fund may enter into
forward foreign currency exchange contracts in order to protect against possible
losses on foreign investments resulting from adverse changes in the relationship
between the U.S. dollar and foreign currencies. A forward foreign currency
exchange contract involves an obligation to purchase or sell a specific currency
at a future date, which may be any fixed number of days (usually less than one
year) from the date of the contract agreed upon by the parties, at a price set
at the time of the contract. These contracts are traded in the interbank market
conducted directly between currency traders (usually large commercial banks) and
their customers. A forward contract generally has a deposit requirement, and no
commissions are charged at any stage for trades. Although foreign exchange
dealers do not charge a fee for conversion, they do realize a profit based on
the difference (the "spread") between the price at which they are buying and
selling various currencies. However, forward foreign currency exchange contracts
may limit potential gains which could result from a positive change in such
currency relationships.
At the consummation of a forward contract, the Fund may either make
delivery of the foreign currency or terminate their contractual obligation to
deliver the foreign currency by purchasing an offsetting contract obligating
them to purchase, at the same maturity date, the same amount of such foreign
currency. If the Fund chooses to make delivery of the foreign currency, they may
be required to obtain such currency through the sale of portfolio securities
denominated in such currency or through conversion of other assets of the Fund
into such currency. If the Fund engages in an offsetting transaction, the Fund
will incur a gain or loss to the extent that there has been a change in forward
contract prices.
It should be realized that this method of protecting the value of the
Fund's portfolio securities against a decline in the value of a currency does
not eliminate fluctuations in the underlying prices of the securities. It simply
establishes a rate of exchange which can be achieved at some future point in
time. Additionally, although such contracts tend to minimize the risk of loss
due to a decline in the value of the hedged currency, at the same time they tend
to limit any potential gain which might result should the value of such currency
increase. Generally, the Fund will not enter into a forward foreign currency
exchange contract with a term longer than one year.
Foreign Currency Options. The Fund may purchase and write options on
foreign currencies to protect against declines in the U.S. dollar value of
foreign securities or in the U.S. dollar value of dividends or interest expected
to be received on these securities. These transactions may also be used to
protect against increases in the U.S. dollar cost of foreign securities to be
acquired by the Fund. Writing an option on foreign currency is only a partial
hedge, up to the amount of the premium received, and the Fund could be required
to purchase or sell foreign currencies at disadvantageous exchange rates,
thereby incurring losses.
A foreign currency option provides the option buyer with the right to buy
or sell a stated amount of foreign currency at the exercise price on a specified
date or during the option period. The owner of a call option has the right, but
not the obligation, to buy the currency. Conversely, the owner of a put option
has the right, but not the obligation, to sell the currency. When the option is
exercised, the seller (i.e., writer) of the option is obligated to fulfill the
terms of the sold option. However, either the seller or the buyer may, in the
secondary market, close its position during the option period at any time prior
to expiration.
A call option on a foreign currency generally rises in value if the
underlying currency appreciates in value, and a put option on a foreign currency
generally rises in value if the underlying currency depreciates in value.
Although purchasing a foreign currency option can protect the Fund against an
adverse movement in the value of a foreign currency, the option will not limit
the movement in the value of such currency. For example, if the Fund was holding
securities denominated in a foreign currency that was appreciating and had
purchased a foreign currency put to hedge against a decline in the value of the
currency, the Fund would not have to exercise its put option. Likewise, if the
Fund were to enter into a contract to purchase a security denominated in foreign
currency and, in conjunction with that purchase, were to purchase a foreign
currency call option to hedge against a rise in value of the currency, and if
the value of the currency instead depreciated between the date of purchase and
the settlement date, the Fund would not have to exercise its call. Instead, the
Fund could acquire in the spot market the amount of foreign currency needed for
settlement.
Foreign Currency Futures Transactions. By using foreign currency futures
contracts and options on such contracts, the Fund may be able to achieve many of
the same objectives as they would through the use of forward foreign currency
exchange contracts. The Fund may be able to achieve these objectives possibly
more effectively and at a lower cost by using futures transactions instead of
forward foreign currency exchange contracts.
A foreign currency futures contract sale creates an obligation by the Fund,
as seller, to deliver the amount of currency called for in the contract at a
specified future time for a specified price. A currency futures contract
purchase creates an obligation by the Fund, as purchaser, to take delivery of an
amount of currency at a specified future time at a specified price. Although the
terms of currency futures contracts specify actual delivery or receipt, in most
instances the contracts are closed out before the settlement date without the
making or taking of delivery of the currency. Closing out of currency futures
contracts is affected by entering into an offsetting purchase or sale
transaction. An offsetting transaction for a currency futures contract sale is
effected by the Fund entering into a currency futures contract purchase for the
same aggregate amount of currency and same delivery date. If the price of the
sale exceeds the price of the offsetting purchase, the Fund is immediately paid
the difference and realizes a loss. Similarly, the closing out of a currency
futures contract purchase is affected by the balance Fund entering into a
currency futures contract sale. If the offsetting sale price exceeds the
purchase price, the Fund realizes a gain, and if the offsetting sale price is
less than the purchase price, the Fund realizes a loss.
Defensive Positions. During periods of adverse market or economic
conditions, the Fund may temporarily invest all or a substantial portion of its
assets in cash or cash equivalents. Cash equivalents are highly liquid,
short-term securities such as commercial paper, time deposits, certificates of
deposit, short-term notes and short-term U.S. government obligations. The Fund
will not be pursuing its investment objectives in these circumstances.
In addition to borrowing, the Fund may use a variety of additional
strategies that would be viewed as potentially adding leverage to the portfolio,
subject to rating agency limitations. These include the sale of credit default
swap contracts and the use of other derivative instruments and reverse
repurchase agreements. By adding additional leverage, these strategies have the
potential to increase returns to shareholders, but also involve additional
risks. Additional leverage will increase the volatility of the Fund's investment
portfolio and could result in larger losses than if the strategies were not
used. However, to the extent that the Fund enters into offsetting transactions
or owns positions covering its obligations, the leveraging effect is expected to
be minimized or eliminated.
During the time in which the Fund is utilizing leverage, the fees paid to
the Advisor for services will be higher than if the Fund did not utilize
leverage because the fees paid will be calculated based on the Fund's total
assets.
EFFECTS OF LEVERAGE
The Fund may use leverage through issuing preferred shares, commercial
paper, borrowing, or a combination thereof. The Fund may use leverage to the
maximum amount permitted by the 1940 Act. Under the 1940 Act, the Fund may issue
preferred shares in an aggregate amount up to 50% of its total assets (including
the amount obtained from leverage) or the Fund may borrow in an aggregate amount
up to 33?% of its total assets (including the amount obtained from leverage).
The Fund also may borrow money as a temporary measure for extraordinary or
emergency purposes, including the payment of dividends and the settlement of
securities transactions, which otherwise might require untimely dispositions of
Fund securities.
Changes in the value of the Fund's portfolio (including investments bought
with amounts borrowed) will be borne entirely by the shareholders. If there is a
net decrease (or increase) in the value of the Fund's investment portfolio, the
leverage will decrease (or increase) the net asset value per share to a greater
extent than if the Fund were not leveraged. During periods in which the Fund is
using leverage, the fees paid to the Advisor for investment advisory services
and to DSC for administrative services (which are effectively borne by the
common shareholders and not holders of the Fund's leverage) will be higher than
if the Fund did not use leverage because the fees paid will be calculated on the
basis of the Fund's total assets, including the amount obtained from leverage,
which may create an incentive to leverage the Fund. The Advisor intends to
leverage the Fund only when it believes that the potential return on additional
investments acquired with the proceeds of leverage is likely to exceed the costs
incurred in connection with the borrowings. The Fund will pay, and common
shareholders will effectively bear, any costs and expenses related to any
borrowings and to the issuance and ongoing maintenance of preferred shares or
commercial paper. Such costs and expenses include the higher management and
administrative fee resulting from the use of such leverage. See "Risk
Factors-Leverage." The terms of any preferred shares, including their dividend
rate, voting rights, liquidation preference, and redemption provisions, and the
terms of borrowings, commercial paper, or any other leverage will be determined
by the Board of Trustees (subject to applicable law and the Fund's Declaration
of Trust) if and when it authorizes the use of leverage.
Capital raised through leverage will be subject to dividend or interest
payments, which may exceed the income and appreciation on the assets purchased.
The issuance of preferred shares or entering into a borrowing program involves
expenses and other costs and may limit the Fund's freedom to pay dividends on
common shares or to engage in other activities. The issuance of a class of
preferred shares or the incurrence of borrowings creates an opportunity for
greater return per common share, but at the same time such leveraging is a
speculative technique in that it will increase the Fund's exposure to capital
risk. Unless the income and appreciation, if any, on assets acquired with
leverage proceeds exceed the associated costs of such borrowings (and other Fund
expenses), the use of leverage will diminish the investment performance of the
Fund's common shares compared with what it would have been without leverage. See
"Risk Factors-Leverage Risk."
Under the 1940 Act, the Fund is not permitted to issue preferred shares
unless immediately after the issuance, the value of the Fund's assets is at
least 200% of the liquidation value of the outstanding preferred shares (i.e.,
such liquidation preference may not exceed 50% of the Fund's assets less
liabilities other than borrowings). In addition, the Fund is not permitted to
declare any cash dividend or other distribution on its Shares unless, at the
time of such declaration, the value of the Fund's total assets less liabilities
other than borrowings is at least 200% of such liquidation value. If Fund
preferred shares are issued, the Fund intends, to the extent possible, to
purchase or redeem Fund preferred shares from time to time to the extent
necessary in order to maintain coverage of any Fund preferred shares of at least
200%. Under the 1940 Act, if the Fund has preferred shares outstanding, at least
two of the Fund's trustees will be elected by the holders of Fund preferred
shares, voting separately as a class. In addition, under the 1940 Act, in the
event the Fund failed to pay dividends on Fund preferred shares for two full
years, Fund preferred stockholders would be entitled to elect a majority of the
trustees of the Fund. The failure to pay dividends or make distributions could
result in the Fund ceasing to qualify as a regulated investment company under
the Code, which could have a material adverse effect on the value of the Shares.
Under the 1940 Act, the Fund generally is not permitted to borrow unless
immediately after the borrowing, the value of the Fund's assets less liabilities
other than the borrowings is at least 300% of the principal amount of such
borrowing (i.e., such principal amount may not exceed 33?% of the Fund's total
assets). In addition, the Fund is not permitted to declare any cash dividend or
other distribution on its shares unless, at the time of such declaration, the
value of the Fund's total assets, less liabilities other than the borrowings, is
at least 300% of such principal amount. If the Fund borrows, the Fund intends,
to the extent possible, to prepay all or a portion of the principal amount of
the borrowing to the extent necessary in order to maintain the required asset
coverage. Failure to maintain certain asset coverage requirements could result
in an event of default and may entitle the debt holders to elect a majority of
the board of trustees.
The Fund may be subject to certain restrictions imposed by either
guidelines of one or more rating agencies which may issue ratings for borrowings
or Fund preferred shares or, if the Fund borrows from a lender, by the lender.
These restrictions may impose asset coverage or portfolio composition
requirements that are more stringent than those currently imposed on the Fund by
the 1940 Act. It is not anticipated that these restrictions will impede the
Advisor from managing the Fund's portfolio in accordance with the Fund's
investment objectives and policies. In addition to other considerations, to the
extent that the Fund believes that the guidelines required by the rating
agencies would impede its ability to meet its investment objectives, or if the
Fund is unable to obtain the expected rating on the borrowings, the Fund will
not use borrowings.
The following table is designed to illustrate the effect on the return to a
holder of the Fund's common shares of issuing preferred shares in the amount of
approximately 50% of the Fund's total assets or borrowing in the amount of
approximately 33?% of the Fund's total assets, assuming hypothetical annual
returns of the Fund's portfolio of minus 10% to plus 10% and an interest rate of
[___]% for borrowings. As the table shows, the issuance of preferred shares or
borrowing generally increases the return to shareholders when portfolio return
is positive and greater than the cost of issuing preferred shares or borrowing
and decreases the return when the portfolio return is negative or less than the
cost of issuing preferred shares or borrowing. The figures appearing in the
table are hypothetical and actual returns may be greater or less than those
appearing in the table.
----------------------------------------------- --------- --------- ----- ------- ----------
Assumed portfolio return (net of expenses) (10.00 )% (5.00 )% 0 % 5.00 % 10.00 %
----------------------------------------------- --------- --------- ----- ------- ----------
Corresponding common share return as a result [ ]% [ ]% [ ]% [ ]% [ ]%
of issuance of preferred shares
----------------------------------------------- --------- --------- ----- ------- ----------
Corresponding common share return as a result [ ]% [ ]% [ ]% [ ]% [ ]%
of borrowing
----------------------------------------------- --------- --------- ----- ------- ----------
Successful use of a leveraging strategy may depend on the Advisor's ability
to predict correctly interest rates and market movements, and there is no
assurance that a leveraging strategy will be successful during any period in
which it is employed.
--------------------------------------------------------------------------------
In addition to the issuance of preferred shares, commercial paper or
borrowing, the Fund may use a variety of additional strategies that would be
viewed as potentially adding leverage to the portfolio, subject to rating agency
limitations. These include the sale of credit default swap contracts and the use
of other derivative instruments and reverse repurchase agreements. By adding
additional leverage, these strategies have the potential to increase returns to
shareholders, but also involve additional risks. Additional leverage will
increase the volatility of the Fund's investment portfolio and could result in
larger losses than if the strategies were not used. However, to the extent that
the Fund enters into offsetting transactions or owns positions covering its
obligations, the leveraging effect is expected to be minimized or eliminated.
During the time in which the Fund is utilizing leverage, the fees paid to
the Advisor and the Administrator for services will be higher than if the Fund
did not utilize leverage because the fees paid will be calculated based on the
Fund's total assets.
RISKS
An investment in the Fund's common shares is subject to risks. The value of
the Fund's investments will increase or decrease based on changes in the prices
of the investments it holds. This will cause the value of the Fund's shares to
increase or decrease. You could lose money by investing in the Fund. By itself,
the Fund does not constitute a balanced investment program. You should consider
carefully the following risks before investing in the Fund. There may be
additional risks that the Fund does not currently foresee or consider material.
You may wish to consult with your legal or tax advisors before deciding whether
to invest in the Fund.
No Operating History
The Fund is a diversified closed-end management investment company with no
history of operations and the common shares have no history of public trading.
During the Fund's start-up period, the Fund may not achieve the desired
portfolio composition. If the Fund commences operations under inopportune market
or economic conditions, it may not be able to achieve its investment objectives.
Market Discount Risk
As with any stock, the price of the Fund's shares will fluctuate with
market conditions and other factors. If shares are sold, the price received may
be more or less than the original investment. Net asset value will be reduced
immediately following the initial offering by the amount of the sales load and
organizational and offering expenses paid by the Fund. Common shares are
designed for long-term investors and should not be treated as trading vehicles.
Shares of closed-end management investment companies frequently trade at a
discount from their net asset value. The Fund's shares may trade at a price that
is less than the initial offering price. This risk may be greater for investors
who sell their shares in a relatively short period of time after completion of
the initial offering. The Fund may utilize leverage, which magnifies the stock
market risk.
Investment and Market Risk
An investment in the Fund's common shares is subject to investment risk,
including the possible loss of the entire principal amount invested. An
investment in common shares represents an indirect investment in the securities
owned by the Fund, which are generally traded on a 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. The
common shares at any point in time may be worth less than the original
investment, even after taking into account any reinvestment of dividends and
distributions.
Issuer Risk
The value of an issuer's securities that are held in the Fund's portfolio
may decline for a number of reasons which directly relate to the issuer, such as
management performance, financial leverage, and reduced demand for the issuer's
goods and services.
Dividend Strategy Risks
The Fund's pursuit of its investment objectives depends somewhat upon the
Advisor's ability to anticipate the dividend policies of the companies in which
it chooses to invest. It is difficult to anticipate the level of dividends that
companies will pay in any given timeframe. The Fund's dividend capture
strategies include having the Advisor attempt to identify and exploit
opportunities such as the announcement of major corporate actions, such as
restructuring initiatives or a special dividend, that may lead to high current
dividend income. These situations are typically not recurring in nature or
frequency, may be difficult to predict, and may not result in an opportunity
that allows the Advisor to fulfill the Fund's investment objectives. In
addition, the dividend policies of the Fund's target companies are heavily
influenced by the current economic climate and the favorable federal tax
treatment afforded to dividends. Challenging economic conditions, affecting
either the market as a whole or a specific investment in the Fund's portfolio,
may limit the opportunity to benefit from the current dividend policies of the
companies in which the Fund invests or may cause such companies to reduce or
eliminate their dividends. Special dividends may result in extraordinary
dividends subject to special tax rules. The use of dividend capture strategies
will expose the Fund to increased trading costs and potential for capital loss
or gain, particularly in the event of significant short-term price movements of
stocks subject to dividend capture trading, and resultant dividends may not be
qualified dividends eligible for reduced federal income tax rates under the
Code. Also, the reduced federal income tax rates that apply to qualified
dividend income sunset, and will not apply, to taxable years beginning after
December 31, 2010, unless extended or made permanent. This and other changes in
the favorable provisions of the federal income tax laws may limit your ability
to benefit from dividend increases or special dividends, may effect a widespread
reduction in announced dividends and may adversely impact the valuation of the
shares of dividend-paying companies. See "Tax Matters."
Risk of Option Overwriting
The Fund will receive a premium when it writes put and call options, which
increases the Fund's return on the underlying security in the event the option
expires unexercised or is closed out at a profit. By writing a call, the Fund
will limit its opportunity to profit from an increase in the market value of the
underlying security above the exercise price of the option for as long as the
Fund's obligation as the writer of the option continues. Upon the exercise of a
put option written by the Fund, the Fund may suffer an economic loss equal to
the difference between the price at which the Fund is required to purchase the
underlying security and its market value at the time of the option exercise,
less the premium received for writing the option. Upon the exercise of a call
option written by the Fund, the Fund may suffer an economic loss equal to an
amount not less than the excess of the security's market value at the time of
the option exercise over the Fund's acquisition cost of the security, less the
sum of the premium received for writing the option and the difference, if any,
between the call price paid to the Fund and the Fund's acquisition cost of the
security. Thus, in some periods the Fund might receive less total return and in
other periods greater total return from its hedged positions than it would have
received from leaving its underlying securities unhedged.
Common Stock Risk
Common stocks are an example of equity securities in which the Fund will
invest. Although common stocks have historically generated higher average
returns than fixed income securities over the long term, common stocks also have
experienced significantly more volatility in returns. Common stocks may be more
susceptible to adverse changes in market value due to issuer specific events or
general movements in the equities markets. A drop in the stock market may
depress the price of common stocks held by the Fund. Common stock prices
fluctuate for many reasons, including changes in investors' perceptions of the
financial condition of an issuer or the general condition of the relevant stock
market, or the occurrence of political or economic events affecting issuers. For
example, an adverse event, such as an unfavorable earnings report, may depress
the value of common stock in which the Fund has invested; 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 held by the Fund. Also, 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. The common stocks in which the
Fund will invest are structurally subordinated to preferred securities, bonds
and other debt instruments in a company's capital structure, in terms of
priority to corporate income and assets, and therefore will be subject to
greater risk than the preferred securities or debt instruments of such issuers.
In addition, common stock prices may be sensitive to rising interest rates, as
the costs of capital rise and borrowing costs increase.
Foreign Securities Risk
The Fund will have substantial exposure to foreign securities, including
emerging market securities. The Fund's investments in securities of foreign
issuers are subject to risks not usually associated with owning securities of
U.S. issuers. These risks can include fluctuations in foreign currencies;
foreign currency exchange controls; social, political and economic instability;
differences in securities regulation and trading, differences in accounting,
auditing and financial standards; expropriation or nationalization of assets;
possible difficulties in transaction settlements; and foreign taxation issues.
In addition, changes in government administrations or economic or monetary
policies in the United States or abroad could result in appreciation or
depreciation of the Fund's securities. It may also be more difficult to obtain
and enforce a judgment against a foreign issuer. Any foreign investments made by
the Fund must be made in compliance with U.S. and foreign currency restrictions
and tax laws restricting the amounts and types of foreign investments. The Fund
has no other investment restrictions with respect to investing in foreign
issuers. Dividends paid on foreign securities may not qualify for the reduced
federal income tax rates applicable to qualified dividends under the Code. As a
result, there can be no assurance as to what portion of the Fund's distributions
attributable to foreign securities will be designated as qualified dividend
income. See "Tax Matters."
The Fund may invest in securities of issuers located in "emerging market
countries." Because of less developed markets and economies and, in some
countries, less mature governments and governmental institutions, the risks of
investing in foreign securities can be intensified in the case of investments in
issuers domiciled or doing substantial business in emerging market countries.
These risks include high concentration of market capitalization and trading
volume in a small number of issuers representing a limited number of industries,
as well as a high concentration of investors and financial intermediaries; lack
of liquidity and greater price volatility due to the smaller size of the market
for such securities and lower trading volume; political and social
uncertainties; national policies that may restrict the Fund's investment
opportunities, including restrictions on investing in issuers or industries
deemed sensitive to relevant national interests; greater risks of expropriation,
confiscatory taxation and nationalization; over-dependence on exports,
especially with respect to primary commodities, making these economies
vulnerable to changes in commodity prices; overburdened infrastructure and
obsolete or unseasoned financial systems; environmental problems; less developed
legal systems; less reliable custodial services and settlement practices.
Dividends paid by issuers in emerging market countries will generally not
qualify for the reduced federal income tax rates applicable to qualified
dividends under the Code. See "Tax Matters."
Small and Medium Cap Company Risk
Compared to investment companies that focus only on large capitalization
companies, the Fund's share price may be more volatile because it also invests
in small and medium capitalization companies. Compared to large companies, small
and medium capitalization companies are more likely to have (i) more limited
product lines or markets and less mature businesses, (ii) fewer capital
resources, (iii) more limited management depth, and (iv) shorter operating
histories. Further, compared to large cap stocks, the securities of small and
medium capitalization companies are more likely to experience sharper swings in
market values, be harder to sell at times and at prices that the Advisor
believes appropriate, and offer greater potential for gains and losses.
Portfolio Turnover Risk
The techniques and strategies contemplated by the Fund might result in a
high degree of portfolio turnover. The Fund cannot accurately predict its
securities portfolio turnover rate, but anticipates that its annual portfolio
turnover rate will likely exceed 100% under normal market conditions, although
it could be materially higher under certain conditions. Higher portfolio
turnover rates could result in corresponding increases in brokerage commissions,
may generate short-term capital gains taxable as ordinary income and cause
dividends received on portfolio securities to not be qualified dividends
eligible for reduced federal income tax rates under the Code. See "Tax Matters."
Defensive Positions
During periods of adverse market or economic conditions, the Fund may
temporarily invest all or a substantial portion of its assets in cash or cash
equivalents. The Fund would not be pursuing its investment objectives in these
circumstances and could miss favorable market developments.
Management Risk
The Fund is subject to management risk because it is an actively managed
portfolio. The Fund's successful pursuit of its investment objectives depends
upon the Advisor's ability to find and exploit market inefficiencies with
respect to undervalued securities and identify companies experiencing a change
in dividend policy, including the announcement of restructuring initiatives or
special dividends. Such situations occur infrequently and sporadically and may
be difficult to predict, and may not result in a favorable pricing opportunity
that allows the Advisor to fulfill the Fund's investment objectives. The
Advisor's security selections and other investment decisions might produce
losses or cause the Fund to underperform when compared to other funds with
similar investment goals. If one or more key individuals leaves the employ of
the Advisor, the Advisor may not be able to hire qualified replacements, or may
require an extended time to do so. This could prevent the Fund from achieving
its investment objectives.
Leverage Risk
The use of leverage by the Fund would create three major types of risks for
shareholders:
o the likelihood of greater volatility of net asset value and market
price of common shares because changes in value of the Fund's
portfolio (including changes in the value of any interest rate swap,
if applicable) are borne entirely by the common shareholders;
o the possibility either that share income will fall if the interest
rate on any borrowings or the dividend rate on any preferred shares
issued rises, or that share income and distributions will fluctuate
because the interest rate on any borrowings or the dividend rate on
any preferred shares issued varies; and
o if the Fund leverages through issuing preferred shares or borrowings,
the Fund may not be permitted to declare dividends or other
distributions with respect to its common shares or purchase its
capital stock, unless at the time thereof the Fund meets certain asset
coverage requirements.
The Advisor in its best judgment nevertheless may determine to use leverage
if it deems such action to be appropriate in the circumstances. During periods
in which the Fund is using leverage, the fees paid to the Advisor for investment
advisory services and the Administrator for administrative services will be
higher than if the Fund did not use leverage because the fees paid will be
calculated on the basis of the Fund's total assets, including proceeds from
borrowing, commercial paper, or preferred share issuance, which may create an
incentive to leverage the Fund. See "Effects of Leverage."
Real Estate Industry Risk
Investments in the real estate industry (including REITs and REOCs and
their equivalent in foreign countries) may subject the Fund to certain risks
associated with direct ownership of real estate and with the real estate
industry in general (although the Fund does not intend to own real estate
directly). If the Fund holds real estate directly, as a result of defaults, or
receives rental income from its real estate holdings, its tax status as a
regulated investment company could be jeopardized. Investments in the real
estate industry are also affected by interest rate changes, particularly if the
companies in which the Fund invests use floating rate debt to finance their
ongoing operations. In addition, changes in interest rates may hurt real estate
values or make REIT shares less attractive than other income producing
investments.
Real estate industry risks include among others:
o possible declines in the value of real estate and real property
values;
o risks related to economic conditions;
o possible shortage of mortgage funds;
o overbuilding and extended vacancies;
o increased competition;
o changes in property taxes, operating expenses or zoning laws;
o costs of environmental clean-up, or damages from natural disasters;
o limitations or fluctuations in rent payments;
o cash flow fluctuations; and
o defaults by borrowers.
If the Fund invests in REITs or REOCs, such investments will also subject
the Fund to various risks. Returns from REITs or REOCs, which typically are
small or medium capitalization stocks, may trail returns from the overall stock
market. Dividends paid by REITs will not generally qualify for the reduced
federal income tax rates applicable to qualified dividends under the Code, and
may result in "excess inclusion income" subject to special tax rules. REITs are
also subject to the risk of failing to qualify for tax-free pass-through of
income under the Code and/or failing to qualify for an exemption from
registration as an investment company under the 1940 Act.
Investments in Undervalued Securities
A portion of the Fund's assets will be invested in securities, which, in
the opinion of the Advisor, are undervalued. The identification of investment
opportunities in undervalued securities is a difficult task and there is no
assurance that such opportunities will be successfully recognized or acquired.
While investments in undervalued securities offer opportunities for
above-average capital appreciation, these investments involve a high degree of
financial risk and can result in substantial losses.
High Yield, High-Risk Securities
Investing in so-called "high yield" or "high-risk" securities ("junk
bonds") entails certain risks, including the risk of loss of principal, which
may be greater than the risks involved in investment-grade securities, and which
should be considered by investors contemplating an investment in the Fund. Such
securities are sometimes issued by companies whose earnings at the time of
issuance are less than the projected debt service on the high yield securities.
Although the market for high yield securities has been in existence for
many years, including periods of economic downturns, the high yield market grew
rapidly during the long economic expansion which took place in the United States
during the 1980s. During that economic expansion, the use of high yield debt
securities to fund highly leveraged corporate acquisitions and restructurings
increased dramatically. As a result, the high yield market grew substantially
during that economic expansion. Although experts disagree on the impact
recessionary periods have had and will have on the high yield market, some
analysts believe a protracted economic downturn would severely disrupt the
market for high yield securities, would adversely affect the value of
outstanding bonds, and would adversely affect the ability of high yield issuers
to repay principal and interest. Those analysts cite volatility experienced in
the high yield market in the past as evidence for their position. It is likely
that protracted periods of economic uncertainty would result in increased
volatility in the market prices of high yield securities and an increase in the
number of high yield bond defaults.
Special Risks Associated with Foreign Currency Options
Buyers and sellers of foreign currency options are subject to the same
risks that apply to options generally, as described below. In addition, there
are certain additional risks associated with foreign currency options, including
taxation risks. The markets in foreign currency options are relatively new, and
the Fund's ability to establish and close out positions on such options is
subject to the maintenance of a liquid secondary market. Although the Fund will
not purchase or write such options unless and until, in the opinion of the
Advisor, the market for them has developed sufficiently to ensure that the risks
in connection with such options are not greater than the risks in connection
with the underlying currency, there can be no assurance that a liquid secondary
market will exist for a particular option at any specific time. In addition,
options on foreign currencies are affected by most of the same factors that
influence foreign exchange rates and investments generally.
The value of a foreign currency option depends upon the value of the
underlying currency relative to the U.S. dollar. As a result, the price of the
option position may vary with changes in the value of either or both currencies
and may have no relationship to the investment merits of a foreign security.
Because foreign currency transactions occurring in the interbank market involve
substantially larger amounts than those that may be involved in the use of
foreign currency options, investors may be disadvantaged by having to deal in an
odd lot market (generally consisting of transactions of less than $1 million)
for the underlying foreign currencies at prices that are less favorable than for
round lots.
There is no systematic reporting of last sale information for foreign
currencies or any regulatory requirement that quotations available through
dealers or other market sources be firm or revised on a timely basis. Available
quotation information is generally representative of very large transactions in
the interbank market and thus may not reflect relatively smaller transactions
(i.e., less than $1 million) where rates may be less favorable. The interbank
market in foreign currencies is a global, around-the-clock market. To the extent
that the U.S. option markets are closed while the markets for the underlying
currencies remain open, significant price and rate movements may take place in
the underlying markets that cannot be reflected in the options markets until
they reopen.
Risk Characteristics of Options and Futures
Options and futures transactions can be highly volatile investments.
Successful hedging strategies require the anticipation of future movements in
securities prices, interest rates and other economic factors. When a fund uses
futures contracts and options as hedging devices, the prices of the securities
subject to the futures contracts and options may not correlate with the prices
of the securities in a portfolio. This may cause the futures and options to
react to market changes differently than the portfolio securities. Even if
expectations about the market and economic factors are correct, a hedge could be
unsuccessful if changes in the value of the portfolio securities do not
correspond to changes in the value of the futures contracts. The ability to
establish and close out futures contracts and options on futures contracts
positions depends on the availability of a secondary market. If these positions
cannot be closed out due to disruptions in the market or lack of liquidity,
losses may be sustained on the futures contract or option. Special tax rules
apply to options and futures.
Special Risks Associated with Foreign Currency Futures Contracts and Related
Options
Buyers and sellers of foreign currency futures contracts are subject to the
same risks that apply to the use of futures generally, as described above. In
addition, there are risks associated with foreign currency futures contracts and
their use as a hedging device similar to those associated with options on
foreign currencies, as described above.
Options on foreign currency futures contracts may involve certain
additional risks, including taxation risks. Trading options on foreign currency
futures contracts is relatively new. The ability to establish and close out
positions on such options is subject to the maintenance of a liquid secondary
market. To reduce this risk, the Fund will not purchase or write options on
foreign currency futures contracts unless and until, in the opinion of the
Advisor, the market for such options has developed sufficiently that the risks
in connection with such options are not greater than the risks in connection
with transactions in the underlying foreign currency futures contracts. Compared
to the purchase or sale of foreign currency futures contracts, the purchase of
call or put options on futures contracts involves less potential risk to the
Fund because the maximum amount at risk is the premium paid for the option (plus
transaction costs). However, there may be circumstances when the purchase of a
call or put option on a futures contract would result in a loss of up to the
amount of the premium paid for the option, such as when there is no movement in
the price of the underlying currency or futures contract.
Preferred Securities Risk
In addition to credit risk, investment in preferred securities carries
risks, including deferral risk, redemption risk, limited voting rights, risk of
subordination, and lack of liquidity. Fully taxable or hybrid preferred
securities typically contain provisions that allow an issuer, at its discretion,
to defer distributions for up to 20 consecutive quarters. Traditional preferreds
also contain provisions that allow an issuer, under certain conditions to skip
(in the case of "noncumulative preferreds") or defer (in the case of "cumulative
preferreds"), dividend payments. If the Fund owns a preferred security that is
deferring its distributions, the Fund may be required to report income for tax
purposes while it is not receiving any distributions. Preferred securities
typically contain provisions that allow for redemption in the event of tax or
security law changes in addition to call features at the option of the issuer.
In the event of a redemption, the Fund may not be able to reinvest the proceeds
at comparable rates of return. Preferred securities typically do not provide any
voting rights, except in cases when dividends are in arrears beyond a certain
time period, which varies by issue. 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 those debt instruments. Preferred securities
may be substantially less liquid than many other securities, such as U.S.
government securities, corporate debt or common stocks. Dividends paid on
preferred securities may not qualify for the reduced federal income tax rates
applicable to qualified dividends under the Code. See "Tax Matters."
Interest Rate Risk
Interest rate risk is the risk that preferred stocks paying fixed dividend
rates and fixed-rate debt securities will decline in value because of changes in
market interest rates. When interest rates rise, the market value of such
securities generally will fall. The Fund's investment in preferred stocks and
fixed-rate debt securities means that the net asset value and price of the
common shares may decline if market interest rates rise. Interest rates are
currently low relative to historic levels. During periods of declining interest
rates, an issuer of preferred stock or fixed-rate debt securities may exercise
its option to redeem securities prior to maturity, forcing the Fund to reinvest
in lower yielding securities. This is known as call risk. During periods of
rising interest rates, the average life of certain types of securities may be
extended because of slower than expected payments. This may lock in a below
market yield, increase the security's duration, and reduce the value of the
security. This is known as extension risk. The value of the Fund's common stock
investments may also be influenced by changes in interest rates.
Duration Risk
Duration is a measure of the expected life of a fixed income security that
was developed as a more precise alternative to the concept of term-to-maturity.
Duration incorporates a bond's yield, coupon interest payments, final maturity
and call features into one measure. The duration of a fixed income security is a
measure of the portfolio's sensitivity to changes in interest rates. Prices of
fixed income securities with longer effective maturities are more sensitive to
interest rate changes than those with shorter effective maturities. As nominal
interest rates rise, the value of fixed income securities held by the Fund is
likely to decrease.
Convertible Securities Risk
The value of a convertible security is a function of its "investment value"
(determined by its yield in comparison with the yields of other securities of
comparable maturity and quality that do not have a conversion privilege) and its
"conversion value" (the security's worth, at market value, if converted into the
underlying common stock). The investment value of a convertible security is
influenced by changes in interest rates, with investment value declining as
interest rates increase and increasing as interest rates decline. The credit
standing of the issuer and other factors may also have an effect on the
convertible security's investment value. The conversion value of a convertible
security is determined by the market price of the underlying common stock. If
the conversion value is low relative to the investment value, the price of the
convertible security is governed principally by its investment value. Generally,
the conversion value decreases as the convertible security approaches maturity.
To the extent the market price of the underlying common stock approaches or
exceeds the conversion price, the price of the convertible security will be
increasingly influenced by its conversion value. A convertible security
generally will sell at a premium over its conversion value by the extent to
which investors place value on the right to acquire the underlying common stock
while holding a fixed income security.
A convertible security may be subject to redemption at the option of the
issuer at a price established in the convertible security's governing
instrument. If a convertible security held by the Fund is called for redemption,
the Fund will be required to permit the issuer to redeem the security, convert
it into the underlying common stock or sell it to a third party. Any of these
actions could have an adverse effect on the Fund's ability to achieve its
investment objectives.
Illiquid Securities Risk
Restricted securities and other illiquid investments of the Fund involve
the risk that the securities will not be able to be sold at the time desired by
the Advisor or at prices approximating the value at which the Fund is carrying
the securities. Where registration is required to sell a security, the Fund may
be obligated to pay all or part of the registration expenses, and a considerable
period may elapse between the decision to sell and the time the Fund may be
permitted to sell a security under an effective registration statement. If,
during such a period, adverse market conditions were to develop, the Fund might
obtain a less favorable price than prevailed when it decided to sell. Restricted
securities for which no market exists and other illiquid investments are valued
at fair value as determined in accordance with procedures approved and
periodically reviewed by the Trustees of the Fund.
Inflation Risk
Inflation risk is the risk that the purchasing power 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 common shares and
distributions thereon can decline. In addition, during any periods of rising
inflation, dividend rates of any preferred shares of the Fund would likely
increase, which would tend to further reduce returns to common shareholders.
Securities Lending Risk
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.
Securities lending is subject to the risk that loaned securities may not be
available to the Fund on a timely basis and the Fund may, therefore, lose the
opportunity to sell the securities at a desirable price. Any loss in the market
price of securities loaned by the Fund that occurs during the term of the loan
would be borne by the Fund and would adversely affect the Fund's performance.
Also, there may be delays in recovery, or no recovery, of securities loaned or
even a loss of rights in the collateral should the borrower of the securities
fail financially while the loan is outstanding.
The Fund's entry into securities lending transactions may cause the
replacement income earned on the loaned securities to fall outside of the
definition of qualified dividend income. This replacement income generally will
not be eligible for reduced federal income tax rates under the Code.
Market Disruption and Geopolitical Risk
The aftermath of the war in Iraq and the continuing occupation of Iraq,
instability in the Middle East and terrorist attacks in the United States and
around the world may result in market volatility and may have long-term effects
on the U.S. and worldwide financial markets and may cause further economic
uncertainties in the United States and worldwide. The Fund does not know how
long the securities markets will continue to be affected by these events and
cannot predict the effects of the occupation 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, convert the Fund to open-end status, or change the composition of its
Board of Trustees. 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. See "Anti-Takeover
Provisions in the Agreement and Declaration of Trust." Tax Risks
The Fund's investment policies and trading strategies, including, but not
limited to, dividend strategies, high portfolio turnover, short sales,
securities lending, use of derivatives and investment in foreign securities, may
result in a larger portion of its income being taxable at ordinary income tax
rates than might otherwise be the case. In addition, the Fund may invest in
complex securities that could be subject to numerous special and complex tax
rules. These rules could accelerate the recognition of income by the Fund
(possibly causing the Fund to sell securities to raise the cash for necessary
distributions) and/or defer the Fund's ability to recognize a loss, and, in
limited cases, subject the Fund to U.S. federal income tax on income. These
rules could also affect whether gain or loss recognized by the Fund is treated
as ordinary or capital, or as interest or dividend income. These rules could,
therefore, affect the amount, timing or character of the income distributed to
you by the Fund. See "Tax Matters."
Given the risks described above, an investment in the common shares may not
be appropriate for all investors. You should carefully consider your ability to
assume these risks before making an investment in the Fund.
HOW THE FUND MANAGES RISK
Investment Limitations
The Fund has adopted certain investment limitations designed to limit
investment risk. These limitations are fundamental and may not be changed
without the approval of the holders of a majority of the outstanding common
shares. Among other restrictions, the Fund will not invest more than 25% of its
net assets in securities of issuers in any one industry. See "Investment
Objectives and Policies" in the Statement of Additional Information for a
complete list of the fundamental and non-fundamental investment policies of the
Fund.
Strategic Transactions
The Fund may use various investment strategies designed to limit the risk
of fluctuations in the Fund's investments and to preserve capital. These
strategies include using swaps, financial futures contracts, options on
financial futures, or options based on either an index of long-term securities
or on equity securities whose prices, in the opinion of DMC, correlate with the
prices of the Fund's investments.
MANAGEMENT OF THE FUND
Trustees and Officers
The Board of Trustees is responsible for the overall management of the
Fund, including supervision of the duties performed by DMC. There are [____]
trustees of the Fund. A majority of the trustees are not "interested persons"
(as defined in the 1940 Act) of the Fund. 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
Delaware Management Company ("DMC" or the "Advisor"), a series of Delaware
Management Business Trust, acts as the Fund's investment advisor. DMC, located
at 2005 Market Street, Philadelphia, Pennsylvania 19103, provides investment
advisory services for registered investment companies. DMC is an indirect
subsidiary of Lincoln National Corporation, a publicly traded corporation
(NYSE-LNC). As of March 31, 2007, the assets under management of DMC and its
affiliates ("Delaware Investments") totaled nearly $[__] billion, of which
approximately $[__] billion were managed by DMC. Through a broad range of
managed accounts and portfolios, mutual funds, retirement accounts, sub-advised
funds, education savings plans, and other investment products, Delaware
Investments provides investment services to individual investors and to
institutional investors, such as private and public pension funds, foundations,
and endowment funds.
Delaware Investments traces its roots to 1938, and has experience managing
open- and closed-end products. As of March 31, 2007, Delaware Investments
advised a closed-end family of six active funds with approximately $553 million
in assets. Headquartered in Philadelphia, Delaware Investments has more than 800
employees located throughout the United States.
Portfolio Managers. Delaware Investments uses a team approach in managing
the Fund's portfolio. Delaware Investments believes that this approach offers
substantial benefits over one that is dependent on the market wisdom or
investment expertise of only a few individuals.
The members of the portfolio management team who are primarily responsible
for the day-to-day management of the Fund are Babak (Bob) Zenouzi, Damon J.
Andres, D. Tysen Nutt Jr., Thomas H. Chow, Philip R. Perkins, Zoe A. Neale, and
Liu-Er Chen. Mr. Zenouzi, lead manager, is primarily responsible for the asset
allocation decisions of the Fund.
Mr. Zenouzi, Senior Vice President and Senior Portfolio Manager, rejoined
Delaware Investments in May 2006. He left Delaware Investments in 1999 after
seven years as an analyst and portfolio manager. Currently, he leads the
Delaware Investments' REIT group, including the team, its process, and its
institutional and retail products, which he created during his prior time with
Delaware Investments. He also serves as lead portfolio manager for Delaware
Investments' Dividend Income products, which he helped to create in the 1990s.
Most recently, Mr. Zenouzi worked at Chartwell Investment Partners from 1999 to
2006, where he was a partner and senior portfolio manager on Chartwell's
Small-Cap Value portfolio. He began his career with The Boston Company, where he
held several positions in accounting and financial analysis. Mr. Zenouzi earned
a master's degree in finance from Boston College and a bachelor's degree from
Babson College. He is a member of the National Association of Real Estate
Investment Trusts.
Mr. Andres, Vice President and Senior Portfolio Manager, joined Delaware
Investments in 1994, and currently serves as a portfolio manager for REIT
investments and convertibles and dividend income products. From 1991 to 1994, he
performed investment-consulting services as a consulting associate with
Cambridge Associates. Mr. Andres earned a bachelor's degree in business
administration with an emphasis in finance and accounting from the University of
Richmond and is a Chartered Financial Analyst.
Mr. Nutt, Senior Vice President, Senior Portfolio Manager, Team Leader -
Large-Cap Value Focus Equity, joined Delaware Investments in 2004 as senior vice
president and senior portfolio manager for Delaware Investments' Large-Cap Value
Focus strategy. Before joining Delaware Investments, Mr. Nutt led the U.S.
Active Large-Cap Value team within Merrill Lynch Investment Managers ("MLIM"),
where he managed mutual funds and separate accounts for institutions and private
clients. Mr. Nutt departed MLIM as a managing director. Prior to joining MLIM in
1994, Mr. Nutt was with Van Deventer & Hoch, where he managed large-cap value
portfolios for institutions and private clients. He began his investment career
at Dean Witter Reynolds, where he eventually became vice president, investments.
Mr. Nutt earned his bachelor's degree from Dartmouth College, and he is a member
of the New York Society of Security Analysts and the CFA Institute
Mr. Chow, Senior Vice President and Senior Portfolio Manager, joined
Delaware Investments in 2001. He is a member of Delaware Investments' Insurance
Asset Management team with primary responsibility for portfolio management of
accounts supporting Lincoln Financial Group and other third-party insurance
clients. Prior to joining Delaware Investments, he was a trader of high grade
and high yield securities, and was involved in the portfolio management of
collateralized bond obligations and insurance portfolios at SunAmerica/AIG from
1997 to 2001. Before that, he was an analyst, trader, and portfolio manager at
Conseco Capital Management from 1989 to 1997. Mr. Chow received a bachelor's
degree in business analysis from Indiana University, and he is a Fellow of Life
Management Institute.
Mr. Perkins, Senior Vice President and Senior Portfolio Manager, joined
Delaware Investments in 2003. He leads Delaware Investments' international bond
team, where his responsibilities include managing global bond assets across the
product matrix. Prior to joining Delaware Investments, Mr. Perkins worked at
Deutsche Bank for five years. He served as a managing director in global markets
from 2001 to 2003, during that same time he was the chief operating officer for
the Bank's emerging markets division in London, and from 1998 to 2001 he was
responsible for local markets trading in Moscow. Prior to that, Mr. Perkins was
chief executive officer of Dinner Key Advisors, a registered broker/dealer
founded to trade derivative mortgage-backed bonds with institutional clients. He
began his career at Salomon Brothers, where he was a mortgage/CMO trader from
1985 to 1990. Mr. Perkins holds a bachelor's degree in international studies
with a minor in computer science from the University of Notre Dame.
Ms. Neale, Senior Vice President and Chief Investment Officer -
International Equity, joined Delaware Investments in June 2005 to develop
Delaware Investments' International Value Equity strategies, from Arborway
Capital, which she co-founded in January 2005. Previously she ran the
International Value Strategies business at Thomas Weisel Asset Management
("TWAM"). She joined TWAM when it acquired ValueQuest/TA in 2002. Ms. Neale
started at ValueQuest in 1996 and served as a senior investment professional
with portfolio management and global research responsibilities for several
sectors. Prior to ValueQuest, she was an assistant vice president and portfolio
manager for Anchor Capital Advisors, with generalist research responsibilities.
Ms. Neale earned a bachelor's degree in economics from the University of Texas,
Austin, and an MBA from Northeastern University.
Mr. Chen, Senior Vice President, Chief Investment Officer - Emerging
Markets, joined Delaware Investments in September 2006 to lead Delaware
Investments' international Emerging Markets team. Previously, he spent nearly 11
years at Evergreen Investment Management Company, where he most recently served
as managing director and senior portfolio manager. He co-managed the Evergreen
Emerging Markets Growth Fund from 1999 to 2001, and became the Fund's sole
manager in 2001. He also served as the sole manager of the Evergreen Health Care
Fund since its inception in 1999. Mr. Chen began his career at Evergreen in 1995
as an analyst covering Asian and global healthcare stocks, before being promoted
to portfolio manager in 1998. Prior to his career in asset management, Mr. Chen
worked for three years in sales, marketing, and business development for major
American and European pharmaceutical and medical device companies. He is
licensed to practice medicine in China and has experience in medical research at
both the Chinese Academy of Sciences and Cornell Medical School. He holds an MBA
with a concentration in management from Columbia Business School.
The Statement of Additional Information contains additional information
about other accounts managed by the portfolio managers, the compensation of the
portfolio managers, and the portfolio managers' ownership of the common shares
of the Fund.
Investment Management Agreement
Under the general supervision of the Fund's Board of Trustees, DMC will
carry out the investment and reinvestment of the assets of the Fund, will
furnish continuously an investment program with respect to the Fund, will
determine which securities should be purchased, sold, or exchanged, and will
implement such determinations. DMC will furnish to the Fund investment advice
and office facilities, equipment, and personnel for servicing the investments of
the Fund. DMC will compensate all Trustees and officers of the Fund who are
members of DMC's organization and who render investment services to the Fund,
and will also compensate all other DMC personnel who provide research and
investment services to the Fund. In return for these services, facilities, and
payments, the Fund has agreed to pay DMC as compensation under the investment
management agreement a monthly fee computed at the annual rate of 1.00% of the
average daily total assets of the Fund. When the Fund is utilizing leverage, the
fee paid to DSC will be higher than if the Fund did not use leverage because the
fees paid will be calculated based on the Fund's total assets, which include the
principal amount of outstanding borrowings used for leverage.
In addition to the management fee of DMC, the Fund pays all other costs and
expenses of its operations, including but not limited to, compensation of its
trustees (other than those affiliated with DMC), custodian, leveraging expenses,
transfer and dividend disbursing agent expenses, legal fees, rating agency fees,
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.
A discussion of the basis for the Board's approval of the Fund's investment
management agreement will be available in the Fund's [annual or semi-annual]
report to shareholders for the period ended [_________], 200[_].
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 and
liabilities. Net asset value per common share will be determined on each Friday
and each month end as of the close of the regular trading session on the NYSE.
The Fund calculates net asset value per common share by subtracting liabilities
(including accrued expenses or dividends) from the total assets of the Fund (the
value of the securities plus cash or other assets, including interest accrued
but not yet received) and dividing the result by the total number of outstanding
common shares of the Fund.
Equity securities, except those traded on the NASDAQ, are valued at the
last quoted sales price as of time of the regular close of the NYSE on the
valuation date. Securities traded on the NASDAQ are valued in accordance with
the NASDAQ official closing price, which may not be the last sales price. If on
a particular day an equity security does not trade, then the mean between the
bid and asked prices will be used. Securities listed on a foreign exchange are
normally valued at the last quoted sales price before the Fund is valued. U.S.
government and agency securities are valued at the mean between the bid and
asked prices. Long-term debt securities are valued by an independent pricing
service and such prices are believed to reflect the fair value of such
securities. Short-term debt securities having less than 60 days to maturity are
valued at amortized cost, which approximates market value. Securities lending
collateral is valued at amortized cost, which approximates market value. Foreign
currency exchange contracts and foreign cross-currency exchange contracts are
valued at the mean between the bid and asked prices of the contracts and are
marked-to-market daily. Interpolated values are derived when the settlement date
of the contract is an interim date for which quotations are not available. Other
securities and assets for which market quotations are not readily available are
valued at fair value as determined in good faith under the direction of the
Fund's Board of Trustees. In determining whether market quotations are readily
available or fair valuation will be used, various factors will be taken into
consideration, such as market closures, or with respect to foreign securities,
aftermarket trading or significant events after local market trading (e.g.,
government actions or pronouncements, trading volume or volatility on markets,
exchanges among dealers, or news events).
DISTRIBUTIONS
Commencing with the Fund's initial dividend, the Fund intends to make a
level cash distribution each month to common shareholders pursuant to a managed
distribution policy. Under the policy, the Fund is managed with a goal of
generating as much of the distribution as possible from ordinary income (net
investment income and short-term capital gains). The balance of the distribution
will then come from long-term capital gains to the extent permitted and, if
necessary, a return of capital. The Advisor expects to declare the initial
monthly dividend on the Fund's common shares within approximately [45] days
after completion of this offering and to pay that initial monthly dividend
approximately [60 to 90] days after completion of this offering. The level
dividend rate may be modified by the Board of Trustees from time to time. The
Board of Trustees may also determine to amend their managed distribution policy
to modify the Fund's distribution frequency from monthly to some other period.
DMC currently intends to apply to the U.S. Securities & Exchange
Commission, on behalf of the Fund, for an exemption from Section 19(b) of the
Investment Company Act of 1940, as amended (the "1940 Act"), and Rule 19b-1
thereunder permitting the Fund to make periodic distributions of long-term
capital gains. No assurance can be given that the U.S. Securities and Exchange
Commission will grant the exemption to the Fund. This offering, however, is not
contingent upon the receipt of such exemption. See "Distribution Policy."
The level dividend distribution described above would result in the payment
of approximately the same amount to the Fund's shareholders each month. If the
source of the dividend or other distribution were the original capital
contribution of the shareholder, and the payment amounted to a return of
capital, Section 19(a) of the 1940 Act and Rule 19a-1 thereunder require the
Fund to provide shareholders with written disclosure to that effect that
accompanies such payment. Nevertheless, persons who periodically receive the
payment of a dividend or other distribution may be under the impression that
they are receiving net profits when they are not. Shareholders should read any
written disclosure provided pursuant to Section 19(a) and Rule 19a-1 carefully,
and should not assume that the source of any distribution from the Fund is net
profit. See "Distributions."
Shareholders will automatically have all dividends and distributions
reinvested in common shares issued by the Fund or common shares of the Fund
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."
The tax treatment and characterization of the Fund's distributions may vary
significantly from time to time because of the varied nature of the Fund's
investments. In light of the Fund's investment policies, the Fund anticipates
that the 1940 Act will require it to accompany each monthly distribution with a
statement setting forth the estimated source (as between net income, capital
gains, and return of capital) of the distribution made. The Fund will indicate
the proportion of its capital gains distributions that constitute long-term and
short-term gains annually. The ultimate tax characterization of the Fund's
distributions made in a calendar or fiscal year cannot finally be determined
until after the end of that fiscal year. As a result, there is a possibility
that the Fund may make total distributions during a calendar or fiscal year in
an amount that exceeds the Fund's net investment company taxable income and net
capital gains for the relevant fiscal year. In such situations, the amount by
which the Fund's total distributions exceed its net investment company taxable
income and net capital gains would generally be treated as a tax-free return of
capital reducing the amount of a shareholder's tax basis in such shareholder's
shares, with any amounts exceeding such basis treated as gain from the sale of
shares.
Various factors will affect the level of the Fund's current income and
current gains, such as its asset mix, and the Fund's use of options. To permit
the Fund to maintain a more stable distribution, the Fund may from time to time
distribute less than the entire amount of income and gains earned in a
particular period. The undistributed income and gains would be available to
supplement future distributions. As a result, the distributions paid by the Fund
for any particular period may be more or less than the amount of income and
gains actually earned by the Fund during that period. Undistributed income and
gains will add to the Fund's net asset value and, correspondingly, distributions
from undistributed income and gains and from capital, if any, 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 common shares of
the Fund 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."
DIVIDEND REINVESTMENT PLAN
Unless the registered owner of common shares elects to receive cash by
contacting the Plan Agent (as defined below), all dividends declared for your
common shares of the Fund will be automatically reinvested by [_______________]
(the "Plan Agent"), agent for shareholders in administering the Fund's Dividend
Reinvestment Plan (the "Plan"), in additional common shares of the Fund. If a
registered owner of common shares elects not to participate in the Plan, you
will receive all dividends in cash paid by check mailed directly to you (or, if
the shares are held in street or other nominee name, then to such nominee) by
[_______________], as dividend disbursing agent. You may elect not to
participate in the Plan and to receive all dividends in cash by sending written
instructions or by contacting [_______________], 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
contacting the Plan Agent before 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 Agent will open an account for each common shareholder under the
Plan in the same name in which such 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 Agent 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 NYSE or elsewhere.
If, on the payment date for any dividend, the market price per common share
plus estimated brokerage commissions is greater than the net asset value per
common share (such condition being referred to herein as "market premium"), the
Plan Agent will invest the dividend amount in newly issued common shares,
including fractions, 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 per common
share is less than 95% of the market price per common share on the payment date,
the dollar amount of the dividend will be divided by 95% of the 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 market value per common share plus estimated brokerage
commissions (such condition being referred to herein as "market discount"), the
Plan Agent 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 Agent will have until the last business day before the next date on which
the common shares trade on an "ex-dividend" basis or 120 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 monthly 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 of the third month of the quarter. If, before the Plan Agent has completed
its open-market purchases, the market price of a common share exceeds the net
asset value per common share, the average per common share purchase price paid
by the Plan Agent 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, if the Plan Agent 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 Agent 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 per common share is
less than 95% of the market price per common share on the payment date, the
dollar amount of the dividend will be divided by 95% of the market price per
common share on the payment date.
The Plan Agent 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 Agent on behalf of the Plan
participant, and each shareholder proxy will include those shares purchased or
received pursuant to the Plan. The Plan Agent 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 Agent 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 U.S.
federal, state or local income tax that may be payable (or required to be
withheld) on such dividends. Participants that request a sale of shares through
the Plan Agent are subject to a $[_____] sales fee and a brokerage commission of
$[____] per share sold.
The Fund reserves the right to amend or terminate the Plan. There is no
direct service charge to participants in the Plan; however, the Fund reserves
the right to amend the Plan to include a service charge payable by the
participants.
All correspondence concerning the Plan should be directed to the Plan Agent
at [___address___]; telephone: [___________].
DESCRIPTION OF CAPITAL STRUCTURE
The Fund is a statutory trust organized under the laws of Delaware pursuant
to an Agreement and Declaration of Trust dated as of [________________], 2007.
The Fund is authorized to issue an unlimited number of common shares of
beneficial interest, without par value. 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. 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 common shares
other than the common shares it may issue under the Fund's Plan. Any additional
offerings of common 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 1940 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.
The Fund anticipates that its common shares will be listed on the NYSE
under the symbol "[___]." Net asset value will be reduced immediately following
the offering of common shares by the amount of the sales load and the amount of
the offering expenses paid by the Fund. See "Summary of Fund Expenses."
Unlike open-end funds, closed-end funds such as 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 NYSE 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 dividend-paying or
income-generating 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, 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.
The Fund generally will not issue share certificates. However, upon written
request to the Fund's transfer agent, a share certificate will be issued for any
or all of the full common shares credited to a record shareholder's account.
Common share certificates that have been issued to a record shareholder may be
returned at any time. The Fund's Transfer Agent will maintain an account for
each shareholder upon which the registration and transfer of shares are
recorded, and transfers will be reflected by bookkeeping entry, without physical
delivery. The Transfer Agent will require that a shareholder provide requests in
writing, accompanied by a valid signature guarantee form, when changing certain
information in an account such as wiring instructions or telephone privileges.
Borrowings
The Fund is authorized to borrow or issue commercial paper or other debt
securities for financial leveraging purposes. Under the 1940 Act, the Fund
generally is not permitted to issue commercial paper or notes or engage in other
borrowings unless, immediately after the borrowing, the value of the Fund's
total assets less liabilities other than the principal amount represented by
commercial paper, notes or other borrowings, is at least 300% of such principal
amount. In addition, the Fund is not permitted to declare any cash dividend or
other distribution on the common shares unless, at the time of such declaration,
the value of the Fund's total assets, less liabilities other than the principal
amount represented by borrowings, is at least 300% of such principal amount
after deducting the amount of such dividend or other distribution. [If the Fund
borrows, the Fund intends, to the extent possible, to prepay all or a portion of
the principal amount of any outstanding commercial paper, notes or other
borrowings to the extent necessary to maintain the required asset coverage.]
The terms of any such borrowings may require the Fund to pay a fee to
maintain a line of credit, such as a commitment fee, or to maintain minimum
average balances with a lender. Any such requirements would increase the cost of
such borrowings over the stated interest rate. Such lenders would have the right
to receive interest on and repayment of principal of any such borrowings, which
right will be senior to those of the common shareholders. Any such borrowings
may contain provisions limiting certain activities of the Fund, including the
payment of dividends to common shareholders in certain circumstances. Any
borrowings will likely be ranked senior or equal to all other existing and
future borrowings of the Fund. If the Fund utilizes borrowings, the common
shareholders will bear the offering costs of the issuance of any borrowings,
which are currently expected to be approximately [___]% of the total amount of
an offering of borrowings.
Certain types of borrowings subject the Fund to covenants in credit
agreements relating to asset coverage and portfolio composition requirements.
Certain borrowings issued by the Fund also may subject the Fund to certain
restrictions on investments imposed by guidelines of one or more ratings
agencies, which may issue ratings for such borrowings. Such guidelines may
impose asset coverage or portfolio composition requirements that are more
stringent than those imposed by the 1940 Act. It is not anticipated that these
covenants or guidelines will impede the Advisor from managing the Fund's
portfolio in accordance with the Fund's investment objective and policies.
The 1940 Act grants to the lenders to the Fund, under certain
circumstances, certain voting rights in the event of default in the payment of
interest on or repayment of principal. Failure to maintain certain asset
coverage requirements could result in an event of default and entitle the debt
holders to elect a majority of the Board of Trustees. See "Effects of Leverage."
Preferred Shares
The Declaration of Trust authorizes the issuance of an unlimited number of
shares of beneficial interest with preference rights, including preferred
shares, having no par value per share or such other amount as the Trustees may
establish, in one or more series, with rights as determined by the Board of
Trustees, by action of the Board of Trustees without the approval of the common
shareholders. The Board may, but has no current intention to, issue preferred
shares.
Under the requirements of the 1940 Act, the Fund must, immediately after
the issuance of any preferred shares, have an "asset coverage" of at least 200%.
Asset coverage means the ratio which the value of the total assets of the Fund,
less all liability and indebtedness not represented by senior securities (as
defined in the 1940 Act), bears to the aggregate amount of senior securities
representing indebtedness of the Fund, if any, plus the aggregate liquidation
preference of the preferred shares. If the Fund seeks a rating of the preferred
shares, asset coverage requirements, in addition to those set forth in the 1940
Act, may be imposed. The liquidation value of the preferred shares is expected
to equal their aggregate original purchase price plus redemption premium, if
any, together with any accrued and unpaid dividends thereon (on a cumulative
basis), whether or not earned or declared. The terms of the preferred shares,
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 Declaration of Trust) if and when it authorizes
the preferred shares. The Fund may issue preferred shares that provide for the
periodic redetermination of the dividend rate at relatively short intervals
through an auction or remarketing procedure, although the terms of the preferred
shares may also enable the Fund to lengthen such intervals. At times, the
dividend rate as redetermined on the Fund's preferred shares may approach or
exceed the Fund's return after expenses on the investment of proceeds from the
preferred shares and the Fund's leveraged capital structure would result in a
lower rate of return to common shareholders than if the Fund were not so
structured. If issued, preferred shares may be viewed as adding leverage to the
Fund.
In the event of any voluntary or involuntary liquidation, dissolution or
winding up of the Fund, the terms of any preferred shares may entitle the
holders of preferred shares to receive a preferential liquidating distribution
(expected to equal the original purchase price per share plus redemption
premium, if any, together with accrued and unpaid dividends, whether or not
earned or declared and on a cumulative basis) 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 preferred shareholders
would not be entitled to any further participation in any distribution of assets
by the Fund.
Under the 1940 Act, if at any time dividends on the preferred shares are
unpaid in an amount equal to two full years' dividends thereon, the holders of
all outstanding preferred shares, voting as a class, will be allowed to elect a
majority of the Fund's Trustees until all dividends in default have been paid or
declared and set apart for payment. In addition, if required by a ratings agency
rating the preferred shares or if the Board of Trustees determines it to be in
the best interests of the common shareholders, issuance of the preferred shares
may result in more restrictive provisions than required by the 1940 Act being
imposed.
If the Fund were to issue preferred shares, it is expected that the Fund
would seek a AAA/Aaa credit rating for the preferred shares from one or more
ratings agencies. In that case, as long as preferred shares are outstanding, the
composition of its portfolio would reflect guidelines established by such
ratings agency. Although, as of the date hereof, no such ratings agency has
established guidelines relating to any such preferred shares, based on previous
guidelines established by such ratings agencies for the securities of other
issuers, the Fund anticipates that the guidelines with respect to the preferred
shares would establish a set of tests for portfolio composition and asset
coverage that supplement (and in some cases are more restrictive than) the
applicable requirements under the 1940 Act. Although, at this time, no assurance
can be given as to the nature or extent of the guidelines, which may be imposed
in connection with obtaining a rating of the preferred shares, the Fund
currently anticipates that such guidelines will include asset coverage
requirements, which are more restrictive than those under the 1940 Act,
restrictions on certain portfolio investments and investment practices,
requirements that the Fund maintain a portion of its assets in short-term,
high-quality, fixed-income securities and certain mandatory redemption
requirements relating to the preferred shares. No assurance can be given that
the guidelines actually imposed with respect to the preferred shares by such
ratings agency will be more or less restrictive than guidelines imposed by the
Board of Trustees on any preferred stock.
ANTI-TAKEOVER 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. A trustee may be removed from office, with or without
cause, by the action of a majority of the trustees then in office.
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 1940 Act) of the Fund shall be
required. For purposes of these provisions, a 5% or greater holder of a class or
series of shares (a "Principal Shareholder") refers to any person who, whether
directly or indirectly and whether alone or together with its affiliates and
associates, beneficially owns 5% or more of the outstanding shares of all
outstanding classes or series of common shares of the Fund.
The 5% holder transactions subject to these special approval requirements
are: the merger or consolidation of the Fund or any subsidiary of the Fund with
or into any Principal Shareholder; the issuance of any securities of the Fund to
any Principal Shareholder for cash, except 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 1940 Act) of the Fund shall be required.
The foregoing vote would satisfy a separate requirement in the 1940 Act that any
conversion of the Fund to an open-end investment company be approved by the
shareholders. If approved in the foregoing manner, the Advisor anticipates
conversion of the Fund to an open-end investment company might not occur until
90 days after the shareholders' meeting at which such conversion was approved
and would also require at least 10 days' prior notice to all shareholders.
Following any such conversion, it is 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 NYSE 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 1940 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 and 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.
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 1940 Act or the Fund's Agreement and Declaration of Trust, with
respect to any class or series of shares. If a separate class 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 Agreement and Declaration of Trust also provides that the Fund may be
liquidated upon the approval of 80% of the Trustees. 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 1940 Act, are in
the best interest of shareholders generally. For a more complete explanation,
see the full text of these provisions in the Fund's Agreement and Declaration of
Trust, which is on file with the Securities and Exchange Commission.
CLOSED-END FUND STRUCTURE
The Fund is a diversified, closed-end management investment company with no
operating history (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 a mutual
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. The
Advisor 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 value, 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 that 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 1940 Act, and the principal stock exchange on which
the common shares are traded.
TAX MATTERS
The following is a description of certain U.S. 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. This discussion assumes that the
shareholders hold their Fund common shares as capital assets for U.S. federal
income tax purposes (generally, assets held for investment). No attempt is made
to present a detailed explanation of all U.S. federal, state, local and foreign
tax concerns affecting the Fund and its shareholders, and the discussion set
forth herein does not constitute tax advice. Investors are urged to consult
their own tax advisors to determine the tax consequences to them of investing in
the Fund.
The Fund intends to elect and to qualify for special tax treatment afforded
to a regulated investment company under Subchapter M of the Code. In order to
qualify the Fund must satisfy income, asset diversification and distribution
requirements. As long as it so qualifies, the Fund will not generally be subject
to U.S. federal income tax to the extent that it distributes its net investment
income and net realized capital gains. The Fund intends to distribute annually
all or substantially all of such income. The amount of any distribution may
vary, and there is no guarantee the Fund will either pay a dividend from its net
investment income or make a distribution of net realized capital gains.
In general, if you are a taxable shareholder, Fund distributions are
taxable to you at either ordinary income or capital gains tax rates. This is
true whether you reinvest your distributions in additional Fund shares or
receive them in cash. Every January, you will receive a statement on Form
1099-DIV that shows the tax status of dividends and distributions you received
the previous calendar year. The Fund may reclassify income after your tax
reporting statement is mailed to you. Prior to issuing your statement, the Fund
makes every effort to search for reclassified income to reduce the number of
corrected forms mailed to shareholders. However, when necessary, the Fund will
send you a corrected Form 1099-DIV to reflect reclassified information. In this
case, use the information on your corrected Form 1099-DIV for tax returns.
Distributions paid by the Fund from its ordinary income and the excess of
net short term capital gains over net long term capital losses (together
referred to hereinafter as "ordinary income dividends"), are generally taxable
to you as ordinary income to the extent of the Fund's earnings and profits. A
portion of such distributions (if designated by the Fund) may, however, qualify
(provided holding periods and other requirements are met) (i) for the dividends
received deduction in the case of corporate shareholders to the extent that the
Fund's income consists of dividend income from U.S. corporations, and (ii) for
taxable years through December 31, 2010, as qualified dividend income eligible
for the reduced maximum U.S. federal tax rate 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 whose stock with respect to which such dividend is
paid is readily tradable on an established securities market in the United
States). There can be no assurance as to what portion of the Fund's ordinary
income dividends will qualify for the dividends received deduction or constitute
qualified dividend income. Distributions made from net capital gain, which is
the excess of net long term capital gains over net short term capital losses
("capital gain dividends"), including capital gain dividends credited to a
shareholder but retained by the Fund, are taxable to shareholders as long term
capital gains if they have been properly designated by the Fund, regardless of
the length of time the shareholder has owned common shares of the Fund. The
maximum U.S. federal tax rate on net long term capital gain of individuals is
generally 15% (5% for individuals in lower brackets) for such gain realized
before January 1, 2011.
If, for any calendar year, the Fund's total distributions exceed both
current earnings and profits and accumulated earnings and profits, the excess
will generally be treated as a tax free return of capital up to the amount of a
shareholder's tax basis in the common shares. The amount treated as a tax free
return of capital will reduce a shareholder's tax basis in the common shares,
thereby increasing such shareholder's potential gain or reducing his or her
potential loss on the sale of the common shares. Any amounts distributed to a
shareholder in excess of his or her tax basis in the common shares will be
taxable to the shareholder as capital gain (assuming the common shares are held
as a capital asset).
Generally, not later than 60 days after the close of its taxable year, the
Fund will provide its shareholders with a written notice designating the amount
of any ordinary income dividends or capital gain dividends and other
distributions.
The sale or other disposition of common shares of the Fund will generally
result in gain or loss to shareholders, and will be long term capital gain or
loss if the common shares have been held for more than one year at the time of
sale and are held by the shareholder as a capital asset. Any loss upon the sale
or exchange of Fund common shares held for six months or less will be treated as
long term capital loss to the extent of any capital gain dividends received
(including amounts credited as an undistributed capital gain dividend) by the
shareholder. Any loss a shareholder realizes on a sale or exchange of common
shares of the Fund will be disallowed if the shareholder acquires other common
shares of the Fund (whether through the automatic reinvestment of dividends or
otherwise) within a 61 day period beginning 30 days before and ending 30 days
after the shareholder's sale or exchange of the common shares. In such case, the
basis of the common shares acquired will be adjusted to reflect the disallowed
loss. Present law taxes both long term and short term capital gains of
corporations at the rates applicable to ordinary income.
Dividends and other taxable distributions are taxable to shareholders even
though they are reinvested in additional common shares of the Fund. If the Fund
pays a dividend or makes a distribution in January that was declared in the
previous October, November or December to shareholders of record on a specified
date in one of such months, then such dividend or distribution will be treated
for tax purposes as being paid by the Fund and received by its shareholders on
December 31 of the year in which the dividend or distribution was declared.
The Fund is required in certain circumstances to withhold, for U.S. federal
backup withholding purposes, on taxable dividends or distributions and certain
other payments paid to non corporate holders of the Fund's common shares who do
not furnish the Fund with their correct taxpayer identification number (in the
case of individuals, their social security number) and certain certifications,
or who are otherwise subject to backup withholding. Backup withholding is not an
additional tax. Any amounts withheld from payments made to a shareholder may be
refunded or credited against such shareholder's U.S. federal income tax
liability, if any, provided that the required information is furnished to the
IRS. When backup withholding is required, the amount will be 28% of any
distributions or proceeds paid.
Fund distributions and gains from the sale or exchange of your Fund shares
generally are subject to state and local income taxes. In addition, the Fund may
be subject to foreign withholding taxes on income and gains from certain foreign
securities; this, in turn, could reduce the Fund's distributions paid to you.
Non-U.S. shareholders (shareholders who, as to the United States, are a
nonresident alien individual, foreign trust or estate, foreign corporation, or
foreign partnership) may be subject to U.S. federal withholding tax and, in the
case of a nonresident alien individual, estate tax and are subject to special
U.S. tax certification requirements. In general, the United States imposes a
flat 30% withholding tax (or a withholding tax at a lower treaty rate) on U.S.
source dividends, including on ordinary income dividends paid to you by the
Fund, subject to certain exemptions for dividends designated by the Fund as
interest-related dividends and short-term capital gain dividends as discussed in
the next paragraph. In addition, dividends designated by the Fund as capital
gain dividends that are paid to certain non-U.S. shareholders (generally those
not present in the United States for 183 days or more) will be exempt from U.S.
federal withholding tax. However, notwithstanding such exemptions from U.S.
federal withholding, any ordinary income dividends and capital gains dividends,
including the proceeds from the sale of your Fund shares, will be subject to
backup withholding at a rate of 28% if you fail to properly certify that you are
not a U.S. person.
Certain dividends designated by the Fund as "interest related dividends"
that are paid to most non-U.S. shareholders (generally those that would qualify
for the portfolio interest exemptions of Section 871(h) or Section 881(c) of the
Code) will be exempt from U.S. federal withholding tax. Interest related
dividends are those dividends derived from certain U.S. source 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. federal income tax if earned by a foreign person directly.
Further, certain dividends designated by the Fund as "short term capital gain
dividends" that are paid to certain non-U.S. shareholders (generally those not
present in the United States for 183 days or more) will be exempt from U.S.
federal withholding tax. In general, short term capital gain dividends are those
that are derived from the excess of the Fund's short term capital gains over its
net long term capital losses. These provisions generally apply, with certain
exceptions, to taxable years of the Fund beginning on or before December 31,
2007, unless such exemptions are extended or made permanent. Also, it may not be
practical in every case for the Fund to designate, and the Fund reserves the
right in these cases to not designate, small amounts of interest-related or
short-term capital gain dividends. Prospective investors are urged to consult
their tax advisor regarding the specific tax consequences to them as related to
these provisions.
Income received by the Fund from certain equity interests in mortgage
pooling vehicles is treated as "excess inclusion income." The Fund may derive
such income either as a result of its direct investment in such interests or,
indirectly, through its investment in REITs that hold such interests or
otherwise qualify as taxable mortgage pools. In general, this income is required
to be reported to Fund shareholders that are not disqualified organizations (as
defined below) in proportion to dividends paid with the same consequences as if
the shareholders directly received the excess inclusion income. Excess inclusion
income (1) may not be offset with net operating losses, (2) represents unrelated
business taxable income (UBTI) in the hands of a tax-exempt shareholder that is
not a disqualified organization, and (3) is subject to U.S. federal withholding
tax, without regard to otherwise applicable exemptions or rate reductions, to
the extent such income is allocable to a shareholder who is not a U.S. person.
The Fund must pay the tax on its excess inclusion income that is allocable to
"disqualified organizations," which are generally certain cooperatives,
governmental entities and tax-exempt organizations that are not subject to tax
on UBTI. To the extent that the Fund shares owned by a disqualified organization
are held in record name by a broker/dealer or other nominee, the Fund must
inform the broker/dealer or other nominee of the excess inclusion income
allocable to them and the broker/dealer or other nominee must pay the tax on the
portion of the Fund's excess inclusion income allocable to them on behalf of the
disqualified organizations.
The foregoing is a general and abbreviated summary of the provisions of the
Code and Treasury regulations in effect as they directly govern the taxation of
the Fund and its shareholders. These provisions are subject to change by
legislative or administrative action, and any such change may be retroactive. A
more complete discussion of the tax rules applicable to the Fund can be found in
the statement of additional information, which is incorporated by reference into
this Prospectus. Shareholders are urged to consult their tax advisors regarding
specific questions as to U.S. federal, state, local and foreign income or other
taxes.
UNDERWRITING
Subject to the terms and conditions of a purchase agreement dated
[____________], 2007, each underwriter named below, for which
[___________________] 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.
Underwriter Number of
Common
Shares
[LIST OF UNDERWRITERS]
-------------
Total....................................................... =============
--------------------------------------------------------------------------------
================================================================================
The purchase agreement provides that the obligations of the underwriters to
purchase the 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 and the Advisor have agreed to indemnify the underwriters against
certain liabilities, including liabilities arising under the 1933 Act, 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 $[____] per share is equal to [0.00667]% of the
initial offering price. The underwriters may allow, and the dealers may reallow,
a discount not in excess of $ per share on sales to other 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
[_______________], 2007.
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.
Without With
Per Share Option Option
Public offering price....................... $[_____] $ $
Sales load.................................. $[_____] $ $
Estimated offering expenses................. $[_____] $ $
Proceeds, after expenses, to the Fund....... $[_____] $ $
--------------------------------------------------------------------------------
The expenses of the offering are estimated at $[_________] and are payable
by the Fund. The Fund will pay all of its organizational and offering costs
(other than sales load) up to and including $[____] per common share. This
amount includes the $[_____] per common share partial reimbursement of expenses
to the underwriters and may also include a reimbursement of DMC's expenses
incurred in connection with this offering. The amount paid by the Fund as the
partial reimbursement to the underwriters will not exceed [______]% of the total
price to the public of the common shares sold in this offering. DMC has agreed
to pay all of the Fund's offering expenses to the extent offering expenses
(other than sales load) and organizational expenses exceed $[___] per common
share.
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
overallotments. 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, the rules of the
Securities and Exchange Commission may limit underwriters and selling group
members from bidding for and purchasing the Fund's common shares. However, the
representative may engage in transactions that stabilize the price of the Fund's
common shares, such as bids or purchases to peg, fix, or maintain that price.
If the underwriters create a short position in the Fund's 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 representative may reduce that short
position by purchasing common shares in the open market. The representative may
also elect to reduce any short position by exercising all or part of the
overallotment option described above. Purchases of the Fund's common shares to
stabilize its price or to reduce a short position may cause the price of the
Fund's common shares to be higher than it might be in the absence of such
purchases. The underwriters may also impose a penalty bid, whereby selling
concessions allowed to syndicate members or other brokers 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.
Neither the Advisor nor any of the underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the Fund's common shares. In addition,
neither the Advisor nor any of the underwriters make any representation that the
representative 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 dealers in executing the Fund's portfolio transactions after they
have ceased to be underwriters. The underwriters are active underwriters of, and
dealers in, securities and act as market makers in a number of such securities,
and therefore can be expected to engage in portfolio transactions with the Fund.
The underwriters may also act as underwriters of the Fund's preferred shares in
the event that the Fund issues preferred shares.
The common shares will be sold to ensure that the NYSE's distribution
standards (i.e., round lots, public shares, and aggregate market value) will be
met.
Other Relationships
DMC (and not the Fund) has agreed to pay from its own assets additional
compensation to [_________________]. [______________] will receive an up-front
fee from DMC in an amount equal to [____]% of the total price to the public of
the common shares sold by the Fund, which will not exceed % of the total public
offering price of the common shares sold in this offering. The total amount of
this additional compensation payment to [______________] will not exceed % of
the total price of the public of the common shares sold in this offering.
DMC (and not the Fund) has agreed to pay to [_______________], from its own
assets, a sales incentive fee for advice relating to the structure, design and
organization of the Fund as well as services related to the sale and
distribution of the Fund's common shares in the amount of $[____]. The
structuring fee paid to [________________] will not exceed % of the total public
offering price of the common shares sold in this offering.
DMC (and not the Fund) may also pay certain qualifying underwriters a sales
incentive fee in connection with the offering.
DMC (and not the Fund) has agreed to pay a commission to certain
wholesalers of its broker-dealer affiliate, Lincoln Financial Distributors, Inc.
that participate in the marketing of the Fund's common shares, which commissions
will not exceed [____] % of the total price to the public of the common shares
sold in this offering. The Fund may reimburse DMC for all or a portion of its
expenses incurred in connection with this offering (other than those described
in the preceding sentence), to the extent that the $[______] per common share
reimbursement of expenses of the underwriters (described above) and the other
offering expenses of the Fund do not equal or exceed the $[____] per common
share the Fund has agreed to pay for the offering and organizational expenses of
the Fund.
The sum of the fees described above, plus the amount paid by the Fund as of
the $[________] per common share partial reimbursement of expenses 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 the
underwriters in connection with this public offering of common shares, including
sales load and additional compensation to and reimbursement of the underwriters,
will be limited to [9.0]% of the total price to the public of the common shares
sold in this offering.
The principal address of [____________] is
[_____________________________________].
CUSTODIAN AND TRANSFER AGENT
The custodian of the assets of the Fund will be [___________], and it will
perform custodial services. [__________] will serve as the Fund's transfer agent
with respect to the common shares. Delaware Service Company, Inc., an affiliate
of DMC, will provide accounting and administrative services to the Fund.
LEGAL OPINIONS
Certain legal matters in connection with the common shares will be passed
upon for the Fund by Stradley Ronon Stevens & Young, LLP, Philadelphia,
Pennsylvania, and for the underwriters by [____________________________].
[_____________________________] may rely on the opinion of Stradley Ronon
Stevens & Young, LLP as to matters of Delaware law.
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
[________________] is the independent registered public accounting firm for
the Fund and will audit the Fund's financial statements. [___________________]
is located at [_____________________].
OTHER INFORMATION
The Prospectus and the Statement of Additional Information do not contain
all of the information set forth in the Registration Statement that the Fund has
filed with the U.S. Securities and Exchange Commission (file No. 333-[_______]).
The complete Registration Statement may be obtained from the U.S. Securities and
Exchange Commission at www.sec.gov. See the cover page of this Prospectus for
information about how to obtain a paper copy of the Registration Statement or
Statement of Additional Information without charge.
TABLE OF CONTENTS FOR STATEMENT OF ADDITIONAL INFORMATION
Prospectus Summary.........................................................[ ]
Summary of Fund Expenses...................................................[ ]
Use of Proceeds............................................................[ ]
The Fund's Investments.....................................................[ ]
Effects of Leverage........................................................[ ]
Risk.......................................................................[ ]
How the Fund Manages Risk..................................................[ ]
Management of the Fund.....................................................[ ]
Net Asset Value............................................................[ ]
Distributions..............................................................[ ]
Dividend Reinvestment Plan.................................................[ ]
Description of Capital Structure...........................................[ ]
Anti-Takeover Provisions in the Agreement and
Declaration of Trust.......................................................[ ]
Closed-End Fund Structure..................................................[ ]
Repurchase of Common Shares................................................[ ]
Tax Matters................................................................[ ]
Underwriting...............................................................[ ]
Custodian and Transfer Agent...............................................[ ]
Legal Opinions.............................................................[ ]
Independent Registered Public Accounting Firm..............................[ ]
Other Information..........................................................[ ]
Table of Contents for Statement of Additional Information..................[ ]
================================================================================
Until [__________], 2007 (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' obligations to deliver a prospectus when acting as underwriters
and with respect to their unsold allotments or subscriptions.
Shares
Delaware Enhanced Global Dividend and Income Fund
Common Shares
$[_______] per Share
--------------------------------------------------------------------------------
PROSPECTUS
--------------------------------------------------------------------------------
[LIST OF UNDERWRITERS]
[_______________], 2007
================================================================================
Subject to Completion
Preliminary Statement of Additional Information dated [______________], 2007
STATEMENT OF ADDITIONAL INFORMATION
Delaware Enhanced Global Dividend and Income Fund (the "Fund") is a newly
organized, diversified, closed-end management investment company with no
operating history. This Statement of Additional Information ("SAI") relating to
common shares does not constitute a prospectus, but should be read in
conjunction with the prospectus relating thereto dated [__________________],
2007. This SAI, 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
[______________]. 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
Use of Proceeds................................................................1
Investment Objectives and Policies.............................................1
Other Investment Policies and Techniques.......................................2
Management of the Fund........................................................18
Portfolio Transactions and Brokerage..........................................28
Description of Shares.........................................................29
Repurchase of Common Shares...................................................31
Tax Matters...................................................................32
Experts.......................................................................39
Additional Information........................................................40
Report of Independent Registered Public Accounting Firm.......................41
Financial Statements..........................................................42
The information in the preliminary Statement of Additional Information 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 preliminary Statement of Additional Information is not an offer
to sell these securities and is not soliciting an offer to buy these securities
in any state where offer or sale is not permitted.
FORWARD-LOOKING STATEMENTS
This SAI contains or incorporates by reference forward-looking statements,
within the meaning of the federal securities laws, that involve risks and
uncertainties. These statements describe our plans, strategies and goals and our
beliefs and assumptions concerning future economic or other conditions and the
outlook for the Fund, based on currently available information. In this SAI,
words such as "anticipates," "believes," "expects," "objectives," "goals,"
"future," "intends," "seeks," "will," "may," "could," "should," and similar
expressions are used in an effort to identify forward-looking statements,
although some forward-looking statements may be expressed differently.
The Fund's actual results could differ materially from those anticipated in
the forward-looking statements because of various risks and uncertainties,
including the factors set forth in the section headed "Risk Factors" in the
Fund's prospectus and elsewhere in the prospectus and this SAI. You should
consider carefully the discussions of risks and uncertainties in the "Risk
Factors" section in the prospectus. The forward-looking statements contained in
this SAI are based on information available to the Fund on the date of this SAI,
and the Fund assumes no obligation to update any such forward-looking
statements, except as required by law.
USE OF PROCEEDS
The net proceeds of this offering of common shares will be approximately
$[___] ($[___] if the underwriters exercise the overallotment option in full)
after payment of the estimated offering costs and the deduction of the sales
load. The Fund will invest the net proceeds of this offering in accordance with
the Fund's investment objectives and policies as stated below. The Advisor
currently anticipates that the Fund will be fully invested in securities that
meet the Fund's investment objectives and policies within approximately one
month after the completion of this offering. It is anticipated that certain Fund
proceeds will be invested in short-term debt securities prior to being invested
otherwise pursuant to the Fund's investment objectives and policies.
INVESTMENT OBJECTIVES AND POLICIES
The Fund's primary investment objective is to seek current income, with a
secondary objective of capital appreciation. The Fund will seek to achieve its
objectives by focusing on broad diversification within its portfolio by
investing globally in dividend-paying or income-generating securities across
multiple asset classes. The primary asset classes include equity securities of
large, well-established companies, securities issued by real estate companies
(including real estate investment trusts and real estate operating companies),
emerging market equities, preferred securities, debt securities including
high-yield corporate bonds, investment grade corporate bonds, U.S. government
securities, non-U.S. corporate bonds, non-U.S. government securities,
convertible bonds, convertible preferred stock, emerging market debt securities,
and international currencies. There is no assurance that the Fund will achieve
its investment objectives.
Investment Restrictions
The Fund has adopted the following restrictions which cannot be changed
without approval by the holders of a "majority" of the Fund's outstanding
shares, which is a vote by the holders of the lesser of: a) 67% or more of the
voting securities of the Fund present in person or by proxy at a meeting, if the
holders of more than 50% of the outstanding voting securities are present or
represented by proxy; or b) more than 50% of the outstanding voting securities
of the Fund. The percentage limitations contained in the restrictions and
policies set forth herein apply at the time of purchase of securities.
The Fund shall not:
1. Make investments that will result in the concentration (as that term may
be defined in the Investment Company Act of 1940 Act, as amended (the "1940
Act"), any rule or order thereunder, or U.S. Securities and Exchange Commission
staff interpretation thereof) of its investments in the securities of issuers
primarily engaged in the same industry, provided that this restriction does not
limit the Fund from investing in obligations issued or guaranteed by the U.S.
Government, its agencies, or instrumentalities, or in tax-exempt obligations or
certificates of deposit.
2. Borrow money or issue senior securities, except as the 1940 Act, any
rule or order thereunder, or U.S. Securities and Exchange Commission staff
interpretation thereof, may permit.
3. Underwrite the securities of other issuers, except that the Fund may
engage in transactions involving the acquisition, disposition or resale of its
portfolio securities, under circumstances where it may be considered to be an
underwriter under the Securities Act of 1933, as amended (the "1933 Act").
4. Purchase or sell real estate, unless acquired as a result of ownership
of securities or other instruments and provided that this restriction does not
prevent the Fund from investing in issuers that invest, deal, or otherwise
engage in transactions in real estate or interests therein, or investing in
securities that are secured by real estate or interests therein.
5. Purchase or sell physical commodities, unless acquired as a result of
ownership of securities or other instruments and provided that this restriction
does not prevent the Fund from engaging in transactions involving futures
contracts and options thereon or investing in securities that are secured by
physical commodities.
6. Make loans, provided that this restriction does not prevent the Fund
from purchasing debt obligations, entering into repurchase agreements, loaning
its assets to broker/dealers or institutional investors, and investing in loans,
including assignments and participation interests.
OTHER INVESTMENT POLICIES AND TECHNIQUES
The following information is in addition to the discussion of the Fund's
investment objective, policies and techniques that are described in the
prospectus.
Brady Bonds
Among the foreign fixed income securities in which the Fund may invest are
Brady Bonds. Brady Bonds are debt securities issued under the framework of the
Brady Plan, an initiative announced by former U.S. Treasury Secretary Nicholas
F. Brady in 1989 as a mechanism for debtor nations to restructure their
outstanding external indebtedness (generally commercial bank debt). Brady Bonds
are not direct or indirect obligations of the U.S. Government or any of its
agencies or instrumentalities and are not guaranteed by the U.S. Government or
any of its agencies or instrumentalities. In so restructuring its external debt,
a debtor nation negotiates with its existing bank lenders, as well as
multilateral institutions such as the World Bank and the International Monetary
Fund, to exchange its commercial bank debt for newly issued bonds ("Brady
Bonds"). The Advisor believes that economic reforms undertaken by countries in
connection with the issuance of Brady Bonds make the debt of countries which
have issued or have announced plans to issue Brady Bonds a viable opportunity
for investment. Investors, however, should recognize that the Brady Plan only
sets forth general guiding principles for economic reform and debt reduction,
emphasizing that solutions must be negotiated on a case-by-case basis between
debtor nations and their creditors.
Convertible Debt and Non-Traditional Equity Securities
From time to time, a portion of the Fund's assets may be invested in
convertible and debt securities of issuers in any industry. A convertible
security is a security which may be converted at a stated price within a
specified period of time into a certain quantity of the common stock of the same
or a different issuer. Convertible and debt securities are senior to common
stocks in a corporation's capital structure, although convertible securities are
usually subordinated to similar nonconvertible securities. Convertible and debt
securities provide a fixed-income stream and the opportunity, through its
conversion feature, to participate in the capital appreciation resulting from a
market price advance in the convertible security's underlying common stock. Just
as with debt securities, convertible securities tend to increase in market value
when interest rates decline and tend to decrease in value when interest rates
rise. However, the price of a convertible security is also influenced by the
market value of the security's underlying common stock and tends to increase as
the market value of the underlying stock rises, whereas it tends to decrease as
the market value of the underlying stock declines. Convertible and debt
securities acquired by the Fund may be rated below investment grade, or unrated.
These lower rated convertible and debt securities are subject to credit risk
considerations substantially similar to such considerations affecting high risk,
high-yield bonds, commonly referred to as "junk bonds." See "High-Yield, High
Risk Securities" for a further discussion of these types of investments.
The Fund may also invest in convertible preferred stocks that offer
enhanced yield features, such as Preferred Equity Redemption Cumulative Stock
("PERCS"), which provide an investor, such as the Fund, with the opportunity to
earn higher dividend income than is available on a company's common stock. A
PERCS is a preferred stock which generally features a mandatory conversion date,
as well as a capital appreciation limit which is usually expressed in terms of a
stated price. Upon the conversion date, most PERCS convert into common stock of
the issuer (PERCS are generally not convertible into cash at maturity). Under a
typical arrangement, if after a predetermined number of years the issuer's
common stock is trading at a price below that set by the capital appreciation
limit, each PERCS would convert to one share of common stock. If, however, the
issuer's common stock is trading at a price above that set by the capital
appreciation limit, the holder of the PERCS would receive less than one full
share of common stock. The amount of that fractional share of common stock
received by the PERCS holder is determined by dividing the price set by the
capital appreciation limit of the PERCS by the market price of the issuer's
common stock. PERCS can be called at any time prior to maturity, and hence do
not provide call protection. However, if called early, the issuer may pay a call
premium over the market price to the investor. This call premium declines at a
preset rate daily, up to the maturity date of the PERCS.
The Fund may also invest in other enhanced convertible securities. These
include but are not limited to "ACES" (Automatically Convertible Equity
Securities), "PEPS" (Participating Equity Preferred Stock), "PRIDES" (Preferred
Redeemable Increased Dividend Equity Securities), "SAILS" (Stock Appreciation
Income Linked Securities), "TECONS" (Term Convertible Notes), "QICS" (Quarterly
Income Cumulative Securities), and "DECS" (Dividend Enhanced Convertible
Securities). ACES, PEPS, PRIDES, SAILS, TECONS, QICS, and DECS all have the
following features: they are company-issued convertible preferred stock; unlike
PERCS, they do not have capital appreciation limits; they seek to provide the
investor with high current income, with some prospect of future capital
appreciation; they are typically issued with three to four-year maturities; they
typically have some built-in call protection for the first two to three years;
investors have the right to convert them into shares of common stock at a preset
conversion ratio or hold them until maturity; and upon maturity, they will
automatically convert to either cash or a specified number of shares of common
stock.
Credit Default Swaps
The Fund may enter into credit default swap ("CDS") contracts to the extent
consistent with its investment objectives and strategies. A CDS contract is a
risk-transfer instrument (in the form of a derivative security) through which
one party (the "purchaser of protection") transfers to another party (the
"seller of protection") the financial risk of a Credit Event (as defined below),
as it relates to a particular reference security or basket of securities (such
as an index). In exchange for the protection offered by the seller of
protection, the purchaser of protection agrees to pay the seller of protection a
periodic premium. In the most general sense, the benefit for the purchaser of
protection is that, if a Credit Event should occur, it has an agreement that the
seller of protection will make it whole in return for the transfer to the seller
of protection of the reference security or securities. The benefit for the
seller of protection is the premium income it receives. The Fund might use CDS
contracts to limit or to reduce the risk exposure of the Fund to defaults of the
issuer or issuers of its holdings (i.e., to reduce risk when the Fund owns or
has exposure to such securities). The Fund also might use CDS contracts to
create or vary exposure to securities or markets.
CDS transactions may involve general market, illiquidity, counterparty, and
credit risks. CDS prices may also be subject to rapid movements in response to
news and events affecting the underlying securities. The aggregate notional
amount (typically, the principal amount of the reference security or securities)
of the Fund's investments in the CDS contracts will be limited to 15% of its
total net assets. As the purchaser or seller of protection, the Fund may be
required to segregate cash or other liquid assets to cover its obligations under
certain CDS contracts.
Where the Fund is a purchaser of protection, it will designate on its books
and records cash or liquid securities sufficient to cover its premium payments
under the CDS. To the extent that the Fund, as a purchaser of protection, may be
required in the event of a credit default to deliver to the counterparty: (1)
the reference security (or basket of securities); (2) a security (or basket of
securities) deemed to be the equivalent of the reference security (or basket of
securities); or (3) the negotiated monetary value of the obligation, the Fund
will designate the reference security (or basket of securities) on its books and
records as being held to satisfy its obligation under the CDS or, where the Fund
does not own the reference security (or basket of securities), the Fund will
designate on its books and records cash or liquid securities sufficient to
satisfy the potential obligation. To the extent that the Fund, as a seller of
protection, may be required in the event of a credit default to deliver to the
counterparty some or all of the notional amount of the CDS, it will designate on
its books and records cash or liquid securities sufficient to cover the
obligation. If the CDS permits the Fund to offset its obligations against the
obligations of the counterparty under the CDS, then the Fund will only designate
on its books and records cash or liquid securities sufficient to cover the
Fund's net obligation to the counterparty, if any. All cash and liquid
securities designated by the Fund to cover its obligations under CDSs will be
marked to market daily to cover these obligations.
As the seller of protection in a CDS contract, the Fund would be required
to pay the par (or other agreed-upon) value of a reference security (or basket
of securities) to the counterparty in the event of a default, bankruptcy,
failure to pay, obligation acceleration, modified restructuring, or agreed upon
event (each of these events is a "Credit Event"). If a Credit Event occurs, the
Fund generally would receive the security or securities to which the Credit
Event relates in return for the payment to the purchaser of the par value.
Provided that no Credit Event occurs, the Fund would receive from the
counterparty a periodic stream of payments over the term of the contract in
return for this credit protection. In addition, if no Credit Event occurs during
the term of the CDS contract, the Fund would have no delivery requirement or
payment obligation to the purchaser of protection. As the seller of protection,
the Fund would have credit exposure to the reference security (or basket of
securities). The Fund will not sell protection in a CDS contract if it cannot
otherwise hold the security (or basket of securities).
As the purchaser of protection in a CDS contract, the Fund would pay a
premium to the seller of protection. In return, the Fund would be protected by
the seller of protection from a Credit Event on the reference security (or
basket of securities). A risk in this type of transaction is that the seller of
protection may fail to satisfy its payment obligations to the Fund if a Credit
Event should occur. This risk is known as counterparty risk and is described in
further detail below.
If the purchaser of protection does not own the reference security (or
basket of securities), the purchaser of protection may be required to purchase
the reference security (or basket of securities) in the case of a Credit Event
on the reference security (or basket of securities). If the purchaser of
protection cannot obtain the security (or basket of securities), it may be
obligated to deliver a security (or basket of securities) that is deemed to be
equivalent to the reference security (or basket of securities) or the negotiated
monetary value of the obligation.
Each CDS contract is individually negotiated. The term of a CDS contract,
assuming no Credit Event occurs, is typically between two and five years. CDS
contracts may be unwound through negotiation with the counterparty.
Additionally, a CDS contract may be assigned to a third party. In either case,
the unwinding or assignment involves the payment or receipt of a separate
payment by the Fund to terminate the CDS contract.
A significant risk in CDS transactions is the creditworthiness of the
counterparty because the integrity of the transaction depends on the willingness
and ability of the counterparty to meet its contractual obligations. If there is
a default by a counterparty who is a purchaser of protection, the Fund's
potential loss is the agreed upon periodic stream of payments from the purchaser
of protection. If there is a default by a counterparty that is a seller of
protection, the Fund's potential loss is the failure to receive the par value or
other agreed upon value from the seller of protection if a Credit Event should
occur. CDS contracts do not involve the delivery of collateral to support each
party's obligations; therefore, the Fund will only have contractual remedies
against the counterparty pursuant to the CDS agreement. As with any contractual
remedy, there is no guarantee that the Fund would be successful in pursuing such
remedies. For example, the counterparty may be judgment proof due to insolvency.
The Fund thus assumes the risk that it will be delayed or prevented from
obtaining payments owed to it.
Currency Swaps
A currency swap is an agreement between two parties to exchange cash flows
on a notional amount of two or more currencies based on the relative value
differential among them. For example, a currency swap may involve the exchange
by the Fund with another party of the right to receive a foreign currency (paid
from the Fund's investment denominated in the foreign currency) for the right to
receive U.S. dollars. The Fund will usually enter into swaps on a net basis,
which means the two payment streams are netted out in a cash settlement on the
payment date or dates specified in the instrument, with the Fund receiving or
paying, as the case may be, only the net amount of the two payments. Currency
swaps sometimes also involve the delivery of the entire principal value of one
designated currency in exchange for the other designated currency. In such a
situation, the entire principal value of a currency swap is subject to the risk
that the other party to the swap will default on its contractual delivery
obligations.
Inasmuch as these currency swaps are entered into for good faith hedging
purposes, the Advisor and the Fund believe such obligations do not constitute
senior securities under the 1940 Act and, accordingly, will not treat them as
being subject to its borrowing restrictions. The Fund will not enter into any
currency swap transaction unless, at the time of entering into such transaction,
the unsecured long-term debt of the counterparty, combined with any credit
enhancements, is rated at least A by S&P or Moody's or is determined to be of
equivalent credit quality by the Advisor. If there is a default by the
counterparty, the Fund may have contractual remedies pursuant to the agreements
related to the currency swap transaction. The swap market has grown
substantially in recent years with a large number of banks and investment
banking firms acting both as principals and as agent utilizing standardized swap
documentation. As a result, the swap market has become relatively liquid.
Because currency control is of great importance to the issuing governments
and influences economic planning and policy, purchases and sales of currency and
related instruments can be negatively affected by government exchange controls,
blockages, and manipulations or exchange restrictions imposed by governments.
These actions could result in losses to the Fund if it is unable to deliver or
receive a specified currency or funds in settlement of obligations, including
swap transaction obligations. These actions could also have an adverse effect on
the Fund's swap transactions or cause the Fund's hedging positions to be
rendered useless, resulting in full currency exposure as well as incurring
unnecessary transaction costs.
Also, the use of currency transactions could cause the Fund losses due to
the inability of foreign securities transactions to be completed. Buyers and
sellers of currency futures are subject to the same risks that apply to the use
of futures generally. Furthermore, settlement of a currency futures contract for
the purchase of most currencies must occur at a bank based in the issuing
nation. Trading options on currency futures is relatively new, and the ability
to establish and close out positions on such options is subject to the
maintenance of a liquid market that may not always be available. Currency
exchange rates may fluctuate based on factors extrinsic to that country's
economy.
Interest Rate and Index Swaps
The Fund may invest in interest rate and index swaps to the extent
consistent with their respective investment objectives and strategies. The Fund
will only invest in swaps in which all the reference rates are related to or
derived from instruments or markets in which the Fund is otherwise eligible to
invest, and subject to the investment limitations on the instruments to which
the purchased reference rate relates.
Swaps are agreements to exchange payment streams over a period of time with
another party, called a counterparty. Each payment stream is based on a
specified rate, which could be a fixed or variable interest rate, the rate of
return on an index, or some other reference rate. The payment streams are
calculated with reference to a hypothetical principal amount, called the
notional principal or the notional amount. For example, in an interest rate swap
one party may agree to pay a fixed interest rate to a counterparty and to
receive in return variable interest rate payments from the counterparty. The
amount that each party pays is calculated by multiplying the fixed and variable
rates, respectively, by the notional amount. The payment streams may thus be
thought of as interest payments on the notional amount. The notional amount does
not actually change hands at any point in the swap transaction; it is used only
to calculate the value of the payment streams.
When two counterparties each wish to swap interest rate payments, they
typically each enter into a separate interest rate swap contract with a
broker/dealer intermediary, who is the counterparty in both transactions, rather
than entering into a swap contract with each other directly. The broker/dealer
intermediary enters into numerous transactions of this sort, and attempts to
mange its portfolio of swaps so as to match and offset its payment receipts and
obligations.
The typical minimum notional amount is $5 million. Variable interest rates
are usually set by reference to the London Inter-Bank Offered Rate ("LIBOR").
The typical maximum term of an interest rate swap agreement ranges from one to
twelve years. Index swaps tend to be shorter term, often for one year. The
Advisor presently intends to purchase swaps with maturities of six to twelve
months, and in no event greater than two years.
The Fund may also engage in index swaps, also called total return swaps. In
an index swap, the Fund may enter into a contract with a counterparty in which
the counterparty will make payments to the Fund based on the positive returns of
an index, such as a corporate bond index, in return for the Fund paying to the
counterparty a fixed or variable interest rate, as well as paying to the
counterparty any negative returns on the index. In a sense, the Fund is
purchasing exposure to an index in the amount of the notional principal in
return for making interest rate payments on the notional principal. As with
interest rate swaps, the notional principal does not actually change hands at
any point in the transaction. The counterparty, typically an investment bank,
manages its obligations to make total return payments by maintaining an
inventory of the fixed-income securities that are included in the index.
Swap transactions provide several benefits to the Fund. Interest rate swaps
may be used as a duration management tool. Duration is a measure of a bond's
interest-rate sensitivity, expressed in terms of years because it is related to
the length of time remaining on the life of a bond. In general, the longer a
bond's duration, the more sensitive the bond's price will be to changes in
interest rates. The average duration of the Fund is the weighted average of the
durations of the Fund's fixed-income securities.
If the Fund wished to shorten the duration of certain of its assets, longer
term assets could be sold and shorter term assets acquired, but these
transactions have potential tax and return differential consequences. By using
an interest rate swap, the Fund could agree to make semi-annual fixed rate
payments and receive semi-annual floating rate LIBOR payments adjusted every six
months. The duration of the floating rate payments received by the Fund will now
be six months. In effect, the Fund has reduced the duration of the notional
amount invested from a longer term to six months over the life of the swap
agreement.
The Fund may also use swaps to gain exposure to specific markets. For
example, suppose bond dealers have particularly low inventories of corporate
bonds, making it difficult for a fixed-income fund to increase its exposure to
the corporate bond segment of the market. It is generally not possible to
purchase exchange-traded options on a corporate bond index. A Fund could
replicate exposure to the corporate bond market, however, by engaging in an
index swap in which the Fund gains exposure to a corporate bond index in return
for paying a LIBOR-based floating interest rate.
Other uses of swaps could help permit the Fund to preserve a return or
spread on a particular investment or portion of its portfolio or to protect
against an increase in the price of securities the Fund anticipates purchasing
at a later date. Interest rate swaps may also be considered as a substitute for
interest rate futures in many cases where the hedging horizon is longer than the
maturity of the typical futures contract, and may be considered to provide more
liquidity than similar forward contracts, particularly long-term forward
contracts.
Counterparty risk. The primary risk of swap transactions is the
creditworthiness of the counterparty, since the integrity of the transaction
depends on the willingness and ability of the counterparty to maintain the
agreed upon payment stream. This risk is often referred to as counterparty risk.
If there is a default by a counterparty in a swap transaction, the Fund's
potential loss is the net amount of payments the Fund is contractually entitled
to receive for one payment period (if any - the Fund could be in a net payment
position), not the entire notional amount, which does not change hands in a swap
transaction. Swaps do not involve the delivery of securities or other underlying
assets or principal as collateral for the transaction. A Fund will have
contractual remedies pursuant to the swap agreement but, as with any contractual
remedy, there is no guarantee that the Fund would be successful in pursuing them
-- the counterparty may be judgment proof due to insolvency, for example. The
Fund thus assumes the risk that they will be delayed or prevented from obtaining
payments owed to them. The standard industry swap agreements do, however, permit
the Fund to terminate a swap agreement (and thus avoid making additional
payments) in the event that a counterparty fails to make a timely payment to the
Fund.
In response to this counterparty risk, several securities firms have
established separately capitalized subsidiaries that have a higher credit
rating, permitting them to enter into swap transactions as a dealer. The Fund
will not be permitted to enter into any swap transaction unless, at the time of
entering into such transaction, the unsecured long-term debt of the actual
counterparty, combined with any credit enhancements, is rated at least A by S&P
or Moody's or is determined to be of equivalent credit quality by the Advisor.
In addition, the Advisor will closely monitor the ongoing creditworthiness of
swap counterparties in order to minimize the risk of swaps.
In addition to counterparty risk, the use of swaps also involves risks
similar to those associated with ordinary portfolio security transactions. If
the portfolio manager is incorrect in his or her forecast of market values or
interest rates, the investment performance of the Fund which has entered into a
swap transaction could be less favorable than it would have been if this
investment technique were not used. It is important to note, however, that there
is no upper limit on the amount the Fund might theoretically be required to pay
in a swap transaction.
In order to ensure that the Fund will only engage in swap transactions to
the extent consistent with its investment objectives and strategies, the Fund
will only engage in a swap transaction if all of the reference rates used in the
swap are related to or derived from securities, instruments or markets that are
otherwise eligible investments for the Fund. Similarly, the extent to which the
Fund may invest in a swap, as measured by the notional amount, will be subject
to the same limitations as the eligible investments to which the purchased
reference rate relates.
The Fund will, consistent with industry practice, segregate and
mark-to-market daily cash or other liquid assets having an aggregate market
value at least equal to the net amount of the excess, if any, of the Fund's
payment obligations over its entitled payments with respect to each swap
contract. To the extent that the Fund is obligated by a swap to pay a fixed or
variable interest rate, the Fund may segregate securities that are expected to
generate income sufficient to meet the Fund's net payment obligations.
There is not a well developed secondary market for interest rate or index
swaps. Most interest rate swaps are nonetheless relatively liquid because they
can be sold back to the counterparty/dealer relatively quickly at a determinable
price. Most index swaps, on the other hand, are considered to be illiquid
because the counterparty/dealer will typically not unwind an index swap prior to
its termination (and, not surprisingly, index swaps tend to have much shorter
terms). The Fund will therefore treat all swaps as subject to their limitation
on illiquid investments. For purposes of calculating these percentage
limitations, the Fund will refer to the notional amount of the swap.
Swaps will be priced using fair value pricing. The income provided by a
swap should be qualifying income for purposes of Subchapter M of the Internal
Revenue Code (the "Code"). Swaps should not otherwise result in any significant
diversification or valuation issues under Subchapter M.
Investment Company Securities
The Fund is permitted to invest in other investment companies, including
open-end, closed-end, or unregistered investment companies, either within the
percentage limits set forth in the 1940 Act, any rule or order thereunder, or
U.S. Securities and Exchange Commission staff interpretation thereof, or without
regard to percentage limits in connection with a merger, reorganization,
consolidation, or other similar transaction. However, the Fund may not operate
as a "fund of funds" which invests primarily in the shares of other investment
companies as permitted by Section 12(d)(1)(F) or (G) of the 1940 Act, if its own
shares are utilized as investments by such a "fund of funds." Any investments
that the Fund makes in investment companies will involve the Fund's pro rata
payment of a portion of the expenses, including advisory fees, of such other
investment companies. Under the 1940 Act's current limitations, the Fund may
not: (1) own more than 3% of the voting stock of another investment company; (2)
invest more than 5% of the Fund's total assets in the shares of any one
investment company; nor (3) invest more than 10% of the Fund's total assets in
shares of other investment companies. If the Fund elects to limit its investment
in other investment companies to closed-end investment companies, the 3%
limitation described above is increased to 10%. These percentage limitations
also apply to the Fund's investments in unregistered investment companies.
Master Limited Partnerships
The Fund may invest in master limited partnerships ("MLP"). A MLP is a
publicly traded company organized as a limited partnership or limited liability
company and treated as a partnership for federal income tax purposes.
MLPs may derive income and gains from the exploration, development, mining
or production, processing, refining, transportation (including pipelines
transporting gas, oil, or products thereof), or the marketing of any mineral or
natural resources. MLPs generally have two classes of owners, the general
partner and limited partners. When investing in an MLP, the Fund intends to
purchase publicly traded common units issued to limited partners of the MLP. The
general partner of an MLP is typically owned by one or more of the following: a
major energy company, an investment fund, or the direct management of the MLP.
The general partner may be structured as a private or publicly traded
corporation or other entity. The general partner typically controls the
operations and management of the MLP through an up to 2% equity interest in the
MLP plus, in many cases, ownership of common units and subordinated units.
Limited partners own the remainder of the partnership, through ownership of
common units, and have a limited role in the partnership's operations and
management.
MLPs combine the tax advantages of a partnership with the liquidity of a
publicly traded stock. MLP income is generally not subject to entity-level tax.
Instead, an MLP's income, gain, loss, deductions and other tax items pass
through to common unitholders.
MLPs are typically structured such that common units and general partner
interests have first priority to receive quarterly cash distributions up to an
established minimum amount ("minimum quarterly distributions" or "MQD"). Common
and general partner interests also accrue arrearages in distributions to the
extent the MQD is not paid. Once common and general partner interests have been
paid, subordinated units receive distributions of up to the MQD; however,
subordinated units do not accrue arrearages. Distributable cash in excess of the
MQD paid to both common and subordinated units is distributed to both common and
subordinated units generally on a pro rata basis. The general partner is also
eligible to receive incentive distributions if the general partner operates the
business in a manner which results in distributions paid per common unit
surpassing specified target levels. As the general partner increases cash
distributions to the limited partners, the general partner receives an
increasingly higher percentage of the incremental cash distributions. A common
arrangement provides that the general partner can reach a tier where it receives
50% of every incremental dollar paid to common and subordinated unit holders.
These incentive distributions encourage the general partner to streamline costs,
increase capital expenditures and acquire assets in order to increase the
partnership's cash flow and raise the quarterly cash distribution in order to
reach higher tiers. Such results benefit all security holders of the MLP.
MLP common units represent limited partnership interests in the MLP. Common
units are listed and traded on U.S. securities exchanges, with their value
fluctuating predominantly based on prevailing market conditions and the success
of the MLP. The Fund intends to purchase common units in market transactions.
Unlike owners of common stock of a corporation, owners of common units have
limited voting rights and have no ability annually to elect directors. In the
event of liquidation, common units have preference over subordinated units, but
not debt or preferred units, to the remaining assets of the MLP. The Fund
intends to invest in MLPs only to an extent and in a manner consistent with the
Fund's qualification as a regulated investment company.
An investment in MLP units involves some risks that differ from an
investment in the common stock of a corporation. Holders of MLP units have
limited control and voting rights on matters affecting the partnership. Although
common unitholders are generally limited in their liability, similar to a
corporation's shareholders, creditors typically have the right to seek the
return of distributions made to such unitholders if the liability in question
arose before the distribution was paid. This liability may stay attached to the
common unitholder even after the units are sold. Investing in MLPs involves
certain risks related to investing in the underlying assets of the MLPs and
risks associated with pooled investment vehicles. MLPs holding credit-related
investments are subject to interest rate risk and the risk of default on payment
obligations by debt issuers. MLPs that concentrate in a particular industry or a
particular geographic region are subject to risks associated with such industry
or region. Investments held by MLPs may be relatively illiquid, limiting the
MLPs' ability to vary their portfolios promptly in response to changes in
economic or other conditions. MLPs may have limited financial resources, their
securities may trade infrequently and in limited volume, and they may be subject
to more abrupt or erratic price movements than securities of larger or more
broadly based companies.
Certain diversification and income requirements imposed by the Code will
limit the Fund's ability to invest in MLP securities. In addition, the Fund's
ability to meet its investment objective may depend in part on the level of
taxable income and distributions and dividends received from the MLP securities
in which the Fund invests, a factor over which the Fund has no control. The
benefit derived from our investment in MLPs is largely dependent on the MLPs
being treated as partnerships for federal income tax purposes. If an MLP were
classified as a corporation for federal income tax purposes, the amount of cash
available for distribution would be reduced and distributions received by us
would be taxed entirely as dividend income.
As a limited partner in the MLPs in which the Fund invests, the Fund will
receive a pro rata share of income, gains, losses and deductions from those
MLPs. Historically, a significant portion of income from such MLPs has been
offset by tax deductions. The Fund's common shareholders will incur a current
tax liability on that portion of an MLP's income and gains that is not offset by
tax deductions and losses. The percentage of an MLP's income and gains that is
offset by tax deductions and losses will fluctuate over time for various
reasons.
Mortgage-Backed Securities
The Fund may invest in mortgage-backed securities issued or guaranteed by
the U.S. Government, its agencies or instrumentalities or by government
sponsored corporations. Those securities include, but are not limited to,
Government National Mortgage Association ("GNMA") certificates. Such securities
differ from other fixed income securities in that principal is paid back by the
borrower over the length of the loan rather than returned in a lump sum at
maturity. When prevailing interest rates rise, the value of a GNMA security may
decrease as do other debt securities. When prevailing interest rates decline,
however, the value of GNMA securities may not rise on a comparable basis with
other debt securities because of the prepayment feature of GNMA securities.
Additionally, if a GNMA certificate is purchased at a premium above its
principal value because its fixed rate of interest exceeds the prevailing level
of yields, the decline in price to par may result in a loss of the premium in
the event of prepayment. Funds received from prepayments may be reinvested at
the prevailing interest rates which may be lower than the rate of interest that
had previously been earned.
The Fund also may invest in collateralized mortgage obligations ("CMOs")
and real estate mortgage investment conduits ("REMICs"). CMOs are debt
securities issued by U.S. Government agencies or by financial institutions and
other mortgage lenders and collateralized by a pool of mortgages held under an
indenture. CMOs are issued in a number of classes or series with different
maturities. The classes or series are retired in sequence as the underlying
mortgages are repaid. REMICs, which were authorized under the Tax Reform Act of
1986, are private entities formed for the purpose of holding a fixed pool of
mortgages secured by an interest in real property. REMICs are similar to CMOs in
that they issue multiple classes of securities. To the extent any
privately-issued CMOs or REMICs in which the Portfolios may invest are
considered by the U.S. Securities and Exchange Commission to be investment
companies, the Portfolios will limit their investments in such securities in a
manner consistent with the provisions of the 1940 Act.
The mortgages backing these securities include conventional 30-year fixed
rate mortgages, graduated payment mortgages and adjustable rate mortgages. These
mortgages may be supported by various types of insurance, may be backed by GNMA
certificates or other mortgage pass-throughs issued or guaranteed by the U.S.
Government, its agencies or instrumentalities. However, the guarantees do not
extend to the mortgage-backed securities' value, which is likely to vary
inversely with fluctuations in interest rates. These certificates are in most
cases "pass-through" instruments, through which the holder receives a share of
all interest and principal payments from the mortgages underlying the
certificate. Because the prepayment characteristics of the underlying mortgages
vary, it is not possible to predict accurately the average life or realized
yield of a particular issue of pass-through certificates. During periods of
declining interest rates, prepayment of mortgages underlying mortgage-backed
securities can be expected to accelerate. When the mortgage obligations are
prepaid, a Portfolio may reinvest the prepaid amounts in securities, the yield
of which reflects interest rates prevailing at the time. Moreover, prepayments
of mortgages which underlie securities purchased at a premium could result in
capital losses.
Certain CMOs and REMICs may have variable or floating interest rates and
others may be stripped. Stripped mortgage securities have greater market
volatility than other types of mortgage securities in which the Portfolios may
invest.
Stripped mortgage securities are usually structured with two classes that
receive different proportions of the interest and principal distributions on a
pool of mortgage assets. A common type of stripped mortgage security will have
one class receiving some of the interest and most of the principal from the
mortgage assets, while the other class will receive most of the interest and the
remainder of the principal. In the most extreme case, one class will receive all
of the interest (the "interest-only" class), while the other class will receive
all of the principal (the "principal-only" class). The yield to maturity on an
interest-only class is extremely sensitive not only to changes in prevailing
interest rates but also to the rate of principal payments (including
prepayments) on the related underlying mortgage assets, and a rapid rate of
principal payments may have a material adverse effect on a Portfolio's yield to
maturity. If the underlying mortgage assets experience greater than anticipated
prepayments of principal, a Portfolio may fail to fully recoup its initial
investment in these securities even if the securities are rated in the highest
rating categories.
Although stripped mortgage securities are purchased and sold by
institutional investors through several investment banking firms acting as
brokers or dealers, these securities were only recently developed. As a result,
established trading markets have not yet been fully developed and, accordingly,
these securities are generally illiquid and to such extent, together with any
other illiquid investments, will not exceed 10% or 15%, as applicable, of a
Portfolio's net assets.
CMOs and REMICs issued by private entities are not government securities
and are not directly guaranteed by any government agency. They are secured by
the underlying collateral of the private issuer. Each of the Portfolios may
invest in such private-backed securities but, the Portfolios, other than The
Intermediate Fixed Income Portfolio, will do so only if: (i) the securities are
100% collateralized at the time of issuance by securities issued or guaranteed
by the U.S. Government, its agencies, or instrumentalities and (ii) currently,
they are rated at the time of purchase in the two highest grades by a national
ratings SRO.
Repurchase Agreements
A repurchase agreement is a short-term investment by which the purchaser
acquires ownership of a debt security and the seller agrees to repurchase the
obligation at a future time and set price, thereby determining the yield of the
debt security during the purchaser's holding period. Should an issuer of a
repurchase agreement fail to repurchase the underlying security, the loss to the
Fund, if any, would be the difference between the repurchase price and the
market value of the security. The Fund will limit its investments in repurchase
agreements to those which the Advisor determines to present minimal credit risks
and which are of high quality. In addition, the Fund must have collateral of at
least 102% of the repurchase price, including the portion representing the
Fund's yield under such agreements which is monitored on a daily basis.
The funds in the Delaware Investments(R)family (each, a "Delaware
Investments(R)Fund" and collectively, the "Delaware Investments(R)Funds"),
including the Trust, have obtained an exemption (the "Order") from the U.S.
Securities and Exchange Commission from the joint-transaction prohibitions of
Section 17(d) of the 1940 Act to allow the Delaware Investments(R)Funds jointly
to invest cash balances. The Fund may invest cash balances in a joint repurchase
agreement in accordance with the terms of the Order and subject generally to the
conditions described above.
Restricted/Illiquid Securities
The Fund may purchase privately-placed debt and other securities whose
resale is restricted under applicable securities laws. Such restricted
securities generally offer a higher return than comparable registered securities
but involve some additional risk since they can be resold only in
privately-negotiated transactions or after registration under applicable
securities laws. The registration process may involve delays which could result
in the Fund obtaining a less favorable price on a resale. The Fund will not
purchase illiquid assets if more than 10% of its net assets would then consist
of such illiquid securities.
Illiquid securities, for purposes of this policy, include repurchase
agreements maturing in more than seven days.
The Fund may invest in restricted securities, including securities eligible
for resale without registration pursuant to Rule 144A ("Rule 144A Securities")
under the 1933 Act. Rule 144A exempts many privately placed and legally
restricted securities from the registration requirements of the 1933 Act and
permits such securities to be freely traded among certain institutional buyers
such as the Fund.
While maintaining oversight, the Board of Trustees has delegated to the
Advisor the day-to-day functions of determining whether or not individual Rule
144A Securities are liquid for purposes of the Fund's limitation on investments
in illiquid assets. The Board has instructed the Advisor to consider the
following factors in determining the liquidity of a Rule 144A Security: (i) the
frequency of trades and trading volume for the security; (ii) whether at least
three dealers are willing to purchase or sell the security and the number of
potential purchasers; (iii) whether at least two dealers are making a market in
the security; and (iv) the nature of the security and the nature of the
marketplace trades (e.g., the time needed to dispose of the security, the method
of soliciting offers, and the mechanics of transfer).
If the Advisor determines that a Rule 144A Security which was previously
determined to be liquid is no longer liquid and, as a result, the Fund's
holdings of illiquid securities exceed the Fund's limit on investment in such
securities, the Advisor will determine what action shall be taken to ensure that
the Fund continues to adhere to such limitation.
Short Sales
The Fund may from time to time engage in short sales of securities, for
investment or for hedging purposes. Short sales are transactions in which the
Fund sells a security it does not own. To complete the transaction, the Fund
must borrow the security to make delivery to the buyer. The Fund is then
obligated to replace the security borrowed by purchasing the security at the
market price at the time of replacement. The Fund may be required to pay a fee
to borrow particular securities and is often obligated to pay over any payments
received on such borrowed securities. In the event that the Fund elects to
pursue such a strategy, the Fund expects it would sell shares of portfolio
securities short through a pair trade system, where it would maintain a long
position in a basket of dividend-paying stocks and a short position in a
security or securities replicating an index, which the Fund expects to be
outperformed by the dividend-paying stocks it owns.
The Fund may also sell short individual stocks that the Fund expects to
underperform other stocks which the Fund holds. For hedging purposes, the Fund
may purchase or sell short futures contracts on global equity indexes.
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 unlimited.
The Fund may also sell a security short if it owns at least an equal amount
of the security sold short or another security convertible or exchangeable for
an equal amount of the security sold short without payment of further
compensation (a short sale against-the-box). In a short sale against-the-box,
the short seller is exposed to the risk of being forced to deliver stock that it
holds to close the position if the borrowed stock is called in by the lender,
which would cause gain or loss to be recognized on the delivered stock. The Fund
expects normally to close its short sales against-the-box by delivering newly
acquired stock.
Purchasing securities to close out the short position can itself cause the
price of the securities to rise further, thereby exacerbating the loss.
Short-selling exposes the Fund to unlimited risk with respect to that security
due to the lack of an upper limit on the price to which an instrument can rise.
Although the Fund reserves the right to utilize short sales, and currently
intends to utilize short sales, the Advisor is under no obligation to utilize
short sales at all. The Fund currently intends to close out each short position
prior to the underlying issuer's ex-dividend date, if any, to avoid the Fund
incurring any dividend expense in connection with such short position.
The requirements of the 1940 Act and the Code provide that the Fund not
make a short sale if, after giving effect to such sale, the market value of all
securities sold short by the Fund exceeds 30% of the value of its total assets;
however, the Fund anticipates that it will generally not make a short sale if,
after giving effect to such sale, the market value of all securities sold short
by the Fund exceeds 20% of the value of its total assets.
When transacting a short sale, the Fund must borrow the security sold to
make delivery to the buyer. The Fund is then obligated to replace the security
borrowed by purchasing it at the market price at the time of replacement. The
price at such time may be higher or lower than the price at which the security
was sold by the Fund.
A short sale will be successful if the shorted security price decreases.
However, if the underlying security goes up in price during the period during
which the short position is outstanding, the Fund will realize a loss. The risk
on a short sale is unlimited because the Fund must buy the shorted security at
the higher price to complete the transaction. Therefore, short sales may be
riskier than investments in long positions. With a long position the maximum
sustainable loss is limited to the amount paid for the security plus the
transaction costs, whereas there is no maximum attainable price of the shorted
security.
The Fund would also incur increased transaction costs associated with
selling securities short. In addition, if the Fund sells securities short, it
must segregate assets on the books of the Fund or its custodian containing cash
or high-grade securities equal to (i) the greater of the current market value of
the stocks sold short or the market value of such securities at the time they
were sold short, less (ii) any collateral deposited with the Fund's broker (not
including the proceeds from the short sales). The Fund may be required to add to
the segregated account as the market price of a shorted security increases. As a
result of maintaining and adding to its segregated account, the Fund may
maintain higher levels of cash or liquid assets (for example, U.S. Treasury
bills, repurchased agreements, high quality commercial paper and long equity
positions) for collateral needs thus reducing its overall assets available for
trading purposes. In addition, the Fund's entry into a short sale transaction
could be treated as a constructive sale causing the recognition of gain, but not
loss, for tax purposes.
Short-Term Investments
The short-term investments in which the Fund may invest include, but are
not limited to:
(1) Time deposits, certificates of deposit (including marketable variable
rate certificates of deposit) and bankers' acceptances issued by a U.S.
commercial bank. Time deposits are non-negotiable deposits maintained in a
banking institution for a specified period of time at a stated interest rate.
Time deposits maturing in more than seven days will not be purchased by the
Fund, and time deposits maturing from two business days through seven calendar
days will not exceed 10% of the total assets of the Fund. Certificates of
deposit are negotiable short-term obligations issued by commercial banks against
funds deposited in the issuing institution. Variable rate certificates of
deposit are certificates of deposit on which the interest rate is periodically
adjusted prior to their stated maturity based upon a specified market rate. A
bankers' acceptance is a time draft drawn on a commercial bank by a borrower
usually in connection with an international commercial transaction (to finance
the import, export, transfer or storage of goods).
The Fund will not invest in any security issued by a commercial bank unless
(i) the bank has total assets of at least $1 billion or, in the case of a bank
which does not have total assets of at least $1 billion, the aggregate
investment made in any one such bank is limited to $100,000 and the principal
amount of such investment is insured in full by the Federal Deposit Insurance
Corporation, (ii) it is a member of the Federal Deposit Insurance Corporation,
and (iii) the bank or its securities have received the highest quality rating by
a nationally-recognized statistical rating organization;
(2) Commercial paper with the highest quality rating by a
nationally-recognized statistical rating organization (e.g., A-1 by S&P or
Prime-1 by Moody's) or, if not so rated, of comparable quality as determined by
the Advisor;
(3) Short-term corporate obligations with the highest quality rating by a
nationally-recognized statistical rating organization (e.g., AAA by S&P or Aaa
by Moody's) or, if not so rated, of comparable quality as determined by the
Advisor;
(4) U.S. Government securities (see "U.S. Government Securities"); and
(5) Repurchase agreements collateralized by securities listed above.
Unseasoned Companies
The Fund may invest in relatively new or unseasoned companies which are in
their early stages of development, or small companies positioned in new and
emerging industries where the opportunity for rapid growth is expected to be
above average. Securities of unseasoned companies present greater risks than
securities of larger, more established companies. The companies in which the
Fund may invest may have relatively small revenues, limited product lines, and
may have a small share of the market for their products or services. Small
companies may lack depth of management, they may be unable to internally
generate funds necessary for growth or potential development or to generate such
funds through external financing or favorable terms, or they may be developing
or marketing new products or services for which markets are not yet established
and may never become established. Due to these and other factors, small
companies may suffer significant losses as well as realize substantial growth,
and investments in such companies tend to be volatile and are therefore
speculative.
U.S. Government Securities
The Fund may invest in U.S. Government securities. U.S. Treasury securities
are backed by the "full faith and credit" of the United States. Securities
issued or guaranteed by federal agencies and U.S. Government sponsored
instrumentalities may or may not be backed by the full faith and credit of the
United States. In the case of securities not backed by the full faith and credit
of the United States, investors in such securities look principally to the
agency or instrumentality issuing or guaranteeing the obligation for ultimate
repayment, and may not be able to assert a claim against the United States
itself in the event the agency or instrumentality does not meet its commitment.
Agencies which are backed by the full faith and credit of the United States
include the Export-Import Bank, Farmers Home Administration, Federal Financing
Bank, the Federal Housing Administration, the Maritime Administration, the Small
Business Administration, and others. Certain agencies and instrumentalities,
such as the GNMA, are, in effect, backed by the full faith and credit of the
United States through provisions in their charters that they may make
"indefinite and unlimited" drawings on the Treasury, if needed to service their
debt. Debt from certain other agencies and instrumentalities, including the
FNMA, are not guaranteed by the United States, but those institutions are
protected by the discretionary authority for the U.S. Treasury to purchase
certain amounts of their securities to assist the institutions in meeting their
debt obligations. Finally, other agencies and instrumentalities, such as the
Farm Credit System, the Tennessee Valley Authority and the Federal Home Loan
Mortgage Corporation, are federally chartered institutions under U.S. Government
supervision, but their debt securities are backed only by the creditworthiness
of those institutions, not the U.S. Government.
An instrumentality of a U.S. Government agency is a government agency
organized under Federal charter with government supervision. Instrumentalities
issuing or guaranteeing securities include, among others, Federal Home Loan
Banks, the Federal Land Banks, Central Bank for Cooperatives, Federal
Intermediate Credit Banks, and the FNMA.
The maturities of such securities usually range from three months to thirty
years. While such securities are guaranteed as to principal and interest by the
U.S. Government or its agencies or instrumentalities, their market values may
fluctuate and are not guaranteed, which may, along with the other securities in
the Fund's portfolio, cause the Fund's daily NAV to fluctuate.
When-Issued and Delayed-Delivery Securities
The Fund may purchase securities on a when-issued or delayed-delivery
basis. In such transactions, instruments are purchased with payment and delivery
taking place in the future in order to secure what is considered to be an
advantageous yield or price at the time of the transaction. Delivery of and
payment for these securities may take as long as a month or more after the date
of the purchase commitment. The Fund will designate cash or securities in
amounts sufficient to cover its obligations, and will value the designated
assets daily. The payment obligation and the interest rates that will be
received are each fixed at the time the Fund enters into the commitment and no
interest accrues to the Fund until settlement. Thus, it is possible that the
market value at the time of settlement could be higher or lower than the
purchase price if the general level of interest rates has changed.
Zero Coupon Bonds and Pay-In-Kind Bonds
The credit risk factors pertaining to lower rated securities also apply to
lower rated zero coupon, deferred interest and pay-in-kind bonds. These bonds
carry an additional risk in that, unlike bonds that pay interest throughout the
period to maturity, the Fund will realize no cash until the cash payment date
and, if the issuer defaults, the Fund may obtain no return at all on its
investment. Zero coupon, deferred interest and pay-in-kind bonds involve
additional special considerations.
Zero coupon or deferred interest securities are debt obligations that do
not entitle the holder to any periodic payments of interest prior to maturity or
a specified date when the securities begin paying current interest (the "cash
payment date") and therefore are generally issued and traded at a discount from
their face amounts or par value. The discount varies depending on the time
remaining until maturity or cash payment date, prevailing interest rates,
liquidity of the security and the perceived credit quality of the issuer. The
discount, in the absence of financial difficulties of the issuer, typically
decreases as the final maturity or cash payment date of the security approaches.
The market prices of zero coupon securities are generally more volatile than the
market prices of securities that pay interest periodically and are likely to
respond to changes in interest rates to a greater degree than do non-zero coupon
or deferred interest securities having similar maturities and credit quality.
Current federal income tax law requires that a holder of a zero coupon security
report as income each year the portion of the original issue discount on the
security that accrues that year, even though the holder receives no cash
payments of interest during the year.
Pay-in-kind bonds are securities that pay interest through the issuance of
additional bonds. The Fund will be deemed to receive interest over the life of
these bonds and be treated as if interest were paid on a current basis for
federal income tax purposes, although no cash interest payments are received by
the Fund until the cash payment date or until the bonds mature. Accordingly,
during periods when the Fund receive no cash interest payments on its zero
coupon securities or deferred interest or pay-in-kind bonds, it may be required
to dispose of portfolio securities to meet the distribution requirements and
these sales may be subject to the risk factors discussed above.
MANAGEMENT OF THE FUND
Investment Management Agreement
Although Delaware Management Company ("DMC" or 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 DMC are not
exclusive and DMC provides similar services to other investment companies and
other clients and may engage in other activities.
The Investment Management Agreement is dated [_______________], 2007, and
was approved by the initial shareholder on [____________________], 2007. The
Investment Management Agreement has an initial term of two years and may be
renewed each year only so long as such renewal and continuance are specifically
approved at least annually by the Board of Trustees or by vote of a majority of
the outstanding voting securities of the Fund, and only if the terms of and the
renewal thereof have been approved by the vote of a majority of the Fund's
Independent Trustees who are not parties thereto or interested persons of any
such party, cast in person at a meeting called for the purpose of voting on such
approval. The Investment Management Agreement is terminable without penalty on
60 days' notice by the Fund's Board of Trustees or by the Advisor. Each
Investment Management Agreement will terminate automatically in the event of its
assignment.
As compensation for the services rendered under the Investment Management
Agreement, the Fund shall pay the Advisor an annual management fee, payable
monthly, in an amount equal to 1.00% of the average daily value of the Fund's
total assets. When the Fund is utilizing leverage, the fee paid to the Advisor
will be higher than if the Fund did not use leverage because the fees paid will
be calculated based on the Fund's total assets, which include the principal
amount of outstanding borrowings used for leverage.
Except for those expenses borne by the Advisor under the Investment
Management Agreement, the Fund is responsible for all of its own expenses. In
addition to the management fee of DMC, the Fund pays all other costs and
expenses of its operations, including but not limited to, compensation of its
trustees (other than those affiliated with DMC), custodian, leveraging expenses,
transfer and dividend disbursing agent expenses, legal fees, rating agency fees,
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.
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. Below is a list of the trustees and
officers of the Fund and their present positions and principal occupations
during the past five years.
Certain officers and Trustees of the Fund hold identical positions in each
of the other Delaware Investments(R)Funds. The Fund's Trustees and principal
officers are noted below along with their ages and their business experience for
the past five years. The Trustees serve for indefinite terms until their
resignation, death, or removal.
---------------------- -------------- ----------------- -------------------------- --------------------- -------------------
Number of Other
Portfolios in Fund Directorships
Position(s) Complex Overseen by Held by Trustee/
Name, Address, and Held with Length of Time Principal Occupation(s) Trustee/ Director Director or
Birthdate the Fund Served During Past 5 Years or Officer Officer
----------------------------------------------------------------------------------------------------------------------------
Interested Trustees
---------------------- -------------- ----------------- -------------------------- --------------------- -------------------
Patrick P. Coyne(1) Trustee Trustee since Mr. Coyne has served in [83] None
2005 Market Street April 12, 2007 various executive
Philadelphia, capacities at different
Pennsylvania 19103 times at Delaware
Investments.(2)
April 14, 1963
----------------------------------------------------------------------------------------------------------------------------
(1) Mr. Coyne is considered to be an "Interested Trustee" because he is an
executive officer of the Fund's Advisor.
(2) Delaware Investments is the marketing name for Delaware Management
Holdings, Inc. and its subsidiaries, including the Fund's Advisor.
----------------------------------------------------------------------------------------------------------------------------
Independent Trustees
----------------------------------------------------------------------------------------------------------------------------
Officers
---------------------- -------------- ----------------- -------------------------- --------------------- -------------------
David F. Connor Secretary Secretary Mr. Connor has served as Vice [83] None
2005 Market Street since April 12, President and Deputy General
Philadelphia, 2007 Counsel at Delaware
Pennsylvania 19103 Investments since 2000.
December 2, 1963
---------------------- -------------- ----------------- -------------------------- --------------------- -------------------
Richard Salus Chief Chief Mr. Salus has served in [83] None
2005 Market Street Financial Financial various executive capacities
Philadelphia, PA 19103 Officer Officer since at different times at Delaware
April 12, 2007 Investments.
October 4, 1963
---------------------- -------------- ----------------- -------------------------- --------------------- -------------------
The following table shows each Trustee's ownership of shares of the Fund
and of all Delaware Investments(R)Funds as of December 31, 2006.
------------------ --------------------------------------------------------- ----------------------------------------------------
Aggregate Dollar Range of Equity Securities in All
Registered Investment Companies Overseen by
Name Dollar Range of Equity Securities in the Fund(1) Trustee in Family of Investment Companies
------------------ --------------------------------------------------------- ----------------------------------------------------
Patrick P. Coyne $0
---------------------------------------------------------------------------------------------------------------------------------
Independent Trustees
---------------------------------------------------------------------------------------------------------------------------------
(1) The Fund is a newly organized closed-end investment company. Accordingly,
as of the date of this Statement of Additional Information, none of the
Trustees beneficially own any securities issued by the Fund.
Compensation of Trustees
The following table sets forth the compensation received or to be received
by each Trustee from the Fund and the total compensation received from all
Delaware Investments(R)Funds for which he or she served as a Trustee or
Director. Only the Trustees of the Fund who are not "interested persons" as
defined by the 1940 Act (i.e., the "Independent Trustees") receive compensation
from the Fund. The following table provides, in addition, information on the
retirement benefits accrued on behalf of those Trustees eligible to receive such
benefits under the Delaware Investments(R)Retirement Plan for Trustees/Directors
(the "Retirement Plan"). This plan was recently terminated as more fully
described below.
Total Compensation from
the Investment Companies
Aggregate Compensation Retirement Benefits in the Delaware
to be Received from the Accrued as Part of Fund Investments(R)
Trustee Fund(1) Expenses(2) Complex(3)
(1) The amounts set forth in this column represent the estimated future
payments that the Trustees are expected to receive for their service on the
Board for the fiscal year ending November 30, 2007.
(2) [Figures reflect amounts already accrued under a Retirement Plan and
additional amounts accrued to effect the termination of the Retirement Plan
for investment companies that are part of the Delaware Investments(R)
complex as of [__________], [____]. The Advisor has agreed to absorb a
minimum of $500,000 through certain additional waivers and/or
reimbursements for those funds within the Delaware Investments(R)complex
that are subject to expense limitations. The Fund will not bear the cost of
the Retirement Plan benefits because the Retirement Plan was terminated
prior to the Fund's inception.
(3) The amounts set forth in this column represent compensation for the
12-month period ended [________], [____]. Effective December 1, 2006, each
Independent Trustee/Director will receive an annual retainer fee of $84,000
for serving as a Trustee/Director for all 30 investment companies in the
Delaware Investments(R) family, plus $5,000 per day for attending each
Board Meeting held on behalf of all investment companies in the complex.
Members of the Nominating and Corporate Governance Committee, Audit
Committee, and Investments Committee receive additional compensation of
$2,500 for each Committee meeting attended. In addition, the chairpersons
of the Audit, Investments, and Nominating and Corporate Governance
Committees each receive an annual retainer of $15,000. The
Lead/Coordinating Trustee/Director of the Delaware Investments(R)Funds
receives an additional annual retainer of $35,000. These amounts do not
include payments related to the termination of the Retirement Plan.
Until the Retirement Plan's termination, as described below, each
Independent Trustee who, at the time of his or her retirement from the Boards,
having attained the age of 70 and served on the Boards for at least five
continuous years, was entitled to receive payments from each investment company
in the Delaware Investments(R) family for which he or she had served as
Trustee/Director. These payments were to be made for a period equal to the
lesser of the number of years that such person served as a Trustee/Director or
the remainder of such person's life. The amount of such payments would have been
equal, on an annual basis, to the amount of the annual retainer paid to
Trustees/Directors of each investment company at the time of such person's
retirement.
The table below sets forth the estimated annual retirement benefit that
would have been payable under the Retirement Plan at specified compensation
levels and years of service. Trustees credited with years of service through
[December 31, 2006] are: [name] [(__ years)]. During the year ended [________],
[____], [_____________________] were receiving yearly benefits under the
Retirement Plan: [__________________].
-------------------------------- ------------------------------------------
Years of Service
-------------------------------- ------------------------------------------
Amount of Annual Retainer Paid
in Last Year of Service 0-4 Years 5 Years or More
-------------------------------- ------------------- ----------------------
The Board of Trustees/Directors of all the funds in the Delaware
Investments(R)complex voted to terminate the Delaware Investments(R)Retirement
Plan for Trustees/Directors, effective November 30, 2006. As a result of the
termination of the Retirement Plan, no further benefits will accrue to any
current or future directors and a one-time payment of benefits earned under the
Retirement Plan will be paid to eligible Trustees/Directors. The amount of the
payment to be made on January 31, 2007 represents the benefits to which the
current Trustee/Director is entitled under the terms of the Retirement Plan. The
calculation of such amount is based on: (1) the annual retainer amount as of the
date of termination ($80,000); (2) each Trustee/Director's years of service as
of the date of termination (listed above); and (3) the actuarially determined
life expectancy of each Trustee/Director. The payments thus calculated are
discounted to present value.
The net present value of the benefits accrued under the plan to which each
such Independent Trustee/Director is entitled was calculated by a
licensed/certified actuary and then reviewed and approved by the Fund's
Independent Directors who had no benefits vested under the Plan. The amounts
being paid in 2007 are as follows: [__________________].]
The Board of Trustees has the following committees:
Audit Committee: This committee monitors accounting and financial reporting
policies and practices, and internal controls for the Fund. It also oversees the
quality and objectivity of the Fund's financial statements and the independent
audit thereof, and acts as a liaison between the Fund's independent registered
public accounting firm and the full Board of Trustees. The Fund's Audit
Committee consists of the following Independent Trustees: [__________].
Nominating and Corporate Governance Committee: This committee recommends
Board members, fills vacancies and considers the qualifications of Board
members. The committee also monitors the performance of counsel for the
Independent Trustees. The committee will consider shareholder recommendations
for nomination to the Board of Trustees only in the event that there is a
vacancy on the Board. Shareholders who wish to submit recommendations for
nominations to the Board to fill a vacancy must submit their recommendations in
writing to the Nominating and Corporate Governance Committee, c/o Delaware
Investments Funds at 2005 Market Street, Philadelphia, Pennsylvania 19103.
Shareholders should include appropriate information on the background and
qualifications of any person recommended (e.g., a resume), as well as the
candidate's contact information and a written consent from the candidate to
serve if nominated and elected. Shareholder recommendations for nominations to
the Board will be accepted on an ongoing basis and such recommendations will be
kept on file for consideration when there is a vacancy on the Board. The
committee consists of the following Independent Trustees: [_____________].
Independent Trustee Committee: This committee develops and recommends to
the Board a set of corporate governance principles and oversees the evaluation
of the Board, its committees and its activities. The committee is comprised of
[all] of the Fund's Independent Trustees.
Investments Committee: The primary purposes of the Investments Committee
are to: (i) assist the Board at its request in its oversight of the investment
advisory services provided to the Portfolio by the Advisor, as well as any
sub-advisors; (ii) review all proposed advisory and sub-advisory agreements for
new funds or proposed amendments to existing agreements and recommend what
action the full Board and the independent trustees take regarding the approval
of all such proposed arrangements; and (iii) review, from time to time, reports
supplied by the Advisor regarding investment performance and expenses and
suggest changes to such reports. The Investments Committee consists of the
following Independent Trustees: [______________].
As the Fund is a closed-end investment company with no prior investment
operations, no meetings of the above committees have been held in the current
fiscal year.
Proxy Voting Policies
The Fund has formally delegated to the Advisor the responsibility for
making all proxy voting decisions in relation to portfolio securities held by
the Fund. If and when proxies need to be voted on behalf of the Fund, the
Advisor will vote such proxies pursuant to its Proxy Voting Policies and
Procedures (the "Procedures"). The Advisor has established a Proxy Voting
Committee (the "Committee") which is responsible for overseeing the Advisor's
proxy voting process for the Fund. One of the main responsibilities of the
Committee is to review and approve the Procedures to ensure that the Procedures
are designed to allow the Advisor to vote proxies in a manner consistent with
the goal of voting in the best interests of the Fund.
In order to facilitate the actual process of voting proxies, the Advisor
has contracted with Institutional Shareholder Services ("ISS") to analyze proxy
statements on behalf of the Fund and vote proxies generally in accordance with
the Procedures. The Committee is responsible for overseeing ISS's proxy voting
activities. If a proxy has been voted for the Fund, ISS will create a record of
the vote. Information, if any, regarding how the Fund voted proxies relating to
portfolio securities during the most recent 12-month period ended June 30 will
be available without charge: (i) through the Fund's Web site at
www.delawareinvestments.com; and (ii) on the U.S. Securities and Exchange
Commission's Web site at www.sec.gov.
The Procedures contain a general guideline that recommendations of company
management on an issue (particularly routine issues) should be given a fair
amount of weight in determining how proxy issues should be voted. However, the
Advisor will normally vote against management's position when it runs counter to
its specific Proxy Voting Guidelines (the "Guidelines"), and the Advisor will
also vote against management's recommendation when it believes that such
position is not in the best interests of the Fund.
As stated above, the Procedures also list specific Guidelines on how to
vote proxies on behalf of the Fund. Some examples of the Guidelines are as
follows: (i) generally vote for shareholder proposals asking that a majority or
more of directors be independent; (ii) generally vote against proposals to
require a supermajority shareholder vote; (iii) votes on mergers and
acquisitions should be considered on a case-by-case basis, determining whether
the transaction enhances shareholder value; (iv) generally vote against
proposals to create a new class of common stock with superior voting rights; (v)
generally vote re-incorporation proposals on a case-by-case basis; (vi) votes
with respect to management compensation plans are determined on a case-by-case
basis; and (vii) generally vote for reports on the level of greenhouse gas
emissions from the company's operations and products.
Because the Fund has delegated proxy voting to the Advisor, the Fund is not
expected to encounter any conflict of interest issues regarding proxy voting and
therefore does not have procedures regarding this matter. However, the Advisor
does have a section in its Procedures that addresses the possibility of
conflicts of interest. Most proxies that the Advisor receives on behalf of the
Fund are voted by ISS in accordance with the Procedures. Because almost all Fund
proxies are voted by ISS pursuant to the pre-determined Procedures, it normally
will not be necessary for the Advisor to make an actual determination of how to
vote a particular proxy, thereby largely eliminating conflicts of interest for
the Advisor during the proxy voting process. In the very limited instances where
the Advisor is considering voting a proxy contrary to ISS's recommendation, the
Committee will first assess the issue to see if there is any possible conflict
of interest involving the Advisor or affiliated persons of the Advisor. If a
member of the Committee has actual knowledge of a conflict of interest, the
Committee will normally use another independent third party to do additional
research on the particular proxy issue in order to make a recommendation to the
Committee on how to vote the proxy in the best interests of the Fund. The
Committee will then review the proxy voting materials and recommendation
provided by ISS and the independent third party to determine how to vote the
issue in a manner which the Committee believes is consistent with the Procedures
and in the best interests of the Fund.
Codes of Ethics
The Fund and Advisor have adopted Codes of Ethics in compliance with the
requirements of Rule 17j-1 under the 1940 Act, which govern personal securities
transactions. Under the Codes of Ethics, persons subject to the Codes are
permitted to engage in personal securities transactions, including securities
that may be purchased or held by the Fund, subject to the requirements set forth
in Rule 17j-1 under the 1940 Act and certain other procedures set forth in the
applicable Code of Ethics. These codes can be reviewed and copied at the
Securities 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 Securities and Exchange Commission at 1-202-942-8090. These codes of
ethics are available on the EDGAR Database on the Securities 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 Securities and Exchange
Commission's Public Reference Section, Washington, D.C. 20549-0102.
Investment Advisor
Delaware Management Company ("DMC") acts as the Fund's investment advisor.
DMC, located at 2005 Market Street, Philadelphia, Pennsylvania 19103, provides
investment advisory services for registered investment companies and is a series
of Delaware Management Business Trust, which is an indirect subsidiary of
Delaware Management Holdings, Inc. ("DMH"). DMH is an indirect subsidiary, and
subject to the ultimate control, of Lincoln National Corporation, a publicly
traded corporation (NYSE-LNC). Lincoln, with headquarters in Philadelphia,
Pennsylvania, is a diversified organization with operations in many aspects of
the financial services industry, including insurance and investment management.
Delaware Investments is the marketing name for DMH and its subsidiaries. The
Advisor and its affiliates own the name "Delaware Group." Under certain
circumstances, including the termination of the Fund's advisory relationship
with the Advisor or its distribution relationship with the Distributor, the
Advisor and its affiliates could cause the Fund to delete the words "Delaware
Group" from its name.
As of March 31, 2007, the assets under management of DMC and its affiliates
("Delaware Investments") totaled nearly $[__] billion, of which approximately
$[__] billion were managed by DMC. The Advisor also provides investment
management services to all of the other Delaware Investments(R)Funds. Affiliates
of the Advisor also manage other investment accounts. While investment decisions
for the Fund are made independently from those of the other funds and accounts,
investment decisions for such other funds and accounts may be made at the same
time as investment decisions for the Fund. The Advisor pays the salaries of all
Trustees, officers, and employees who are affiliated with both the Advisor and
the Fund.
Portfolio Managers
The following chart lists certain information about types of other accounts
for which each portfolio manager is primarily responsible as of
[_________________], 2007.
Total Assets in
Accounts with
No. of Total No. of Accounts with Performance-
Accounts Assets Managed Performance-Based Fees Based Fees
Bob Zenouzi
Registered Investment ____ ____ ____ ____
Companies
Other Pooled Investment ____ ____ ____ ____
Vehicles
Other Accounts ____ ____ ____ ____
Damon J. Andres
Registered Investment ____ ____ ____ ____
Companies
Other Pooled Investment ____ ____ ____ ____
Vehicles
Other Accounts ____ ____ ____ ____
Liu-Er Chen
Registered Investment ____ ____ ____ ____
Companies
Other Pooled Investment ____ ____ ____ ____
Vehicles
Other Accounts ____ ____ ____ ____
Thomas H. Chow
Registered Investment ____ ____ ____ ____
Companies
Other Pooled Investment ____ ____ ____ ____
Vehicles
Other Accounts ____ ____ ____ ____
Zoe A. Neale
Registered Investment ____ ____ ____ ____
Companies
Other Pooled Investment ____ ____ ____ ____
Vehicles
Other Accounts ____ ____ ____ ____
D. Tysen Nutt Jr.
Registered Investment ____ ____ ____ ____
Companies
Other Pooled Investment ____ ____ ____ ____
Vehicles
Other Accounts ____ ____ ____ ____
Philip R. Perkins
Registered Investment ____ ____ ____ ____
Companies
Other Pooled Investment ____ ____ ____ ____
Vehicles
Other Accounts ____ ____ ____ ____
Description of Material Conflicts of Interest
Individual portfolio managers may perform investment management services
for other accounts similar to those provided to the Funds and the investment
action for each account and Fund may differ. For example, one account or Fund
may be selling a security, while another account or Fund may be purchasing or
holding the same security. As a result, transactions executed for one account
and Fund may adversely affect the value of securities held by another account.
Additionally, the management of multiple accounts and Funds may give rise to
potential conflicts of interest, as a portfolio manager must allocate time and
effort to multiple accounts and Funds. A portfolio manager may discover an
investment opportunity that may be suitable for more than one account or Fund.
The investment opportunity may be limited, however, so that all accounts and
Funds for which the investment would be suitable may not be able to participate.
Delaware has adopted procedures designed to allocate investments fairly across
multiple accounts.
[______] of the accounts managed by the portfolio managers has a
performance-based fee. This compensation structure presents a potential conflict
of interest. The portfolio manager has an incentive to manage this account so as
to enhance its performance, to the possible detriment of other accounts for
which the investment manager does not receive a performance-based fee.
A portfolio manager's management of personal accounts also may present
certain conflicts of interest. While Delaware's code of ethics is designed to
address these potential conflicts, there is no guarantee that it will do so.
Compensation Structure
Each portfolio's manager's compensation consists of the following:
Base Salary: Each named portfolio manager receives a fixed base salary.
Salaries are determined by a comparison to industry data prepared by third
parties to ensure that portfolio manager salaries are in line with salaries paid
at peer investment advisory firms.
Bonus: Bonuses may be awarded to the portfolio managers based on the
specific determinations described below, which vary depending on the team to
which the portfolio manager is assigned.
Members of the REIT team may receive a bonus based on a proportion of the
bonus pool for the team, which is comprised of a percentage of the revenues
associated with the products managed by the team. The REIT team's bonus pool is
allotted based on subjective factors (50%) and objective factors (50%). The
primary objective factors are the performance of the funds managed by the team
relative to the performance of the appropriate Lipper peer groups and the
performance of the institutional accounts relative to the NAREIT equity index,
each of which is given equal weight. Performance is measured as the result of
one's standing in the Lipper peer groups and relative to the NAREIT equity index
on a one-year, three-year and five-year basis, all of which are equally
weighted. There is no objective award for a fund whose performance falls below
the 50th percentile for a given time period. There is a sliding scale for
performance achievements above the 50th percentile.
Portfolio managers that are members of the emerging markets team are
entitled to receive a guaranteed base bonus. In addition, team members may
receive an additional bonus based entirely on [subjective] factors, including
the realization of certain performance objectives. The primary objective is the
performance of the fund relative to the Emerging Markets Lipper peer group.
Performance is measured as the result of one's standing in the Lipper peer group
on a one-year, three-year and five-year basis. Three year performance is
weighted more heavily and there is no award above the base bonus for performance
below the 40th percentile for a given time period. There is a sliding scale for
performance achievements above the 50th percentile.
Members of the focus international equity and focus value teams may receive
a bonus based on a proportion of the individual bonus pools for the teams, which
are comprised of a percentage of the revenues associated with the products
managed by each team. The amounts in the bonus pools are based on the revenues
associated with the products a portfolio manager manages. Due to the
transitioning of responsibilities of this team, the bonuses for the [2006]
fiscal year for both teams were guaranteed. It is anticipated that in the
future, objective components will be added to the determination of the size of
the bonus pools to be awarded to the teams that are reflective of account
performance relative to an appropriate peer group or database.
Portfolio managers that are members of the global bond team are eligible to
receive an annual cash bonus, based on quantitative and qualitative factors. The
amount of the pool for bonus payments is first determined by mathematical
equation based on all assets managed, management fees, and related expenses
(including fund waiver expenses) for registered investment companies, pooled
vehicles, and managed separate accounts. Generally, 50-70% of the bonus is
quantitatively determined. Each manager is compensated according the Fund's
Lipper peer group percentile ranking on a one-year and three-year basis, equally
weighted. There is no objective award for a fund that falls below the 50th
percentile over the three-year period. There is a sliding scale for investment
companies that are ranked above the 50th percentile. The remaining 30%-50%
portion of the bonus is discretionary as determined by Delaware Investments and
takes into account subjective factors.
Portfolio managers that are members of the high grade or high yield teams
are eligible to receive an annual cash bonus, which is based on quantitative and
qualitative factors. There is one pool for bonus payments for the fixed income
department. The amount of the pool for bonus payments is first determined by
mathematical equation based on all assets managed (including investment
companies, insurance product-related accounts and other separate accounts),
management fees and related expenses (including fund waiver expenses) for
registered investment companies, pooled vehicles, and managed separate accounts.
Generally, 50%-70% of the bonus is quantitatively determined. For more senior
portfolio managers, a higher percentage of the bonus is quantitatively
determined. For investment companies, each manager is compensated according the
Fund's Lipper peer group percentile ranking on a one-year and three-year basis,
equally weighted. For managed separate accounts the portfolio managers are
compensated according to the composite percentile ranking against the Frank
Russell and Callan Associates databases on a one-year and three-year basis, with
three-year performance more heavily weighted. There is no objective award for a
fund that falls below the 50th percentile over the three-year period. There is a
sliding scale for investment companies that are ranked above the 50th
percentile. The remaining 30%-50% portion of the bonus is discretionary as
determined by Delaware Investments and takes into account subjective factors.
Deferred Compensation: Each named portfolio manager is eligible to
participate in the Lincoln National Corporation Executive Deferred Compensation
Plan, which is available to all employees whose income exceeds a designated
threshold. The Plan is a non-qualified unfunded deferred compensation plan that
permits participating employees to defer the receipt of a portion of their cash
compensation.
Stock Option Incentive Plan/Equity Compensation Plan: Portfolio managers
may be awarded options to purchase common shares of Delaware Investments U.S.,
Inc. pursuant to the terms the Delaware Investments U.S., Inc. Stock Option Plan
(non-statutory or "non-qualified" stock options). In addition, certain managers
may be awarded restricted stock units, or "performance shares", in Lincoln
National Corporation. Delaware Investments U.S., Inc., is an indirect subsidiary
of Delaware Management Holdings, Inc. Delaware Management Holdings, Inc., is in
turn a indirect, wholly-owned subsidiary of Lincoln National Corporation.
The Delaware Investments U.S., Inc. Stock Option Plan was established in
2001 in order to provide certain Delaware investment personnel with a more
direct means of participating in the growth of the investment manager. Under the
terms of the plan, stock options typically vest in 25% increments on a four-year
schedule and expire ten years after issuance. Options are awarded from time to
time by the investment manager in its full discretion. Option awards may be
based in part on seniority. The fair market value of the shares is normally
determined as of each June 30 and December 31. Shares issued upon the exercise
of such options must be held for six months and one day, after which time the
shareholder may put them back to the issuer or the shares may be called back
from the shareholder.
Portfolio managers who do not participate in the Delaware Investments U.S.,
Inc. Stock Option Plan are eligible to participate in Lincoln's Long-Term
Incentive Plan, which is designed to provide a long-term incentive to officers
of Lincoln. Under the plan, a specified number of performance shares are
allocated to each unit and are awarded to participants in the discretion of
their managers in accordance with recommended targets related to the number of
employees in a unit that may receive an award and the number of shares to be
awarded. The performance shares have a three year vesting schedule and, at the
end of the three years, the actual number of shares distributed to those who
received awards may be equal to, greater than or less than the amount of the
award based on Lincoln's achievement of certain performance goals relative to a
pre-determined peer group.
Other Compensation: Portfolio managers may also participate in benefit
plans and programs available generally to all employees.
Ownership of Securities
The Fund is a newly organized investment company. Accordingly, as of the
date of this Statement of Additional Information, none of the portfolio managers
beneficially owns any securities issued by the Fund.
Administrator
Delaware Service Company, Inc. ("DSC"), 2005 Market Street, Philadelphia,
Pennsylvania 19103, an affiliate of DMC, will serve as the Fund's Administrator
and will provide accounting and administrative services to the Fund. DSC is
responsible for calculating the net asset value of the common shares and
generally managing the administrative affairs of the Fund. DSC is entitled to
receive [fee structure to be added], plus out of pocket expenses. When the Fund
is utilizing leverage, the fee paid to DSC will be higher than if the Fund did
not use leverage because the fees paid will be calculated based on the Fund's
total assets, which include the principal amount of outstanding borrowings used
for leverage.
Custodian and Transfer Agent
The custodian of the assets of the Fund will be [___________], and it will
perform custodial services. [__________] will serve as the Fund's transfer agent
with respect to the common shares.
PORTFOLIO TRANSACTIONS AND BROKERAGE
The Advisor selects broker/dealers to execute transactions on behalf of the
Fund for the purchase or sale of portfolio securities on the basis of its
judgment of their professional capability to provide the service. The primary
consideration in selecting broker/dealers is to seek those broker/dealers who
provide best execution for the Fund. Best execution refers to many factors,
including the price paid or received for a security, the commission charged, the
promptness and reliability of execution, the confidentiality and placement
accorded the order and other factors affecting the overall benefit obtained by
the account on the transaction. A number of trades are made on a net basis where
the Fund either buy securities directly from the dealer or sell them to the
dealer. In these instances, there is no direct commission charged but there is a
spread (the difference between the buy and sell price) which is the equivalent
of a commission. When a commission is paid, the Fund pays reasonable brokerage
commission rates based upon the professional knowledge of the Advisor's trading
department as to rates paid and charged for similar transactions throughout the
securities industry. In some instances, the Fund pays a minimal share
transaction cost when the transaction presents no difficulty.
Payments of commissions to brokers who are affiliated persons of the Fund
(or affiliated persons of such persons) will be made in accordance with Rule
17e-1 under the 1940 Act. Commissions paid on such transactions would be
commensurate with the rate of commissions paid on similar transactions to
brokers that are not so affiliated.
The Advisor may allocate, out of all commission business generated by all
of the funds and accounts under its management, brokerage business to
broker/dealers who provide brokerage and research services. These services
include advice, either directly or through publications or writings, as to the
value of securities, the advisability of investing in, purchasing or selling
securities, and the availability of securities or purchasers or sellers of
securities; furnishing of analyses and reports concerning issuers, securities,
or industries; providing information on economic factors and trends; assisting
in determining portfolio strategy; providing computer software and hardware used
in security analyses; and providing portfolio performance evaluation and
technical market analyses. Such services are used by the Advisor in connection
with its investment decision-making process with respect to one or more funds
and accounts managed by it, and may not be used, or used exclusively, with
respect to the fund or account generating the brokerage.
As provided in the 1934 Act and the Investment Management Agreement, higher
commissions are permitted to be paid to brokers/dealers who provide brokerage
and research services than to broker/dealers who do not provide such services,
if such higher commissions are deemed reasonable in relation to the value of the
brokerage and research services provided. Although transactions directed to
broker/dealers who provide such brokerage and research services may result in
the Fund paying higher commissions, the Advisor believes that such commissions
are reasonable in relation to the value of the brokerage and research services
provided. In some instances, services may be provided to the Advisor which
constitute in some part brokerage and research services used by the Advisor in
connection with its investment decision-making process and constitute in some
part services used by the Advisor in connection with administrative or other
functions not related to its investment decision-making process. In such cases,
the Advisor will make a good faith allocation of brokerage and research services
and will pay out of its own resources for services used by the Advisor in
connection with administrative or other functions not related to its investment
decision-making process. In addition, so long as no fund is disadvantaged,
portfolio transactions that generate commissions or their equivalent are
allocated to broker/dealers who provide daily portfolio pricing services to the
Fund and to other Delaware Investments(R) Funds. Subject to best execution,
commissions allocated to brokers providing such pricing services may or may not
be generated by the funds receiving the pricing service.
The Advisor may place a combined order for two or more accounts or funds
engaged in the purchase or sale of the same security if, in its judgment, joint
execution is in the best interest of each participant and will result in best
execution. Transactions involving commingled orders are allocated in a manner
deemed equitable to each account or fund. When a combined order is executed in a
series of transactions at different prices, each account participating in the
order may be allocated an average price obtained from the executing broker. It
is believed that the ability of the accounts to participate in volume
transactions will generally be beneficial to the accounts and funds. Although it
is recognized that, in some cases, the joint execution of orders could adversely
affect the price or volume of the security that a particular account or fund may
obtain, it is the opinion of the Advisor and the Fund's Board of Trustees that
the advantages of combined orders outweigh the possible disadvantages of
separate transactions.
Consistent with the National Association of Securities Dealers, Inc.
("NASD") and subject to seeking best execution, the Fund may place orders with
broker/dealers that have agreed to defray certain expenses of the Delaware
Investments(R)Funds, such as custodian fees.
[The Fund has the authority to participate in a commission recapture
program. Under the program, and subject to seeking best execution as described
in this section, the Fund may direct certain security trades to brokers who have
agreed to rebate a portion of the related brokerage commission to the Fund in
cash. Any such commission rebates will be included in realized gain on
securities in the appropriate financial statements of the Fund. The Advisor and
its affiliates have previously and may in the future act as an investment
advisor to mutual funds or separate accounts affiliated with the administrator
of the commission recapture program. In addition, affiliates of the
administrator act as consultants in helping institutional clients choose
investment advisors and may also participate in other types of businesses and
provide other services in the investment management industry.]
[The Advisor and its affiliates manage investments for clients from offices
located around the world. As a result, purchases and sales of securities may be
executed through different trading desks or on different exchanges or markets
through out the day, resulting in transactions in the same security being
effected at different prices over a 24 hour period.]
The Fund may engage in short-term trading strategies, and securities may be
sold without regard to the length of time held when, in the opinion of the
Advisor, investment considerations warrant such action. The Fund will not
attempt to achieve or be limited to a predetermined rate of portfolio turnover.
Such turnover always will be incidental to transactions undertaken with a view
to achieving the Fund's investment objective. These policies, together with the
ability of the Fund to effect short sales of securities and to engage in
transactions in options and futures, may have the effect of increasing the
Fund's annual rate of portfolio turnover. A high turnover rate (100% or more)
may increase brokerage commissions paid and could generate taxes for
shareholders on realized investment gains.
DESCRIPTION OF SHARES
Common Shares
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. 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.
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 1940 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. Under the 1940 Act, the Preferred Shares shall have complete priority
over any other class as to distribution of assets and payment of dividends.
Voting Rights. The 1940 Act requires that the holders of any Preferred
Shares, voting separately as a single class, have the right to elect at least
two trustees at all times. The 1940 Act also requires that, in addition to any
approval by shareholders that might otherwise be required, the approval of the
holders of a majority of any outstanding Preferred Shares, voting separately as
a class, would be required to (1) adopt any plan of reorganization that would
adversely affect the Preferred Shares, and (2) take any action requiring a vote
of security holders under Section 13(a) of the 1940 Act, including, among other
things, changes in the Fund's subclassification as a closed-end investment
company or changes in its fundamental investment restrictions. 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. In the event that
the Board of Trustees determines to issue preferred shares, such shares will
have the voting rights and preferences as deemed appropriate by the Board of
Trustees.
The affirmative vote of the holders of a majority of the outstanding
Preferred Shares, voting as a separate class, will be required to amend, alter
or repeal any of the preferences, rights or powers of holders of Preferred
Shares so as to affect materially and adversely such preferences, rights or
powers, or to increase or decrease the authorized number of Preferred Shares.
The class vote of holders of Preferred Shares described above will in each case
be in addition to any other vote required to authorize the action in question.
Redemption, Purchase, and Sale of Preferred Shares by the Fund. The terms
of any Preferred Shares, as determined by the Board of Trustees, may 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, while any resale of shares by the Fund will increase that leverage.
The discussion above describes the possible offering of Preferred Shares by
the Fund. If the Board of Trustees determines to proceed with such an offering,
the Preferred Shares will have the rights and privileges and deemed appropriate
by the Board of Trustees, 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 may apply for ratings for any Preferred Shares from Moody's, S&P,
or Fitch. 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 and/or S&P. Such guidelines will likely be more
restrictive than the restrictions otherwise applicable to the Fund as described
in the Fund's prospectus or above in this Statement of Additional Information.
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 objective. The Fund anticipates that any Preferred Shares that it
issues would be initially given the highest ratings by Moody's ("Aaa") or by 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 and S&P receive fees in connection with their ratings issuances.
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 see 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 has Preferred
Shares 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 1940 Act and the rules and regulations thereunder.
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 reduce net
assets which would likely have the effect of increasing the Fund's expense
ratio.
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 and
any other relevant factors, 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 discussion is a brief summary of certain U.S. federal income
tax considerations affecting the Fund and its shareholders. The discussion
reflects applicable tax laws of the United States as of the date of this
Statement of Additional Information, which tax laws may be changed or subject to
new interpretations by the courts or the Internal Revenue Service (the "IRS")
retroactively or prospectively. This discussion assumes that the Fund's
shareholders hold their common shares as capital assets for U.S. federal income
tax purposes (generally, assets held for investment). 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
prospectus do not constitute tax advice. Investors are urged to consult their
own tax advisors with any specific questions relating to federal, state, local
and foreign taxes.
Taxation of the Fund
The Fund intends to elect and to qualify for special tax treatment afforded
to a regulated investment company under Subchapter M of the Code. As long as it
so qualifies, in any taxable year in which it meets the distribution
requirements described below, the Fund (but not its shareholders) generally will
not be subject to U.S. federal income tax to the extent that it distributes its
net investment income and net realized capital gains.
In order to qualify to be taxed as a regulated investment company, the Fund
must, among other things: (i) derive in each taxable year at least 90% of its
gross income from (a) dividends, interest (including tax-exempt interest),
payments with respect to certain securities loans, and gains from the sale or
other disposition of stock, securities, or foreign currencies, or other income
(including but not limited to gain from options, futures and forward contracts)
derived with respect to its business of investing in such stock, securities or
currencies and (b) net income derived from interests in certain publicly traded
partnerships that are treated as partnerships for U.S. federal income tax
purposes and that derive less than 90% of their gross income from the items
described in (a) above (each a "Qualified Publicly Traded Partnership"); and
(ii) diversify its holdings so that, at the end of each quarter of each taxable
year (a) at least 50% of the value of the Fund's total assets is represented by
cash and cash items, U.S. Government securities, the securities of other
regulated investment companies and other securities, with such other securities
limited, in respect of any one issuer, to an amount not greater than 5% of the
value of the Fund's total assets and not more than 10% of the outstanding voting
securities of such issuer and (b) not more than 25% of the value of the Fund's
total assets is invested in the securities of (I) any one issuer (other than
U.S. Government securities and the securities of other regulated investment
companies), (II) any two or more issuers that the Fund controls and that are
determined to be engaged in the same business or similar or related trades or
businesses, or (III) any one or more Qualified Publicly Traded Partnerships.
As a regulated investment company, the Fund generally is not subject to
U.S. 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, interest, the excess of any net
short-term capital gain over net long-term capital loss and other taxable
income, other than net capital gain (as defined below), reduced by deductible
expenses) determined without regard to the deduction for dividends and
distributions paid and (ii) its net tax-exempt interest income (the excess of
its gross tax-exempt interest income over certain disallowed deductions). For
purposes of satisfying the 90% distribution requirement, a distribution will not
qualify if it is a "preferential" dividend (i.e., a distribution which is not
fully pro rata among shares of the same class or where there is preference to
one class of stock as compared with another class except to the extent that such
preference exists by reason of the issuance of such shares). The Fund intends to
distribute annually all or substantially all of such income.
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 a tax of 35% of such amount. If
the Fund retains any net capital gain, it expects to designate the retained
amount as undistributed capital gains in a notice to its shareholders, each of
whom, if subject to U.S. federal income tax on long-term capital gains, (i) will
be required to include in income for U.S. federal income tax purposes its share
of such undistributed long-term capital gain, (ii) will be entitled to credit
its proportionate share of the tax paid by the Fund against their U.S. federal
income tax liability, if any, and to claim refunds to the extent that the credit
exceeds such liability, and (iii) will increase its tax basis in its common
shares for the Fund by an amount equal to 65% of the amount of undistributed
capital gain included in such shareholder's gross income.
Amounts not distributed on a timely basis in accordance with a calendar
year distribution requirement are subject to a nondeductible 4% federal excise
tax at the Fund level. To avoid the excise tax, the Fund must distribute during
each calendar year an amount at least equal to the sum of (i) 98% of its
ordinary income (not taking into account any capital gains or losses) for the
calendar year, (ii) 98% of its capital gains in excess of its capital losses
(adjusted for certain ordinary losses) for a one-year period generally ending on
October 31 of the calendar year (unless an election is made to use the Fund's
fiscal year), and (iii) certain undistributed amounts from previous years on
which the Fund paid no U.S. federal income tax. While the Fund intends to
distribute any income and capital gain in the manner necessary to minimize
imposition of the 4% federal excise tax, there can be no assurance that
sufficient amounts of the Fund's taxable income and capital gains will be
distributed to avoid entirely the imposition of the tax. In that event, the Fund
will be liable for the tax only on the amount by which it does not meet the
foregoing distribution requirement.
Dividends and distributions will be treated as paid during the calendar
year if they are paid during the calendar year or declared by the Fund in
October, November, or December of the year, payable to shareholders of record on
a date during such a month and paid by the Fund during January of the following
year. Any such dividend or distribution paid during January of the following
year will be deemed to be received by the Fund's shareholders on December 31 of
the year the dividend or distribution was declared, rather than when the
dividend or distribution is actually received.
If the Fund were unable to satisfy the 90% distribution requirement or
otherwise were to fail to qualify as a regulated investment company in any year,
it would be taxed in the same manner as an ordinary corporation and
distributions to the Fund's shareholders would not be deductible by the Fund in
computing its taxable income. In such case, distributions generally would be
eligible (i) for treatment as qualified dividend income in the case of
individual shareholders and (ii) for the dividend received deduction in the case
of corporate shareholders. To qualify again to be taxed as a regulated
investment company in a subsequent year, the Fund would be required to
distribute to its shareholders its earnings and profits attributable to
non-regulated investment company years reduced by an interest charge on 50% of
such earnings and profits payable by the Fund to the IRS. In addition, if the
Fund failed to qualify as a regulated investment company for a period greater
than two taxable years, then the Fund would be required to elect to recognize
and pay tax on any net built-in gain (the excess of aggregate gain, including
items of income, over aggregate loss that would have been realized if the Fund
had been liquidated) or, alternatively, be subject to taxation on such built-in
gain recognized for a period of ten years, in order to qualify as a regulated
investment company in a subsequent year.
If the Fund utilizes leverage through borrowings, it may be restricted by
loan covenants with respect to the declaration and payment of dividends in
certain circumstances. Limits on the Fund's payment of dividends may prevent the
Fund from distributing at least 90% of its net income and may therefore
jeopardize the Fund's qualification for taxation as a regulated investment
company and/or may subject the Fund to the nondeductible 4% federal excise tax.
The Fund will endeavor to avoid restrictions on its ability to make dividend
payments.
Gain or loss on the sales of securities by the Fund will generally be
long-term capital gain or loss if the securities have been held by the Fund for
more than one year. Gain or loss on the sale of securities held for one year or
less will be short-term capital gain or loss.
The Fund's investment in so-called "section 1256 contracts," such as
regulated futures contracts, certain foreign currency contracts, options on most
stock indices and any listed nonequity options, are subject to special tax
rules. Any such section 1256 contracts held by the Fund at the end of its
taxable year are required to be marked to their market value, and any unrealized
gain or loss on those positions will be included in the Fund's income as if each
position had been sold for its fair market value at the end of the taxable year.
The resulting gain or loss will be combined with any gain or loss realized by
the Fund from positions in section 1256 contracts closed during the taxable
year. Provided such positions are held as capital assets and are not part of a
"hedging transaction" nor part of a "straddle," 60% of the resulting net gain or
loss will be treated as long-term capital gain or loss, and 40% of such net gain
or loss will be treated as short-term capital gain or loss, regardless of the
period of time the positions were actually held by the Fund.
Certain of the Fund's investment practices are subject to special and
complex U.S. federal income tax provisions that may, among other things, (i)
disallow, suspend or otherwise limit the allowance of certain losses or
deductions, including the dividends received deduction, (ii) convert lower taxed
long-term capital gains and qualified dividend income into higher taxed
short-term capital gains or ordinary income, (iii) convert ordinary loss or a
deduction into capital loss (the deductibility of which is more limited), (iv)
cause the Fund to recognize income or gain without a corresponding receipt of
cash, (v) adversely affect the time as to when a purchase or sale of stock or
securities is deemed to occur, (vi) adversely alter the characterization of
certain complex financial transactions, and (vii) produce income that will not
qualify as good income for purposes of the 90% annual gross income requirement
described above. The Fund will monitor its transactions and may make certain tax
elections and may be required to borrow money or dispose of securities to
mitigate the effect of these rules and prevent disqualification of the Fund as a
regulated investment company.
Because the Fund may invest in foreign securities, its income from such
securities may be subject to non-U.S. taxes. Tax conventions may reduce or
eliminate such taxes. Due to the makeup of the Fund's investment portfolio,
shareholders will not be entitled to claim a credit or deduction with respect to
such foreign taxes. However, if the Fund invests more than 50% of its total
assets in non-U.S. securities as of year-end, the Fund may elect to have its
foreign tax deduction or credit for foreign taxes paid with respect to
qualifying taxes to be taken by its shareholders instead of on its own tax
return. If the Fund so elects, each shareholder shall include in gross income,
and also treat as paid by him, his proportionate share of the foreign taxes paid
by the Fund. If the Fund makes this election, it will furnish its shareholders
with a written notice after the close of the taxable year.
The Fund may invest in securities of foreign entities that could be deemed
for tax purposes to be passive foreign investment companies ("PFICs"). When
investing in PFIC securities, the Fund intends to mark-to-market these
securities and will recognize any gains at the end of its fiscal and excise tax
years. Deductions for losses are allowable only to the extent of any current or
previously recognized gains. These gains (reduced by allowable losses) are
treated as ordinary income that the Fund is required to distribute, even though
it has not sold the securities. If the Fund is unable to identify an investment
as a PFIC and thus does not make a mark-to-market election, the Fund may be
subject to U.S. federal income tax on a portion of any "excess distribution" or
gain from the disposition of such shares even if such income is distributed as a
taxable dividend by the Fund to its shareholders. Additional charges in the
nature of interest may be imposed on the Fund in respect of deferred taxes
arising from such distributions or gains.
Taxation of Shareholders
Distributions paid by the Fund from its investment company taxable income,
which includes the excess of net short-term capital gains over net long-term
capital losses (together referred to hereinafter as "ordinary income
dividends"), are generally taxable to you as ordinary income to the extent of
the Fund's earnings and profits. Such distributions (if designated by the Fund)
may, however, qualify (provided holding periods and other requirements are met)
(i) for the dividends received deduction in the case of corporate shareholders
to the extent that the Fund's income consists of dividend income from United
States corporations, and (ii) for taxable years through December 31, 2010, as
"qualified dividend income" eligible for the reduced maximum U.S. federal tax
rate 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
whose stock 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 "passive foreign investment company," as defined in the Code. If the Fund
lends portfolio securities, the amount 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. In general, distributions
from trust preferred securities will not be eligible for a dividends received
deduction nor constitute qualified dividend income while distributions from
traditional preferred securities may be eligible for the dividends received
deduction and constitute qualified dividend income. There can be no assurance as
to what portion of the Fund's distributions will qualify for the dividends
received deduction or constitute qualified dividend income.
A dividend (whether paid in cash or reinvested in additional Fund shares)
will not be treated as qualified dividend income (whether received by the Fund
or paid by the Fund to a shareholder) if (1) the dividend is received with
respect to any share held for fewer than 61 days during the 121-day period
beginning on the date which is 60 days before the date on which such share
becomes ex-dividend with respect to such dividend, (2) to the extent that the
shareholder is under an obligation (whether pursuant to a short sale or
otherwise) to make related payments with respect to positions in substantially
similar or related property, or (3) if the shareholder elects to have the
dividend treated as investment income for purposes of the limitation on
deductibility of investment interest.
Distributions made from net capital gain, which is the excess of net
long-term capital gains over net short-term capital losses ("capital gain
dividends"), including capital gain dividends credited to a shareholder but
retained by the Fund, are taxable to shareholders as long-term capital gains if
they have been properly designated by the Fund, regardless of the length of time
the shareholder has owned common shares of the Fund. The maximum U.S. federal
tax rate on net long-term capital gain of individuals is generally 15% (5% for
individuals in lower brackets) for such gain realized before January 1, 2011.
Unrecaptured Section 1250 gain distributions, if any, will be subject to a 25%
tax. For non-corporate taxpayers, investment company taxable income (other than
qualified dividend income) will currently be taxed at a maximum rate of 35%,
while net capital gain generally will be taxed at a maximum rate of 15%. For
corporate taxpayers, both investment company taxable income and net capital gain
are taxed at a maximum rate of 35%.
Income earned on certain U.S. Government obligations is exempt from state
and local personal income taxes if earned directly by you. States also grant
tax-free status to dividends paid to you from interest earned on direct
obligations of the U.S. Government, subject in some states to minimum investment
or reporting requirements that must be met by the Fund. Income on investments by
the Fund in certain other obligations, such as repurchase agreements
collateralized by U.S. Government obligations, commercial paper, and federal
agency-backed obligations (e.g., GNMA or FNMA obligations), generally does not
qualify for tax-free treatment. The rules on exclusion of this income are
different for corporations.
If, for any calendar year, the Fund's total distributions exceed both
current earnings and profits and accumulated earnings and profits, the excess
will generally be treated as a tax-free return of capital up to the amount of a
shareholder's tax basis in the common shares. The amount treated as a tax-free
return of capital will reduce a shareholder's tax basis in the common shares,
thereby increasing such shareholder's potential gain or reducing his or her
potential loss on the sale of the common shares. Any amounts distributed to a
shareholder in excess of his or her tax basis in the common shares will be
taxable to the shareholder as capital gain (assuming the common shares are held
as a capital asset).
Generally, not later than 60 days after the close of its taxable year, the
Fund will provide its shareholders with a written notice designating the amount
of any ordinary income dividends or capital gain dividends and other
distributions. If you have not held Fund shares for a full year, the Fund may
designate and distribute to you, as ordinary income, qualified dividends, or
capital gains, and in the case of non-U.S. shareholders the Fund may further
designate and distribute as interest-related dividends and short-term capital
gain dividends, a percentage of income that is not equal to the actual amount of
such income earned during the period of your investment in the Fund.
The sale or other disposition of common shares of the Fund (except in the
case of a redemption where a shareholder's percentage stock interest is not
meaningfully reduced) will generally result in capital gain or loss to
shareholders. Generally, a shareholder's gain or loss will be long-term gain or
loss, if the shares have been held for more than one year. Any loss upon the
sale or exchange of Fund common shares held for six months or less will be
treated as long-term capital loss to the extent of any capital gain dividends
received (including amounts credited as an undistributed capital gain) by the
shareholder. Any loss a shareholder realizes on a sale or exchange of common
shares of the Fund will be disallowed if the shareholder acquires other common
shares of the Fund (whether through the automatic reinvestment of dividends or
otherwise) within a 61-day period beginning 30 days before and ending 30 days
after the shareholder's sale or exchange of the common shares. In such case, the
basis of the common shares acquired will be adjusted to reflect the disallowed
loss. Present law taxes both long-term and short-term capital gains of
corporations at the rates applicable to ordinary income.
Shareholders may be entitled to offset their capital gain distributions
(but not distributions eligible for qualified dividend income treatment) with
capital loss. There are a number of statutory provisions affecting when capital
loss may be offset against capital gain, and limiting the use of loss from
certain investments and activities. Accordingly, shareholders with capital loss
are urged to consult their tax advisers.
An investor should be aware that if Fund common shares are purchased
shortly before the record date for any taxable distribution (including a capital
gain dividend), the purchase price likely will reflect the value of the
distribution and the investor then would receive a taxable distribution likely
to reduce the trading value of such Fund common shares, in effect resulting in a
taxable return of some of the purchase price.
Certain types of income received by the Fund from REITs, "REMICs", taxable
mortgage pools or other investments may cause the Fund to designate some or all
of its distributions as "excess inclusion income." With respect to Fund
shareholders who are not nominees, for Fund taxable years beginning on or after
January 1, 2007, the Fund must report excess inclusion income to shareholders in
two cases: (1) if the excess inclusion income received by the Fund from all
sources exceeds 1 % of the Fund's gross income, it must inform the non-nominee
shareholders of the amount and character of excess inclusion income allocated to
them; and (2) if the Fund receives excess inclusion income from a REIT whose
excess inclusion income in its most recent tax year ending not later than nine
months before the first day of the Fund's taxable year exceeded 3% of the REIT's
total dividends, the Fund must inform its non-nominee shareholders of the amount
and character of the excess inclusion income allocated to them from such REIT.
Under these circumstances, (i) the taxable income of any Fund shareholder can in
no event be less that the sum of the excess inclusion income allocated to that
shareholder and any such excess inclusion income cannot be offset by net
operating losses of the shareholder; (ii) if the shareholder is a tax-exempt
entity, such as an individual retirement account, 401(k) account, Keogh plan,
pension plan or a certain type of charitable entity, and not a "disqualified
organization," then this income is fully taxable as unrelated business taxable
income under the Code; (iii) if the shareholder is a non-U.S. shareholder, such
shareholder would be subject to U.S. federal income tax withholding at a rate of
30% on this income without reduction or exemption pursuant to any otherwise
applicable income tax treaty; and (iv) if the shareholder is a REIT, a regulated
investment company, common trust fund or other pass-through entity, such
shareholder's allocable share of the Fund's excess inclusion income would be
considered excess inclusion income of such entity and such entity would be
subject to tax at the highest corporate tax rate on any excess inclusion income
allocated to their owners that are disqualified organizations. "Disqualified
organizations" are generally certain cooperatives, governmental entities and
tax-exempt organizations that are not subject to tax on unrelated business
taxable income. In addition, the Fund will be taxed at the highest corporate
income tax rate on its excess inclusion income that is allocable to the
percentage of its shares held in record name by disqualified organizations and,
to the extent that Fund shares owned by disqualified organizations are held in
record name by a broker/dealer or other nominee, the broker/dealer or other
nominee would be liable for the corporate level tax on the portion of the Fund's
excess inclusion income allocable to Fund shares held by the broker/dealer or
other nominee on behalf of the disqualified organizations. Because this tax on
excess inclusion income allocable to Fund shares held by disqualified
organizations is imposed at the Fund level, all shareholders, including
shareholders that are not disqualified organizations, will bear a portion of the
tax cost associated with the Fund's receipt of excess inclusion income. However,
to the extent permissible under the 1940 Act, a regulated investment company
such as the Fund is permitted under Treasury Regulations to specially allocate
this tax expense to the disqualified organizations to which it is attributable,
without a concern that such an allocation will constitute a preferential
dividend. While the Fund does not presently intend to make such a special
allocation, it reserves the right to do so.
Dividends are taxable to shareholders even though they are reinvested in
additional shares of the Fund.
Ordinary income distributions and capital gain distributions also may be
subject to state and local taxes. Shareholders are urged to consult their own
tax advisers regarding specific questions about U.S. federal (including the
application of the alternative minimum tax rules), state, local and foreign tax
consequences to them of investing in the Fund.
A shareholder that is a nonresident alien individual or a foreign
corporation (a "foreign investor") generally will be subject to U.S. federal
withholding tax at the rate of 30% (or possibly a lower rate provided by an
applicable tax treaty) on ordinary income dividends (except as discussed below).
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 183 days or more during a taxable year and
certain other conditions are met. Foreign investors should consult their tax
advisors regarding the tax consequences of investing in the Fund's common
shares.
In general, U.S. federal withholding tax will not apply to any gain or
income realized by a foreign investor in respect of any distributions of net
capital gain, exempt-interest dividends, or upon the sale or other disposition
of common shares of the Fund.
For taxable years beginning before January 1, 2008, properly-designated
dividends are generally exempt from U.S. federal withholding tax where they (i)
are paid in respect of the Fund's "qualified net interest income" (generally,
the Fund's U.S. source interest income, other than certain contingent interest
and interest from obligations of a corporation or partnership in which the Fund
is at least a 10% shareholder, reduced by expenses that are allocable to such
income) or (ii) are paid in respect of the Fund's "qualified short-term capital
gains" (generally, the excess of the Fund's net short-term capital gain over the
Fund's long-term capital loss for such taxable year). Depending on its
circumstances, however, the Fund may designate all, some or none of its
potentially eligible dividends as such qualified net interest income or as
qualified short-term capital gains, and/or treat such dividends, in whole or in
part, as ineligible for this exemption from withholding. In order to qualify for
this exemption from withholding, a foreign investor will need to comply with
applicable certification requirements relating to its non-U.S. status
(including, in general, furnishing an IRS Form W-8BEN or substitute Form). In
the case of common shares held through an intermediary, the intermediary may
withhold even if the Fund designates the payment as qualified net interest
income or qualified short-term capital gain. Foreign investors should contact
their intermediaries with respect to the application of these rules to their
accounts. There can be no assurance as to what portion of the Fund's
distributions will qualify for favorable treatment as qualified net interest
income or qualified short-term capital gains.
An individual who, at the time of death, is a foreign investor will
nevertheless be subject to U.S. federal estate tax with respect to shares at the
graduated rates applicable to U.S. citizens and residents, unless a treaty
exception applies. In the absence of a treaty, there is a $13,000 statutory
estate tax credit. A partial exemption from U.S estate tax may apply to Fund
shares held by the estate of a nonresident decedent. The amount treated as
exempt is based upon the proportion of the assets held by the Fund at the end of
the quarter immediately preceding the decedent's death that are debt
obligations, deposits, or other property that would generally be treated as
situated outside the United States if held directly by the estate. This
provision applies to decedents dying after December 31, 2004 and before January
1, 2008, unless such provision is extended or made permanent. Transfers by gift
of shares of the Fund by a foreign investor who is a nonresident alien
individual will not be subject to U.S. federal gift tax. The tax consequences to
a foreign investor entitled to claim the benefits of an applicable tax treaty
may be different from those described herein. Foreign investors are urged to
consult their own tax advisers with respect to the particular tax consequences
to them of an investment in the Fund, including the applicability of foreign
tax.
Backup Withholding
The Fund is required in certain circumstances to withhold, for U.S. federal
backup withholding purposes, on taxable dividends or distributions and certain
other payments paid to non-corporate holders of the Fund's common shares who do
not furnish the Fund with their correct taxpayer identification number (in the
case of individuals, their social security number) and certain certifications,
or who are otherwise subject to backup withholding. Backup withholding is not an
additional tax. Any amounts withheld from payments made to a shareholder may be
refunded or credited against such shareholder's U.S. federal income tax
liability, if any, provided that the required information is furnished to the
IRS.
This discussion of "Tax Matters" is not intended or written to be used as
tax advice and does not purport to deal with all federal tax consequences
applicable to all categories of investors, some of which may be subject to
special rules. The foregoing discussion is a general summary of the provisions
of the Code and the Treasury regulations in effect as they directly govern the
taxation of the Fund and its shareholders. These provisions are subject to
change by legislative or administrative action, and any such change may be
retroactive. Shareholders are urged to consult their tax advisers regarding
specific questions as to U.S. federal, state, local, and foreign income or other
taxes.
EXPERTS
The Statement of Assets and Liabilities of the Fund as of
[_______________], 2007 appearing in this Statement of Additional Information
and related Statements of Operations and Changes in Net Assets for the period
from [____________________], 2007 (date of inception) to [___________________],
2007 have been audited by [_______________], an independent registered public
accounting firm, as set forth in their report thereon appearing elsewhere
herein, and is included in reliance upon such report given upon the authority of
such firm as experts in accounting and auditing. [___________________], located
at [___________________________], 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 (the "Commission"), Washington, D.C. The
prospectus and this Statement of Additional Information do not contain all of
the information set forth in the Registration Statement, including any exhibits
and schedules thereto. For further information with respect to the Fund and the
shares offered hereby, reference is made to the Registration Statement.
Statements contained in the prospectus and this Statement of Additional
Information as to the contents of any contract or other document referred to are
not necessarily complete and in each instance reference is made to the copy of
such contract or other document filed as an exhibit to the Registration
Statement, each such statement being qualified in all respects by such
reference. A copy of the Registration Statement may be inspected without charge
at the Commission's principal office in Washington, D.C., and copies of all or
any part thereof may be obtained from the Commission upon the payment of certain
fees prescribed by the Commission.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
FINANCIAL STATEMENTS
[to be added]
[for the period ______, 2007 (date of inception) to _____, 2007]
PART C
OTHER INFORMATION
Item 25. Financial Statements and Exhibits
(1) Financial Statements
Part A - None.
Part B - None.
(2) Exhibits
(a)(1) Certificate of Trust (1)
(a)(2) Agreement and Declaration of Trust (1)
(b) By-Laws (1)
(c) Not Applicable
(d)(1) Please see Article V of Agreement and Declaration of Trust as filed
herewith.
(d)(2) Please see Article II of Bylaws as filed herewith.
(e) Form of Dividend Reinvestment Plan (2)
(f) Not Applicable
(g)(1) Form of Investment Management Agreement (2)
(h) Form of Purchase Agreement (2)
(i) Not Applicable
(j) Form of Custody Agreement (2)
(k) Other Material Agreements (2)
(l) Opinion and Consent of Counsel to the Registrant (2)
(m) Not Applicable
(n) Independent Registered Public Accounting Firm Consent (2)
(o) Not Applicable.
(p) Subscription Agreement (2)
(q) Not Applicable
(r)(1) Code of Ethics of the Trust (2)
(r)(2) Code of Ethics of the Advisor (2)
(s) Power of Attorney (2)
____________________
(1) Filed herewith.
(2) To be filed by amendment.
Item 26. Marketing Arrangements
Reference is made to the Form of Purchase Agreement for the Registrant's
common shares to be filed by amendment to this registration statement.
Item 27. 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 fees $
---------------------------------------------------- -------------------------
NYSE listing fee
---------------------------------------------------- -------------------------
Printing (other than certificates)
---------------------------------------------------- -------------------------
Engraving and printing certificates
---------------------------------------------------- -------------------------
Accounting fees and expenses related to the offering
---------------------------------------------------- -------------------------
Legal fees and expenses related to the offering
---------------------------------------------------- -------------------------
NASD fee
---------------------------------------------------- -------------------------
Miscellaneous (i.e. travel) related to the offering
---------------------------------------------------- -------------------------
Total $
---------------------------------------------------- -------------------------
Item 28. Persons Controlled by or under Common Control with the Registrant
None.
Item 29. Number of Holders of Shares
As of April 12, 2007.
---------------------------------- ------------------------------
Title of Class Number of Record Holders
---------------------------------- ------------------------------
Common shares, no par value 0
---------------------------------- ------------------------------
Item 30. Indemnification
Article VII of the Registrant's Agreement and Declaration of Trust provides as
follows:
Section 1. Limitation of Liability.
(a) For the purpose of this Article, "Agent" means any Person who is or was
a Trustee, officer, employee or other agent of the Trust or is or was serving at
the request of the Trust as a trustee, director, officer, employee or other
agent of another foreign or domestic corporation, partnership, joint venture,
trust or other enterprise; "Proceeding" means any threatened, pending or
completed action or proceeding, whether civil, criminal, administrative or
investigative; and "Expenses" include without limitation attorneys' fees and any
expenses of establishing a right to indemnification under this Article.
(b) An Agent shall be liable to the Trust and to any Shareholder for any
act or omission that constitutes a bad faith violation of the implied
contractual covenant of good faith and fair dealing, for such Agent's own
willful misfeasance, bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of such Agent (such conduct referred to herein as
"Disqualifying Conduct"), and for nothing else.
Subject to subsection (b) of this Section 1 and to the fullest extent that
limitations on the liability of Agents are permitted by the DSTA, the Agents
shall not be responsible or liable in any event for any act or omission of any
other Agent of the Trust or any Investment Adviser or Principal Underwriter of
the Trust.
(c) No Agent, when acting in its respective capacity as such, shall be
personally liable to any Person, other than the Trust or a Shareholder to the
extent provided in subsections (b) and (c) of this Section 1, for any act,
omission or obligation of the Trust or any Trustee thereof.
(d) Each Trustee, officer and employee of the Trust shall, in the
performance of his or her 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 Trust, upon an
opinion of counsel, or upon reports made to the Trust by any of its officers or
employees or by the Investment Adviser, the Principal Underwriter, any other
Agent, selected dealers, accountants, appraisers or other experts or consultants
selected with reasonable care by the Trustees, officers or employees of the
Trust, regardless of whether such counsel or expert may also be a Trustee. The
officers and Trustees may obtain the advice of counsel or other experts with
respect to the meaning and operation of this Declaration of Trust, the By-Laws,
applicable law and their respective duties as officers or Trustees. No such
officer or Trustee shall be liable for any act or omission in accordance with
such advice, records and/or reports and no inference concerning liability shall
arise from a failure to follow such advice, records and/or reports. The officers
and Trustees shall not be required to give any bond hereunder, nor any surety if
a bond is required by applicable law.
(e) The failure to make timely collection of dividends or interest, or to
take timely action with respect to entitlements, on the Trust's securities
issued in emerging countries, shall not be deemed to be negligence or other
fault on the part of any Agent, and no Agent shall have any liability for such
failure or for any loss or damage resulting from the imposition by any
government of exchange control restrictions which might affect the liquidity of
the Trust's assets or from any war or political act of any foreign government to
which such assets might be exposed, except, in the case of a Trustee or officer,
for liability resulting from such Trustee's or officer's Disqualifying Conduct.
(f) The limitation on liability contained in this Article applies to events
occurring at the time a Person serves as an Agent whether or not such Person is
an Agent at the time of any Proceeding in which liability is asserted.
(g) No amendment or repeal of this Article shall adversely affect any right
or protection of an Agent that exists at the time of such amendment or repeal.
Section 2 Indemnification.
(a) Indemnification by Trust. The Trust shall indemnify, out of Trust
Property, to the fullest extent permitted under applicable law, any Person who
was or is a party or is threatened to be made a party to any Proceeding by
reason of the fact that such Person is or was an Agent of the Trust, against
Expenses, judgments, fines, settlements and other amounts actually and
reasonably incurred in connection with such Proceeding if such Person acted in
good faith or in the case of a criminal proceeding, had no reasonable cause to
believe the conduct of such Person was unlawful. The termination of any
Proceeding by judgment, order, settlement, conviction or plea of nolo contendere
or its equivalent shall not of itself create a presumption that the Person did
not act in good faith or that the Person had reasonable cause to believe that
the Person's conduct was unlawful.
(b) Exclusion of Indemnification. Notwithstanding any provision to the
contrary contained herein, there shall be no right to indemnification for any
liability arising by reason of the Agent's Disqualifying Conduct. In respect of
any claim, issue or matter as to which that Person shall have been adjudged to
be liable in the performance of that Person's duty to the Trust or the
Shareholders, indemnification shall be made only to the extent that the court in
which that action was brought shall determine, upon application or otherwise,
that in view of all the circumstances of the case, that Person was not liable by
reason of that Person's Disqualifying Conduct.
(c) Required Approval. Any indemnification under this Article shall be made
by the Trust if authorized in the specific case on a determination that
indemnification of the Agent is proper in the circumstances by (i) a final
decision on the merits by a court or other body before whom the proceeding was
brought that the Agent was not liable by reason of Disqualifying Conduct
(including, but not limited to, dismissal of either a court action or an
administrative proceeding against the Agent for insufficiency of evidence of any
Disqualifying Conduct) or, (ii) in the absence of such a decision, a reasonable
determination, based upon a review of the facts, that the Agent was not liable
by reason of Disqualifying Conduct, by (1) the vote of a majority of a quorum of
the Trustees who are not (x) "interested persons" of the Trust as defined in
Section 2(a)(19) of the 1940 Act, (y) parties to the proceeding, or (z) parties
who have any economic or other interest in connection with such specific case
(the "disinterested, non-party Trustees"); or (2) by independent legal counsel
in a written opinion.
(d) Advancement of Expenses. Expenses incurred by an Agent in defending any
Proceeding may be advanced by the Trust before the final disposition of the
Proceeding on receipt of an undertaking by or on behalf of the Agent to repay
the amount of the advance if it shall be determined ultimately that the Agent is
not entitled to be indemnified as authorized in this Article; provided, that at
least one of the following conditions for the advancement of expenses is met:
(i) the Agent shall provide a security for his undertaking, (ii) the Trust 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 of the Trust, or
an independent legal counsel in a written opinion, shall determine, based on a
review of readily available facts (as opposed to a full trial-type inquiry),
that there is reason to believe that the Agent ultimately will be found entitled
to indemnification.
(e) Other Contractual Rights. Nothing contained in this Article shall
affect any right to indemnification to which Persons other than Trustees and
officers of the Trust or any subsidiary thereof may be entitled by contract or
otherwise.
(f) Fiduciaries of Employee Benefit Plan. This Article does not apply to
any Proceeding against any trustee, investment manager or other fiduciary of an
employee benefit plan in that Person's capacity as such, even though that Person
may also be an Agent of the Trust as defined in Section 1 of this Article.
Nothing contained in this Article shall limit any right to indemnification to
which such a trustee, investment manager, or other fiduciary may be entitled by
contract or otherwise which shall be enforceable to the extent permitted by
applicable law other than this Article.
Section 3. Insurance. To the fullest extent permitted by applicable law,
the Board of Trustees shall have the authority to purchase with Trust Property,
insurance for liability and for all Expenses reasonably incurred or paid or
expected to be paid by an Agent in connection with any Proceeding in which such
Agent becomes involved by virtue of such Agent's actions, or omissions to act,
in its capacity or former capacity with the Trust, whether or not the Trust
would have the power to indemnify such Agent against such liability.
Section 4. Derivative Actions. Subject to the requirements set forth in
Section 3816 of the DSTA, a Shareholder or Shareholders may bring a derivative
action on behalf of the Trust only if the Shareholder or Shareholders first make
a pre-suit demand upon the Board of Trustees to bring the subject action unless
an effort to cause the Board of Trustees to bring such action is excused. A
demand on the Board of Trustees shall only be excused if a majority of the Board
of Trustees, or a majority of any committee established to consider the merits
of such action, has a material personal financial interest in the action at
issue. A Trustee shall not be deemed to have a material personal financial
interest in an action or otherwise be disqualified from ruling on a Shareholder
demand by virtue of the fact that such Trustee receives remuneration from his or
her service on the Board of Trustees of the Trust or on the boards of one or
more investment companies with the same or an affiliated investment adviser or
underwriter.
Item 31. Business and Other Connections of Investment Advisor
To be filed by amendment.
Item 32. Location of Accounts and Records
All accounts and records required to be maintained by Section 31(a) of the
Investment Company Act of 1940 and the rules under that section are maintained
at 2005 Market Street, Philadelphia, PA 19103-7094 and 430 W. 7th Street, Kansas
City, MO 64105.
Item 33. Management Services
Not Applicable
Item 34. Undertakings
(1) The Trust hereby undertakes to suspend the offering of its shares until
the prospectus is amended 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 "1933 Act"), 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 1933 Act shall be deemed to be part of the Registration
Statement as of the time it was declared effective; and
(b) For the purpose of determining any liability under the 1933 Act, 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.
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 Philadelphia, and State of Pennsylvania, on the 13th
day of April, 2007.
/s/ Patrick P. Coyne
--------------------------------------
Patrick P. Coyne
Sole Initial Trustee, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities set forth below on the 13th day of April, 2007.
Name Title Date
/s/ Patrick P. Coyne Sole Initial Trustee, President April 13, 2007
Patrick P. Coyne and Chief Executive Officer
/s/ Richard A. Salus Chief Financial Officer April 13, 2007
Richard A. Salus
INDEX TO EXHIBITS
(Delaware Investments Enhanced Global Dividend and Income Fund)
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Exhibit No. Exhibit
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Ex-99(a)(1) Certificate of Trust
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Ex-99(a)(2) Agreement and Declaration of Trust
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Ex-99(b) By-Laws
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